When Worlds Collide

Addison Wiggin – January 24, 2012

  • When worlds collide: Soros starts sounding a lot like us (“survival”), while one of our own editors is convinced of an American revival…
  • While the mainstream chatters about the Fed, here’s the ball you need to keep an eye on
  • A major beneficiary of the Keystone pipeline decision, and his bizarro YouTube sensation
  • An unlikely “best place” for U.S. expats… the similarities between the Fed and your average workplace… and more!

   “It’s already started,” declared George Soros this morning in Newsweek. “It” is riots in the streets. And with that, Mr. Soros upped the ante on concerns we first raised in June.

Yesterday, in fact, we spent a few hours with Russia Today producer Demetri Kofinas for a segment on the “The Mother of All Asset Bubbles” and our forecast that it’s beginning to burst. (RT will air at 4:30 p.m. this afternoon and be hosted on this page on the Agora Financial site afterward.)

“At times like these, survival is the most important thing,” Soros says to underscore the point in Newsweek.

“We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment.”

“The worst-case scenario is a collapse of the financial system.”

Alas, he left us in the lurch as far as his outlook for gold. He sold most of his holdings in the first quarter of last year. Rumor has it he was buying again in Q4, but we won’t know for sure until he files his 13-F next month.

Nor did Newsweek press him on the matter.

   We’re faced with a conundrum this morning.

We’ve been fielding more requests for interviews on our work in Empire of Debt and I.O.U.S.A. than at any other time… certainly more than during the initial release of the book in 2005 or the film in 2008.

Indeed, as our forecast indicates, there are few reasons to be optimistic about the economy or that it’s going to much better during the election year.

But during our morning editorial meetings about five months ago, Matt Insley and Byron King — the able bodies on Agora Fiancial’s natural resource beat — started regaling us about the potential lying beneath obscure stretches of the Texas plains or long-dead Rust Belt cities in Ohio… we were, well, skeptical.

You can relate, we’re willing to bet.

As you know, we’ve spent a decade (and then some) tracking the rise of the most epic financial bubble the world has ever seen. We’ve profiled the change in attitudes Americans, in particular, have had to adopt to convince themselves the society, the government itself, can spend beyond its means in perpetuity. And right now, we’re convinced the fruits of those foul labors are beginning to bear putrid fruit.

Still, “markets make opinions,” the old-timers like to say.

   Now, here’s the conundrum. What Byron has stumbled upon he believes has the power to shift perceptions away from the profound pessimism the country has been enduring since 2008… to a renewed optimism.

“No matter how many times I review the data,” Byron asserts, “or how many ways I rearrange the pieces of the puzzle, the outcome is the same: America’s fortune is set to change in very drastic, very amazing way — and it could happen as early as THIS MAY.”

Indeed, Byron sees this one factor creating up to 3.2 million new manufacturing jobs… more than making up for the 2.3 million lost in the 2007-09 recession. Further, it will create vast new wealth for people who catch on to the trend before events are set in motion in May.

Despite our ornery outlook, we recommend you review Byron’s research for yourself. If what he’s talking about will bear fruit… it starts a mere four months from now.

   The revival Byron sees is “so powerful,” he believes it can withstand whatever stunts the Federal Reserve’s Open Market Committee (FOMC) tries to pull while meeting the next two days.

We’ll leave any speculation about what the Fed will say in their statement tomorrow to a myriad of Fed-bashing websites…. and skip to the longer, more important view: “The Federal Reserve will unleash a third wave of quantitative easing sometime in the next few months,” says our short strategist Dan Amoss.

“Big investors demand QE3, so they’ll get it, even if it requires a ‘risk-off’ tantrum. If we don’t see QE3 within a few months, the clear slowing in earnings momentum and leading economic indicators will push the stock market down — at which point, the Fed would step in with QE3.”

“This would flood the global monetary system with even more U.S. dollars, continuing a trend in place since the beginning of the recession in 2007.”

Check out this chart of “True Money Supply,” as calculated by the Ludwig von Mises Institute. It’s exploded by more than $2 trillion since late 2007. “The annualized growth in true money supply is in the range of $700-800 billion per year,” says Dan.” This growth rate will remain steady (or accelerate) as long as the U.S. government maintains its current spending habits and the Fed doesn’t tighten policy:

So what’s it to you? “QE3 plus easier policies from emerging-market central banks set the stage for a rally in commodity and precious metals prices,” Dan concludes. “This rally in 2012-13 could dwarf what we saw in 2010-11.”

“At that point, it will be obvious to most investors how governments and central banks all around the world prefer to address the suffocating burden of debt: ease the pain with as many doses of inflation as possible and don’t lose the ‘currency war’ by allowing too much currency appreciation.”

   Major U.S. stock indexes are down today, but not much. For lack of any better explanation, mainstream media sources attribute the losses to new tension over Greece.

   “In order for a new bull market to gain traction,” says Greg Guenthner of our small-cap team, “we want to see investors begin to favor the riskier asset classes — such as small caps.”

“To some extent, this has already happened. The Dow is up about 3.75% to start the year, while the S&P has risen almost 4.25%. On the other hand, the Russell 2000 — an index that reflects small-cap performance — is up almost 5.5% in 2012.”

“This is a strong sign for the bulls. If small caps can maintain their lead over the broad market, traders and investors will feel much more confident in the new trend.”

Another strong sign: A report from Bespoke Investment Group showing the 50 stocks in the S&P 500 that performed best during 2011 are up barely 2% so far this year. The 50 stocks that performed worst are up 11.2%.

“It could remain a bumpy ride in the near term, yet I will remain cautiously optimistic that this new rally might stick. With a few clearer signals and some emotional adjustments of the investing public, the floodgates could open for a new bull market.”

   Precious metals are pulling back today. Gold has settled back to $1,666. Silver is clinging to $32 by a thread.

   “Ecuador has the best-value real estate to be found anywhere in the world,” a colleague at International Living announced unexpectedly yesterday. The value exhibited there, they say, tips the scales to make it rank “Best Overseas Retirement Destination.”

Their conclusion comes, as is their annual wont, after months of research factoring in everything from the price of milk to the average daily temperature.

“Ecuador scored well across a number of categories,” says editor Eoin Bassett. “However, when we compared the standard and value of its real estate market, it surged ahead of the other countries.”

Ecuador eclipsed Panama as the longtime expat favorite in that category. For a comprehensive review of International Living’s top retirement havens, look here.

[For the record, we still prefer Nicaragua. Please join us March 21-25, 2012, to explore offshore investing. It will cover logistics, legalities, and estate-planning implications of placing a portion of your wealth overseas. If you want to be considered for attendance, call Kristen Palmer today at 1-800-708-1020. She’ll add you to the list.

   Turns out there’s a significant beneficiary in the White House’s move to reject the current proposal for the Keystone XL pipeline.

Buried in the State Department’s rationale are a few lines about how with just a little expansion, western Canada’s rail lines can transport any increase in production from the Canadian tar sands through 2030.

“Whatever people bring to us, we’re ready to haul,” says a spokeswoman for Burlington Northern.

And who bought Burlington Northern in 2008? Oh yeah, this guy…

In what will surely rate as one of the ultimate non sequiturs of 2012, Warren Buffett turned up on Chinese TV Sunday to ring in Chinese New Year in a most unusual way: by singing “I’ve Been Working on the Railroad” and strumming a ukulele.

For once, we’re speechless…

   “As a native Nebraskan,” a reader writes, “I can tell you that outside of the usual anti-carbon nihilists, most Nebraskans strongly support the Keystone XL pipeline.”

“We still are mostly a state of oil-dependent farmers. However, to clarify, the issue is not the Ogallala Aquifer, it is the Sandhills. This is the largest area of grass-covered sand dunes in the world. And the grass isn’t that thick, so all it takes is an initial scar, called a ‘blowout,’ and the wind does the rest. It is nearly impossible to recover the damaged area.”

“If they built the pipeline through the Sandhills, in six months, you would have bare pipe, and an environmental disaster, especially since in some of the areas of the original route, the aquifer is nearly at the surface. The state is actively working with Keystone to approve the amended route, and Nebraska is not going to be the reason this doesn’t get built.”

   “I have moved my two smallish-quantity primary electronics modules back into USA production,” a reader writes after our item about the U.S. leading the way in manufacturing jobs among developed economies the last two years.

“Why? Because (1) no time zone issues, (2) no language issues, (3) one-quarter the lead time, (4) locals here want only upfront money for the parts, (5) locals here will ship partial quantities and bill for the labor only on what is shipped. No-brainer.”

The 5: Thanks for the input. For other people in your situation, there’s one additional factor at work. And it’s set to propel a flurry of economic activity no later than this May. Here’s why.

   “I fully agree with Mr. Tucker in regard to the Fed,” a reader writes after yesterday’s issue. “I also work for a private company: same as the Fed. It works the same way: We have a meeting for policy and ideas and action.”

“The policies, actions and ideas are those of the owners, predetermined to be implemented, It is always glad-handing, serious head shaking up and down and let’s get to work.”

“We finally quit having meetings years ago. Just like for the Fed, they were a waste of time. Just send the memo.”

   “The final comment concerning the lack of dialogue in the Fed could be applied to every major corporation in the U.S.,” agrees another. “I have been witness to exactly the same ‘consensus’ building by CEOs since the 1990s.”

“These men surround themselves with sycophants who take groveling to new levels. This sometimes takes on comic forms. A CEO makes an offhand comment in some lobby that he likes the carpet or the wall treatments, and an email goes out to 129 locations to redo their lobbies accordingly.”

“These ‘yes people’ derive their power from using the boss’ name behind their edicts, and CEOs seek power and prestige only. At a completion center for biz jets, I was told how their backlog was entirely due to CEO one-upmanship in insisting on exotic materials, wide-screen TVs and other forms of luxury designed to create flying brothels, rather than efficient transportation (but excellent lobbying forums, no doubt).”

“No wonder American business has become such a failure model.”


Addison Wiggin
The 5 Min. Forecast

P.S. We landed a short time ago in Miami and are now ensconced at the Betsy Hotel on South Beach. Eight of us are gathered here for two days of brainstorming. By the time we leave, we expect to come up with new solutions to the concerns you express most frequently.

One of the conundrums we expect to untangle is the one described above: The contrast between the overwhelming rot penetrating governments and the financial system on the one hand… and the staggering entrepreneurial potential that can overcome the rot on the other.

Example: an email just in this morning. We quote verbatim…

“Agora Financial readers are invited to join Patrick Cox, editor of Breakthrough Technology Alert in exploring anti-aging techniques and tools at Personalized Life Extension 2012:”

  • Food wars: Paleo, Mediterranean, vegan, raw?
  • Which supplements actually work?
  • Does a DNA test give actionable results?
  • Can too much exercise hurt lifespan?”

It’s a tremendous honor for Patrick to be keynote speaker: Last year’s keynoter was PayPal founder Peter Thiel.

The dates are March 31-April 1. The setting is San Francisco. And we’ve arranged discounted admission for readers of The 5. Use the code AGORA to save $100. Here’s where to learn more.

P.P.S. As seen above, the year has begun nicely for U.S. stocks, with the major indexes up about 4%.

The year has begun far better for readers of Options Hotline. Last week, four of Steve Sarnoff’s recommendations reached new highs:

  • Call options on a chemical firm: Up 138% in two months
  • Put options on an energy producer: Up 104% in three months
  • Call options on an apparel maker: Up 36% in three months
  • Call options on a semiconductor firm: Up 56% in a month.

Indeed, 11 of Steve’s recommendations last year could have doubled your money or better. And that’s no fluke: Markets go up, markets go down, but across the last 12 years, he’s made money-doubling recommendations on average more than once a month.

To learn more about Steve’s system, and how to put it to work in your portfolio starting next week, look here.


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