No, It’s Not 2008

Addison Wiggin – September 23, 2011

  • Does it feel like 2008? Dare we suggest “the end is not nigh”…?
  • Amoss on how Operation Twist will prop up (some) stocks… Mayer on what to do now… King on keeping the faith with natural resources
  • Gold falls below $1,700: Rick Rule, James Turk on what to expect next
  • Your tax dollars in action: U.S. military stimulates 1% boost to island nation’s GDP
  • Local currency movement hits close to home… cross-border payments held hostage… and an unlikely debate among The 5 readers in… Bolivia?

   We begin today’s 5 with a wet rag: It’s not 2008.

Our apologies to managing editors across the spectrum of the financial media: “Investors Are Back in a 2008 Mind-Set,” declares the Financial Times this morning. “Dow Jones Average Posts Biggest Two-Day Slump Since 2008,” reports The Washington Post. “Treasury 30-Year Bonds Head for Biggest Weekly Gain Since 2008,” says Bloomberg.

History, as Mark Twain observed, does not always repeat, but it often rhymes. Now and then, however, the poetry of the market turns out to be free verse.

   “We probably won’t see a broad market rally,” declares Strategic Short Report’s Dan Amoss, “but there is much more support under the market than there was in 2008.”

That’s because “there is more than meets the eye,” Dan says, to the Federal Reserve’s Operation Twist.

“As with QE2, the Fed will continue to make it painful for institutional investors to own Treasuries. In the Fed’s mind, low yields will force savers and investors to speculate in riskier assets like junk bonds and stocks.

“The effect of this will probably be weaker than it was during QE2, and the rally in stocks this time should be concentrated in fewer sectors: resources and metals mining, to name a few.”

   Even the sickly U.S. banks might turn out to be winners.

“Much has been written,” Dan goes on, “about how Operation Twist will kill the big banks’ margins on Treasury carry trades. But this is offset by greater clarity about future Fed policy.

“Greater clarity about where short-term (and long-term) rates will in a few years embolden the Wall Street primary dealers to lever up carry trades and repurchase activity to unseen heights. Higher leverage in trading can offset lower net interest margins.”

   “The Fed will basically buy long-duration Treasury paper from the banks,” adds Chris Mayer, “handing them nice gains on those securities. (Remember, as rates fall, the value of the paper goes up. So banks have big gains in long-duration Treasuries).

“Banks get an increase in short-duration Treasuries. Net-net, they are in a less vulnerable position and will show a boost in profits.”

“Banks that play along by levering up the most,” concludes Dan Amoss, “will benefit the most.”

   So what to do now?

If you believe in the companies that you own, “it’s easier just to sit during times like this,” advises Chris Mayer. “With a massive wave of selling pressure, it’s pretty clear that the fundamental stories don’t matter just now.

“That’s great news, because it means that the odds of picking up something really good are solidly in your favor. Panic and fear are what are driving these stocks lower, not necessarily any change in the fundamental value of the assets or businesses.

“I know there is a powerful urge to ‘do something,’ which for most people suggests ‘sell stuff.’ But the time for that was before the sell-off happened. Now, with stocks so cheap, the best thing to do is to wait it out or pick up some things.”

   Fitting then, there is one thing that is reminiscent of 2008: opportunity.

“We saw many stocks plunge,” says Chris, “from $16 down to $2, from $40 down to $13 and so on. But if you just went about your business, tending to the daily affairs of your life and not your portfolio, you were well rewarded for your patience in less than two years as these stocks recovered the ground loss and then some. And that was 2008.

“Today stocks are cheaper than in 2008. Balance sheets are stronger. They have already been through the fire and are better prepared for a turbulent economy.”

   “It’s easy to get discouraged,” commiserates Byron King, looking at prices in the natural resource sector. “Still, I’m convinced that the best managed of energy and mining companies — certainly those with excellent assets in their resource base — will survive whatever happens on Wall Street and in the political halls of the world.

“It’s a tragedy that the bad decisions of a relatively small number of policymakers across the globe cause such a huge and immediate effect on the economy. But the world is full of people who want things — food, shelter, transportation and much more.

“The world has strong demand for basic resources like oil and gas, plus other valuable things like uranium, iron, aluminum, copper, precious metals and much more.”

   Major U.S. stock indexes are treading water today, and European indexes closed slightly in the green, traders evidently exhausted by the previous day and a half of selling.

Either that or they’re actually buying into the hokum put out by finance ministers of the G-20 nations. They issued a statement overnight promising “strong and coordinated effort” to stabilize the global economy.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” read the communique. We’re not sure if that’s a promise or a threat.

   Gold is getting whacked again today. After holding firm near $1,800 only 48 hours ago, the Midas metal’s current bid is $1,692.

On the other hand, $1,692 would have been an all-time high less than two months ago.

   “Could gold go lower?” asks our friend Rick Rule, rhetorically. “Absolutely. Does it matter over two or three years? Absolutely not.”

“Think about where the value is, that shiny stuff that has more or less held value for 6,000 years or a dream printed on a piece of paper, backed by the honor, integrity and good will of Congress? This is a simple trade.”

“It doesn’t mean it’s a trade that is going to work in the next month or two, but it’s a trade [you] have to be involved in. While I think the physical is attractive, the stocks are relatively more attractive than the metal. In a risk-off trade you have some people going into the metal to shelter cash.”

   “Every once in a while,” adds GoldMoney’s James Turk, “you see a moment in the gold market when all of the factors impacting the gold price are screaming, ‘Buy now!’”

“Each and every time gold breaches the $1,800 level to the downside, we see one of those rare moments. While we may move sideways for a few more days until everybody reads the writing on the wall, I think we should be preparing for much higher prices.”

“I am sticking to my $2,000 target before the end of October.”

   Silver isn’t holding up nearly as well. In fact, it’s plunging to levels even lower than those reached earlier in the summer. At last check, the spot price was $32.74 — something last seen in early February.

“Silver is notoriously volatile,” says Gary Gibson in today’s Whiskey and Gunpowder. Whatever gold does in the short term, silver tends to do to excess.

Adds Byron King: “When people need cash in a hurry (to meet margin calls, or to take that look of horror off the face of their spouse), they sell what’s liquid and what inflicts the least pain.”

Need liquidity? Dumping silver’s an easy call for anyone who bought before, well, early February. “My view,” Byron concludes, is to buy judiciously, but over the long term, buying back in during the meltdown will pay off in terms of long term wealth protection.”

   The greenback is holding onto its gains of the last two days. The dollar index is at 78.3.

   Dollar strength translates to commodity weakness. The CRB index sits at 305, its lowest level so far in 2011.

Oil is back below $80, at $78.40 a barrel. A pound of copper sells for $3.34, the lowest in more than a year.

   We’ve found a place where, against all odds, the U.S. government may have pulled off a gangbusters stimulus program.

You may recall the Seychelles, an island nation off the coast of Africa, provides a base for U.S. drone aircraft flying missions to Somalia and Yemen.

Well, apparently, “local shop owners and restaurateurs have commented,” reveals a 2010 diplomatic cable that fell into the hands of WikiLeaks, “that the U.S. military is bringing a steady income into hotels, restaurants and shops: a direct influence of the American presence.”

The cable estimates the U.S. presence generated $3.1 million in revenue for local businesses in the first four months of operation.

Annualized, that’s over $9 million U.S. taxpayer dollars in an economy with a GDP of $919 million. Or, an instant 1% GDP boost.

In addition to drone pilots, the Seychelles are a popular spot
for visiting swimsuit models

Nearly half of the four-month total — $1,457,784 — was for hotel accommodations. With 82 people stationed there, that works out to roughly $150 per person per night.

   An essential metal in the construction of drones presents a one-of-a-kind investment opportunity.

“Beryllium is a silvery white metal,” explains Byron King in today’s Penny Sleuth. “It is very lightweight. Yet beryllium has six times the specific stiffness of steel. In short, beryllium is a miracle metal.”

“Beryllium has an incredible combination of properties that occur in no other metal. And it means that super-smart people have figured out how to use beryllium in all sorts of applications.”

“I’m serious. Rocket scientists use beryllium — in rockets. Beryllium goes into satellites and space structures, aircraft, optical systems, semiconductors, medical imaging and nuclear systems. There’s beryllium in gun sights, rocket launch rails, camera gimbal systems and more.”

Including drones. Byron is keen on a tiny company — only a $43 million market cap — that’s delivering the beryllium that industry needs. “The business model is an aggressive form of development, prototyping and large-scale production, with sales at high margins.”

At less than 20 cents a share, you don’t want to overlook this. Byron lays it out in this presentation. Be advised: This offer for half-price membership in Energy & Scarcity Investor expires one week from today. Best give it a look now.

   Our charming city is now the home of its very own alternative currency.

Behold, the BNote

A form of scrip known as the BNote has been circulating around Baltimore for nearly six months. Like other local currencies — Ithaca HOURs and BerkShares — you can exchange 100 Federal Reserve Notes for 110 BNotes and spend them at up to 120 local businesses… but not at chain stores like Target or Wal-Mart.

“We need some local currency to push back against how crazy the economy has gotten,” says Jeff Dicken, director of the Baltimore Green Currency Association, echoing the people behind other alternative currencies.

But there’s a new angle to the movement in Baltimore that we haven’t seen elsewhere: The folks behind BNotes are also pushing barter. Organizers recently hosted a “Marketplace Minus the Dollar” auction in which you could use BNotes, or bypass them and do an outright swap.

“You could trade two dozen cookies for a massage,” says Dicken.

Hmmn… “Marketplace Minus the Dollar” has a prophetic ring to it.

   “I live and do business within the U.S. but have a few Canadian customers,” writes a reader continuing our discussion of cross-border transactions, and the increasing difficulty thereof.

“Each time a Canadian Company sends me a check for over $5,000 (usual transaction size is $15,000-20,000) my bank, JP Morgan Chase, takes four-six weeks to process the check and get the funds cleared.”

“As a small business owner, I can be out as much as $100,000 for up to a month and a half while my bank tries to figure out if the check is legit. All it takes is a simple call to the Canadian bank to confirm the funds are in the account, but because of all the red tape and layers of approval required for ‘international’ transactions (come on, it’s Canada), it typically takes at least a month.”

“Oh, and I get charged at least $100 per check for all their hard work described as ‘processing fees’ and ‘currency transaction fees.’”

   “I don’t exactly disagree with the opinions of the person who lives in Santa Cruz, Bolivia,” writes a reader. “However, I don’t care for the perception he puts forward. I have lived here for going on five years and I can think of no issues of retailers, etc., accepting my U.S. dollars as payment.”

“Most Bolivians prefer U.S. dollars when purchasing big-ticket items. The rate of exchange had been 7 bolivianos (BOB) to 1 dollar. For about a year now, the exchange rate has been going down BOB to dollar and the domestics are savvy enough to understand their $200 monthly wage is less than it had been.”

“So when paid in dollars, what once was 1,400 BOB per month is now about 1,370, and that is a huge difference to them! BTW, the inflation rate here in Bolivia has been a hardship to the poorer citizens.”

“And I had to chuckle with his comment about the BOB being Monopoly money compared with the U.S. dollar. Hmmmm, kind of a pot-kettle thing there!”

“As an aside, no one in Brazil will accept U.S. dollars, period.”

The 5: We had no idea we had so many readers in Bolivia, where President Evo Morales is following the model of his mentor Hugo Chavez. Will we hear from a Venezuelan contingent next?

   “In a time of gloom and doom,” reads a short note of appreciation, “I enjoy your sense of humor.”

“It’s like getting an RSS feed,” says another, “on global current events and investment reports wrapped up into one neat package. Spot on!”

The 5: It’s our privilege to bring it to you every day.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Sometime after this arrives in your inbox, a defunct 6-ton satellite launched by NASA 20 years ago will come crashing to Earth. Conceivably, in a location near you.

Its descent has slowed, and thus “the United States is once again an unlikely, but potential target for the 26 pieces of the Upper Atmosphere Research Satellite, expected to survive the descent,” reports CNN.

The Upper Atmosphere Research Satellite, seen in better days

“Those pieces, made of stainless steel, titanium and beryllium that won’t burn, will range from about 10 pounds to hundreds of pounds, according to NASA.”

Well, well… There’s beryllium again. Incredibly lightweight, yet stronger than steel. And as demonstrated here, so fire-resistant it can survive re-entry into Earth’s atmosphere.

No wonder it’s needed for applications as diverse as drone aircraft and nuclear power. And one company is harnessing its unique abilities to the max. If you haven’t seen Byron King’s presentation about “The Fourth Element,” it’s worth your time.


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