Ben’s Secret Plan!

Addison Wiggin – May 5, 2011

  • Ben Bernanke's "secret" plan to support the dollar: Let the economy tank! Wow… it's already working.
  • Dollar rallies, but for how long? Abe Cofnas sizes up U.S., Aussie, loonie, plus your last chance to snag a Strategic Currency Trader discount
  • Manipulation? Incompetence? Alan Knuckman on silver, margin requirements and J.P. Morgan
  • Superman makes the fight-or-flight choice, surrenders U.S. citizenship… Canada woos him
  • "Join the club" — Readers sympathize with the sterling-credit realtor who has less chance of getting a mortgage than a fry cook

"The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy," said Federal Reserve chief Ben Bernanke in the Fed's press conference last week.

While watching the press conference, we had a nagging suspicion the wily one had a "secret plan": If the recovery sputters, the hot money will back out of the stock market and into the dollar and Treasuries again!

In the two months following the first round of quantitative easing (QE1) from late April to June 2010, the S&P shed 16%. In that same time frame, the dollar index rose from 82 to 88. The yield on Treasuries sank to a low 2.4% by October.

(Of course, the plan has to be "secret" because that would mean the chairman of the FOMC would have to admit their original plan to prop up the stock market by debasing the dollar works only while the spigots are open… O, the tangled web!)

And look, the plan is already working… After spending most of the last week around 73, the dollar index has firmed to 73.6 and looks to be trending higher.

It doesn't take much, really — just a few simple signs that the economic "recovery" is starting to roll over. Yesterday, it was a lousy report on the service sector from ISM, and a lousy report on private-sector jobs from ADP.

Today we got confirmation the "jobless" recovery is becoming a little more jobless.

First-time unemployment claims moved up last week to 474,000. In a genuine recovery, the figure would be around 300,000. The four-week average is now up to 431,250.

The Bureau of Labor Statistics (BLS) gamely attempted to explain away this week's spike by citing the following factors…

  • Temporary layoffs in the auto sector brought on by the earthquake in Japan (i.e., Toyota plants in Kentucky and Indiana)
  • Temporary layoffs in New York, where — incredibly — school bus drivers get unemployment during spring break
  • A new emergency benefits program in Oregon.

A plausible explanation… except that the biggest increases came in New Jersey, Massachusetts and Pennsylvania. These numbers will be too new to show up in tomorrow's monthly unemployment report… but they still serve as an omen.

Traders frowned at the claims number and stocks are tumbling for the fourth straight day, the major indexes giving up about half a percent as we write. For the moment, the S&P has broken below its old February high of 1,344.

Turns out there's an interesting correlation between the claims number and the S&P. Check out the above chart. The blue line is an inverse of the four-week jobless claims average.

Meaning, as jobless claims continue to rise, the stock market is likely to falter…

Dollar strength is translating to commodity weakness. Oil is down to $105.64. Gold clings to $1,500 with broken fingernails. And silver… oh, silver… has been pushed below $37.

More on the impact of increased margin requirements for silver traders from Resource Trader Alan Knuckman in an Overtime Briefing below

"The Canadian and Australian dollars are losing value as the prices of gold and oil pull back," writes our currency trading specialist Abe Cofnas. "But the retreat of these 'commodity currencies' might not last.

"In fact, there's a chance we could start seeing a turnaround as early as Friday — no matter what happens with oil and gold." Abe is expecting significant moves with the release of the U.S. unemployment number — and Australian consumer prices.

"The U.S. news will impact the Canadian dollar, briefly taking precedence over oil prices. Meanwhile, news of strong inflation in Australia will open the possibility of another interest rate hike — causing the currency to rally even in the face of lower gold prices."

That could well set up Abe's recommendations for next week. Today is your last chance to join his readers at the charter-member rate.

Every week, Abe issues a new set of recommendations, giving you the chance to trade a market followed by no other North American advisory. You open a position on Monday, and no later than Friday you know which way it's worked out.

Previous trades have generated gains of 238%… 545%… even 1,329%. Yes, there are losing trades too, but the idea is to have big gains to more than compensate. Abe's next recommendations come Monday morning. Today is your last chance to access those recommendations at the low charter-member rate. The offer expires tonight at midnight.

Buyers of physical silver appear to be swooping in as paper traders are scared out of the market. The U.S. Mint reports sales of 701,900 Silver Eagles so far in May — during a period silver has tumbled more than 20%.

At this pace, sales could reach 4.2 million by month's end.

In the Eagle program's 25-year history, that figure's been exceeded only twice — last November and last January.

Gold Eagle sales are looking strong too — 35,500 ounces of coins so far in May, which is well ahead of last month's pace, when sales totaled 160,500 ounces.

[Please note if you're a collector: As an Agora Financial reader, your window of exclusivity on 1/10th-ounce Chinese Gold Pandas expires tonight. These MS69 and MS70 First Strikes are available only through our friends at First Federal. Full disclosure: We may be compensated if you buy.]

It's come to this: Canada is courting Superman.

Perhaps you caught the news last week that Superman has weighed in on our fight or flight debate — renouncing his U.S. citizenship in DC Comics' current Superman storyline.

The back story: In a previous issue, Superman visits Tehran to support opponents of the regime. But because Superman is widely viewed as a representative of America, the Iranian government condemns him as a tool of the White House, carrying out an act of war.

Thus, this pivotal exchange in the current issue…

"We love immigrants and Superman is the ultimate immigrant!" writes columnist Steve Murray in Canada's National Post, imploring the superhero to settle in the Great White North.

"Also, in Canada, we respect traditional immigrant garb, so Superman's Kryptonian-inspired super-snug ensemble is totally fine by us. We will not laugh at his outside-the-pants underwear choice. We swear."

Uh, yeah. Here at The 5, we'd encourage Superman to keep his options open for a while… or at least join us in Vancouver July 26-29 to discuss the issue.

"I just read about the real estate agent with 40 years of experience going through hell to get a mortgage himself," a reader writes. "I have been going through this too to refinance and get a home equity line of credit.

"I have a credit score of 800 and plenty of money in the bank and have been selling real estate for 22 years. If I'm having a hard time getting a loan, how are the other folks able to get loans? That's just one of the things dragging home sales down."

"You ask: 'What does the fry cook have on you?'" writes a reader who saw our reply to the real estate agent's observation that "if I were a fry cook in a line camp somewhere, there wouldn't be a problem.

"The fry cook isn't self-employed," the reader responds.

"What the fry cook has," another elaborates, "is a J-O-B! For some reason, they think that if it's someone else's business, your income is safer. Tell that to all the folks who got laid off.

"Then again, with unemployment benefits extending to 2025 or whatever it is at this point, maybe their income is secured by the full faith and credit of good ole I.O.U.S.A. They own the loan too, so…

"We are in the same situation as the real estate agent, unable to refi because of unconventional income (i.e., self-employed), despite significant equity and assets."

The 5: You bring up a good point, one we intend to explore in the coming months as part of our fight or flight debate: How government is steadily pushing more and more people out of entrepreneurship and into employment.

The difficulty for a self-employed mortgage applicant is just the beginning. How many new businesses aren't being started these days, how many great ideas are dying on the vine because the people who have those great ideas choose to stay tied down to a wage-paying job just to have semi-affordable health insurance?

"I were a fry cook," writes another reader with a front-line tale, "I probably would qualify for the mortgage refinance I recently tried to get.

"I have applied twice to refinance $128,000, which is currently on a 26-year (remaining) 6.66% note. I could easily pay off the note, which was originally a signature note, but my investments are doing much better than 6.66% and, evidently, my average credit score of 785 has had little bearing on my applications.

"Bank of America, who currently has the note, was the first to reject my application. I can only guess that they didn't really want to lose the 6.66%. Ally Bank (GM's new extension) was the second to reject me. They decided that my 4,000-square-foot home, which before the economy's downturn was worth over $350,000, couldn't be sold for the $285,000 that their contracted appraisal company claimed it was worth in March of this year.

"This is the decision that really shocked me. I bet that even in today's market I could sell my home in a week for $150,000. That's $37.50 per square foot. They are stupid and symbolic of what is really holding back our economy."

"If you want a house loan," writes a reader from a small town in Kentucky offering a solution, "go to a small locally owned bank or savings and loan that does not and did not sell their loans in the past five years.

"We have at least two in our town. They don't have bad balance sheets to prop up, so it is business as usual. Approximately 5% interest depending on your credit score and down payment, low closing costs. Two-three page application. Loans approved whenever the loan committee meets following the completion of your application and appraisal. Usually within a week.

"Just saying, in this instance, smaller is better.

"I go to courthouse auctions occasionally for foreclosure sales and the lending party is almost always an out-of-town large bank. The local guys could not afford to make the questionable loans in the past, because they were keeping them, not selling them."

The 5: Dig it. Too small to flail.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. "It's one of the things you should do before you die," the infectiously enthusiastic Abe Cofnas says about trading the unique market he follows.

It's "last call" for new members. Access at the charter-member rate closes tonight at midnight. Seize the day here.

After Alan Knuckman's commentary yesterday on the Chicago Mercantile Exchange's increase of margin requirements for silver traders, a reader writes, "First, on the math: How do you get $30,000 with a 6-cent move? Didn't you mean $6.00, not 6 cents?

"Second, in a rising market, how could someone who was long be undercapitalized? Certainly, the shorts (like J.P. Morgan) could have been. Was this an effort to protect J.P. Morgan's outsized short position by knocking down the price? It certainly would have knocked out the new weak hands that got in after the first margin increase.

"Third, as followers of Agora Financial, we all are aware that excess credit creates all sorts of problems. Allowing excess margin is allowing excess credit. Why aren't margins regulated so that they can't be excessive to begin with and thus create the panic trading we saw the last 10 trading days? There were no changes in the fundamentals of silver demand or the dollar.

"So the final question is was this crash caused by 1) excessive credit via excessive margin or 2) a deliberate manipulation by the CME (in conjunction with others, i.e., the Fed) to knock down the prices of silver in a lame effort to divert attention away from the dollar or 3) total incompetence on the part of the CME?"

The 5: Alan Knuckman replies: "First off, I incorrectly used 6 cents, but the $30,000 sum was correct when it was, obviously, a $6 move in silver.

"Silver is no exception to the same leverage principles for all commodities. A small deposit, usually around 10% of the total cash value, is required to invest both long or short. If the trade goes against you, it may be necessary to replenish the funds to that deposit requirement set by the exchange. This mandates that you have funds on hand to handle what any one day may bring. It only makes sense that when larger daily moves occur that deposit requirements rise to protect everybody.

"The price action is typical of volatility after an extreme move. Not only did silver double in 2010, it also did so again in the first few months of 2011.

"Nothing illegal, nefarious or conspiratorial has occurred — just an emotional monetary reaction with big dollar movement. Greed and fear drive trading decisions for many investors, right and wrong. Those short — including possibly the JPM position you mentioned — have to keep putting up more funds to add more money to the bad position or get out and take the loss.

"The only investors who may have gotten hurt financially are those who bought into silver in the last few weeks at the end of an extreme move, with prices jumping 25% in April. That itself was a danger sign that prices may retrace or recoil no matter how strong the silver trend.

"Read my Penny Sleuth column from Tuesday about my logic on how to invest in silver —- or not in this case, because of specific concerns." And register to receive trading recommendations from Alan here.

rspertzel

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