Housing Conundrum, Important Gold Shift, China’s Monopoly and More!

by Addison Wiggin & Ian Mathias

  • Housing starts plummet… is that a bad thing?
  • Investor optimism still strong… Parenteau on the future of equities
  • Byron King on a Chinese monopoly that could cripple U.S. alt. energy plans
  • Chris Mayer identifies an important sea change in the global gold trade
  • Plus, so much for the American Dream: Crisis causes crash in Mexican immigration


  We’re confused this morning… help us understand this mess.

Initial construction of new homes in the U.S. fell to the lowest level on record last month, the Commerce Department announced early today. Housing starts in April fell 12.8%, to an annual rate of 458,000, the worst since at least 1959, when the government started keeping track. Applications for building permits fell to a record low as well.

Here’s what we don’t get: The market hates this. Futures were aiming for another day in the black early this morning, and then reversed seconds after the numbers were announced.

  But we see the housing starts number as an encouraging development. In the worst housing crisis of our lifetimes — with a 9.8-month supply of existing homes on the market and a record 342,000 homes in foreclosure in April alone — who in their right mind is starting construction on a new house?

If the biggest hurdles in ending the housing crisis are price discovery and clearing supply, and if true recovery is a curtailment of home price expectations and a return to living within our means… why are record low housing starts a bad thing?

At this stage, isn’t the best possible housing start number… 0?

More of this “better to make do with what we’ve got” theme: Home improvement giants Lowe’s and Home Depot both topped Wall Street estimates in their earnings announcements this week. Hell, Home Depot is even making money. Cost cutting helped the obnoxiously orange store pull in $514 million last quarter, a 44% annual gain. Lowe’s wasn’t so fortunate, with a 22% decline in first-quarter earnings. But they still managed to top estimates and up their guidance for the rest of the year.

Of course, neither company is booming… they simply no longer appear to be accelerating into the abyss.

  After sell-offs late last week, buyers returned to the market in force yesterday. Traders scooped up the most beaten-down names, mostly financials, while the boom in India’s stock market provided a nice push as well. The Dow and S&P 500 rose 3%.

Today, traders are taking profits. The Dow opened down about 30 points and is struggling to break even as we write.

  “Equity investors ran too far with the green shoots story,” opines Rob Parenteau, “and soggy second-quarter macro news appears to be giving them relapse jitters. Green shoots grow. The economy is still contracting.

“The recession is still severe — just less severe than Q4 2008 and Q1 2009. Early signs of fiscal efforts stabilizing the level of retail sales and initial unemployment claims are encouraging, but we remain concerned there will be a price to be paid, as Treasury issuance proves hard to place as the year goes on.”

  Consumer sentiment in the U.S. is back to pre-crisis levels, claim the pollsters at Reuters and the University of Michigan. Their index of consumer vibes rose from 65.1. to 67.9 in May, almost a full point better than expected and the best score since September 2008. While we’re still a far cry from “normal” levels, around 80-100, the latest reading is well above the 28-year low of 55 from November.

  We’re a bit surprised consumers are so rosy, as gas and energy prices are nowhere near crisis lows. Crude oil is back to $59 a barrel to day, while the national average price at the pump is $2.31. That’s a 30 cent increase this month alone.

Elsewhere in the oil patch, Venezuela and China announced their first oil-drilling partnership today. Under the proposed plan, Venezuela will borrow Chinese offshore drilling technology to build a rig in the oil-rich Orinoco Belt. In return, China gets a 40% stake in the project.

Of course, this is one of those “signs of the times” bits… China is forging partnerships and establishing eminence at an alarming rate (more proof below). But to be honest, what intrigues us most about this deal is simply the potential fireworks. Venezuelan honcho Hugo Chavez has a long history of rash, sudden nationalizations, while China has an equally established reputation for not tolerating fools… should be fun to watch.

  “Rare earths are more a Chinese thing than oil is an OPEC thing,” begins Byron King today. (Rare earths are hard-to-pronounce metals and minerals that, while in small supply, are found in seemingly every high-tech gadget around the world).

“The Chinese are running 95% of world output, and virtually all of the final refining and smelting… the U.S. left the biz about 10 years ago, and Japanese left it about four years ago.

“Rare earths are critical to all future ‘green’ energy, especially with things like permanent magnets for windmills (not to mention the rare earths that go into those ‘efficient’ light bulbs.) Every large windmill, for example, requires about 560 pounds of a rare earth called neodymium, for the permanent magnet within the turbine system. There’s no substitute for neodymium. People have gone through the entire periodic chart, and only neodymium will work in large permanent magnets.

“The U.S. has NO locale for manufacturing permanent magnets. None. Zilch.”

“The West had better get serious about rare earths or we’re forfeiting the key industries of the 21st century to China.”

There is much, much more to say on this matter, far beyond our humble 5 Mins. Luckily, Byron just finished a full-length report on the subject… get the dirty details here.

  Brazil and China are working on a plan to use their own currencies in exchange for each other’s goods, not the U.S. dollar.

Sounds like a perfectly natural progression to us. Last month, we noted that China overtook the U.S. as Brazil’s No. 1 trading partner. Both the yuan and real are strong, capable currencies. So why bother doing business in greenbacks?

Brazil and Argentina inked a similar deal back in September.

  The dollar’s been falling most of this week. The dollar index took a 1 point hit yesterday as stocks soared. It found a low of 82.1 this morning, and is now back to 82.3. That’s put the euro up a cent, to $1.36. The pound’s up 3 cents from Monday’s low, to just below $1.55. The yen’s at 96.

  Gold broke out of its recent range yesterday… to the downside. The spot price fell about $10, to $920 an ounce.

  “Something important is happening in the gold markets right now,” observes Chris Mayer. “All through the 1990s to the present day, the world’s central banks were net sellers of gold. Europe’s central banks, for instance, have sold 3,800 tonnes of gold in the last 10 years. According to the Financial Times, this move has cost them $40 billion, as gold is now $900 an ounce.

“But suddenly, that long-standing tradition of selling gold is changing. Last year, central banks sold 246 tonnes, which was the lowest amount in 10 years, but still 10% of all mined gold.

“As the FT reports: ‘Sales in Europe have slowed to a crawl and fresh demand is emerging elsewhere and the financial crisis has helped to highlight gold’s value in turbulent times.’ In fact, we may soon see central banks flip to net buyers of gold. That would be a sea change from what has existed in the past.

“China has doubled its holdings of gold this year and is now the world’s fifth largest holder of the metal. China is likely to be a buyer of gold for years because its gold holdings are still very small relative to the size of its total reserves. Gold represents only 1.6% of China’s reserves, versus a global average of nearly 11%. To further diversify its reserves — just to get to average — would require significant amounts of gold.

“In addition to China, Russia, Mexico, the Philippines, Venezuela and Ecuador are all buying gold. The U.S., the largest holder of gold, has not been a seller.

“This is what we’d expect to see. Gold competes with other cash substitutes. Therefore, its attractiveness often boils down to relative credit quality.”

Chris has three new gold plays in his Special Situations portfolio.Gain access to the tickers here.

  The ailing U.S. economy has caused a crash in Mexican immigration into America, reports the U.S. Census. On Friday, the Census declared that emigrations from Mexico declined 25% from August 2007-August 2008. Heh… and that was long before the s!*$ really hit the fan.

Interestingly, while there is much less immigration into the U.S., the 11 million illegal immigrants already in our borders are staying put. Census demographers say there is no significant exodus among Mexicans in the States.

  Still, Hispanics are the fastest growing demographic in the U.S. The Census reports the minority population in the U.S. now exceeds 104 million, about 34% of our population. The last time they checked, in 2000, minorities comprised 31% of our ranks. Hispanics alone account for 15% of our population and, interestingly, garner about 25% of all U.S. live births.

  “I think the better analogy,” a reader adds to yesterday’s entitlement debate, “and the one originally intended for the Social Security system, is insurance. Just about everyone pays thousands of dollars a year for home, car, flood, earthquake and/or term life insurance — and every payer hopes never to get a dime back from those insurance payments. Getting any money back from any of those payments means you have suffered a loss — oftentimes, one that money is no real compensation for — and everyone would rather not have to make a claim.

“Social Security is nothing more than ‘retirement insurance,’ insuring against the possibility that you will reach retirement age without having accumulated enough in a pension plan, 401(k) or other savings plan to live on. Those persons who have an adequate retirement fund outside of SS should not receive any benefits from Social Security.

“Those like my father, who lost his pension when his company went bankrupt only a few years before his retirement, at least have SS to fall back upon. Since the level of benefits depends in part on the amount of SS income earned during one’s working years, it is appropriate to base the tax on income; and because those who reach retirement age without any means to support themselves would otherwise be a charge on society, it is appropriate that such insurance be mandatory — just like unemployment insurance.

“We should just relabel it ‘Retirement Security Insurance’ and everyone will be happy.”

The 5: Hmmm… probably not.

  “There was a time,” writes another reader, “when it was considered unprincipled to accept charity unless in dire need. Proud people accepted handouts only reluctantly, and typically when there was no other hope. We have lost our sense of pride as a people. The vast majority of us have our hands out like beggars. Now we seek to classify every man and woman in the country, except perhaps some loosely defined ‘uber-wealthy,’ as a person in need of assistance and charity. It is ugly, shameful and depressing.


“We’re selling our dignity (and perhaps ultimately our freedom) for a small government stipend.”

Thanks for reading,

Ian Mathias

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