The Bond Crisis, China’s New Role, A Sector to Short, Technical Indicators and More!

by Addison Wiggin & Ian Mathias

  • Bernanke’s sudden call for fiscal responsibility… has the Fed chairman turned a new leaf?
  • Byron King on the end of Western finance… and the Eastern system already taking its place
  • Land down under posts surprise GDP growth… has Australia dodged the global recession?
  • Stocks snap 4-day wining streak… Wayne Burritt on trading the next move
  • Our short side specialist tags a sector moving “way too far, way too fast”

 

  “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," said Ben Bernanke yesterday. The Fed Chairman took a page from our playbook yesterday, warning Congress that “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,”

From a man who played an integral role in two of the most easy-money, spendthrift administrations in U.S. history… that’s an interesting recommendation.

So what’s an investor to do? Prepare for higher Fed interest rates? Look for Bernanke to shut down the dollar printing press and for Congress to get its fiscal act together?

Nah. For the most part, we suspect Mr. Bernanke is just talking up his book. He’s got loads of T-bonds to buy, yields to suppress and mortgage rates to manipulate. The more interference he can run, the longer it will take for the world to wake up to this:

  Washington is on track to issue more than $5 trillion in new debt over the next 18 months. Total interest payments on government debt are plotted to exceed $800 billion in the next 10 years, up almost fivefold from 2009. That’s if long bond yields stay under 5%, as the Congressional Budget Office forecasts. Every one percentage point higher, says Harvard economist Kenneth Rogoff, will cost the U.S. government an extra $170 billion annually.

“The Fed can only manipulate interest rates so far,” notes our currency trader Bill Jenkins. “Then the market takes over. Our Treasury bonds are becoming a greater and greater risk to people who buy and hold them. Of course, basic market theory holds that to assume greater risk going forward, one must have a higher rate of return. So no matter what the Fed "dictates” by lowering rates, they are on their way up!”

We’ve got plenty more to say on this matter, far more than our humble 5 Min. can allow. So be sure to watch the test installment of our Retirement Recovery Series. Our resource trader and options veteran Alan Knuckman explains how you can rake in quick and consistent double-digit gains as the bond crisis worsens. This Webinar is a completely free supplement to your Agora Financial subscription, so check it out, here.

  Perhaps Washington’s only saving grace: The whole Western world has bought into America’s economic school of thought.

  “We are witnessing the end of the post-World War II economic construct of the world’s financial system,” opines Byron King. “That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, ‘Nature abhors a vacuum.’

“Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects.

“Exhibit 1, Brazil. Brazil is making a national commitment to develop energy resources located far offshore in the South Atlantic. Indeed, no nation has ever advanced such an ambitious plan for long-term comprehensive offshore development. And it’s being bankrolled by China.”

(If you haven’t heard, Byron just published his latest special report — Set for Life: Eight Keys to Getting “Miserable Rich” with Gold. We have only a limited number of copies available, so get yours now.

  Could the world’s new reserve currency be “BRIC dollars”? Russian President Dmitry Medvedev will propose a new world currency when he meets with Chinese, Brazilian and Indian leaders this month, his spokeswoman said this week.

“We need some kind of universal means of payment, which could create the basis of a future international financial system,” Medvedev told CNBC. “Naturally, because of the crisis in the American economy, attitude to the dollar has also changed.”

What would we call them? Bric-ollars? Bric-ies?

  Both the Bank of England and European Central Bank held their main lending rates at all-time lows this morning: A measly 0.5% for the Brits, 1% for the eurospace. Just like the U.S., both nations announced plans to buy their own long-term bonds, a process that funds government deficit with the printing press.

  Australia is in the global economic spotlight today, as the land down under reported surprising GDP growth last quarter. Aussie number crunchers say GDP expanded 0.4% in the first quarter of 2009 — not exactly a booming economy, but far better than any of its Anglo counterparts.

“That means that technically,” Dan Denning reports from Melbourne, “Australia hasn’t had two consecutive quarters of ‘negative growth’ and isn’t in a recession. That’s if you accept the technical definition of recessions, or if you’re a moron.

“The numbers show reduced imports because consumers are scared. They show statistically goosed exports, which predict lower commodity prices, and therefore higher export volumes. And they show the biggest contraction in business capital and machinery outlays since 1991.

“In summary: To celebrate the GDP figure as a triumph of government policy is to shout your economic ignorance from the rooftops of the world. Sure, there are items to be positive about, especially exports. But the idea that government spending has somehow spared Australia from the long-term consequences of debt and leverage is beyond absurd. If this isn’t an old-fashioned recession, it’s a diet chocolate recession, in which the short-term benefits of consumption belie the long-term consequences of debt.”

  Despite all you’ve read above, the dollar is notably stronger today. The dollar index is up over a full point from Wednesday’s low, to 79.6 as we write.

  Stock investors ended the market’s four-day rally yesterday. The S&P 500 fell 1.4%. Trading today looks a bit timid, but the market’s in the black as we write, thanks mostly to this:

  Unemployment claims have finally snapped their record-setting streak. Continuing claims for jobless benefits fell by 15,000 last week, to a still lousy 6.7 million. That’s the first reprieve from a 20-week streak of record highs. First-time claims for benefits declined a bit too, down 4,000 to 621,000.

  “Stocks are still on a roll,” says one of our shorter-term analysts, Wayne Burritt. “From a low of 667 in March to a recent price of 944, the S&P 500 is up a mind-blowing 41%. That’s a ton of upside action in a relatively short amount of time. And while I anticipate the typical 3-5% pullbacks along the way, there’s little doubt this market is headed higher.

“The S&P has powered above the 930 resistance level — set during the beginning of last month — like a walk in the park. That level should now become a solid support level for more movement to the upside.

“For the market’s recent action to really get legs, I’m looking for a decisive move above 944. And since we just pierced 944 this week and have yet to establish support, don’t be surprised if we get some lower prices in the days and weeks ahead.”

Wayne suggests that traders should use pullbacks to build their positions. “When everyone says it’s time to get into this market for good, you can bet your bottom dollar the market’s big moves will be history. It’s just a fact of life that you can’t wait for the herd; you have to take reasonable chances, and you have to have vision of what’s going to happen, not what’s already in the hopper right now.”

For Wayne’s trading advice, be sure to check out Easy Money Options. If you’re new to the options game, it’s a perfect introduction. Details here.

  Junk bonds have come back from the dead — and then some. Of all the asset classes, you’d think the market for debt from financially fragile companies wouldn’t fare well during a “credit crisis.” In fact, we’d suspect it would be one of the last asset classes to recover. But no, anything is possible in 2009… Check the chart of HYG, an ETF that tracks the “distressed debt” market.

“I think that high-yield bonds have moved up way too far, way too fast,” says Strategic Short Report’s Dan Amoss. “Like low-quality stocks, many of these bonds are pricing in a return to the bubble economy, when that is clearly not going to happen. I agree with NYU professor Ed Altman — creator of the Z-Score and an expert in distressed debt investing — that the high-yield bond market will not bottom until defaults peak. Defaults will probably not peak before late 2009 at the earliest. The recent rally in junk stocks and bonds was primarily a function of the Fed’s hyperinflationary policies, which have served as rocket fuel powering any risky asset class with momentum, regardless of fundamentals.”

  

 

  After a series of small pullbacks this week, most commodities are back near their 2009 highs. Crude oil goes for $68 a barrel as we write and gold is just below $980 an ounce — both near the high end of their recent range.

  “Where did China,” asks a reader, “get all the money it’s spending on oil and gold and other commodities? From you and me, of course. All those Chinese-made products we’ve been buying for the last couple of decades — all those jobs that U.S. companies sent over to China to save on labor costs here. Talk about cutting our own throats!

“We’ve no one to blame but ourselves. And they still have most of the trillion or so in U.S. T-bonds that the Fed is trying to make worthless. Maybe Bernanke should be hailed as a hero, instead of being reviled.”

The 5: Hmmm… want to bet?

  “Whenever I see health care numbers comparing us with Japan or Europe I get upset because it is so unfair,” a reader writes in response to a chart we ran yesterday, which suggests Americans spend much more on health care then other rich nations, but live no longer.

“Just two of the many reasons that we have these problems are: We are supporting a huge number of illegal immigrants and all the diseases that they bring into this country. Plus, we have an out-of-control legal system that sues the medical profession for enormous amounts of money, most of which goes to the attorneys. I only ask, where are the new medical breakthrough coming from and where do people in the world go if they want the best health care available? The U.S., of course.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Have $1? Then you can afford a full month trial of Chris Mayer’s high-end investment advisory, Mayer’s Special Situations. No kidding — just $1 for a month of Chris’ advice and a look into the MSS portfolio. If you’re a serious investor, that’s a no-brainer… get the details,here.

 

rspertzel

Recent Alerts

“Prepping” for a Post-Dollar World

“How would we use our precious metals as money and stay outside of the government system?” asked a reader after our recent exploration of CBDCs. So here goes… Read More

Innocence Is No Defense (Against Federal Seizure)

There are at least five lawsuits pending after a federal trifecta raids U.S. Private Vaults in Beverly Hills. Read More

Russian Hackers, American Negligence

Much of the hot mess that’s “cybersecurity” in the United States can be laid at the feet of the U.S. government. Read More

Tesla = Pets.com?

Investing legend Jeremy Grantham says: “The thing about a bubble… it can keep going.” Read More

The $4.197 Trillion Threat

The Federal Reserve’s twice-yearly Financial Stability Report whistled past the graveyard where Archegos Capital Management will soon be interred. Read More

Digital Currency = Total Surveillance

“While China may be the leader in the race to build central bank digital currency (CBDC),” says Jim Rickards, “the Fed has not been caught napping…” Read More

Russia’s Long Game (Gold)

The Central Bank of Russia has been loading up on gold for years. “No one plays the gold market better,” observes Jim Rickards. Read More

Six Years (Max) to China War

If China forces Taiwan reunification, is the U.S. ready to go to war with China? Read More

Bloodbath Newbies

The mainstream is finally recognizing that a new era of the mom and pop investor has arrived. Read More

FinTech Meets Fine Art

“Financial technology (FinTech) — along with some good old-fashioned creativity — has opened an elite market to the masses,” says Zach Scheidt. Read More