The Real Misery Index

Addison Wiggin – June 20, 2011

  • “Misery index” at a 28-year high? How it’s actually 50% higher than the “all-time record”
  • The 62-year inventory: Foreclosure pipeline severely clogged… and a strategy to profit from the trend
  • Gold stocks can’t keep up with the bullion… Why Frank Holmes says this is your second-best buying opportunity in 30 years
  • Reader wonders why we “attack” Social Security recipients… and an on-site report after the riots in Vancouver

   Here’s a cheery way to begin the week. For a brief moment on Friday, the “misery index” of the Jimmy Carter era reared its ugly head again.

Readers old enough to recall “the misery index” will remember it was computed by adding the inflation rate to the unemployment rate. On Friday, CNBC posted, and Drudge picked up, a brief story about how the misery index stands at its highest since 1983:

9.1% unemployment + 3.6% consumer price index = 12.7% misery index

What the story did not explain is how government has gamed both elements of the misery index in the ensuing 28 years.

People who’ve given up looking for work no longer count as unemployed. Statisticians make the rising price of steak go away by assuming you buy less steak and more hamburger. And so on.

John Williams at ShadowStats.com still runs the numbers the way they were in those bygone days. Let’s recalculate…

22.3% unemployment + 11.2% consumer price index = 33.5% misery index

That compares to a peak misery index of 22.0% in June 1980.

If circumstances now feel worse than they did then, if the “recovery” of the last two years seems like a chimera, now you have a statistical glimpse why.

If they don’t feel worse, then you’ve been successful at staying abreast of the trends… and on the “right side of the trade,” for which you should be commended. We’ll do our best to assist you in that endeavor, if we can…

   The source of much of the “misery” in the index, the number of foreclosure filings, fell to a near four-year low in May, according to RealtyTrac. If the “recovery” were for real, this would be because homeowners can once again keep up with their payments.

But the real reason for the low number of filings appears to be that banks are “weighed down by an increasing inventory of seized homes,” as a Bloomberg story put it… so they’re holding off (again) on processing even more defaults.

   In New York State, 213,000 homes are now in severe default or foreclosure, according to figures from LPS Analytics. At the current rate banks are unloading these properties, it will take 62 years to clear the inventory.

In New Jersey, it will take 49 years. In Illinois, Massachusetts and Florida, it will take a decade.

   “Rather than bite the bullet and take losses,” Strategic Short Report’s Dan Amoss explains, “banks are holding onto these mortgages and marking them at laughably high valuations.

“They would tell you that this practice is perfectly OK, and here is their rationale: ’We’ll deal with our foreclosure backlog when housing prices rebound to where they should be.’ Yet this very strategy prevents housing prices from falling to market-clearing prices to create a base for a sustained rebound.”

Naturally, in the face of ugly data, homebuilder stocks are… rising.

   The homebuilder ETF rose 2% last week, even as the broader market was flat. Lennar rose 4%. Home Depot and Lowe’s rose too… all on the back of a blip in housing starts.

Does this make it a good time to short homebuilders, or the home improvement outfits? Tread carefully… Many of these stocks are already severely beaten down. Hovnanian is just now coming off two-year lows.

Profiting from a faltering housing sector is a tough business these days… but it can be done. Dan just spotted a specialty firm set to plunge 50%. Play it the way he recommended to his readers on Friday and you could double your money by October.

Dan has six more ideas to help bolster your portfolio in the face of a beaten-down housing sector, high unemployment and rising consumer prices. Check them out here.

   European leaders huddled this weekend in Luxembourg to discuss the Greek crisis and decided… absolutely nothing. The euro is down to $1.432. The dollar index sits at 75 on the nose.

   Major U.S. stock indexes are ruler-flat as a new week gets under way. After clawing and scraping its way back to 12,000 at Friday’s close, the Dow clings to that level tenaciously.

“This past week, volatility spiked,” Options Hotline editor Steve Sarnoff wrote his readers last night. “This is a sign of investor fear. The economic and political turmoil of the Greek debt crisis is weighing on the euro. An improving dollar is applying additional selling pressure to stocks and commodities.

“Though there are signs that stocks could continue their down move, and a turn back up may just be short term, we will look to use such action to position for profit.”

Steve’s readers made the most of last week’s volatility. A play on falling Dow delivered a 104% gain in three weeks. Meanwhile, an 8% drop in a major tech stock made it possible for his readers to reap 183% gains in only 10 days.

That’s eight plays so far this year that could have doubled your money or better, following the signals Steve uses to decode the market’s action. For a limited time, you can become one of his readers for a substantial discount. Details here.

   Gold has pulled back slightly from its late-day rally on Friday, the spot price currently $1,537. The price set a record today in pounds, and is close to a record in euros.

   Gold stocks, as measured by the XAU Index, are up slightly this morning… but they have a long way to go to catch up to the bullion.

Gold stocks have underperformed the metal most of this year… but the breakdown has been glaring since early April.

“Short-term aberrations in markets are common,” says U.S. Global Investors chief Frank Holmes, “and this isn’t the first time gold bullion and gold equity prices have diverged.”

“Gold equities underperformed gold bullion in 2000 and 2008 during times of extreme market negativity and uncertainty. These previous instances have been merely temporary setbacks, and markets generally reverted to their long-term trends.”

Here’s a chart Frank believes tells the full story: “Historically, one could purchase about 4.4 units of the XAU for the price of an ounce of gold. That ratio fell to less than 3 units per ounce in the mid-1990s, when gold prices bottomed, but has averaged 5.2 units during the current bull market.”

“You can see from the chart,” Frank continues, “that today’s level is 46% above the historical norm at 7.6 units to one ounce of gold. By this measure, one can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years.

“The extreme was in 2008 during the depths of the financial crisis; many share values quadrupled off of those levels.” Just goes to show, as we like to say, it’s not too late to get rich with gold.

Frank is a perennial favorite at the Agora Financial Investment Symposium, and he’ll be back again this year. If you can’t catch him in person, you can listen to his talk — and all the others — on CD or MP3. We got last year’s sessions on MP3 files in readers’ inboxes exactly one week after the conference wrapped up… so the information was still timely and actionable.

You can sign up here to get these recordings at the best-available price. It won’t last long.

   Stephen McDow couldn’t believe his good fortune when the IRS deposited $110,000 in his bank account last September. The Laguna Beach, Calif., resident wasn’t expecting a refund, but he figured what the hey?

You know how this story ends… with McDow in jail.

McDow has no way to post bond now that everyone knows the money isn’t his. But it’s the little details that make this case extra special…

  • The money belonged to a 67-year-old woman who neglected to inform the IRS she’d closed her account with Citibank in 2004. Citi reassigned the account number, oblivious to the host of things that could go wrong in this day and age of automatic deposits and withdrawals
  • The woman hired lawyers to get her money back. Once they tracked down McDow, he proposed setting up a payment plan — which she rejected
  • McDow didn’t spend all the money on hookers and blow. He paid off his car loan, student loan and mortgage… and still had $50,000 left.

We almost feel sorry for the guy. The money wasn’t his, but he was trying to do the right thing with it — get out of debt and build up some savings.

Accused of theft… and acting responsibly with the ill-gotten gains

Oh, well… McDow’s bail is set at the precise amount of his mistaken windfall — $110,000.

   “Cut Social Security. Cut Medicare. You seem to be right on board with all the politicians,” a reader carps. “What about welfare, housing allowances, food stamps, health care, etc., etc., that generations of inner-city denizens have been sucking up for 45 years without ever contributing a penny toward. Are those sacred to you, as they are to the political class?

“Why is it your opinion that people, like myself, who were forced to pay into Social Security beginning in 1954 should go without while the worthless who never worked and never paid anything continue to receive in full, indexed to inflation benefits? Don’t you understand the problems with that?

“Also, if I had been permitted to save and invest what I was forced to pay to the government so it could pay it out to these others, I would have a hell of a lot more income from it than what the government is paying.

“Please respond to this. Don’t just kick it under the mat, as you have in the past.

You need to explain why you attack Social Security recipients and are silent on this other issue.”

The 5: When have we ever recommended cutting Social Security or Medicare? When have we attacked Social Security recipients or ducked the “issue”? When have we suggested you have to go without? On the contrary, we do our best to provide viable alternatives so you don’t have to live with the miserable return you get from having been forced to contribute.

Please don’t conflate us with those who offer political solutions to political problems… that’s not our bag.

   “If Obama, who is just the latest of several presidents, can commit both the financial and military strength of the nation into foreign wars anytime and anyplace all without the slightest approval of Congress, what makes us think that he will stop spending and exceeding a simple two-digit number followed by twelve zeros if Congress does not first approve?

“According to the Debt Clock, he already is doing just that, by over 100 billion. The only thing he hasn’t done is to tell Congress to just go pound sand.

“If the American voter doesn’t care if Congress is MIA on sending our men and women into war, I can almost guarantee they couldn’t care less about silently adding another $2 trillion to the debt ceiling.”

The 5: It’s hard to know where to begin. Yes, Obama is acting the part of the Imperial President, illegally engaging the military in Libya. But spending bills, to our knowledge, still originate in the House. And it’s still illegal for Congress to borrow money beyond the “debt ceiling”; hence the political theater we referred to last week.

There’s plenty of “blame” to go around. If anyone is MIA, the American public doesn’t seem to care about the spending limits or the military overreach. At least they keep voting for the same results time and again.

Having said that, you don’t have to take part. That’s probably the most important message we can convey in response to both of the first readers. You can’t do much about social programs or the politics of an empire in decline. But you can take your future into your own hands… that’s the driving passion of our business.

   “As we are getting ready to attend the conference in July,” says one of two Vancouver-based readers who checked in over the weekend, “I write to update you on the events following the Stanley Cup final hockey game.

“You have seen the pictures of the riot in the streets. I am not sure you have seen or heard of the response of Vancouver’s people.

“That night as rioters were setting vehicles on fire, smashing storefronts and looting, there were numerous heroes. These were the persons who stood in front of cars to defend someone else’s property. Others were standing in front of storefronts — some in lines, but sometimes it was just one individual who chose to face down anarchy.

“That night, a Facebook site was set up to encourage Vancouverites to get downtown the next morning to help clean up the mess. More than 10,000 persons signed up and many were there the next morning picking up debris, sweeping away their disgust and dismay.

“There is a Facebook campaign under way. Persons with pictures and videos of rioters who created the havoc are posting the pictures onto Facebook, identifying parties if they are known or asking others to identify the parties. Those pictures are being tagged with names, and Facebook braggarts about their role are being noted. Arrests based on this outpouring of public-assisted information have begun.

“Yesterday, citizens spontaneously began writing Post-it sticky notes and placing them on police cruisers thanking them for the work they had done, the danger they had faced the night before. One police officer said he had never before experienced such a public display of support and gratitude.

“We were angered and embarrassed by those events. Please affirm to your readers that Vancouver continues to be a safe and beautiful city for conferences. I look forward to seeing you there.”

The 5: As do we, you, eh?

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. If you can’t join us in Vancouver, the next best thing really is the recordings of all the sessions.

You can receive the digital audio files, professionally recorded, in your email inbox only one week after the conference’s close… plus, a handy PDF summary of every investment recommendation. And the price can’t be beat — especially now, if you order early.

rspertzel

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