Fear Looks Cheap Again

by Addison Wiggin

• The VIX near six-month lows… and why it’s about to reverse

• Marc Faber on an “important turning point” for interest rates and the dollar

• Tiny nation, big worries… Bahrain’s U.S. ambassador spins a $200 oil scenario

• A new gauge of U.S. decline: Wealth per person higher in… France?

• The future catching you: Prepare yourself for “an expansion of ideas, innovation and wealth”

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 — its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs… and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The U.S. has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the U.S. government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

With the “risk trade” off again, the dollar index is firming for a second day in a row. It climbed to 77.7 this morning.

As a result, the major stock indexes are down 0.5%. Traders are nervously awaiting the 2 p.m. release of minutes from the Fed’s September meetings. At which point scads of journalists, analysts, wonks and bloggers will eagerly begin scouring for any indication the vaunted round two of quantitative easing (QE2) will set sail soon.

Perhaps, what they really fear is what our Dan Amoss predicted in this space last week: The Fed will wait for much stronger signs of deflation, and QE2 steam up until after their next meeting on Nov. 3.

 The dollar bounce this week? “Get used to it,” our friend and Vancouver favorite Marc Faber told an audience in Seoul this morning.

Faber expects an “important turning point” over the next three months — with interest rates starting to rise. “Instead of interest rates going down,” he said, “they could start to go up. Instead of the dollar being weak, it could strengthen.

“I’m ultra-bearish on everything,” the good doctor concluded, “but I believe you’ll be better off owning shares than government bonds.”

And gold? For Faber, that’s a given.

Gold backed off yesterday’s record of $1,354.40. Still, $1,348 looks plenty strong from here. Silver touched another 30-year high yesterday at $23.35, but has since backed off to $23.13.

Just a friendly reminder: The first-issue Kangaroo Silver Dollars we mentioned last week are still available from our friends at First Federal. But your window of exclusivity as a reader of The 5 expires tonight. The offer “goes public” tomorrow. Read here for details if you’re interested.

[Full disclosure: Because of our business relationship with First Federal, we may be compensated if you order through this exclusive offer.]

Oil is off more than 1%, to $81.25. The risk trade is off in the energy space, too.

Corn and soybean prices, however, are holding their own today after surging to two-year highs Friday and Monday. Friday, the U.S. Department of Agriculture cut its forecast for the U.S. corn crop by 3.4%.

Corn’s summer surge delivered two big gains for readers of Resource Trader Alert — 83% in a week and 172% in two months. Alan’s still eight for his last eight and we’re still offering 50% off membership — but only through midnight tomorrow.

The government in tiny Persian Gulf nation of Bahrain worries it could be the first target if Iran builds a nuclear weapon, reports The Washington Times. That’s gotten the Pentagon’s attention, seeing as Bahrain sits just 150 miles across the gulf from Iran and is home to the U.S. Fifth Fleet.

“Iran has had claims in the past on Bahrain,” says the country’s ambassador to the United States, Houda Nonoo. “The latest was on their 30th anniversary in February 2009, where they mentioned Bahrain as the 14th province. Very similar to [Saddam Hussein’s] Iraq mentioning Kuwait as their 19th province.”

Bahrain’s leaders are Sunni Muslims, but the population is majority Shia… as is Iran’s. The government is rounding up Shia leaders in the run-up to elections a week from Saturday, accusing them of links to “outside forces,” without singling out Iran.

The next 11 days in Bahrain will be, to say the least, interesting. It may or may not prove to be the spark in a new Middle East war… but as Byron King outlines in this presentation, there are three other potential sparks in the region. Only one needs to ignite the conflagration before we have a whole new recipe for oil prices globally.

If you believe the decline of empire is a slow-motion process, here’s something to consider: Ten years ago, the United States ranked No. 1 in the world when it came to average wealth per adult.

Today? According to Credit Suisse, we rank No. 7. Average wealth per adult in No. 1 Switzerland is 58% higher than in the United States.

Even those cheese-eating surrender monkeys in France are better off than Americans. So are the Swedes. (But then, the World Economic Form says Sweden is now a better place to do business too. And what do they know?)

“The cause of liberty in the Western Hemisphere has good reason to rejoice,” says our friend Alvaro Vargas Llosa, a senior fellow at the Independent Institute and one of the patient sit-down interviewees in our latest documentary project.

That’s because his father, Mario Vargas Llosa, was awarded the Nobel Prize in literature last week.

Alvaro says it’s “great news for those of us who value freedom.

“His work, as the Swedish Academy recognized in its public statement, explores the oppressive structures of power and the plight of the individual who rebels against them.

“Among the moving messages he and the family have received since the announcement come from hundreds of letters of hope from Cubans and Venezuelans who see in him a symbol of what they stand for.”

We can’t help but wonder how history might have turned out if Vargas Llosa won the Peruvian presidential election in 1990. (The man who defeated him now serves a 25-year sentence for human rights abuses.)

“He is so right, and it is so obvious,” a reader writes of the Chinese high school teacher who said yesterday the U.S. trade deficit won’t fall until the savings rate rises and businesses have an incentive to manufacture again.

“Yet most Americans don’t seem to get it,” the reader says. “After the U.S. nearly destroyed the world economy with its mortgage scams/Wall Street scams/Washington scams, the U.S. is going to give it another try by starting a trade war with China. If that happens, it will escalate quickly and the worldwide consequences will be serious, indeed.

“The rest of us,” this Canadian concludes, “are getting kinda tired of, and worried about, the American way of doing things.”

The 5: We actually heard from our friend Dee Woo in Beijing again this morning. Apparently, while we were merely quoting from his Op-Ed in The Wall Street Journal, he is also a reader of The 5.

“While the whole world’s edging toward a currency war triggered by the nationalist survival instinct in a post-crisis world,” Mr. Woo writes, “isolation of China will destroy a lot and accomplish little.

“It’s time for the U.S. to rise up above all to lead the international coordination to defend free trade and the dollar’s status as the global currency upon which decades of world’s prosperity is built. That’s the aspiration the U.S. gives the world as the beacon of the free market, free trade and great capitalism in previous crises. That’s the foundation for the U.S.’ status as the superpower and world leader.

“A U.S.-led coordinated gradual currency appreciation will leave China with no choice but to cooperate and help address grievous global imbalance and keep the world on the track of recovery toward a new decade of free trade and prosperity.”

Ah, if it were only that simple… and if only inhabitants of Washington and Beijing agreed with you.

“Who is the bigger criminal in this case,” asks our reader who admitted he’s going to report all his gold was stolen “last night” to his local police department to prevent its confiscation, “me or the government? If the government wants to rob me, I will do all that I can do to protect my gold, even if it means committing a crime.”

The 5: The point may be moot given the next reader’s comment.

“Sorry, boys,” he writes, “but the notion that Uncle Sam can’t find your gold is incorrect. Using the so-called Patriot Act, the government hooked themselves up with every precious metals dealer in the country years ago. The dealer does not have to report a sale because the government can simply demand their records and find all the sales they have made, right along with your name, address and phone number.

“Just for the record, they will look harder at gold than silver, because they cannot control silver; i.e., it is ubiquitous, everyone has some, it’s an industrial metal and so on. Choose carefully, but remember, in general, silver outperforms gold. Good luck.”

Indeed,

Addison Wiggin

The 5 Min. Forecast

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Breakthrough Technology Alert