Government-Guaranteed Losses

Dave Gonigam – January 26, 2012

  • An “asset class” now government-guaranteed to lose at least 18% in a decade…
  • Dan Amoss identifies winners and losers now that the Fed is extending its zero-rate horizon for 18 more months
  • Unpacking the Indian-gold-for-Iranian-oil rumor…
  • How $100-a-barrel oil is good for American business: A compelling argument in support of Byron King’s U.S. energy forecast… plus, a reader’s thoughtful take: socialism, corruption, both or neither?

   For years, it was an unwritten rule. As of yesterday, it’s official policy: The dollars in your wallet are destined to lose at least 18% of their purchasing power during the next 10 years.

Lost in the noise of countless Federal Reserve announcements yesterday was a formal target of 2% annual inflation.

   Actually, it’s worse than 18% over 10 years. For the Fed’s favored measure of inflation is not the heavily gamed consumer price index — CPI — or the even-more-gamed “core” CPI that assumes your cost of living isn’t really affected by food and energy.

After all, CPI is currently running 3.0% year over year. Whoops, too high. Core CPI is 2.2%. Still too high.

The Fed prefers something called “core personal consumption expenditures.”

That number is currently running 1.7%.

Voila! Applying the logic only central bankers are capable of divining, there’s not enough inflation!

That’s the real take-away from the flurry of Fed declarations. Seen in that light, the announcement that the fed funds rate would remain near zero through “late 2014” is almost superfluous.

Financial repression? Old news. Even The New York Times is onto that game now, its Fed story describing “the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers.”

   Still, lest you think the Fed is suddenly acquiring a preference for “transparency,” some matters of policy remain sotto voce: “A weak U.S. dollar, despite its consequences, remains an unstated goal of both the Fed and Treasury Department,” says our Dan Amoss, who took the bullet watching Ben Bernanke’s news conference yesterday while Addison and a small group of us carried on with our editorial retreat in Miami.

Indeed, says Dan, “We will continue to see a global race to devalue currencies and ease government debt burdens. The Fed will not stand idly by as the Europeans, Chinese and Japanese print copious money and weaken their currencies.

“All of these central banks are going down a path from which they cannot return. They are monetizing government debts, and will continue to do so, with sad semantic arguments that they their money printing operations are not really monetizing government debts. The financial market consequences of selling assets from central bank balance sheets and shrinking money supplies are too scary for central bankers to consider.”

   We’ll interrupt Dan long enough to note the dollar index is down this morning to 79.2 — the lowest it’s been in six weeks.

   “It goes without saying that a lot can happen between now and 2014,” says Dan of the Fed’s latest interest rate target, “including a rapid loss of confidence in the integrity of the dollar.”

“The Fed keeps giving investors reasons to treat the dollar like confetti. Its actions are predictable. Despite evidence to the contrary, investors want to believe that the Fed’s radical policies are good for the stock market.”

   We’ll interrupt Dan again to note that by day’s end, the Dow might well eclipse the post-2007 high it set nine months ago, on April 29.

The broader market isn’t quite as perky: The S&P is still climbing back up the steep slope it fell down in July and August.

   Stock market ebullience notwithstanding, “the Fed’s actions have been — and will continue to be — undermining the health of most sectors of the economy outside of government and banking,” Dan goes on.

“On the one hand, zero interest rates on savings will force retirees to take more risk in corporate bonds and dividend stocks; on the other, the future stream of cash flow that most companies will be able to deliver shareholders in this crazy, postmodern monetary environment will disappoint.”

A well-chosen gold miner will prove the exception to this rule, Dan says. He’s recommending one tomorrow in the new issue of Strategic Short Report. Access here.

   The Fed announcement propelled gold above $1,700 for the first time in six weeks. At last check, the spot price is up to $1,711.

   “[Yesterday,] the light went on with regards to the intentions of the Fed,” says legendary gold bug Jim Sinclair. “They did that for very specific reasons. We have troubles people can’t see, and this is one of the ways out.”

Mr. Sinclair tells King World News the Fed’s latest gambit is a “game-changer” in the gold market. “I think you are going to see a very significant change amongst investors, corporations and companies with extra capital and people of the mainstream.

“You’ve never had mainstream investment [in gold], mainstream pensions, mainstream life insurance companies, mainstream health plans, which gather money looking to use a medium in order to maintain the buying power of what they’ve accomplished. This is a huge change, huge new demand, a total new definition.”

“You’re going to find out that public companies with significant resources (tech companies, as an example) are going to start to recognize that gold is an important part of protecting what they have.”

With that in mind, Mr. Sinclair’s describes $1,700-2,100 as a “conservative range” for gold in 2012. For an even more audacious outlook, check this out.

   Seems mighty peculiar that the president is pushing “American-made energy” the same week that we issued a report spotlighting, well, American-made energy.

Today, he’s in Las Vegas, where he’ll announce a plan to step up demand for natural gas — including a new tax break for gas-fueled trucks.

We find ourselves in the even more peculiar circumstance of noting the president’s pronouncements are more cautious than those of our own Byron King — who sees shale oil and gas fueling a revival of U.S. manufacturing.

We remain skeptical — even as we acknowledge companies like Caterpillar and Ford are expanding U.S. operations — but now we see Jim Puplava, host of the Financial Sense Newshour podcast, is also pounding the table on this. “Higher energy prices raise the cost of transportation,” he explains. “And the shale oil and gas boom in the United States has cut the cost of energy.”

True, oil is hovering around $100 a barrel… but that’s the point, he says: “If you’re Caterpillar and 30% of sales are in the United States, you’d better have the plant capacity here to produce and meet the demand of 30% of your sales. It’s not going to make sense if you have plants in China, because by the time you build something in China, put it on a boat, get it to the Port of Long Beach, put it on a train and then on a truck… your transportation and energy costs become too expensive.”

You don’t have to buy into the renaissance theme to see this makes sense… or to profit from the trend. For months now, Byron’s been laser-focused on unearthing the companies best positioned to profit from the phenomenon Mr. Puplava describes.

In a world where savers are being punished and forced out “further on the risk curve,” as the saying goes, this appears one of the less-risky propositions for your money right now.

   If India is planning to buy Iranian oil with gold, no one’s saying. Come to think of it, why would they?

This story’s been out there a couple of days, and we’ve been loath to touch it, since it originated with DEBKAfile, an Israeli-based “intelligence” website that regularly floats wild rumors based on anonymous sources that frequently don’t pan out.

Of course, we don’t rule out that it’s true: Maybe this is a case of “no rumor is confirmed until it’s officially denied,” and there are ample official denials today in The Times of India.

Something’s got to give under tightened Western economic sanctions: India counts on imports for 80% of its oil supply… and 12% of its imports come from Iran.

“While the use of gold as currency,” the paper reports, “may help India get around the proposed freeze on Iranian central bank assets and the oil embargo that the EU foreign ministers have agreed to impose on Monday, any outflow of sovereign gold will not go undetected, bringing in the political consequences of flouting the West-imposed embargo.”

An alternative arrangement floated by Indian officials is to pay for Iranian oil in rupees. India already trades with Russia in rupees and rubles, bypassing the dollar.

Hmmm… Might Western sanctions on Iran have the perverse effect of accelerating the dollar’s demise as the world’s reserve currency?

   “Norway, or Nigeria?” a reader posits cryptically after examining Byron King’s Re-Made in America presentation.

“Energy booms,” he writes, “can bring economic benefit to society as a whole. Or not. I know, I know, them Scandinavian countries is SOCIALIST!! OMG!!! How could Norway be managing its oil resource so well? And Nigeria is — well, Nigeria is corrupt. Which are we? Socialist AND corrupt?”

“Energy booms can be used by governments to pay off deficits. That isn’t out of the question in this case. It would be the kind of irony that Bill Bonner might (reluctantly) cherish. Yeah, the zombies deserve to get what’s due to them, but they may have their asses saved one more time. Or not.”

“Petro-states tend to be disasters, and the notion that this energy boom will transfer seamlessly to other sectors of the economy and lift all boats, so to speak, is quite a stretch. For instance, Byron says food prices will go down. That seems unlikely. We’ve already maxed out our use of fossil fuel energy in food production, and as he points out, we aren’t going back to the days of cheap oil. Ending the ethanol subsidy would lower corn prices, but I don’t see how a shale gas boom would make that decision any more likely than under current circumstances.

“To put it another way, the amount of recoverable fossil fuel in the shale formations, even under conservative assumptions, is sufficient that we could theoretically take a Norway route; but I believe that at this point, our culture of corruption is so pervasive that we’re more likely to move in the direction of Nigeria.”

“There is a lot of hype around shale gas, and Byron and his sidekick Matt Insley do not seem capable of distinguishing the hype from reality. For instance, the U.S. just downgraded its estimate of the amount of recoverable gas in the Marcellus by two-thirds (Byron quotes the old figure). The new estimate is based on hard data coming in from the drillers. If Byron had been willing to listen to the contrarian geologists, he would have seen this coming years ago. Yeah, the estimate may go back up again if ‘super-fracking’ can be made to work, but for now, many Marcellus leases look likely to be money losers.”

“Similarly, there are scads of economic studies, forecasts and claims of economic benefit that are industry funded, and tend to drown out the facts, which are much more nuanced. Sure, in North Dakota, where there are no people, everyone (i.e., almost no one) is doing great. In the northern tier of Pennsylvania, near where I live, there are lots of jobs created by the Marcellus, but the good ones mostly go to people from Texas and Louisiana,, because they have the necessary training and the locals do not. The locals get to take waitress jobs. Yes, that’s better than nothing, but it’s way less rosy than the image conjured by the industry.”

“Overall, the Pennsylvania tax receipts show that the boom hasn’t been nearly as great as forecast. And sense of community is way down, as a few people get very rich while others actually become poorer.”

“Having said all that, I expect that Byron has picked out excellent investment prospects. I don’t really enjoy reading him, because he has such a pronounced tendency to go off half-cocked and dis anyone who doesn’t think the oil companies are comprised of Christlike figures, but I gotta give him cred for doing his homework and being careful and thoughtful with his investment picks. 🙂 ”

“And I really appreciate the service you guys collectively provide. Nothing like it. Funny, thoughtful, honest, incisive, original and sometimes even mind-blowing.”

The 5: Thank you.

If you’ve not yet had the chance to examine Byron’s argument — as nuanced as it is bold — it’s well worth your time.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. We apologize for the absence of certain economic indicators out this morning. We’re flying back to Baltimore and out of Wi-Fi range as we prepare the better part of this issue. We’ll catch you up on anything we missed tomorrow.

rspertzel

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