Avoid the Next Big Bubble

Dave Gonigam – December 21, 2011

  • Step 3 of a generation’s wealth destruction well under way… and the charts to prove it
  • European banks belly up to the trough… Dan Amoss on why the latest fix won’t work either
  • Millions of imaginary home sales finally vaporized by the National Association of Realtors
  • A groundswell of support for a gold standard in 2012… Another mineral with which China’s building a monopoly… A reader challenges us on an editor’s track record… and more!

   Six months after Addison warned of the “third and final step in the systematic destruction of a whole generation’s wealth,” we have statistical evidence to bear out his forecast.

The generation in question is the baby boomers. The first step in the destruction of their wealth was the dot-com bubble. The second step was the real estate and credit bubble.

Step three is a bubble in fixed income… starting with U.S. Treasuries.

   Worldwide, investors have pulled $34 billion out of stock mutual funds this year… and plowed $75 billion into bonds.

In the United States, according to EPFR Global, stock mutual funds and ETFs have had a net inflow of $4 billion this year… while fixed-income managers have seen a tsunami amounting to $86 billion.

And what are all those “risk-averse” investors getting for their trouble?

A 10-year Treasury note yields 1.93% this morning. But consumer prices rose 3.4% in the last 12 months. So even by the addled standards of the Bureau of Labor Statistics, you’re losing 1.5% of purchasing power every year. Before taxes.

“This is no accident. It’s policy,” said Addison in June — when the yield on the 10-year was 2.95%! “Even if, in the end, we discover it’s accidental policy.”

“‘Negative real interest rates’ are how the federal government will try to pay down some of its staggering debt.”

Thus, the final destruction of the boomers’ retirement… unless you take some protective measures. You can find one of our favorites right here.

   U.S. stock indexes are giving back some of yesterday’s monster rally. For the moment, the Dow’s head remains above the 12,000 waterline.

   Traders appear nonplused by the news from Europe — an unseemly grab by 523 banks for $638 billion in emergency three-year loans from the European Central Bank.

This is the first of two auctions the ECB announced earlier this month. The next is in February.

$638 billion is darn near double the figure the “expert consensus” was counting on.

PIIGS (and French, and Germans…) at the ECB Trough

The ECB hopes banks will use this money for the carry trade — borrowing at bargain-basement rates and plowing the cash into European government bonds to collect a higher rate.

Good luck with that: $638 billion amounts to 63% of European bank debt maturing next year, according to Goldman Sachs.

In other words, $638 billion is a Band-Aid on a gaping wound, according to Strategic Short Report’s Dan Amoss: “It’ll be enough to address the scary wall of 2012 European bank debt maturities… but not enough to spark a hugely profitable carry trade.

“The European banking system still has a huge capital shortage,” says Dan, “which may only be addressed by nationalization of the weakest banks.”

No… this latest headline doesn’t fix Europe either. There’s still time to follow through on Dan’s year-end guidance to prepare for the inevitable eurozone meltdown. He applied a similar strategy during the 2008 financial crisis to generate 334% gains in a little over three months. Intrigued? Give this a look.

   Currency markets are yawning in reaction to the latest euro-fix. The euro is at $1.307, the dollar index down ever so slightly, to 79.9.

   After a 10-month hiatus, The 5 resumes reporting existing home sales as counted by the National Association of Realtors.

We threw up our hands in disgust last February after the NAR fessed up to fiddling with the numbers. Rather than relying on MLS listings or county courthouse filings, the NAR was performing statistical imputations — using the 2000 census as a starting point and then guessing at the numbers based on assumed population growth.

After 10 months of re-crunching the numbers going back to 2007, we’re now told that…

  • Sales in 2007 were 11% lower than previously thought
  • Sales in 2008 were 16% lower
  • Sales in 2009 were 16% lower
  • And sales last year were 15% lower than the NAR first told us.

Fast-forward to October of this year — the most recent batch of bad numbers. The NAR originally pegged home sales at an annual rate of 4.97 million. Whoops… No, it’s actually 4.25 million.

Thus, the November numbers don’t look awful — up 4%, to 4.42 million. The year-over-year increase works out to 12.2%.

   Precious metals are treading water today. Gold is holding onto yesterday’s gains at $1,613. Silver has retreated from its charge toward $30 — currently $29.34.

   “The world dollar standard’s death certificate arrives in the mail this week,” says Ralph Benko of the American Principles Project, writing at Forbes.

He’s referring to a paper issued yesterday by the Bank of England with the prosaic title, “Reform of the International Monetary and Financial System.” The gist of it: The world was better off under the Bretton Woods system, when the world’s currencies were tied to the dollar and the dollar was tied to gold — however tenuously.

“What’s next?” Mr. Benko asks rhetorically. “Presciently, at the watershed Oct. 5-6 Heritage Foundation Conference on a Stable Dollar: Why We Need It and How to Achieve It, Forbes’ editor-in-chief Steve Forbes called for escalating the discourse from ‘whether’ we should restore the gold standard to ‘how’ to do so. The floodgates open.

“In the second half of 2011, monetary policy scholars, policy virtuosi, financiers and activists have issued over half a dozen books and important monographs on the very subject heralded by Forbes.” [Ed. Note: Laissez-Faire Books stocks a couple of the most important, here and here — as always at 20% off.]

Addison, who was in attendance at that October conference, is intrigued by Mr. Benko’s thesis that gold is the means by which people will take their power back from the world’s financial elites. Stay tuned…

   “The Chinese have the world over a barrel with barite now,” reads an email this morning from our resident geologist and natural resource specialist Byron King.

Barite, we learn from an article he sent along, is an essential ingredient of “drilling mud” — the chemical mixture that goes down every oil well.

The story is similar to the one with rare earths: China needed the stuff for its growing economy. China ended up mining so much of it that it flooded the market, suppressing the price, making it a losing proposition for miners in the West.

Now China dominates global production, and it’s clamping down on illegal producers of the stuff — limiting supply, which it intends to keep for itself.

“Rare earths… tungsten… graphite… now barite!” Byron muses. Rest assured he’ll keep an eye out for any profit opportunities as Western companies try to ramp up production.

And what’s going on with rare earths these days, you wonder? Expectations of a global slowdown have kicked the living mucus out of the sector. “The Bloomberg Rare Earth Mineral Resources Index,” Byron says, “is down about 52% so far this year.”

Industry darling Molycorp — which Byron got his readers out of for a 178% gain at $53 — has crumbled to $28.

But he still sees value in a couple of rare-earth players. He’s visited the sites in person. He’s examined their books and found plenty of cash to fund their operations. “I expect good, positive news to flow from the companies as 2012 gets under way. That news flow ought to dominate in 2012.” No time like the present to get on board.

   “In the issue yesterday about one test to diagnose a variety of cancers,” an MD in Nevada writes of Patrick Cox’s latest research, “the PSA is mentioned.”

“The PSA has proved to be a poor test at best and a horrible one at its worst. The PSA does go up with the incidence of prostate cancer, BUT one must also consider the issue of false positives.”

“It is slowly being recognized that just because there is an elevation of the PSA that the patient does not necessarily need a radical prostatectomy and all the comorbidities entailed (loss of sexual abilities and urinary incontinence being the most common).”

“The PSA was just not a good test.”

The 5: We’re aware of its shortcomings, and in retrospect maybe it wasn’t the best analogy to make. Not when discussing the life-changing potential of a single blood test that can detect a host of cancers, and with much more accuracy than the PSA.

   “Patrick does a great research job,” writes another reader, “and I fully expect he believes in the companies and technologies he writes about!”

We sense a “but…” coming on…

“However, the name of the investment game is to make money! The last time I checked, most of Patrick’s stock recommendations were in the red.”

“Perhaps, if one could wait, they might recoup their money, but it seems to me, Agora and Mr. Cox should spend more time on more ‘timely’ potentially positive investments. In addition, you should bluntly disclose the performance record of Breakthrough Technology Alert when touting this newsletter!”

The 5: The only thing missing from your letter was the dare to publish it… Heh.

How do you define “timely”? If you’re looking for quick paydays, we have other publications much better suited for that purpose. (How does four days sound?)

But it takes time to develop, test and bring world-changing breakthroughs to market. Are some of Patrick’s plays down from the time he recommended them? Sure. But I’m going over the spreadsheet covering every recommendation in the nearly four years he’s been on our team: Every sell he’s issued has been for a gain… and the average gain is 321%.

He won’t issue a sell until he’s convinced the story has played itself out. And the story has yet to be written on many of the companies in the BTA portfolio.

The early chapters, however, will have you begging for more.

   “Any chance,” writes a reader about Byron King’s “New War” forecast, “of something we can read quietly over Christmas — NOT an audio?”

“Even if we have to pay something — I will buy the presentation if necessary.”

The 5: It’s on the house. Read here.

   “I applaud you fellas for putting the knucklehead author of the ‘you are smarter than that’ letter in your Dec. 20 edition of The 5,” about the IRS’ aggressive attempts to extract failure-to-file penalties from U.S. citizens who’ve never set foot in the country.

“The reader is exemplary of that widespread American affliction: delusional hubris combined with gross ignorance. The affliction is rampant in the population. Its most crippling side effect is zombification.”

“In the spirit of a metaphorical device used by one of your writers in a recent Agora publication, the reader in question is just one of too many millions of ‘people’ oblivious that the path down which increasingly totalitarian-minded political regimes herd the fat and groggy masses leads right to the slaughterhouse — where the nail gun awaits.”

“The collective quality of your readership would see an uptick if the reader followed through with his (or her) threat of subscription cancellation — if you yourselves weren’t inclined to take proactive measures in that regard.”

   “People are missing the basic point,” writes a reader winding down our light bulb discussion. “Energy efficiency is not the primary issue here.”

“The gut issue is that the government has destroyed the free market in light bulbs. It is just plain old central planning.”

“It should be everyone’s right to purchase the light bulb of his/her choice based on their preferences. There is no moral reason or any justification to force a particular type of light bulb into someone’s home. I use all types of light bulbs in my home. Each one fits a different need.”

“Now if we want to talk about the benefits of incandescent lighting, one benefit is that it is the best, ummh, ‘mood lighting’ around. If you are planning on seduction, then pop in the incandescent bulbs, preferably rose-tinted incandescent light bulbs — not so easy to find anymore.”

“Thanks for letting me sound off on one of my biggest irritations — light bulb central planning.”


Dave Gonigam
The 5 Min. Forecast


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