The Worst is Over? College Costs, CRB Bull Market v2.0, Bank Warning and More!

by Addison Wiggin & Ian Mathias

  • Greenspan, Newsweek say worst is over… unless it isn’t
  • Dan Denning on why “you might be better off trading” this market
  • Dollar falls, commodities soar… Chris Mayer on why the materials rally might have legs
  • Squirreling away for college? You can stop saving now… if you own some gold
  • Plus, Byron King explains a “fundamental misconception of wealth in this world”

  We’re sensing a theme to the latest leg of the sucker’s rally. It’s a lot like the first time we drove a car: One foot was on the gas, a full-blast expression of newfound joy. But the jerky acceleration wasn’t too comfortable, and that left foot broke the rule… you can’t tap the brake and hit the gas at the same time, we were told. Au contraire:

  “Collapse, I think, is now off the table,” said Alan Greenspan over the weekend, pedal to the metal. “I’m pretty sure we’ve already seen the bottom… it’s clear that we’ve turned, perhaps in the middle of last month, the middle of July.”

“I do think it is possible that we could get a second wave down,” he cautioned, literally seconds later. “But the important issue is if we don’t — and I think the probability is that we won’t — that we are close to stabilization.”

So the worst is over, unless it gets bad again.

  The major media’s singing the same tune… check out the purposeful irony on this cover:

Newsweek, no doubt, has no interest in repeating BusinessWeek’s infamous “The Death of Equities" cover. In fact, they seem to be poking fun at it. But still: “I’m prepared to declare that the recession is really, most probably over,” said Newsweek’s business guru, Daniel Gross. Yet a few paragraphs later, he concluded, “Without the tail wind of cheap money and a housing boom, it’s difficult to see — as it always is at the beginning of expansions — what is going to produce large-scale jobs growth.”

  After roaring ahead yesterday to a 1.5% gain, the S&P is slowing it down today. The index closed over 1,000 yesterday for the first time since November. But the S&P opened down 0.5% this morning… good ol’-fashioned profit taking.

  But just as we were ready to finish today’s 5, the latest pending home sales number has jerked the stock market back to break-even. According to the National Association of Realtors, pending home sales rose 3.6% in June. That’s the fifth straight month of improvement and the best streak since 2003. Pending home sales are up 6.7% since June of last year.

  “We don’t know if the world’s economy has really reached the bottom of this debt-deflation cycle,” writes Dan Denning, “where the bad investments and underperforming assets of the credit boom are written down, or off altogether. Is the balance sheet recession — the reduction of debt and the write-down in assets bought with debt — really over?

“We’d suggest the answer is no. But then, it doesn’t pay to argue with markets, does it? The wretched performance of the U.S. dollar and dollar-denominated bonds leaves investors with a simple choice: Speculate on other, riskier assets or watch the value of your dollar-based savings erode.

“So we have the era of forced speculation. It’s a kind of dollar exodus. And anything that is not the dollar is a potential promised land. The upside — if you own oil, base metal and commodity shares — is that there’s a strong tail wind behind your investments.

“The downside is that the speculation may not be based on real sustainable growth. It’s just another lending bubble in China piled on the rubble of the real estate lending bubble in America. Bubbles built on rubble aren’t stable. That means you may be better off trading the shares, rather than buying and holding and getting whipsawed by volatility. It’s worth thinking about.”

  Right on queue, the FDIC warned banks today that they should batten down for more losses on home equity loans. Banks “should consider their historical loss experience on the group, adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans,” reads the FDIC letter. We note that’s their own emphasis in italics.

According to, 93 million homes, condos and co-ops have mortgages that exceed their appraisal value. Home equity loans on those places are likely worth… zippy. And banks call those “assets”?

  The dollar index found a new 2009 low yesterday. The American stock rally plus better-than-expected manufacturing data from China, Europe and the U.S. pushed the dollar index as low as 77.4. You’ll have to go back to late September 2008 to find the index that beaten down.

The dollar index arrested its slide this morning, but still remains around 77.5.

As the dollar slumps, commodities are soaring. The Reuters/Jefferies CRB Index of the 19 most popular commodities shot up 3.9% yesterday, its best day since March. With a score of 266, it’s at the highest point since November. What’s more, the CRB just got a technical tail wind… check it out:

And if the greenback has any bearing on the price of commodities — which it certainly does — the dollar index makes the CRB look a bit cheap as well. The last time the dollar index was at today’s value was back in late September… when the CRB was just under 350.

  “People will blame the higher oil price on speculators,” adds Chris Mayer, “but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for moly. It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

“So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead…

“Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view.”

  Gold is sitting pretty today, thanks mostly to the dollar’s decline. The spot price reached as high as $962 an ounce yesterday. As we write, it’s at $958.


  “I was just doing some research into college tuition and discovered something interesting,” writes Charles Vollum of Charles has been digging up details on tuition fees at Yale and then doing what he’s been known to do — pricing ’em in gold.

“Although dollar costs for tuition, room and board have risen tremendously, from about $700 per year in 1900 to $48,622 per year in 2009, their price in gold has only risen from 1,053 gold grams in 1900 to 1,726 gold grams in 2009…

“Before we continue, reread that last paragraph carefully… in dollars, prices have risen to 70 times their starting price! SEVENTY TIMES! In gold, they are up 64% over a 109-year period.

“Interestingly, Yale tuition was almost exactly the same in the 2008-2009 school year (1,633 grams) as it was in the 1932-1933 school year (1,589 grams). It works out that 2008’s annual tuition is just $30 more in the gold coins of 1932. In fact, you’d get a couple of silver quarters and a silver dime back in change from your $10 Eagle and $20 Double Eagle. This is in spite of a 44 times increase in dollar prices, from $1,056 in 1932 to $46,000 in 2008.”

  Cash for clunkers” boosted auto sales by over 200,000 vehicles in July, said industry researcher Autodata yesterday afternoon. That bumped total sales to 1.14 million in July, easily the best month of the year for automakers. But even with direct government manipulation, sales were down 12% from a year earlier.

  In a similar fold, personal incomes fell 1.3% in June after an equally large rise in May, the Commerce Department says today.

Uncle Sam gave Social Security recipients a one-time stimulus payment in May, which bumped “incomes” up 1.3% during the month. Well, who would have thought… that increase in “wealth” went just as fast as it came. Incomes fell by a similar amount in June. Excluding the stimulus, incomes dropped 0.1% in both months.

  “When the government stops dropping cash out of helicopters, people get poor again,” notes Byron King. “Nothing saved, nothing ventured, nothing invested… nothing gained.


“There’s a fundamental misconception of wealth in this world. It’s two competing paradigms, at war with each other for nearly 200 years.

“One side says that wealth is the capital formed from investment in hard, tangible stuff (mines, mills, factories, farms, ships, etc.) Also add in the ‘real’ intellectual property, like patents and techniques… basically, how to accomplish stuff.


“The other version says that wealth comes from the power of the state to redistribute things that are already here. Hence the fixation and love affair with fiat currency, tax policy and big spending… By means of manipulating the currency, the state can control how the ‘real’ assets get used and abused.


“There’s probably some happy mean of true wealth creation, and redistribution by the state in the name of its own power. Societies can work for a while, even when the government is sucking down the previously created capital and redistributing it to bureaucrats and other government supplicants.


“At some point, though, there’s too much government friction. The gears seize up. The creation of true wealth slows or ceases. In the U.S., we may be finding that point right now.”

  Last today, another odd recessionary bull market: backyard chicken farms. According to today’s New York Times, business is booming at baby chick hatcheries. It’s a two-pronged craze, evidently… folks in rural parts are starting backyard coops so “if you lose your job tomorrow, you’ve still got food,” an Idaho man told the NYT. In cities, it’s access to the foodie/organic/locavore craze without Whole Foods prices… eggs can’t get any fresher, can they?

Either way, it’s a good time to be in the chick business. The Postal Service says it shipped 1.2 million pounds of packages containing chicks in the first six months of 2009, a 7% jump from the same time last year. One chick weighs about an ounce… that’s a lot o’ baby birds.

  “The economic idiocy behind destroying the engines of the ‘cash for clunkers’ vehicles is almost unfathomable,” writes a reader. “What next — a ‘money for McMansions’ program in which homes are burned in order to stimulate new home sales and prop up the price of existing houses? Bastiat must be spinning in his grave as we break windows on the most massive scale in history.”

  “To the guy who drives seven miles to work every day and thinks everyone can live five minutes from where they work,” writes a reader responding to yesterday’s inbox, “go try to buy a house in Arlington, Va., or Chevy Chase, Md., or downtown Austin, Texas. The cost of a Cadillac is p-ss in a bucket compared with a detached house, or even an efficiency-sized condo, in those towns.

“I left the Washington, D.C., area because I couldn’t afford to buy a detached house at all, let alone near where I worked. Don’t beef at the folks that don’t have any options as to where to buy. Nobody likes sitting in traffic for two hours a day, as I was doing. But until city planners and the ‘American mind-set’ — much of which is driven by the marketing strategy of builders who ‘just gotta build’ — changes, the average Joe with (or without) a family doesn’t have much of an option.”


Ian Mathias

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