The Exit Strategy, National Security, Buying Gold Coins, The China Bust and More!

by Addison Wiggin & Ian Mathias

  • Stocks, currencies, commodities stand still… why traders are waiting to make their next move
  • A worthy consensus: Gross, Bonner, Fry and Butler all call for Treasury bear market
  • Greg Guenthner on investing in national security, post the Christmas Day attack
  • The single most important factor when investing in gold coins
  • Plus, a look into the flaws of China’s growth, GDP measurement and gov. stimulus… all in one handy video


  The Fed is kicking off the New Year in search of an exit strategy, yesterday’s FOMC minutes revealed. “A few members noted,” the minutes read, “that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter.” Yet only one soul on the FOMC noted that “that it might become appropriate” to stop manipulating mortgage and Treasury markets… you know… one of these days.

Our takeway from these drab minutes: They’re will likely be more intervention before there is less. The Fed is still scheduled to stop purchasing Treasuries and agency debt in March.

  “If 2008 was the year of financial crisis,” reads Bill Gross’ latest monthly outlook, “and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of ‘exit strategies,’ during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder ‘which’ government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries…

“Using 2007 as a starting point and 2014 as a near-term destination, the IMF numbers show that the U.S., Japan and U.K. will experience ‘structural’ deficit increases of 4-5% of GDP over that period of time, whereas Germany will move in the other direction. Germany, in fact, has just passed a constitutional amendment mandating budget balance by 2016. If these trends persist, the simple conclusion is that interest rates will rise on a relative basis in the U.S., U.K. and Japan compared to Germany over the next several years and that the increase could approximate 100 basis points or more. Some of those increases may already have started to show up — the last few months alone have witnessed 50 basis points of differential between German Bunds and U.S. Treasuries/U.K. Gilts, but there is likely more to come.”

  And just in case Mr. Gross didn’t quite pound the idea home:

“The new trade of the decade is sell U.S. Treasuries, buy Japanese stocks,” Bill Bonner wrote a few days ago.

“Treasuries are a sell,” Eric Fry wrote yesterday.

“I’m telling you this now, so you can listen to me later,” Chuck Butler penned this morning. “Treasury yields are going to rise in 2010, causing huge losses for holders of existing Treasuries.”

  Here’s another nail in that coffin: Gov. Arnold Schwarzenegger demanded federal assistance today to help close California’s 2010 budget gap. Already $20 billion in the hole for this fiscal year, Schwarzenegger is threatening to nix all kinds of politically sensitive programs (welfare, in-home care services for the elderly) if Washington doesn’t cut him a check for $8 billion. The state pays part of the tab for those federally mandated assistance programs; thus, the Governator says he “no longer can ignore what is owed to us.”

As perverse as the whole underlying logic might be, we suspect he’ll get it… and the debt in Washington will pile higher. Look for other states to follow suit.

  “The Treasury may be in big trouble,” Greg Guenthner writes. “However, our collective focus remains on national security after the attempted Christmas Day attack on an airplane as it landed in Detroit — and how, with the proper tools, incidents like this could be prevented.

“Here’s an important fact to keep in mind: The Nigerian man charged with attempting to detonate an explosive on the flight was in a government database of more than half a million people suspected of having ties to al-Qaida and other terrorist organizations. The fact that this man was able to slip though security underscores the flaws of government screening techniques.

“That’s why these recent events have piqued the interest of the investing community. The incident has refreshed intense debate over the effectiveness of current security measures — as well as the potential implementation of high-tech threat detection systems. This debate could very well lead to massive overhauls in airport security, as well as tracking and identification techniques for suspected terrorists… which could lead to a windfall for early speculators in the right small-cap security stocks.”

Greg just added his favorite penny stock symbols in this arena to the Bulletin Board Elite watch list — a list you need to check out if you favor the giant profit potential of these very small stocks.

  Another hint on the Friday jobs report trade: First-time jobless claims came in lower than expected last week, the Labor Department announced today. “Just” 434,000 people filed for unemployment, bringing the four-week moving average down to its lowest level in 18 months.

  After a nice rally on Monday, gold has been holding steady. The spot price is about $1,130 as we write.

With the gold price this high, we’re still getting a lot of latent interest in gold coins. But be careful. If you’re investing in gold coins, “you should buy the finest-quality coins that you can afford,” Nick Bruyer of First Federal Coin told us during our gold Q&A last month. “In the bullion market — in the spot metal market — it’s just all about the precious metal itself. There’s really no condition factor to that; it’s either gold or it’s not. In the collectable market grading, the quality of the rare coin is extremely important, and it’s comparable to things, for example, such as the diamond market, where a low-grade diamond is worth far less than, let’s say, a D flawless diamond, and in almost any collectable market you’ll see this huge focus on quality…

“The grading makes an absolute difference, and we basically take the position that whatever your budget is, you should buy the finest quality within that budget because what we see is that the money in the coin market is chasing quality. So they’re after the very finest, the very best, and those areas are the ones — the top-quality material is the material that is setting and breaking price records today. The mediocre material, the average-quality material, is languishing, and in some areas is even declining in value, with our soft economy. But the top material, the top rarities are the coins that are bringing the big money.”

Thus, it’s no coincidence that Nick and First Federal are currently offering us exclusive rights to a stash of MS-70 $5 Gold Eagle coins. Simply put, there is no finer grading of quality than MS-70, and Nick is offering these particular coins only to you. If you’re in the market, this is a great opportunity to score a high-quality coin. Details here… and don’t wait: The deal is off the table tomorrow night.

And if you aren’t quite ready to pull the trigger, we still have Addison’s Q&A with Nick posted online… it’s a great primer on buying and storing coins.

  Wow, here’s a must-see video — the farce of GDP, the China boom and government stimulus all wrapped into one. If you don’t have time for the whole bit (this is The 5 Min. Forecast, after all) here’s the gist: Al-Jazeera found a city in Inner Mongolia that’s almost completely empty… built with stimulus money, used to prop up GDP numbers, sold to investors who thought property prices would never fall… but no one actually lives or works there!

“These governments labor under the conceit that printing up more paper will create more wealth,” Doug Casey comments. “The truth is that it does just the opposite, because the inflated money supply sends false signals to the market, and people build things, buy things, invest in things, etc., that they would not do without that false information. That’s how governments distort economic decision making and create massive misallocations of capital.”

  “Regarding your reader who opined on ‘frack drilling,’” a reader writes, “his (or her) lack of knowledge about the subject should have precluded the comments from being published. That being said, there is no such thing as ‘frack drilling.’ Hydraulic fracturing is a process that takes place after a well has been drilled and has been used for decades.

“It is not a major threat to the environment. Most of the environmental problems cited by your poorly informed reader are actually from failures of casing or cement in abandoned wells, and occasionally cement failures in new wells. Fracturing does not result in the release of methane. The term is spelled ‘frac,’ which further demonstrates that your reader did not know what the frack he was talking about.”

  “I noticed the last item of yesterday’s missive discusses the issue of who is purchasing U.S. Treasuries,” a reader writes, whom we suspect does know what the frack he is talking about. “Your piece from The Richebacher Letter correctly identified the three major groups. However, the household sector is really quite interesting, especially since ‘households’ bought 35 times more government debt than they did in 2008. Really? In this environment of unemployment and rising foreclosures, where are the households who can afford to increase their investment in Treasuries? A recent article by Eric Sprott and David Franklin at Sprott Asset Management LP took a look at this issue in a December article entitled "Is It All Just a Ponzi Scheme?”

“Their research indicates that the ‘household sector’ is actually just a catchall category. ‘It represents the buyers left over who can’t be slotted into the other group headings.’ They quote directly from the Flow of Funds Guide, and discover that, after accounting for known sectors, the remainder of the purchases are assumed to be the amounts held or owed by the household sector. Sprott and Franklin conclude that this group of investors may not actually exist; they may simply be a ‘phantom.’ This group serves simply to balance the ledger in the Federal Reserve’s Flow of Funds report, yet now this group accounts for a very substantial portion of the reported purchases. So the question remains: Who is buying all these Treasuries? The picture may be even worse than The Richebacher Letter described.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. No kidding, those gold coins Nick is offering are going fast. You can stake your claim on one of the hottest selling coins in the country here… while he still has some in stock.


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