Dave Gonigam – December 29, 2011
- “Out of money” or “a little difficulty”? A preadolescent teen magazine encapsulates the U.S. fiscal situation better than Bloomberg…
- Treasuries rally in the midst of gold’s “panic liquidation”: Pento, Hathaway, Amoss on an improbable flight to safety, and the euro-driven endgame in 2012
- Gun sales set another record: Guenthner on the investable angle
- Chris Mayer on one of his major criteria as he surveys the world for opportunity next year
- Reader backs up Byron King… what’s up with all the hyphens… strangling new businesses in the crib… and more!
It’s come to this: Mad magazine has a better read on the economy than legions of journalists, analysts and pontificators…
Pretty prescient, considering that tomorrow the White House will formally ask Congress to raise the debt ceiling another $1.2 trillion.
No big deal, as conventional wisdom would have it: “The U.S. government received record demand for its bonds in 2011,” said a Bloomberg piece this week, “in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.”
Once again, we see that Mad has things nailed down better than the mainstream…
Hold the thought: We’ll return to that “record demand for bonds” in a bit… after we survey the carnage in another asset class.
Let’s start with the good news: Assuming nothing changes much between now and the close tomorrow…
- Gold measured in U.S. dollars will be up for the 11th straight year
- It will be up a little over 7% — a darn sight better than stocks
- That gain will come despite the U.S. dollar index ending the year slightly higher than it began.
“Yeah,” you say, “but what about the last 24 hours?”
Oh… that:
Well, should we really be surprised? One day after another this week we’ve been hit with disquieting news to disrupt the calm that’s an investor’s birthright during the week between Christmas and New Year’s — thin trading or no.
It’s funny to watch mainstream reporters flail for explanations in these circumstances: “Gold prices declined,” said a report from TheStreet.com, “after a Chinese government crackdown on illegal gold exchanges raised concern that demand in the world’s second-largest economy would weaken.”
Nice try, no cigar. Word of the China crackdown came in time for yesterday’s 5. The precipitous drop in gold came later.
The drop did, however, coincide with a reminder that the eurozone mess isn’t taking the week off: The European Central Bank revealed its balance sheet has swelled to a record 2.73 trillion euros, thanks to all the extra lending it did last week to keep the continent’s banks liquid.
Suddenly, the safety trade was back in play, sending the major U.S. stock indexes down more than 1% on the day. The dollar rose, Treasury yields fell.
This is the sick irony of the eurozone crisis: It’s brought a flood of money into U.S. Treasuries… despite S&P’s “historic” downgrade of Uncle Sam…
Indeed, “foreigners increased their holdings of Treasuries in Q3 by $17.2 billion,” says our Michael Pento, “and now own nearly 50% of our marketable debt. And 60% of their currency reserves are in U.S. dollars.”
“The prevailing wisdom of today,” Mr. Pento goes on, “yields the conclusion that getting your debt downgraded automatically renders a boost to your currency and bond prices. Therefore, why worry?”
“Their comfort is ridiculously based upon the notion that the U.S. has a printing press and can create unlimited amounts of inflation. Therefore, interest rates will never rise and debt service won’t ever be a problem.”
Sort of brings to mind one of our favorite videos of 2011…
“Just wait until interest rates start to rise,” Michael adds. The average yield on U.S. debt is near 1% today. It was 6.5% in the year 2000.
“But given our record level of debt and Fed-led money creation, yields on Treasuries could go much higher than at any other point in U.S. history. Just imagine the instability that will arise when yields start to soar on corporate, consumer and government debt.”
This, Mr. Pento submits, is “the most important reason why the price of gold is still just 20% off its all-time high. And why it’s likely not to retreat much lower than where it is today.”
“The action is what you would expect in a thin market like this; the moves are exaggerated,” adds Tocqueville Gold Fund chief John Hathaway. “We are seeing panic liquidation.”
But longer term? “Traders commitments are indicative of a bottom, sentiment is indicative of a bottom and market action is indicative of a bottom. I’d suspect,” he tells King World News, “we will see a couple more scary days in terms of probing the downside, but I don’t think it’s sustainable.”
“Then you look at the big picture and we have a sovereign debt crisis, the mother of all sovereign debt crises in Europe, and they are just pouring gasoline on the fire. Everything to me points to a continuation of this European crisis into next year.”
While Europe is proving a drag on gold this week, it will ultimately act as a prop starting next year, says Strategic Short Report’s Dan Amoss.
The catalyst might well turn out to be bank nationalizations: “The eurozone banks are already wards of their respective states,” says Dan, “so why don’t we stop pretending otherwise?
“As depositors and derivative counterparties panic about the solvency of European banks, governments will force TARP-like equity injections into them, while the ECB supports the bank liabilities with unlimited lending against even the shakiest collateral.”
“The European banking system still has a huge capital shortage that liquidity operations cannot solve. This can be addressed only by nationalization of the weakest banks (in the form of TARP-like equity injections from core EU governments.”
“At the end of this grueling process, the peripheral eurozone economies will be weaker, and have global influence in proportion to their weak demographics and productivity.”
“In the meantime, I expect we’ll see lots of money printing, which will drive more investors to currency substitutes like precious metals and natural resources.”
Dan’s call for bank nationalizations in Europe goes hand in hand with his call last week for several of the PIIGS countries to leave the eurozone — starting with Greece. There’s still time to move on his recommendation to profit from the fallout.
If it’s anything like the recommendation he made in the teeth of the financial crisis in late 2008, it could mean 334% gains in as little as four months.
Silver got hit much worse than gold yesterday — down 5.5% — and the thrashing continues today. As of this writing, the spot price is down to $26.69.
Barring some sort of fat-tail event, silver will likely end the year lower than it began.
Major U.S. stock indexes have regained more than half of yesterday’s losses, thanks in part to a mix of economic numbers that once again highlight John Mauldin’s “muddle through” thesis…
- First-time unemployment claims: Up to 381,000 last week from the previous week’s post-recession low
- Chicago-area business conditions: Flat from last month, as measured by ISM’s “Chicago PMI” figure, and still firmly in expansion mode
- Pending home sales: Up 7.3% month over month, to the highest level since the homebuyer tax credit expired in the spring of 2010.
It wasn’t just the day after Thanksgiving: As of yesterday, U.S. gun sales appear to have already set a one-month record. At least that’s if you go by requests for FBI background checks. At 1,534,414, the number has broken the previous record — set last month.
On Dec. 23, the FBI ran 102,222 background checks — the second-highest total after Black Friday this year — which as we noted set the one-day record of 129,166.
“I think there’s an increased realization that when something bad occurs, it’s going to be between them and the criminal,” says NRA spokesman Andrew Arulanandam, who notes — as Addison has — the cutbacks at police departments across the country.
“American consumers continue to flock to these products,” notes Penny Stock Fortunes editor Greg Guenthner, “as fears escalate over global unrest, a lackluster economy and the possibility of an increasingly intrusive government stripping away one of the most prominent rights of its citizenry.”
There are relatively few ways to play the trend: In recent years, several legacy gunmakers like Remington have been consolidated under the banner of Cerberus Capital Management, the private-equity megalith — which has spawned a host of conspiracy theories.
Greg recommended one of the few remaining publicly traded firms a couple weeks ago. Readers who didn’t get in at the time are now waiting for shares to fall back to his buy-up-to price.
“Most Americans,” says Chris Mayer, “would be surprised to learn Nicaragua is the second-safest country in Central America, behind only Costa Rica.” Addison and Chris spent the Christmas holiday at Rancho Santana and the nearby colonial town of Granada with their families.
Apart from one incident where Addison nearly lost his iPhone to some passing hooligans on a motorcycle at a public market, they report the country is relatively calm and peaceful. Christmas Eve, they report, the town of Granada erupts with homegrown fireworks displays and families from all over Nicaragua party in the streets until well after midnight.
For Americans spoon-fed bogeyman stories about Sandinistas and Ollie North, the relative safety of Nicaragua is not the only surprise.
“The World Bank ranks it as the easiest country in Central America, Panama excepted, in which to start a new business. Or that in ‘ease of doing business,’ Nicaragua ranks well ahead of such perennial darlings as Brazil or India — or even neighboring Costa Rica. A recent IMF report said that Nicaragua was the Central American country that best protected investors’ rights.”
This spotlights something Chris tells us will be one of his major themes in 2012. “I think ‘ease of doing business’ is unappreciated by investors who get in a lather about the size of markets such as India or China or Brazil, but pay less attention to ease of doing business… but it’s so important when actually trying to build businesses on the ground.
“I’d rather invest in smaller markets where getting things done is easier. And so I prefer Colombia to Brazil, Cambodia to India and Mongolia to China.”
“I’m happy to see at least one educated individual telling the oil sands story the way it really is,” a reader writes after Byron King’s remarks yesterday.
“I’ve worked there, and he’s right, in its natural state, the oil sands region is a huge (natural) petroleum wasteland. Stunted trees, the smell of hydrocarbons so thick in the heat that you can barely breathe, gooey, sticky black and gray mess oozing from the river banks into the water everywhere, no animal or fish life of any kind.”
“On the other hand, the reclaimed land in Alberta is clean, planted with healthy (and growing) trees and brush, small lakes by the dozens with clean water, birds by the hundreds landing in and eating from the water, deer and moose thick on the landscape, etc., etc., etc.”
“These idiot environmentalists who decry the oil sands ‘reclamation’ projects have likely never been there to compare the natural state to the reclaimed state of the region. Perhaps in time it will be regarded as one of man’s biggest favors to the environment. Yes, it is a mess while in process, but the end product is a vast improvement.”
“Thanks for a great daily missive.”
“Balance of $3.55 trillion?” a reader inquires about the European Central Bank’s balance sheet — which as noted above, is now 2.73 trillion euros.
“Isn’t this similar to the USA debt build up of 15 trillion?”
The 5: It’s more analogous to the Federal Reserve’s balance sheet of $2.8 trillion.
Except that the Fed’s has been steady or slowly falling since the end of QE2 six months ago. The ECB’s has exploded by 40% during the same period — more than it grew during the 2008 panic, in fact.
This fact reinforces the thinking behind Dan Amoss’ “protection play” against the euro. Best to move on it quickly, though.
“What gives with all the dashes in the middle of words in yesterday’s 5?” a reader inquires.
“It’s filled,” writes another, “with horrible styling and spelling errors, as if your editor were drunk or you had a programming error.”
The 5: We can assure you The 5 has been powered only by coffee and water this week. Heck, we’re glad to learn you’re still reading!
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. On the heels of Michael Pento’s call that Israel or the United States will likely attack Iran in 2012, The Daily Beast reports that Israel and the U.S. are discussing exactly what would constitute a “red line” in Iran’s nuclear program to justify an attack.
2012 is shaping up to be quite a year: war, attempts to stave off eurozone collapse, electoral uncertainty… Famine, pestilence and death can’t be far behind.
If you already know and appreciate some of our services… please consider now the most opportune time to step up to our VIP level of membership, the Agora Financial Reserve.
You get full access to everything we publish… for life… for a one-time fee that’s actually lower than you’d pay to subscribe to everything separately for one year.
We open membership only rarely… and now is one of those times. The Reserve is not for everyone… but the only way you’ll know it’s for you is to examine the full array of privileges you get when you belong. You can do so right here.
Addison’s documentary-in-progress Risk! chronicles the obstacles faced by the entrepreneurs who will drive any economic recovery whenever the smoke clears from the Great Correction.
But what of the entrepreneurs who will never get off the ground to begin with? Laissez-Faire Books executive editor Jeffrey Tucker tells us of their plight…
Generation Demoralized
by Jeffrey Tucker
It’s a scandal how little talk there is of what really amounts to a national calamity: youth unemployment. It soared after the recession began in 2008, and it only grew higher after the recession supposedly ended. It is approaching 19% according to the official data. But official data tell only trends and part of the story. They don’t reflect the ghastly reality on the ground:
These data exclude students not looking for work or people helping out around the house or people who haven’t done anything to seek employment for four months. And whereas most countries calculate youth as age 15-24, U.S. law generally deems a person ready for remunerative work at 16, as if a 15-year-old is a babe that needs to be coddled and protected from the wiles of the world of wage slavery.
The real story is buried in the Department of Labor’s statistical release: “The employment-population ratio for youth — the proportion of the 16-24-year-old civilian noninstitutional population that was employed — was 48.8% in July, a record low for the series.” In other words, most people in this age range do not work at all. Forget 19%; the problem affects 52%. That’s an incredible fact.
The trend is generating lasting damage. If you read the biographies of history’s great creators, they all tell of wonderful and crazy experiences of work in early youth, by which I mean 11 or 12 years old. By the time these people were 20, their lives were pretty well set. As the biographies all report, work instills an ethic of attentiveness, getting along with others, discipline to stick to a task and pride in a job well done.
And work is a fantastic teacher, better than the classroom. You learn about inputs and outputs, accounting and why it matters, customers and business relations, the competitive marketplace, the strictures and framework of profitability. It requires the acquisition and applications of new skills. It teaches kids to be other-regarding and to push themselves to the limits, instead of selfish and indulgent toward sloths. These are lessons you have to acquire early in life, and they stick with you forever.
The classroom does none of this. Neither does sitting on the sofa playing Wii. I’m a champion of video gaming for kids, but let’s get real: It has a fraction of the sociological and economic value of a real job. It is escapism, whereas working for a business is the real thing.
How can we sit by and watch an entire generation — many millions of kids — be denied all of this? Do we really believe that these kids are going to be prepared for the highly competitive workplace after 16 years of desk sitting? How are they going to learn that the value of a person’s labor in the marketplace is directly linked to the value they bring to a firm unless they get out there early in life and see how the whole game is played?
Kids are much quicker learners than adults, which is why when these lessons are taught early, they tend to stick. It is too late to enter the workforce at 24. The person who does this is not in a good position to compete. You can read all the books you want on how to conduct yourself in an interview, but there is no substitute for knowing from experience what a boss is looking for in an employee. A would-be employee who is clueless about this always imagines himself or herself as a buyer of a paycheck, rather than a seller of labor resources. That attitude does not go over well in the tight marketplace for work.
I’m particularly intrigued by the existence of the vast numbers of unemployed young people who drop off the data collectors’ radar completely. These are kids who might have thought about working at the age of 15 or 16 but became discouraged rather quickly when they realized that (1) getting a job is harder than they thought, (2) the pay is lower than they imagined and (3) it is much easier to sponge off mom and dad as long as permitted. Sloth and stupidity become a way of life.
Let’s talk about the law. The minimum wage is an obvious villain here. It says to the young person: You have no right to lower the asking price for your labor below a floor that the government establishes. In this sense, the minimum wage really is a violation of human rights. It certainly leads to unemployment. We’ve seen the largest-ever increases in the minimum wage in recent years, so it is hardly surprising that youth unemployment has been profoundly affected.
Ten or 20 years ago, it was rather easy to get around the minimum wage laws, the tax reporting requirements, the child labor laws and all the rest of the apparatus that keep kids out of the workforce. Every family had friends in business who needed help, and the kids could be paid cash. Today, this is no longer true. Everyone is scared of the government. If you get reported for hiring under the table, you face prosecution and the potential death of the business. Hiring young people for cash is no longer worth the risk. So the opportunities have dwindled. This is particularly true in urban areas.
The entire crisis could be ended right away with the right repeals. We need to end the child labor laws, the minimum wage, the payroll tax and crazy restrictions on hiring and firing. We would see the entire labor marketplace light up immediately, with young people in particularly high demand for their computer skills and fast teachability. Why doesn’t this happen? Ignorance, political stalemates, labor unions and cartels that benefit from the laws as they are.
The future of civilization is paying a huge price for shutting these people out of the workforce. It is a price will we be paying for many decades ahead because kids grow up to become the adult population of the future. As the saying goes, these minds are terrible things to waste. But that is precisely what is happening. Tragically, it doesn’t seem like too many people even care.
A final piece of advice for every kid and parent: Buck the trend in every way you can. Don’t let the system beat you. Any youth who starts working now, even against all odds and in whatever way this is possible — even if it means working for free — is going to have a huge advantage in the future.