A Slow, Measured Panic

Addison Wiggin – June 27, 2011

  • Gold clings to $1,500: Byron King on why it hasn’t sold off more… and Dan Amoss with a new way to play it…
  • Dow recovers to 12,000: How to make money regardless of its mixed signals…
  • Two swords hanging over currencies this week… Abe Cofnas gives us a way to trade beneath them…
  • The perils of enterprise (and free speech): Restaurant reviewer fined and jailed for negative review, truth be damned
  • Readers ask for an update on New Trade of the Decade, see bad omens in the arrests at the D.C. Taxicab Commission meeting

   Gold’s grasp on $1,500 is slipping this morning… and its hands are getting sweaty. After another beat-down just before the close on Friday, the Midas metal sits at $1,498 today.

That’s about 4% lower than the early May peak. Gold usually gets a summertime sell-off, but so far it hasn’t amounted to much.

“To me,” says Byron King, “it signals that most people who buy and sell in the gold space don’t think that the world currency situation will get better soon. No matter what the central bankers say, there’s a lot of smart money sticking with the yellow metal.

“This implies to me that people think things will get worse, but likely at a slow, if not measured, pace. You could analogize it to people just sort of idling casually toward the lifeboats. No panic. No need to run. But get nearer to a means of safety in case those bubbles near the waterline get worse.

“Governments everywhere are still overspending, which means that debt will pile onto more debt. The future is grim. Smart money is holding gold. Hold your gold. Never sell the real metal. Hang tough with the mining company shares.”

   “It’s a great time to accumulate gold mining stocks,” chimes in Dan Amoss. “Gold miners are cheap; they are trading at valuations that anticipate lower future gold prices.

“Top-down, or ‘macro,’ analysis indicates that the bull market in gold stocks still has a long way to go. And bottom-up analysis — projecting the amount of free cash flow most miners can generate at $1,500 gold — tells you that gold stocks are cheap.”

The bull market in gold shares is nearly a decade old… but the sector remains populated almost exclusively by retail investors. “Most institutional investor portfolios remain hugely underweight gold and gold stocks,” Dan continues. “These investors should keep looking to add exposure to gold because of the state of the private credit markets, government debts and central banks’ policies of stealth debt monetization.

“More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes. Today’s global monetary system remains chaotic, so demand for gold stocks will remain strong.”

On Friday, Dan recommended a gold miner trading at an 80% discount to its peers. “With improved operations, moderate exploration success and higher gold prices,” Dan says, “a 500-1,000% return from today’s stock price is possible.” Access to all of Dan’s ideas is right here.

   Stocks are up this morning after Friday’s drubbing. The Dow is back within spitting distance of 12,000, while the S&P 500 reaches for 1,275.

“The S&P is still sitting right above our key trendline support level,” says Jonas Elmerraji of our small-cap team, “and refusing to give us a clear indication of what’s going on in the near term.

“For that, we’ll need to see the index either bounce higher off of support (a bullish signal) or fall through it (a bearish signal). Until one of those things happens, it’s going to be tough to develop any decent market expectations.”

Still, “while patience is a virtue when waiting for setups to unfold,” says Jonas, “being too patient is a major liability when stocks are writhing around. Instead, be an impatient investor in this market.

“Being an impatient investor means that you’re ready to snatch up gains early when stocks show signs of weakness and you’re eager to cut losses if a trade falls below a technical stop-loss level.”

As of this writing, Jonas is keeping his powder dry for readers of his premium service, Penny Momentum Trader. But even as the S&P fell nearly 6% this month, Jonas recommended short-term plays that delivered gains of 17% in two days… 45% in two days… 81% in two weeks… and 85% in 12 days.

That’s the power of Jonas’ S.T.O.R.M. system. To learn how it works, look here.

   Consumer spending as measured by the Commerce Department last month was flat between April and May. That’s the worst one-month performance since September 2009.

Meanwhile, after-tax incomes adjusted for inflation are now slightly lower than they were in January. So much for the stimulus we were supposed to get from the payroll tax cut that showed up in paychecks at the start of the year.

   The greenback is drifting down as a new week begins. The dollar index is at 75.4. The euro is up to $1.427.

“A great deal of uncertainty pervades the markets,” says our currency trading specialist Abe Cofnas. “First, the Greek problem is not going away.” Greece’s parliament began debating another round of “austerity measures” today, with a vote coming Wednesday.

“Meanwhile, on the U.S. side of things, there is the element of uncertainty on negotiations over federal debt.” Standard & Poor’s Valuation and Risk Strategies says in the event a rating agency downgrades U.S. sovereign debt, investors would faces losses up to $100 billion.

”Taken together,” Abe says, “it means this week’s price action is headline driven. It’s the gift of volatility that keeps giving.” Before the week is out, Abe expects the euro to bounce and Germany’s DAX Index to rally… and he’s issued trade recommendations accordingly.

He’s also recommending a play with the potential of a sixfold return… and like his other trades, it will play out between now and Friday. Maybe you’ve gotten burned trading forex before… but you’ve never tried it this way. Check out what Strategic Currency Trader is all about in this presentation.

   When we were in China last month, our friend Dee Woo, whom we’ve unceremoniously dubbed “Woody,” proposed we write a book together called The Dragon and the Eagle. Essentially, Woody believes that the impending success of the Chinese economic model will doom Western values: freedom, property, free speech.

He might have a point. And we may, in fact, undertake the project with him. No doubt, nuggets like the following from Taiwan will bear some scrutiny in the process: the plight of a restaurant reviewer under the surname “Liu.”

Nearly three years ago, she blogged about a beef noodle restaurant in Taichung.

“Liu wrote,” according to the Taipei Times, “that the restaurant served food that was too salty, the place was unsanitary because there were cockroaches and that the owner was a ‘bully’ because he let customers park their cars haphazardly, leading to traffic jams.”

The restaurant owner sued. And won.

Liu must now fork over $7,000… and serve 30 days in jail. And another two years of probation after that. The court agreed she was truthful about the bugs, but “Ms. Liu should not have criticized all the restaurant’s food as too salty because she only had one dish on her single visit.”

Restaurant reviewers in Taiwan are on notice: Have more than one dish, and visit more than one time, or risk the wrath of the bureaucrats.

   “What happened,” a reader inquires, “to the Trade of the Decade — buy Japanese stocks and sell U.S. Treasuries?”

The 5: Give it time. We’re only 18 months into the new decade. For perspective, let’s examine the previous Trade of the Decade at this point in 2001:

  • Sell stocks on rallies: The S&P was down 15% from January 2000 levels
  • Buy gold on dips: Gold was actually down 5% at this stage.

As for the new trade, let’s sum it up as follows:

  • Sell Treasuries: As our friend Doug Casey quips, just because something is inevitable does not make imminent
  • Buy Japanese stocks: Said Marc Faber shortly after the earthquake in March: “I think as a result of the reconstruction work that may cost up to $300 billion, that obviously the government will need to monetize, and Japanese bonds in the long term will become terribly unattractive, and that will push money into equities.”

   “I was stunned,” a reader writes, “by the video of the reporter being cuffed and arrested at the Washington, D.C., taxidrivers meeting. He couldn’t have been more polite (in my view, too polite), but still ended up in cuffs.

I’m not American, and this kind of thing is creeping in all around Europe as well. But this makes me very concerned about the political trajectory that America is on. I mean, I know all about the TSA, home invasions by police, bombing civilians in Pakistan and so on. But arresting media representatives for taking photos of proceedings at public meetings is really bizarre and worrying.”

   “If the Gestapo in this country thinks they can control the masses by these tactics reminiscent of Hitler,” adds another, “they are badly mistaken.

“Sentiment against this type of thing has hit a boiling point, and it won’t be long before a-holes like the police officer in the footage end up in dire straits by trying to throw around their phony weight. The day of reckoning is coming at a very fast pace.”

   “That was really bad behavior on the part of the officials,” writes a third. “You gotta love all the new technology out there. That was great reporting. What I found most interesting was the lady who attempted to deny Mr. Epstein permission to record her at a public meeting and in a public place. Who does she think she is? Sheesh.

“I donated $10 to the Reason folks — I figure those two reporters are gonna need all the help they can get. It was genuinely heartwarming to see the reaction of the crowd. An injustice to another cannot be tolerated in a free society unless you are volunteering for the next injustice to be doled out by the ham-handed cowards of officialdom.

“Stand by. It’s going to get worse.”

   “As a believer,” writes a reader reacting to the prayer vigil aimed at averting municipal bankruptcy in Harrisburg, Pa., “I am discouraged by this sort of thing.

“While we should seek the Lord in all we do, this appears (from faraway) to be an act of asking the Almighty to bail them out of their own dishonesty. Either you have the money or you don’t. Writing a rubber check and asking God to cover it isn’t faith — it’s presumption.

“God can bail them out, and may. But more often than not, we’re better off reaping the fruit of our labor and dealing with the consequences of our indiscretions. It’s better for us because we have an opportunity to learn the lesson in a way that is more likely to keep us from repeating the transgression (and presume upon God). It’ll be interesting to see how this all plays out.

“If they fail to pay up, will they then blame God?”

   “Forgive my cynicism,” writes our final correspondent, “but I do agree that praying for divine intervention to solve governments’ fiscal problems is a totally ridiculous idea.

“By the same token,” the reader, pivots to another topic in Friday’s edition, “I find the idea that America should rely on ‘entrepreneurs to generate new ideas and create new jobs’ as a solution to our economic and unemployment problems is an equally ridiculous notion.

“The millions of ‘small business jobs’ engaged in designing, permitting, building, selling, financing, renovating and flipping houses that served as the replacement backbone for the U.S. economy, once one-third of our legitimate manufacturing jobs were exported, during the great housing bubble are (hopefully) never coming back.

“Expecting such large-scale job creation from brilliant entrepreneurs starting as-yet not-even-thought-of products and services is an equivalent form of wishful thinking, minus the divine intervention part.”

The 5: Where else do you expect jobs to come from?

“Net job growth occurs in the U.S. economy only through startup firms,” concludes a study released last year by the Kauffman Foundation, after crunching nearly three decades’ worth of Census data.

“For all but seven years between 1977-2005, existing firms [were] net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.”

True, the United States has roughly 130 million nonfarm payroll jobs — which is fewer than the 132 million 10 years ago. Without startups, the situation would be even worse.


Addison Wiggin
The 5 Min. Forecast

P.S. We’ve heard rumors of a nuclear reactor that’s in trouble in Nebraska, a victim to the floods there… but we’re loath to comment without hearing from our energy maven Byron King. We’ll include his comment tomorrow.

In the meantime, we refer you to a differ kind of meltdown already under way: In Providence, R.I., “annual retiree costs now amount to an astounding 50% of its tax collections,” writes the Manhattan Institute’s Steve Malanga in today’s Wall Street Journal.

“Wages and benefits account for 30% of state general fund expenditures, according to data from the National Governors Association,” Malanga continues. “But U.S. Census surveys show that in the typical town or school district, employee pay and benefits can consume from 70-80% of the budget.”

We suspect we’ll be seeing a lot more “frontline” reports from the crisis like this. With stimulus drying up from Washington, debt and pension obligations of local and state government become a real problem. What’s a stake is your future tax bite, and the quality of local services — like police, fire and garbage pickup.

As we mentioned, we’re about to complete a special report entitled American Oases: Five Spots to Find Paradise in the Midst of Crisis. Looks like it will be ready for your review in time for Independence Day weekend. Watch this space for details.


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