Life Without Stimulus, The “Strong Dollar” Myth, Taking Gold Profits and More!

by Addison Wiggin & Ian Mathias

November 12, 2009

  • Stalled stimulus: New housing market data shows what’s in store for “recovery”
  • Marc Faber on the “precarious position” that now plagues ALL investors
  • Tim Geithner cheers for “strong dollar” policy… Dan Amoss analyzes the market’s reaction
  • Byron King on taking profits in these uncertain times


  Can the American recovery persist without government support? Today the market gave us a hint:

Heh, it didn’t even take actual removal of government intervention to sack mortgage applications, the MBA confirms today. As we noted earlier this week, the tax credit was extended and expanded into the spring of 2010. Just the anxiety of its Nov. 30 expiration alone (or perhaps savvy homebuyers waiting to see if they were going to get a better government deal) plunged the mortgage applications index to 220 last week, its lowest score since 2000.

And what a coincidence, too… the previous low was in early February of this year, right before our government enacted the homebuyer credit.

  A few more quick hits on the housing front today:

The median home price in the U.S. fell 11% in the third quarter, year over year, said a report from the National Association of Realtors. The median price came in at $177,900 after recorded sale prices fell in 123 out of 153 metropolitan areas in the U.S. during the quarter. The NAR also said that 30% of sales were distressed.

And speaking of distressed sales, a total of 332,292 properties suffered foreclosure in October, RealtyTrac says today. That’s a 19% annual jump and the eighth month in row in which foreclosures exceeded 300,000. According to the firm, one in every 385 U.S. households was in some form of foreclosure in October.

So… prices still plummeting and foreclosures still soaring, despite waves of distressed sales and government manipulation (tax credits, fed purchases, etc)? Not our image of recovery.

  “Central bankers and pundits seem to believe that they have averted the second Great Depression,” Marc Faber wrote in yesterday’s Daily Reckoning, “while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

“For now, though, the low 10-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap — not by the volition of a cooperative private sector, rather induced by a U.S. government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

“Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

“Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much, in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.”

Keeping watching The Daily Reckoning for more from Dr. Faber, including an exclusive interview we’re just wrapping up today… details soon.

  The dollar index is a bit higher today after Wednesday’s 15-month low. It scores 75.2 as we write. Amazingly, this BS is helping its rise today:

“I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar," Treasury Secretary Tim Geithner told reporters in Japan yesterday. Mr. Geithner is buttering up the Asian population before President Obama’s visit with tear-jerkers like, “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors… and savers, but investors around the world.”

Heh, we’re sure the Japanese took that one to heart. They’ve seen the “confidence” created by years of easy-money policies.

  The U.S. government will finish its historic streak of debt sales today with a record $16 billion offering of 30-year bonds. This will pile on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question. If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast. The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

“The market may force the Fed to defend the dollar with interest rate hikes. This is type of currency crisis, in which Fed tightening comes earlier than expected, is totally outside of consensus expectations. An imminent financial crisis was also far outside of consensus expectations in early 2007.”

And if the Fed is forced to tighten before the stock market desires – or if the Treasury suddenly fails to find enough demand for its debt — you better be one of Dan’s Strategic Short Report subscribers. Learn how he can help you conquer the next crash, right here.

  Our government’s “strong dollar” policies and record bond auctions have pushed gold to yet another record high today. The spot price hit $1,123 in Hong Kong trading early this morning.

  "1,100 per ounce at the moment is probably more a U.S. dollar story," said AngloGold Ashanti CEO Mark Cutifani. Cutifani, who manages the world’s third largest gold producer, said the spot price could trade down to $900 an ounce in the next few months.

  On the other hand, “There is a strong case to be made that we are already at ‘peak gold,’" CEO of Barrick Gold (the world’s biggest producer) Aaron Regent said yesterday. “Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore.” Regent says Barrick is still committed to breaking down its 3 million ounce hedge book, an explicit bet on higher gold prices in the future.

  “If you need cash in the next year or two,” Byron King wrote to his readers yesterday, “say, for tuition or a major purchase or to care for a relative in a nursing home — then now’s a good time to benefit from the recent appreciation in gold stocks. The rising tide lifted your boat. Don’t let a falling tide smack your hull onto the rocks. Book the cash and set it aside in an insured bank account.

“Just to be clear — I’m NOT issuing any sell recommendations for the official Outstanding Investments portfolio.

“I’m just discussing what to do now that we’ve benefited from rising prices for gold and silver. If you’ve been following the OI portfolio for more than a year or so, you’ve probably got some nice gains. I still like all the companies whose stocks we own. I just don’t like or trust the stock market, let alone what’s happening to the U.S. economy.”

  502,000 Americans filed for unemployment benefits for the first time last week, the Labor Department says today. You’re supposed to find comfort in this data, as that’s the lowest level sine January and less than the 510,000 the market expected. So yeah… “only” half a million people sought unemployment insurance last week… feel better.

  Last today, some multilayered irony: The global art market has proved its resiliency by selling a painting of U.S. dollars.

It’s not a painting, actually, but a silk screen of "200 One Dollar Bills" carefully selected and arranged by Andy Warhol. The 1962 piece is worth $43 million to at least one collector — a yet-to-be named buyer who scored the winning bid at a Sotheby’s auction yesterday. That was four times the estimated sale price, the second most expensive Warhol bid ever, and ipso facto evidence that while most of the world is cutting back, very rich people are still inclined to pay through the teeth for fine art. The entire auction sold all but two of 54 lots for $134 million, about 38% bigger than pre-sale estimates.

  “I do not consider myself conspiracy theorist,” a reader writes with, you guessed it, a conspiracy theory in tow, “but this has to be the most manipulated market of all time.

“I am a small-business man, and there is no recovery on the horizon. It smells like something on the ‘margin’ is about to trigger a crash of all crashes. I not know when, but sure wish I did. If the market were still wallowing in the 6,500-7,000 (Dow) range, there might be some hope going forward, because it would mean that business and Americans were retrenching for a REAL move forward. Right now, it is a smoke-and-mirrors economy. When the crash occurs, the only people standing are going to be those on Mr. Dodd’s donation list, and we will all be subservient to the great corporatists and Uncle $am. I sincerely hope I am delusional and wrong, but I know I am not!”

  “Please help!” another reader exclaims. “I don’t get how this China data could cause our market to go up. Their industrial production surged. OK. Their internal consumption is up sharply. Gotcha. Are WE the ones selling them the stuff for this production? Are OUR exports to China increasing? Is the balance of trade actually coming into balance? Or is this all Chinese internal consumption? The Dow’s increase on this news gives me the impression of starving people in the street outside an expensive restaurant partying because people inside are enjoying a good meal.”

The 5: And if you read yesterday’s 5, it looks like that great meal is getting paid with American AND Chinese debt. Getting interesting, eh?


Ian Mathias
The 5 Min. Forecast

P.S. For every $1 that gold goes up, you could make $3. Find out how in Byron King’s latest special report: Triple Your Gold Gains With "Slingshot Options" 


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More