When China Didn’t Show Up

Addison Wiggin – August 12, 2011

  • “Professional politicians” blow off the poor “ins and outs” of a Treasury auction… Why you shouldn’t
  • The economic number that just turned in its most dismal performance since 1980
  • How gold stocks are looking as cheap as they did at the bottom in 2008… and a 3-Part “Market Volatility” Strategy for your consideration…
  • Echoes of 2008: Europe’s short-selling ban sets up an intriguing opportunity…
  • Soccer moms patrolling for prostitutes… nickel-and-diming folks at customs… and how unemployment benefits create more jobs (ahem)…

   Yesterday, an auction of 30-year Treasury bonds went south.

So poorly, in fact, did the auction go, yields jumped from 3.51% to 3.78% — the largest single day leap since “Tall Paul” Volcker was running the Fed in the early 1980s.

Back then, it was a matter of necessity: Volcker told us, off camera during the filming of I.O.U.S.A., that his status as an “inflation slayer” was a revisionist myth, more or less, and that higher interest rates back then were the only way to bring buyers into the tent and keep the government funded.

Yesterday’s leap? That was not part of the plan. Certainly not, if you go by the Fed’s FOMC press release from Tuesday. The Fed wants to keep their overnight rates at 0-0.25% until mid-2013.

   We pause for a moment here at the beginning today’s 5 with apologies to the president.

He politely asked during a White House press conference a month and a day ago if we, “the public” would please leave the “ins and outs of… a Treasury auction” to the “professional politicians.”

He’s right, we know. The “pros” have been doing such a bang-up job, who are we to worry?


This morning, however, we just couldn’t help ourselves…

   What got us spooked at yesterday’s bond auction is, in a word, the Chinese didn’t show up. We have speculated on more than one occasion what would happen if the Chinese failed to show. Well, now we know.

It gets a little worse. Insurance companies and pension funds sat this one out, too.

For the first time in the history of 30-year bond auctions, “direct bidders” bought more bonds than foreign bidders.

The “primary dealers” — the 20 megabanks that are required to submit bids in exchange for a host of special privileges with the Fed and U.S. Treasury — wound up buying 68% of yesterday’s issue.

Why the sudden aversion to U.S. debt?

“Duration risk,” a bond trader would answer.

“Unless you think there’s going to be no inflation for an extremely long period,” explains Credit Suisse strategist Ira Jersey, “then it’s hard to make the case for why 30-year bond yields should go a lot lower.”

   As if to underscore the point, the People’s Bank of China issued a quarterly report laying out its worldview today. The main take-away: The debt level in the United States and other Western nations is “worrisome.”

   At the same time, the Chinese allowed their currency to rise to a 17-year high against the dollar.

Since S&P’s downgrade of U.S. debt last Friday, Chinese leaders have allowed the renminbi to rise the most in one week since they loosened its peg to the dollar in June 2010.

“The Chinese have stopped laughing at [Treasury Secretary] Geithner’s so-called ‘strong dollar policy,’” says Euro Pacific Capital’s Michael Pento, “and are now allowing the renminbi to rise against the greenback” — up 6.8% since that loosening of the peg 14 months ago.

“If we continue down this road much longer, the only buyer of U.S. debt will be the Fed. That’s the real downgrade to come. Not from the credit rating agencies, but from our foreign creditors.

“Once we have a failed Treasury auction, it will engender a vicious cycle. Debt service expense will soar, which causes out-of-control deficits. The Fed will be forced to purchase more of the debt and inflation rates become intractable, thus destroying GDP growth.”

   “Ordinary Chinese feel let down by the government,” writes our friend Dee Woo from China. “Woody” is a high-school teacher and one of our most valuable on-the-ground contacts there.

“They heard the country is suffering billions in losses because of dollar depreciation and S&P downgrade,” Woody says, confirming the accounts of Chinese “microbloggers” we passed along on Tuesday.

“Because of the severe income inequality, many Chinese are further pushed down the social spectrum. Too many can’t afford a house, health care, pension, and education for their kids. They have contributed so much to Chinese boom only to see their hard-earned dollars to be loaned to the U.S.”

Sounds as if that’s starting to wind down now.

   The Chinese are sending a warning. Alas, despite the president’s request of a month ago, the “professional politicians” don’t seem too worried. Or even to have noticed what happened.

The president hasn’t canceled his August vacation to Martha’s Vineyard. Meanwhile, 81 members of the House — nearly one in every five members — will be on a junket to Israel this month sponsored by the pro-Israel lobby AIPAC.

Heh. You can’t make this stuff up.

However, as a member of “the public at large,” you can take protective measures right now. We describe them in this presentation. Ignore it at your peril.

   Too early to say as of this writing… but today might turn out to be the only day this week the Dow makes a move of less than 400 points. (Strange times… which we plan to address directly on your behalf with the three-part strategy you’ll see below.)

The blue chips opened up nearly 150 points on the news that retail sales rose 0.5% between June and July.

Then most of that gain evaporated on the news that consumer confidence as measured by Reuters and the University of Michigan sank to nearly unprecedented lows.

   At 54.9, the new consumer confidence number pulled off several extraordinary feats…

  • It’s lower than any of the guesses among 69 economists surveyed by Bloomberg
  • It’s lower than at any other time during the Great Correction
  • In fact, it’s the lowest it’s been since May 1980… when Americans’ only respite from economic gloom was the release of the first Star Wars sequel.

   European stock indexes ended the day up big. The Euro Stoxx 50 index, a blue chip benchmark, jumped over 4% — the first substantial move up in three weeks.

Authorities in France, Italy, Spain and Belgium are, apparently, choosing to kill the bearers of bad news, rather than address any financial problems they face. They’ve banned short selling of those nation’s big financial shares for the next two weeks.

“This is a sign of desperation,” says Strategic Short Report’s Dan Amoss, “and it will only worsen the liquidity freeze in European stock markets.

“Plus, it will heighten suspicions that French banks are in big trouble with PIIGS debts… and perhaps were the parties writing credit default swaps on Greece and Portugal debt in the wake of the May 2010 bailout, and thus are like AIG pre-September 2008.”

You don’t have to imagine how this is going to turn out. Two days after AIG blew up in 2008, the SEC banned short selling of the financials. The sector, as represented by the XLF ETF, plunged nearly 40% in three weeks.

Hmmm… A look at the holdings of the iShares MSCI Europe Financials Sector Index Fund (EUFN) and a little work with a calculator… and we see that French-, Italian-, Spanish- and Belgian-traded firms make up nearly 30% of the total.
And there’s nothing to stop you from shorting that. Just sayin’.

   Gold is experiencing a delayed reaction to the increased margin requirements we mentioned yesterday. The spot price sank fast this morning, bottoming out for the moment a little below $1,730.

Still, that’s a higher price than anytime before this week.

Gold “would have to get to $2,200 just to break the inflation-adjusted highs from 1980,” our resource trader Alan Knuckman tells First Business. “There’s still more upside. But you’ve got to be careful. We could see some $100 moves either way. Better to have a long-term investment horizon.”

Alan’s readers have applied simple strategies in gold this year to grab gains that far outpace the bullion price — 107% and 233%, to be precise. Right now, you can join them right here at a substantial break from the regular subscription fee.

   Silver is the metal proving to be less volatile today, down slightly to $38.47.

   Gold stocks are finally taking a breather after an impressive run-up this week. The GDX gold stock ETF, which moved up 7% the first four days this week, is off 1.5% as we write.

By any objective standard, gold stocks are looking cheap.

“Aggregate data for the world’s 13 senior gold producers showed them worth just $0.73 for every $1 of the gold price,” according to one report from MineFund Analytics issued last Friday. “The last time gold stocks were that cheap was November 2008, shortly after the all-time low of $0.66 set on Oct. 27, 2008.

“Although that suggests there is excellent value to be had by buying more equity in gold producers,” the report goes on, “there is still reason for caution. The chart pattern for the deteriorating valuations is very similar to summer 2008, when it seemed impossible for prices to go any lower. However, they continued to do so.”

[Urgent Editor’s note: “The various editors at Agora present many gold stocks,” writes a reader in a recent survey we sent to Reserve members. “Considering the current market conditions, which ones are the most attractive for the midterm, either low-risk good upside or medium-risk higher upside?”

“In this crazy stock market,” writes another, “for the next six-12 months, what should my portfolio strategy be? Do I get out of stocks and short the market? Invest only in gold, long-term bonds and foreign currency? Or some other strategy?”

Another put things more succinctly: “Buy, sell or hold?”

To address this market head on, we’re employing a 3-Part “Market Volatility” Strategy immediately:

  1. First, we’re holding an exclusive “Reserve members-only” teleconference early next week — convening all our editors to ask them one simple question at this critical juncture: What to do now? Send additional questions you have, here
  2. Second, we’re assembling a report detailing the top precious metals plays among all our editors.
  3. We’re convening an “Emergency Summit” of our editors, assembling them in person, and inviting a select group of readers to join them. We’re sending out the invitations next week. If you want to receive this invitation, all you need to do is drop us your email address. Here’s where to go. Please indicate if you’re a Reserve member when you write in.]

   For a brief picture of what real life is like after a municipal bankruptcy, we turn to the soccer moms patrolling for prostitutes in Vallejo, Calif. The story was profiled on ABC’s Nightline last night.

Vallejo went into bankruptcy court more than three years ago. The police force that once numbered 160 is down to 90. So ordinary parents are keeping an eye out for any soliciting.

“Is this what your life is going to be like if you continue to live here?” asks the reporter of one of the moms. “Yeah… we’re just trying to protect each other and save our neighborhood.”

One of the women being confronted by the soccer moms turned to prostitution after losing her job at a hospital. “Any job that pays well is a good job,” she said.

“If you keep this up” she then warned the soccer moms on patrol, “someone’s going to get hurt and I guarantee it won’t be a prostitute.”

   Meanwhile, it looks as if the feds are picking up a few cues from local governments… and using petty offenses to help fill their bottomless coffers.

U.S. Customs has fined a family $300 for failing to declare an apple, tomato, and three cucumbers upon arrival from Israel at Newark Intl. They were healthful snacks for the flight, stashed in one of the kids’ backpacks. Dad forgot all about it when he filled out the declaration form.

We know produce is getting expensive, but sheesh

“For me it was like, you know, what you see on TV,” said mom Suri Steinberger. “I thought I was going to get handcuffed, they have my kids. So I just started to cry.”

Customs says it’s an individual officer’s discretion whether to “destroy” the offending agricultural goods or “fine the traveler.”

With a yawning $1.65 trillion annual deficit, we have a feeling the latter is going to be the default option going forward.

   “This administration and the Congress,” writes a reader, conspiratorially, “will thank you for urging everyone to buy gold. I don’t believe they were smart enough to plan it this way, but once the dollar is nearly worthless and it takes $5,000, $10,000, $100,000 (pick a number) to get one ounce of gold, the solution to salvaging what’s left of their scheme is nearly certain: Gold in private hands will be confiscated.

“Not only will this save the country (at least temporarily) from complete bankruptcy, it will, in effect, greatly accelerate the transfer of wealth. Few poor people own gold, but the ‘wealthy’ do.”

The 5: We haven’t urged anyone to do anything. We’re just reading the writing on the wall.

“I have a 1907 $10 gold piece,” a colleague wrote over IM this morning, “that my grandparents kept hidden in an upright piano during the 1930s as an act of defiance against FDR…”

When or if the government “confiscates” gold… they won’t get to spend the money to clean up their debts. Their goal would be to remove gold as a contender to the U.S. dollar.

If you disagree with the strategy, we’ve identified a few “offshore gold storage programs” in a special report that goes out to every new reader of Apogee Advisory. Thus, we urge you inquire here.

   “As any old mule farmer knows,” writes another with an obvious overassessment of the size of his audience, “to get a mule to do what you want it to do you first have to get its attention. Congress has had it far too easy for far too long and are just going through the motions of listening to the American people.”

“Imagine if in 2012 a fairly large percentage of the voting population just simply refused to vote for any Republican or any Democrat, period. Instead they voted for the Libertarian, Constitution or Green Parties candidates. I’m not saying that the third-party candidates all would win. More than likely, they wouldn’t.”

“What it would do if a third-party candidate starting coming in a respectable third or even second would be to be to make the two major parties realize that they could no longer assume that they would be the only candidates the voting public would support, and they would have to clean up their act.”

The 5: More likely they’ll seek to tighten up the ballot access laws — a ridiculous number of “valid” petition signatures, for instance, which has already taken place in several states — to further limit the impact of third parties.

Sorry, we still don’t see any answers coming from the inane rules that define the rules of politics.

   “The riots in England,” a reader writes, “could very well be a forecast of things in the U.S. With the unemployment rate for teens and those in their early 20s soaring, we are sitting on a time bomb waiting to explode. Meanwhile, Congress fiddles and the country burns…”

“Everything I read says that small businesses are the main sources of new jobs, but no one focuses on helping small businesses. The last government official I heard on TV said that they were working with banks to make more loans available to small businesses. Typical governmental attitude — solve your problems with more debt.”

“I own a small business and I don’t need more credit. I need less governmental red tape and help with Obamacare. If Obama has his way, I will be hit with higher taxes because my tax return shows more than $250,000 in income. The problem is that I don’t get a $250,000 salary. I have a Sub S business on the accrual basis. That book income represents inventory I can’t sell and accounts receivable I can’t collect.”

“In order to pay for Obamacare and higher taxes, I will have to cut expenses, and my biggest expense is salaries. I will have to let people go to pay for this.”

“If someone in the government were smart, they would open a website where small business owners could send in their suggestions on how the government could help them and then they would actually take some of these suggestions.”

The 5: You’re looking at this all wrong. All those people you let go to pay for health insurance and higher taxes? The government gives them unemployment benefits… and that creates new jobs.

Or at least that’s how White House Press Secretary Jay Carney explained it yesterday.


Asked to justify the president’s push for extended benefits, Mr. Carney put it this way: “It is one of the most direct ways to infuse money directly into the economy because people who are unemployed and obviously aren’t running a paycheck are going to spend the money that they get…

“And… that way, the money goes directly back into the economy, dollar for dollar virtually.”

“Every place that money is spent has added business and that creates growth and income for businesses that lead them to decisions about jobs, more hiring. So there are few other ways that can directly put money into the economy than applying unemployment insurance.”

The circuitous reasoning seems to go something like this: Pass new regulations and tax hikes that make it harder for already stressed small business owners to keep employees, let alone hire news ones; then when the unemployment numbers fail to turn around, ask Congress to borrow more money so they can extend unemployment benefits… because it’s good for the economy and creates jobs.


If we’re missing some higher purpose to the administration’s reasoning, we hope you’ll do us the honor and correct our understanding. Until then…

Have a good weekend,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.“With so much volatility,” inquired another Reserve member who replied to our recent survey, “what criteria do you use to exit the market (cash or short or puts) and re-enter the market (long and calls)?”

A great question after a rough week like this… we expect to answer it next week when we kick off our 3-Part “Market Volatility” Strategy.

We’re going assemble our editors on the phone for an exclusive “Reserve members-only” teleconference. If you’re a Reserve member, you’ll have the chance to listen in. As of this moment, it looks like we’ll host the teleconference on Tuesday.

Likewise, we’re assembling an exclusive special report detailing the top gold and precious metals plays being recommended by our editors right now.

And we’re convening an “Emergency Summit” of our editors, assembling them in person and inviting a select group of readers to join them. We’re sending out the invitations next week. If you want to receive this invitation, please leave your email address with us here. Please indicate if you’re a Reserve member when you write in.


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