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QE2 running out of gas already? What’s behind today’s stock sell-off
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Big Pharma fails yet again… and how you can profit from its missteps
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“Moving from greenbacks to redbacks”… How the renminbi could become the world’s reserve currency
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Deficit commission plan DOA, except for one critical part: What you should plan for now
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Glutton for punishment: Mr. “Maybe I Am Naive” writes back
Hmmn… stocks are down 1% this morning. The Dow is just 35 points away from where it was when QE2 was announced last week.
A week ago today, Ben Bernanke as much as promised The Washington Post that QE2 would make stocks go up. “Stock prices rose and long-term interest rates fell,” he wrote, “when investors began to anticipate the most recent action.”
What went wrong… and why so soon?
For starters, traders are freaked this morning by an outlook from the computer networking giant Cisco. It sees weakening demand. Core customers like cable TV operators and even government agencies won’t be buying as much Cisco gear in the coming quarters as first thought. Cisco is down 16% as we write.
This is the first significant cut in “forward guidance” to hit the tape in a while. With skyrocketing commodity prices now working their way through the system, we have a feeling it won’t be the last.
Also weighing on the market: news that drugmaker Novartis is giving up on developing a lung cancer drug. Study results indicated it had little or no chance to improve patient survival rates.
Yikes… What a lousy year this has been for Big Pharma. The sector has had one setback after another… a phenomenon we capture in this one-minute and 16-second Speed Brief:
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August: Eli Lilly suspends trials of semagacestat, an Alzheimer’s treatment that actually worsened some patients’ symptoms
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May: GlaxoSmithKline suspends trials of a drug aimed at treating multiple myeloma — a type of blood cancer — after patients developed complications
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March: Pfizer’s own lung cancer treatment flunks Phase III trials.
Big Pharma has had so many disappointments fighting Alzheimer’s disease that earlier this year, five companies decided to pool the results from 11 failed drug trials involving 4,000 patients… on the theory that maybe one set of researchers will notice something another set of researchers overlooked.
“Companies said they’re running into a stone wall with Alzheimer’s,” according to Ray Woosley, head of the Critical Path Institute, which is spearheading the effort. “We really believe drugs are failing because we honestly don’t understand the disease.”
“Innovation no longer happens solely in one company’s lab,” added Frank Casty, an AstraZeneca executive. “It is happening through constant interaction between scientists in the biopharma industry, patient advocates, academia and government.”
Heh… We can just imagine the slew of obscenities a remark like that would draw from Breakthrough Technology Alert editor Patrick Cox.
“Big Pharma has Alzheimer’s wrong,” Patrick wrote recently. “But they keep throwing more money at bad research.
“A Barclays analyst recently reported that a drug on the market that could reduce memory loss would immediately be worth $5 billion a year.” And Patrick has identified a company on the verge of an Alzheimer’s treatment that tackles the disease itself — not just its symptoms.
“When you compare $5 billion to the current market cap of this company, you’re looking at the potential for a 100-fold price explosion. Maybe overnight.”
Only a few hours remain for you to check out Patrick’s presentation on this company… and two others on the brink of medical breakthroughs. It’s your last chance to grab a membership to Breakthrough Technology Alert at more than half off the regular fee. After midnight tonight, this offer is off the table.
Long-term rates haven’t exactly heeded Bernanke’s calling, either. Beyond goosing the stock market, QE2 was also meant to drive down rates for mortgages and corporate bonds.
The Federal Open Market Committee (FOMC) has great hopes of putting a floor in the housing market and making businesses, large and small, comfortable enough to hire again.
Just the opposite seems to be happening. Alas, there’s only so much a central banker can do. Sigh.
“The world is slowly, but surely, moving from greenbacks to redbacks,” wrote Qu Hongbin, chief China economist for HSBC, in the Financial Times yesterday, pouring on. “Given China’s economic and trade power, as it moves closer toward full currency convertibility, it will become more natural for the renminbi to be seen as a reserve currency.”
We forecast the shift in The Demise of the Dollar, first published in 2005, and have been chronicling it these pages ever since. But the speed with which it’s happening now… well, that’s unexpected.
“We could be on the verge of a financial revolution of truly epic proportions,” Qu continues. “China’s aim of internationalizing the renminbi has no doubt been helped by America’s pursuit of quantitative easing, a policy that many emerging nations have interpreted as an attempt to export U.S. economic problems via a weaker dollar.”
Indeed.
As if to underscore the point, a honcho at China’s central bank spoke up on the first day of the G-20 summit in Seoul about how the United States “should not force others to take medicine for its own disease.”
At this point, it doesn’t even matter whether it’s true. The leaders of emerging market countries think it’s true, and they will act accordingly. “It will surely only encourage governments, reserve managers and companies to think about alternatives to the dollar,” says Qu.
Emerging markets now account for 55% of China’s trade.
“A switch from the dollar to the renminbi for trade settlement would be an appealing option for EM nations,” Qu concludes. “And we expect at least half of China’s trade flows with EM countries to be settled in renminbi within five years, making it one of the top three global trading currencies.”
Thus, Brazil and China are now settling trade in reais and renminbi, bypassing the dollar completely. China has similar deals with Russia, Indonesia, Argentina and South Korea.
In the meantime, the Chinese do seem to be importing one item the Fed would love to see more of in the U.S.: “inflation” in the Middle Kingdom rose in October to an annualized 4.4%.
That’s the highest in more than two years… higher than the 3% Chinese leaders would like… and it assumes the figure isn’t vastly understated for public consumption.
Gold continues to gyrate like Skinny Elvis around $1,400, as it has all week. “This gold move is overdone, overextended and hasn’t seen any major corrections in many, many months,” says our commodities trading specialist Alan Knuckman.
But that doesn’t mean it can’t keep going higher. Replying to a reader who wondered about a Goldman Sachs forecast of $1,650 gold, Alan says, “The trend is strong, and $1,650 is only another 15% higher from here.”
If you want to play a 15% move for much higher gains (Alan’s readers collected 221% gains on gold last month), consider Resource Trader Alert.
Like wise men bearing stone tablets, the co-chairs of President Obama’s deficit commission have emerged with their post-election proposal to fix the nation’s fiscal mess. And not a moment too soon.
Democrat Erskine Bowles and Republican Alan Simpson figure they can balance the budget by 2020. Among the measures they would apply to get there…
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Individual income tax rates are cut to a maximum of 23%… but many popular deductions go away, including the biggie — mortgage interest
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Spending cuts totaling $200 billion a year, half of that coming from defense; 10% of the federal work force is eliminated
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Lower benefits and higher retirement ages for Social Security (more about that shortly).
Allegedly, for every $1 in higher taxes, there’s $3 in spending cuts. As usual with proposals like this, what was left out is even more interesting…
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No mention of a value-added tax (we dodged a bullet there)
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Apart from cutting payments to doctors, there are only vague generalities about fixing Medicare
Now it’s up to the deficit commission as a whole to take up the proposal. 14 of the 18 members must agree to something by Dec. 1 before it can be submitted to Congress.
Given the makeup of the panel (two-thirds are sitting members of Congress), that’s looking unlikely right now — the plan may suffocate before Congress ever gets a chance to strangle it.
Still, one key element of the plan may well end up written into law, sooner or later.
“The likely fate of Social Security is one step closer to fruition,” Ian Mathias says, examining those planks in the commission’s plan. “In short, get ready for lower benefits and higher retirement ages.” (If you remember Ian’s Daily Reckoning series on Social Security, this shouldn’t be much of a surprise.)
“This proposal is complicated, like most things from Washington. Some suggestions include ‘creating a new bendpoint,’ ‘reducing replacement factors’ and ‘phasing into a higher taxable maximum.’ But stripped down to the essentials, it looks something like this:
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The retirement age goes up to 68 by 2050 and 69 by 2075
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The government will make “hardship exemptions” for people 62 and over unable to work for various reasons
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There will also be a minimum SS benefit for those making very little income
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The rich will likely be eligible for fewer benefits while having to contribute slightly higher FICA taxes.
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Cost-of-living adjustments will be gradually reduced by using a different measure of inflation (Chained CPI).
“So if by some miracle Congress approves these reforms, the Commission says these small cuts now will prevent a very large cut in the future — a 22% across-the-board slash in benefits in 2037, they project. And of course, most SS projections still assume the U.S. economy will be “back on track” in a year or two… so that reality might come even sooner.
“To be honest, none of these ideas are really that bad. Higher taxes always make me cringe, but other than that, how else does one unwind a Ponzi scheme? It’s very, very hard to imagine a plausible solution to getting Social Security back into the black that doesn’t involve benefit reductions, higher taxes or higher retirement ages.
“That might not be what’s fair, and it certainly won’t be popular… but you should still prepare for it.” That means looking for alternative retirement investments that will deliver more than the paltry 1.2% on a bank CD. Lifetime Income Report’s Jim Nelson has a host of suggestions to consider here.
As long as China’s on our mind today, we note a phenomenon there known as “White Guy Window Dressing.” Or “The Token White Guy Gig”… or “White Guy in a Tie.”
Apparently, Chinese companies are willing to rent fair-skinned foreigners for a day, a week, even a couple of months… merely to pose as an employee or business partner.
Like Jonathan Zatkin, an American actor living in Beijing. For about $300, he flew to the grand opening of a jewelry store in Heinan province, posing as the vice president of an Italian jewelry company.
“I was up on stage with the mayor of the town,” he says, “and I made a speech about how wonderful it was to work with the company for 10 years and how we were so proud of all of the work they had done for us in China.”
And it was all for show. “Because Western countries are so developed,” says Think Like Chinese author Zhang Haihua, “people think they are more well off, so people think that if a company can hire foreigners, it must have a lot of money and have very important connections overseas.
“So when they really want to impress someone, they may roll out a foreigner.”
Heh. Good work if you can get it?
“I bet you’ll get some awful feedback,” a reader writes, “on your comments about the hunger strike.”
The 5: Nope.
“Still,” our reader continues, “I thought you might enjoy reading her sign from left to right, as most English speakers do: ‘Hunger Day Strike Against 1 Foreclosure.’”
The 5: Heh. A Freudian Slip if there ever was one. And our point exactly. Thanks for deconstructing the sign.
“Talk about shooting the messenger!” another reader writes coming to the aid of a wounded comrade. “The irate readers who were upset with the NAIVE READER didn’t get the point about the presentation on why debasing the currency is probably favored by those in the federal government, which was largely spot-on.
“He didn’t say it was his idea or recommendation.
“Investors should be on the lookout for the most probable future monetary scenarios in order to prepare themselves for not getting wiped out. I don’t think high-rate CDs will do the trick!”
“Wowie Zowie,” Mr. “Maybe I Am Naive” responds himself, “The 5 speaks to a really tough crowd. Sheeshka!
“Well, I’m coming back for a second heaping helping of ‘Poop on you’ and to clarify something that I thought was obvious from the context of my recent email:
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By ‘Uncle Sam,’ I meant officials elected and appointed to administrate the affairs of the people of the United States. For sure I didn’t mean us little nonofficial-just-getting-along folks. Sorry if there was some confusion there. Anyway, if you go back and reread what I wrote previously, putting yourself in the shoes of a self-serving politician (aka Uncle Sam), you may find yourself feeling a little more ‘naive’ than you did previously … or not …
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Some readers apparently think that inflating dollars by printing lots of them will not, in the time ahead, effectively and substantially reduce the funded and unfunded liabilities of the American people. I would love to hear the logic of their perspective.
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Some readers apparently think that the increased exports and reduced imports caused by reducing the value of the dollar (in terms of BRIC money, let’s say) won’t add jobs and generally help the U.S. economy to better compete in world trade. Once again, I would love to hear the logic of that perspective.
“Please understand: I, personally, am not in favor of the scenario I have described. It has a good chance to take from me a good part of what little wealth I may have chanced to scrape together. I just see it as the easily understandable progression of events that our ‘take the easy road to re-election’ public servants currently seem to be moving forward, with some vigor.
“Running the dollar printing presses is a direct mechanism for implementing a sneaky transfer of funds from those (like China, for example) who ’we the people’ owe money to (as well as, in the years ahead, many of ourselves as retirees on fixed Social Security incomes) to those Americans who currently don’t have much money. Many among the ‘have-not’ recipients of the involuntary and currently in process wealth transfer we are engaged in are our own offspring and their children … many of whom are, sadly and from direct experience, learning early the joys of being on the public dole.
“Is all this good for you and me personally? Certainly not. Nevertheless, I think many of us are going to be hurt … then hurt more … before things get better. In the words of an individual that (arguably) may well have been a large contributor to our current debacle: ‘I feel your pain.’
“Keep it cooking, 5ers … it is all good!”
Dig it,
Addison Wiggin
The 5 Min. Forecast
P.S.: The discounted offer on Patrick Cox’s Breakthrough Technology Alert expires tonight at midnight. It’s your last chance to get more than six months of membership free. If you’d like to go directly to the order form, here it is.