These are the Good Old Days

Dave Gonigam – December 16, 2011

  • Consumer prices “steady,” we’re told. Even if it were true, Michael Pento and Dan Amoss have two reasons they won’t be next year
  • Gold begins to recover: Top-drawer fund manager on why now’s the time to add to your stash
  • The beginning of the end? Social media IPO fails to dazzle: Greg Guenthner reads the signals
  • SEC prepares Fannie and Freddie wrist slaps… Hugo Chavez discovers markets… a reprieve for the incandescent bulb… and more!

   Consumer prices neither rose nor fell last month, in the skewed estimation of the Bureau of Labor Statistics. Year over year, CPI is up 3.4%.

Notably, food prices are up 4.6%… and if you’ve cut back on dining out, the cost of sustenance is even higher. The category “food at home” is up 5.9%.

   Meanwhile, the core CPI rate, that statistical wonder reflecting the cost of living for people who don’t eat or drive, is up 2.2% — on the high end of the Federal Reserve’s inflationary “sweet spot,” but from its vantage point, still not a cause for concern.

“It looks like,” said a Bloomberg summary issued just after the number came out, “the Fed is getting its wish for easing inflation with lower energy costs coming into play — at least for now.”

In other words, if the Fed is looking for an excuse to open the monetary spigots further, there’s nothing in today’s numbers to deter them.

   “Keep in mind,” advises our Dan Amoss, “that starting in 2012, the voting on the Board of Governors of the Fed will get much more ‘dovish.’”

“Ben Bernanke, Janet Yellen and Bill Dudley — all doves at the core of the decision-making process — will look to experiment with new QE programs using something like ‘heightened stress in the European (and global) banking system’ as the excuse to inflate.”

“The Fed’s ‘price stability’ mandate is broadly defined; it should suppress any criticism the Fed may get in aiding European banks. You can be sure they are aware of the European bank asset sales and will ease in order to smooth out the process. If the desire to ‘ease unemployment’ was sufficient justification for QE2, then the desire to prevent a meltdown in European banks is surely justification for QE3 in 2012.”

[Ed. Note: Dan has a simple strategy to plan for exactly this scenario. You’ll want to move on this quickly — before year-end. Details here.]

   But what might QE3 actually look like? “The Fed will make the watershed decision,” suggests our newest analyst Michael Pento, “to stop paying interest on reserves — probably in the second half of 2012.”

To understand what this means, we must briefly jump into the weeds of Fed arcana: Among the rubber bands and paper clips the Fed applied to the banking system after the 2008 crisis was a move to pay banks interest on “excess reserves” deposited at the Fed.

“It means,” explains Mr. Pento, “banks don’t have to make a loan and don’t have to expand the money supply in order to earn money. And if banks aren’t making loans, the money supply doesn’t increase, and the rate of inflation is muted.”

Conventional wisdom has it that with interest rates near zero, the Fed is “out of bullets” to pursue further monetary stimulus. But an end to interest payments on excess reserves would produce a whole new sugar high: “Once banks stop receiving interest on their deposits held at the Fed,” Michael goes on, “banks will start handing out loans like they do lollipops.”

“Banks will hand out money to anyone and everyone regardless of their ability to pay the loan back, just as they did before the credit crisis. The money supply will boom and inflation will take off. I think that will have a most profound impact on the cost of food.”

That 4.6% increase you’ve seen over the last year will feel like the good old days.

   Major U.S. stock indexes opened up; now they’re flat.

Nothing is moving the needle today — not even the IPO of a company whose marquee product is, as Wikipedia describes it, “a farming simulation social network game.”

Zynga is the company behind the inexplicably popular Facebook game FarmVille — in which players raise virtual crops and livestock and trade them with their “friends” using “farm coins.”

On this tissue-thin business model is built an IPO valued before today’s open at $7 billion.

Because people who have no jobs have nothing better to do with their time

The IPO price was $10 a share. It popped early; now it’s below the IPO price.

   “The IPO market has been anything but dull this year,” reflects our Greg Guenthner. “But social media offerings that were initially hyped are now in the gutter (think Zillow, Pandora, LinkedIn, etc.).”

“A ton has already been said about their respective valuations, but now we’re seeing a turn in how the media are viewing these stocks. All of the initial stories I’m seeing on Zynga are fairly negative because the share price didn’t double in the first hour of trading.”

“It’s as if it has become fashionable to bash these IPOs for what they really are — overvalued story stocks. But then again, this could just be a symptom of a sagging market. It’s hard to say whether or not we’ve hit a legitimate turning point in regards to investor expectations.”

“It’s possible that poor performance throughout the social media ‘sector’ (I use the term loosely) this year is squashing interest. Maybe these stocks have finally worn out their welcome. Investors have been burned across the board this year — why should they lay down their cash on another long-shot opportunity?”

   This is laughable: The SEC is suing six former executives at Fannie Mae and Freddie Mac… claiming they lied to their investors about their exposure to subprime mortgages.

No… Say it ain’t so!

The executives include former Freddie CEO Dick Syron and former Fannie CEO Daniel Mudd.

Let’s take a wild guess here: The accused will settle with the SEC, admit no wrongdoing (after all, that would open them up to lawsuits by investors) and fork over a paltry penalty.

Better than nothing, says Bailout Nation author and Vancouver stalwart Barry Ritholtz: “Phoney and Fraudie had a long history of fraud, bad execs, fake accounting.”

“Next up: AIG. They are the no-brainer, with zero reserves against $3 trillion in potential liability.”

“There are cases to be made against Countrywide, Citigroup, Bank of America, Lehman Bros., Bear Stearns, etc., but you take the low-hanging fruit first.”

   The revelations just keep coming: Venezuela’s Hugo Chavez is having his “New Economic Policy” moment.

History buffs will recall that after full-on Marxism nearly collapsed the Soviet economy, Lenin introduced the New Economic Policy in 1921 — allowing just enough capitalism to generate just enough wealth to keep the whole thing from falling apart.

Now comes word that our favorite caudillo is “rolling back policies that have allowed him to expand control over the economy,” Bloomberg reports. His aim: “to boost supplies of milk, corn flour and cement as shortages threaten to dent his bid for re-election in 2012.”

Funny how that works…

   Buyers are returning to the gold market as the week winds down. At last check, the spot price is up to $1,591… and by the reckoning of Kitco, only a small amount of the increase can be chalked up to dollar weakness.

Silver is also trying to recover a round number, currently $29.67.

   “This is the time when you want to put some money to work, particularly in the metals,” says the Tocqueville Gold Fund’s John Hathaway.

“Bloomberg is obsessing about the falling gold price. That’s generally the tone of what I see, so it is consistent with the sentiment numbers for gold and silver, and to me it’s a pretty good sign.”

“This summer,” Hathaway tells King World News, “when we got up to $1,900, gold was overcooked and sentiment was bullish. All of the front-page stories were about the reasons to own gold. The usual suspects were bulling it like (Dennis) Gartman, to give one example.”

“Now Gartman is calling it a bear market in gold and that is a good contrarian indicator.”

   The 100-watt incandescent light bulb might live beyond the first of the year.

Slipped into a $1 trillion spending bill that will prevent a government shutdown at midnight tonight (yes, that’s been looming again, but now it’s retreating) is a provision effectively repealing the ban.

Could it be? Consumers won’t be corralled after all into buying the compact fluorescents that turn your home into a hazmat zone if your kid knocks over a lamp and breaks the bulb?

It lives! It lives!

The 2007 law banned the manufacture and distribution of light bulbs that didn’t meet government energy-efficiency standards. That effectively put the kibosh on 100-watt incandescents, effective Jan. 1, 2012. Lower wattages would become verboten in subsequent years.

The plank inserted into the spending bill doesn’t explicitly repeal the ban… but it does forbid the White House from spending any money to enforce it.

Hmmm… That’s an interesting gray area. Raises a couple of questions. First, would a producer of incandescents bother to ramp up production again after shutting it down in anticipation of the ban?

Second, does that make this latest move by Congress nothing more than a feel-good measure? Naw, they’d never do that…

   “I am a U.S. citizen and have lived in Canada since 1972,” writes a reader from the Maritimes. “The IRS is now trying to get all of us that live outside the U.S. to do tax returns, even though we pay taxes in the country we live in on the income we earn outside the USA.”

“And the U.S. government wants the Canadian government to collect any outstanding taxes that may be owing. But that has been refused. There are over 800,000 U.S. citizens living in Canada.”

“I guess the U.S. government is so hard up they are trying to intimidate us into filing a return. My wife and I finally decided to become Canadian citizens so we can travel more freely (not only to the U.S., but to other countries, as well). And we haven’t decided if we will file returns or not.”

“They are really trying to find people with offshore accounts that are hidden or used to avoid taxes. If someone fits in that category they can give ‘full disclosure’ of all their assets and holdings and send a check for 5% of their net worth and the IRS will forgive them back taxes and fines.”

“My accountant told me a story that he heard of a woman who wrote a check for $80 million to clear her record. He also told me not to worry too much because the IRS doesn’t have the staff to do all the paperwork that will pile up if we all start filing.”

“I think I’ll do it without the help of an accountant (which will cost me about $300 plus 15% provincial tax) and let the IRS help me with all the paperwork!”

“All the best in the new year, and keep up the good work! Know your opinions and information are a good contrast to CNBC, and other news media, which I watch only about 2 minutes per month!”

The 5: There is indeed an IRS dragnet of U.S. citizens living abroad, even if they’ve never lived in the United States.

But that’s what happens when governments get desperate for revenue. No matter where your residence, you need to line up a defense — sooner, rather than later.

   “Watching representative and senator comments on C-SPAN,” writes a reader, “I discovered a valuable tool for physical health.”

“If you eat too much or the wrong thing, immediately turn on C-SPAN. If you give a continental damn about the USA, within minutes you will experience projectile poop and puke, clearing the bad stuff from your body.”

“Too bad it is not as easy to clear out STOUCD (the Slime That Oozes Under the Capitol Dome, I think that you it call Congress).”

The 5: C’mon, you didn’t specify what legislation delivered this insight. Internet censorship dressed up as copyright? Military detention of U.S. citizens dressed up as anti-terrorism? A garden-variety $1 trillion spending bill?

The choices this week have been legion…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast


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