Stimulus… and Withdrawal

Dave Gonigam – May 19, 2011

  • Gee, imagine: QE2 winds down, economy slows down… and the chart that proves it
  • One lousy number after another… but the stock market shrugs them off
  • Alan Knuckman on why the commodities bull is resting, not dying
  • Chinese buyers drive a real estate boom… in North America

   "Alas, I clicked and clicked on the video," a reader writes about the first item in yesterday's issue, "but it doesn't play."

"Too bad, because she looks like a babe. Oh, and there's the debt explanation or something… what was it you said?"

Yes, the national debt. It's a bad thing. But you already knew that, right? Anyway, here's the video that explains it in a one-of-a-kind way. We had three people check to make sure it works this time.

Technical difficulties resolved. We now return you to our regularly scheduled programming…

   We're getting our surest sign this morning that whatever passed for "growth" in the U.S. economy the last two years is stalling out without the help of easy money from the Federal Reserve.

Again.

   The Conference Board's leading economic indicators are finally running out of gas. The index fell 0.3% in April — the first drop since last June.

Among the 10 indicators making up the index, the biggest hit came from rising first-time unemployment claims. If it weren't for record-low interest rates, the index's performance would have been even worse.

Plotted on a chart, the index looks like this. And to put it in perspective, we've added two shaded areas — to indicate when "quantitative easing" was in effect.

Strictly speaking, "QE2" began last November and ends this June. But Fed chief Ben Bernanke telegraphed its arrival during his annual address at Jackson Hole, Wyo., in late August… and he confirmed it would wind down on schedule when he gave his first news conference in late April.

Revealing, no?

   The leading indicators are one of four rotten figures hitting the wires today…

  • First-time unemployment claims came in last week at a lame 409,000. And the previous week's number, in what's becoming standard operating procedure at the Bureau of Labor Statistics, was revised up. The four-week average is now its highest since last November
  • Existing home sales clocked in at an annual rate of just over 5 million in March. We don't much care, seeing how the National Association of Realtors has gamed this number for years with statistical assumptions about population growth. But the Street does care… and the number was on the low end of expectations
  • The Philadelphia Fed's monthly index of manufacturing in the mid-Atlantic plunged from 18.5 last month to 3.9 this month. In other words, there's still growth, but it's negligible. The "expert consensus" had this number actually growing a bit.

   We remind you that when "QE1" came to an end in April 2010, not only did the leading indicators stall out… the S&P fell 16% in the following two months, while the dollar index rose 7%.

So far, since Bernanke's April 27 news conference, stocks are down 1.7%… and the dollar index is up nearly 3.5%.

QE2 isn't formally done yet… but we'll stick to what Addison said the day after the news conference… The stage is already set for QE3.

   Stocks are demonstrating resilience despite the raft of rotten numbers. The Dow and the S&P are both more or less flat — holding on tight to yesterday's gains.

"Directionless trading continues to be the name of the game right now," says one of our in-house technicians, Jonas Elmerraji, "but some notable signals are starting to shake themselves out. Most significant is the fact that higher-quality trading setups are beginning to spring up once again in the market."

Jonas revealed three of them yesterday to followers of Penny Momentum Trader. They're not recommendations yet, but he's following the charts closely for the right signals. With gains this year of up to 51% in only five days… you'll want to be on board when his S.T.O.R.M. system says it's time to act.

   Precious metals are down slightly from where they were at this time yesterday. Gold is at $1,490, silver at $34.89.

   For all the gloomy U.S. economic numbers, the long-term commodities bull remains in place, says Resource Trader Alert editor Alan Knuckman.

"The Commodity Research Bureau index (CRB) of resources as a whole has dropped 10% in the past week to the key technical 335 area, which was a halfway recovery of the 2008 extreme highs to 2009 extreme lows.
"As a trader, this news is a potentially bullish buying area for a number of markets that are now near long-term uptrend supports. The reward-to-risk is much more attractive at these levels for continuation of global demand growth.

"The overall basket of commodities has been in an overextended, yearlong strong upward trend. One of many major pullbacks, the last few have been bullish buying opportunities, which encouraged top pickers to go short. Timing a major market reversal is nearly impossible and almost always a gambler's ruin.

"Buying against support and trend levels has been successful in the past. A close below the 335 halfway 2008-2009 recovery point on a weekly basis would get attention and renewed evaluation of the trend. It is definitely too soon to make that call."

Indeed, the CRB is demonstrating some resilience of its own this morning, down only 4 points, to 340. We invite you to review Alan's track record and learn how to secure discounted access to his trading recommendations in this presentation.

   Again today, the greenback is motionless. The dollar index sits at 75.3. Its major component, the euro, is likewise flat — again confounding the "experts" who saw its fate inextricably tied to the fate of IMF chief Dominique Strauss-Kahn.

He issued his resignation today from his jail cell at Rikers Island. Traders yawned, and the euro is at $1.426.

   Japan's on-again, off-again 22-year recession is on again. The earthquake/tsunami/nuclear disaster pushed Japanese GDP down 3.7% during the first quarter of 2011. That's on top of a revised 3.0% drop the previous quarter.

The Ministry of Economic and Fiscal Policy forecasts growth "close to 1%" in the following four quarters. Good luck with that…

   And now, an asset class where demand is off the charts. According to the most recent figures available, demand grew 70% from January to February of this year, and another 32% from February to March.

It's residential real estate in one of the world's most livable cities — and Agora Financial's temporary home for one week in July each year — Vancouver.

That growth trajectory is for sales, not prices. But prices are also off the charts. The typical home in Vancouver sells for 9.5 times the annual median household income, according to the Frontier Centre for Public Policy — a wee bit more than the 3 times that Frontier deems affordable.

Much of the demand is driven by Chinese buyers. "Our office has done 50 sales this year, which is pretty incredible," realtor Tom Gradecak tells Bloomberg. "Half of those sales are from mainland China." And Gradecak's firm specializes in Vancouver's West Side… where the median price is $C2 million.

"As the Chinese get more and more prosperous, they are diversifying their assets out of China," says commodities guru Jim Rogers, who's made his home in Singapore the last four years. "Vancouver is very high on the list."

Jim Rogers is among a host of speakers we've been privileged to book over the years at our annual event. This year promises one of the best lineups yet…

  • Gary Shapiro, author of The Comeback
  • Eric Sprott, Canadian resource investing legend
  • Doug Clayton, managing partner at Leopard Capital.

We crossed paths with Doug on our Colombia visit in March, and Addison is meeting him this week at his home base in Cambodia. This is a fellow who finds promising investment opportunities in Haiti, of all places. You don't want to miss him.

Familiar faces will be back too — including Doug Casey, Rick Rule and Bill Bonner. Plus, our own lineup of editors you can meet face to face.

Only 62 seats remain for this year's July gathering. At this pace, they'll all be spoken for before Memorial Day… so if you have any desire to join us, please make haste. Dates, the full speaker lineup and other essential details are here.

   "I went to a local gun show last weekend," a reader writes, "to see what rifles were going for in the off-season. For fun, I took along some silver rounds (which I purchased at $10/oz).

"I was able to pick up a nice 30-06 with scope for 10 oz of silver; he was asking $475 for a S&W rifle that was selling for $700 last fall during hunting season. I talked him down to $425 and then brought out the silver and said I would take $40 apiece for them (even with spot at $35.50+/-).

"We haggled a little more, but he finally took it and threw in a strap. The missus wasn't very happy at first, but she is now telling friends that we are prepared to defend our stash and eat venison if need be."

The 5: So in other words, you're cashing in your silver gains to load up on survival gear. And people call us doom and gloomers…

   "I'm the newbie you quoted Tuesday," a reader writes. "I'm honored I got quoted, but I seem to be the butt end of the joke. Three things…"

  1. I am not a newbie and have been reading/subscribing to Bonner stuff for 20 years, I even bought Empire of Debt and I.O.U.S.A.
  2. I have had multiple sclerosis for 5 years and don't think clearly. In street slang, MS rots your brain.
  3. On reflection of your response, what you think is funny is you and Bill have been saying the question is not 'if' defaults will occur, but 'when,' and it's happened before; whereas I'm amazed to see it happening now.

"Ya, I read this thing every day. I didn't take it too seriously when you warned of the housing subprime mortgage reset bubble. Now I'm scared not to take you seriously."

The 5: Sorry if Addison was a bit hard on you.

On the other hand, mail that says, "You idiot!" frequently assures a less-than-gentle response. But it does keep things lively for our readership, and for that we thank you…

   "The 5 will be responsible for my success," writes a reader who evidently wishes to add to the compliments that came in yesterday. "Thanks for every letter. You guys ROCK.

"P.S. So glad I found you, Agora Financial. Keep up the great work!!!"

The 5: Thank you. It's a privilege to serve.

Regards,

Dave Gonigam
The 5 Min. Forecast

rspertzel

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