Beware a “Vicious Cycle”

Addison Wiggin – September 30, 2011

  • Double Dip under way: Credible source warns “vicious cycle” will increase joblessness AND deficit spending… awesome.
  • Michael Pento cites two reasons for gold’s smackdown from $1,900… dingbat reporter comes up with her own…
  • “Utah Monetary Declaration”: a new “financial secession” movement begins in Salt Lake… how long before it gains “tipping point” status?
  • The Onion spoofs Congress’ inability to deal with their most basic duty… Capitol Police respond with real-world investigation…
  • Readers weigh in on the ethics of investing in raw materials, warmongering, the New World Order… and more!

   Incomes for average Americans fell last month for the first time in nearly two years, according to the Commerce Department.

The drop was modest, 0.1%. But spending, on the other hand, rose 0.2%. Thus, Americans’ revert to a trend we’d come to know, love and expect during the bubble years. The “savings rate” dropped to 4.5%, the lowest since December 2009.

   Today is the last day of the third quarter. Barring a miraculous and spectacular rally, the Dow will have turned in its worst performance since the first quarter of 2009.

A host of factors are at work, disconcerting news filtering in from three continents. Including a “sucker punch” no one in the mainstream saw coming… or, frankly, is prepared for.

   China’s manufacturing sector shrank for the third straight month. That “jab” was just a little tap to let the market know something’s coming…

HSBC’s Chinese purchasing manager’s index came in at 49.9 — right below the 50 dividing line between expansion and contraction.

   There’s growing talk of Germany leaving the euro. Another “jab” with a bit more umph behind it.

The Germans “have already got the printing machines going,” observes Philippa Malmgren, co-founder of the firm Principalis, speaking at conference in London. “and are bringing out the old deutsche marks they have left over from when the euro was introduced.”

“The decision has already been made by the government that leaving the euro is a possibility.”

   These initial jabs had already slapped the S&P silly… back below 1,150 at this writing.

The volatility index, for its part, jumped back above 40… on the high end of its recent range.

   Now, the sucker punch: “The U.S. economy is indeed tipping into a new recession,” declares a report this morning from the Economic Cycle Research Institute (ECRI). “And there’s nothing that policy makers can do to head it off.”

If you believe we’ve been in one long recession, or even a “Great Correction,” as Bill Bonner calls it, for the last four years, you can go ahead and yawn now.

But get it over quick.

When ECRI calls recession, a lot of “smart money” starts running for the exits.

The ECRI is “the single conventional economics consultancy I respect,” says our short strategist Dan Amoss. “Their model doesn’t issue false alarms. It relies on a robust series of economic metrics.”

Last year, bloggers and arm chair economists alike latched on to ECRI’s weekly leading economic index, claiming it was a surefire recession indicator and it was flashing red. But ECRI held off on calling a “double dip” recession in the U.S. Data they track were turning positive — even before Fed chief Ben Bernanke announced QE2.

Now, however, “the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not ‘soft landings,’” according to ECRI’s statement.

“It’s important to understand that recession doesn’t mean a bad economy — we’ve had that for years now,” ECRI goes on.

“It means an economy that keeps worsening because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.”

   “The ECRI call is a big deal,” says Dan Amoss. “It may cause investors to panic, and finally incorporate a recession into their earnings models” — something that’s been glaringly absent to date.

From where Dan sits, it makes a new and aggressive easy-money program from the Federal Reserve a sure thing. “A $1 trillion QE3 would be just the beginning,” Dan advised his readers today, “if Ben Bernanke and the Fed doves perceive a U.S. recession on the horizon.”

“Each successive round of central bank intervention will pressure the input costs of most businesses even further, and those that cannot pass through costs will see lower stock prices. It’s clear that with the way the global economy is currently set up, commodities continue to be the sector with the tightest supply bottlenecks.”

“The next rebound in the stock market — which may not arrive until we see another sharp 10-20% decline in the S&P 500 — will be concentrated in fewer industries, including natural resources, because they will increasingly be perceived as better stores of value than paper money.”

“I’ll repeat my guidance from the past several months: Hold your open short positions, and use panicked selling of quality gold mining and energy companies to build positions to hold for the long term.”

Dan has six ideas on how to implement this guidance in a special report. He also has a seventh recommendation in his newest issue, coming out this afternoon. If you’d like to be on board, here’s where to go.

   Gold is winding up the week holding the line above $1,600. At last check, the spot price was $1,629. Silver is likewise keeping above a round number, in this case $30. The bid right now is $30.50.

   “Why gold is falling,” says our newest analyst Michael Pento, “has to some degree to do with what is going on in Europe. Sovereign nations are dumping whatever they can and some of them have significant gold reserves and they are putting them on the market.”

What’s more, “Bernanke disappointed the gold market when he did not expand his balance sheet” during the announcement of Operation Twist last week. “He sterilized his purchases of longer-dated Treasuries.”

“So the reason for the decline was the combination of that one-two punch. I don’t think it’s going to last much longer. This is a buying opportunity, in my opinion.”

   The greenback is strengthening big-time to wrap up the week. After spending much of the week below 78, the dollar index is back to 78.5.

The euro’s been knocked back to $1.345.

   The dollar and the yen were the world’s best-performing major currencies in the third quarter, according to an index of 10 currencies maintained by Bloomberg.

In Japan, there’s talk yet again of intervention to keep the yen from strengthening. Of course, because it’s been working so well all along.

[Ed note. The yen’s movements this week delivered a 130% gain to readers of Strategic Currency Trader. Editor Abe Cofnas will issue new recommendations first thing Monday morning, all of them set to play out before the end of the week. To learn more about this one-of-a-kind way to play forex, check this out.]

   If you’re looking for an alternative explanation of why gold tumbled from $1,900 this month, we found one fitting for a good Friday afternoon laugh. It comes from a local newscast in Calgary. We’ll let the lass speak for herself:


It would be scary… if it wasn’t so, well, earnest. The reporter refers to an expert named Todd Hirsch and does so in a way that presumably her audience would recognize.

On his website, Mr. Hirsch bills himself as “Alberta’s foremost economist.” Assuming the reporter represented his views accurately, we weep for you Alberta… good luck.

   Last today… it’s no secret Congress is desperate for revenue. But anyone with half a brain, or even a quarter, would recognize the following as satire:

“While brandishing shotguns and semiautomatic pistols, members of the 112th U.S. Congress took a class of visiting schoolchildren hostage on Wednesday, barricading themselves inside the Capitol rotunda and demanding $12 trillion dollars in cash.”

This plainly satirical news story was posted yesterday on website of the satirical The Onion. If you know what The Onion is all about, this is typical fare. The Onion Twitter feed sported the following:

Apparently, commanders at the Capitol Police force in Washington are lacking even that much brain capacity.

“It has come to our attention,” read a subsequent statement from the Capitol Police force, “that recent twitter feeds are reporting false information concerning current conditions at the U.S. Capitol. Conditions at the U.S. Capitol are currently normal. There is no credibility to these stories or the Twitter feeds.”

OK, so the Capitol Police force has less than a quarter of a brain. And like most bureaucracies, it takes itself waaay too seriously. Their statement concludes: “The U.S. Capitol Police are currently investigating the reporting.”

They’re “investigating the reporting”? So… is a SWAT team about to descend on Onion offices? Stay tuned…

   “I’m one of the persons affected by the GoldMoney decision to close all Dutch accounts,” writes a reader from the Netherlands.

“It’s a shame that GoldMoney bends over for the AFM (Authority for Financial Markets) without putting up a fight. The Dutch Authorities want to interfere in all markets and want to control everything. Are there any other good online alternatives besides GoldMoney?”

The 5: It wasn’t for lack of fight on the part of GoldMoney. They tried their best to make the case that GoldMoney did not constitute an “investment object,” but logic and a good legal team can only take you so far.

The problem now is that under Dutch regulations, any other “offshore gold storage program” of the sort we’ve discussed in the past would be viewed the same way. Unfortunately, Dutch citizens/residents who want to store gold overseas are going to have to find bullion and a vault on their own now.

   “I personally don’t see anything wrong with it,” writes a Reserve member in response to our inquiry about the ethics of investing in raw materials used primarily by the military-industrial complex.

“Generally speaking, investing in an established business that is not issuing new shares or buying other businesses with stock is not really putting money into the company’s treasury.”

“If the most money is to be made from these types of businesses and you are concerned about it, then invest in them and use the money you make for something good. In my mind, it doesn’t matter where the money comes from (as long as you get it honestly), but what you accomplish with it.”

“It all spends the same and can be used for good or evil. What better way to fight evil than to take money produced from evil and use it for good? Kind of like beating them at their own game.”

   “Invest in warmongers?” a reader writes. “Of course, if it will make a good and fast profit, which I can then use to flee the Union of Soviet Socialist States of Amerika. Stopping the warmongering still requires broad support and action from the sheeple, the booboisie.

“Like, that’s really gonna happen.”

   “I do confess,” adds a reader coming down on the other side, “I am sometimes perplexed about the ethics of investing.

“Take Monsanto for example. How can anyone invest in this company and then look in the mirror without blushing with shame? And I really don’t want to go the way of all flesh knowing that my hard-earned savings were used by warmongers to finance the development of flying death.”

   “No doubt about it,” says another, “unless you are totally asleep or totally dumbed down, all of these raw materials are eventually meant to be used in imposing on us the planned One World Government (New World Order).”

“In order to put us all down on our knees begging for their merciful help, it is looking like they intend to broaden the war, maybe into World War III, and this combined with the destruction of our currency and economy should accomplish their plans for submission.”

“Let’s not help them. Invest in real money, food, fuel, water and other necessary staples for survival.”

“I have already lost one country to communism, and this looks more like its blood brother, fascism. Let’s wise up and oppose them all the way.”

   “I am very pleased,” our final correspondent writes, “that The 5 actually considers the consequences of investing in industries that are patently dangerous to our freedom, like those involved in making drones or eavesdropping on U.S. citizens.”

“Our freedoms have been severely curtailed in the past decade, in the name of security. I, like our Founding Fathers, want security from an overweening government that’s no longer responsive to human needs, but rather those of very large corporations.”

“I hope your editorial board takes a very principled stand in this matter, one that sides clearly with human beings over robots, and with small businesses over large ones, even at the cost of some financial risk/reward ratio.”

The 5: Unfortunately, we expect we’re going to think about them a lot more in the months and years ahead.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. So reads the declaration of the Utah Monetary Summit, which concluded this week in Salt Lake City: “As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.”

“The Utah Monetary Declaration is a financial declaration of independence whereby states are beginning to opt out of the Federal Reserve System,” wrote Ron Hera in an email addressed to us this morning. Mr. Hera was an attendee and a signer of the declaration.

“The United States is approaching a constitutional crisis,” Mr. Hera suggests, “because states are beginning to financially break away from the federal government. This is no less serious than the American War of Independence or the War Between the States.”

You may recall Utah passed a law this year affirming the legal tender status of U.S. Gold and Silver Eagles. Having just reread the history of independent banking in the U.S. covered in The Case for Gold, one wonders where this will lead…

The monetary summit attracted a few names you’ll recognize from these pages, including our friend Nathan Lewis, author of Gold: The Once and Future Money, founder James Turk and silver guru David Morgan. For Mr. Hera’s full account of the week’s activities in Salt Lake, check out today’s Whiskey & Gunpowder.

P.P.S. As a side note, we’ll be attending the Conference on a Stable Dollar: Why We Need It and How to Achieve It, hosted by the Heritage Foundation next Wednesday and Thursday, Oct. 5-6.

Lew Lehrman, Dr. Paul’s co-author on The Case for Gold, will be the keynote speaker during dinner on Wednesday night. The aforementioned Nathan Lewis sits on a panel discussing the logistics of a stable dollar early in the morning on Thursday. Details to come… stay tuned.


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