End of a Bull Market?

by Addison Wiggin – December 8, 2010

  • Bernanke backlash… Bond blowout… Is this the end of a 28-year bull market?

  • Why commodities are cratering… at least for the moment

  • How Chinese demand could drive oil past $100 by March

  • Latest sign of robust recovery: Food stamp recipients top 40 million

  • Hero? Traitor? Invite him to Vancouver? Readers stuff The 5’s inbox on Julian Assange

Somehow, we don’t think this is what Ben Bernanke had in mind when he launched another round of easy money five weeks ago.

Indeed, he promised us lower long-term interest rates. But this morning, the yield on a 10-year Treasury note just reached its highest level in more than six months — 3.28%.

There are two possible explanations… the benign one, and the more likely one.

The benign one, pimped by Deutsche Bank, zeroes in on the cut in payroll tax that’s part of the Grand Bargain between President Obama and congressional Republicans. Deutsche figures that’ll add 0.7% to GDP during the next two years.

The more likely one is evident even to the always-late-to-the party analysts at Moody’s and Fitch: The Grand Bargain is just digging Uncle Sam into a bigger hole.

The rating agencies reckon that with no spending cuts as part of the deal, it’ll add another $1 trillion to the national debt — above and beyond what’s already baked into the cake.

Treasury plans to auction $21 billion in 10-year notes today. Could be interesting.

But really, should anyone be surprised? After Bernanke launched the first round of “quantitative easing” in March 2009, the rate on the 10-year spiked from 2.5% to over 4% within three months.

Our call: Look for 4% by early February. But we’ll go a step further.

“Every streak must come to an end,” says our income-investing specialist Jim Nelson. “On Nov. 17, that truism hit home in the bond fund world. It was the first week in the previous 100 that saw a net outflow of money.

“Investors, after nearly two years of manic consumption, are finally leery over the future of bonds.”

That outflow continued in the week ending Dec. 1, according to a report from EPFR Global analysts. Few sectors were spared…

  • Global bond funds suffered their second outflow in 3 weeks

  • Redemptions on high-yield funds hit a 6-month-high

  • Emerging-market bond funds saw 2 consecutive weeks of outflows for the first time since April 2009.

There’s no shortage of reasons, Jim says. “Start with QE2… then add Ireland's new massive bailout… throw in the new permanent bailout fund for the eurozone. And what do you get? Panicked and confused investors.

“Now, that's not to say they won't forget about this in another couple of days and pile right back into bond funds. But if this is a true turning point, we might soon see some discount opportunities — something we haven't had in quite a while.

“But,” Jim reminded his Lifetime Income Report readers recently, “even as the rest of the world struggles with tough issues, we still find ourselves in a pretty good place. We have a number of solid, undervalued plays that have plenty of capital and growing dividends.”

Ah, dividends. That’s going to be the key for income investors if the 28-year bull market in bonds is really over. Say this much for the Obama-GOP Grand Bargain: It leaves the tax rate on dividend income alone, at least for two more years.

To learn about some of Jim’s favorite dividend players for 2011, check this out.

Despite the exit from Treasuries this week, hot money isn’t flowing into commodities:

  • The spot price of gold has dropped from $1,430 to $1,395 in barely 24 hours

  • Silver’s down from over $30.60 to $28.94 in the same time frame

  • Oil, which topped $90 yesterday, is down to $88.68.

So what gives? It’s at moments like these we have to remember that it’s no longer “all about us.”

There’s new buzz that China’s about to raise interest rates — the one action that really would put a damper on its inflation problem. That would put a hurt on demand for raw materials. Well, for the short term. In theory, anyway.

But that overlooks some other big trends, like this…

Chinese oil inventories are plunging, even as demand for fuel hasn’t let up. “Refined oil stocks held by China’s two largest oil companies have fallen for eight consecutive months,” according to former CIBC World Markets chief economist Jeff Rubin, “while diesel stocks in the country fell 14% in October.”

And the tightening oil market won’t just be felt in China. “The 140 million gallons of international oil inventories sloshing around in floating storage on the high seas is also all but gone.

“That may come as a shock to those who thought the bloated oil inventories that came in the wake of the last recession would provide a buffer against future oil price spikes. Suddenly, that buffer has literally gone up in smoke.

“With no letup in China’s fuel demand,” Rubin concludes, “the world should be looking at triple-digit oil prices again within a quarter.”

Another half-million Americans went on food stamps in September, according to new figures from the Agriculture Department. That’s a 15.2% increase over a year earlier.

The number continues to climb even as the “U-6” unemployment rate — which includes part-timers who want to work full-time — has leveled off.

42.9 million Americans are now on food stamps — 13.8% of the population.

Fifty-eight percent of Americans expect the housing market to stay depressed for two more years — at least according to a poll commissioned by Trulia and RealtyTrac. The survey also finds 48% of respondents saying they’d consider walking away from their home if they had negative equity — up from 41% six months ago.

"As a result of the recent robo-signing debacle, half of U.S. adults expressed that they now have less faith in mortgage lenders, banks and the government," says a press release accompanying the poll. Whatever it takes to wake folks up, we figure.

Actually, the number crunchers at the two websites are even more gloomy than the public at large. They don’t see recovery until 2014.

As long as science is developing algae to make fuel for our cars, how about using wasps to electrify our homes?

Researchers in Britain and Israel have discovered the Oriental hornet is able to absorb solar energy. The yellow stripe along the hornet’s body helps it trap the sun’s rays… triggering a pigment that harvests the energy.

This solves a long-standing mystery in the insect world: Why most wasp species are “morning wasps,” but the Oriental hornet can’t seem to drag itself out of bed till the sun is shining brightest at midday.

In the journal article where this discovery appears, there’s no mention of harnessing the hornet for electricity — that’s just our own flight of fancy. Probably not such a hot idea, either; they’d make a frightful noise up on your roof.

“I never attend these conferences, but would consider it if you got Assange there,” a reader writes in reply to our query yesterday about whether it would be a good idea to bring WikiLeaks founder Julian Assange to our annual shindig in Vancouver.

“I expect to leave Vancouver in late June,” writes another, “but might consider staying longer if you can get him there.

“Julian in Vancouver, that might bring me back 'topside,'” writes a third. “Vancouver is probably my favorite city, if I had to live in one, that is.”

We didn’t do a formal tally, but we’d venture to say the mail ran between 2-to-1 and 3-to-1 in favor.

“He should be put in jail for life for his leaks or put on the U.S. hit list and assassinated,” writes a dissenter. “He is a scumbag rapist also.

“It would fit your left-wing agenda though to have this moron at one of your seminars. And shows me that you are also condoning treasonous behavior by supporting this a**h***. Look at him he looks like a child molester/pedophile that crawled out from under a rock.”

“Regardless of his troubles in Sweden,” writes a dissenter who manages to avoid the ad hominem fallacy, “this character, while masquerading as a ‘do-gooder,’ in fact has released several items that may have far-reaching and potentially deadly effects to real people's lives.

“The problem is that in his arrogance, he doesn't know enough to know what is relatively harmless and what is not… while I would be the last to say that even the U.S. government doesn't have some secrets it should not be covering, there are, in fact, items of national security that should be secret and remain so in our national interest… this guy should be jailed without any access to electronic media, or even games.”

“While it’s great to find out some of this stuff, and know some unknown crooks are going to squirm… the bottom line is this guy's a scumbag who doesn't give a damn about our soldiers' lives. Let me know if you will bring him in, so I can cancel my subscription.”

“Yes, invite him,” says another. “Politicians hate transparency. I think his actions, while not exactly honorable, are necessary.”

“You bet,” says another. “At least he believes that a light should be shined on the government so we the taxpayer knows what is going on in our name.”

“You should make the invitation public now, as that would make clear that he is not a pariah in all eyes. His crime, if there is a crime, is that he has made some folks very uncomfortable.”

“It is similar to what happens when we come upon a nest of roaches and shine a light on them.”

“Yes, I think it is a good idea to invite Assange to speak in Vancouver. I can’t wait for his release on ‘the banks.’”

“I agree that he would be a ‘gold mine’ of information. He might even be able to shed some extra light on the ‘quantitative squeezing’ (QS).”

“I'm all for it. It's amazing the number of people who made unfavorable comments on Yahoo about the guy. They think he's some kind of threat to national security.

“Those are the same people who still trust the government to act in the best interest of the people, as opposed to its own self-interest. How dense can some people still be?”

“Yes!” says a reader in 18-point boldface. With an apparently conspiratorial bent, he adds, “But keep in mind we all might end up with Legionnaires’ disease.”

The 5: We don’t think you have much to worry about. Assange isn’t well-disposed to travel anywhere as long as he’s in custody. And especially not to a country where the prime minister’s former campaign manager said on national TV that he should be assassinated.

“I don't see what the big problem is with those high-tech bank notes,” writes our final contributor, noting our item about the creased $100 bills. “There are numerous possible solutions.

“The first one is to give the job to Bill Gates, who will promptly declare the misprints as features, not bugs, and distribute them forthwith.

“Another would be to turn the notes over to the banksters and require them to use these notes to pay all bonuses AND also keep the notes out of circulation.”

“Third would be to simply distribute the notes. I mean, who is going to try to counterfeit misprinted notes?

“We could also send the notes to the U.K. as foreign energy aid, you know, something to burn when they run out of oil this winter.

Oy vey, these Americans lack imagination and ingenuity.”


Addison Wiggin

The 5 Min. Forecast

P.S.: Byron King just interrupted his busy travel schedule to record an audio briefing about the most extraordinary resource opportunity he’s encountered in nearly two years.

The audio wound up a little scratchy, but Byron insisted this couldn’t wait for him to get to a better phone connection. Our technical team is cleaning up the audio as we speak, so you won’t miss a thing.

Once you hear why Byron is so excited, we don’t think you’ll mind the fact it’s not a studio-quality recording. Watch your inbox for the link later today.


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