Dave Gonigam – May 15, 2012
- The scary number that’s doubled in 20 years… and the generation about to get hit good and hard
- Why Bill Gross believes Treasury yields can’t go much lower… and the corroborating evidence from China
- “Inflation Is Falling,” scream the headlines. Savers are still getting punished, we hasten to note…
- How a slumping economy puts sand in the gears of stock cars… a reader marvels that we have any readers left… a tweet in vain (we assume)… and more!
“We used to be a nation of thrifty creditors,” Addison writes. “Now even our sharpest students look abroad and see no problem with collectivized risk and a mountain of unpaid liabilities.”
His revelation came when speaking to some finance students at Towson University. “What is so bad about a debt-to-GDP ratio in the 90% range? [This was before it crossed the 100% threshold.] Japan has been running in excess of 130% of GDP for years? They seem to be doing just fine.”
Addison’s response: “You don’t know this yet, but when you leave school with a mound of debt and try to find work in a struggling economy — you’ll begin to understand.”
There’s a whole lot of “understanding” about to begin, good and hard.
According to Department of Education figures crunched by The New York Times: 94% of students who earn a bachelor’s degree take on debt to do so. In 1993, it was only 45%.
The Gray Lady finally got around to doing a big splash over the weekend about the higher education bubble — a year after we picked up on it here. And of course, they couldn’t bring themselves to use the B-word to label it such.
Today, however, an even bigger bubble — one we’ve taken in recent months to calling the mother of all financial bubbles — consumes our attention.
First, we briefly survey the landscape: U.S. Treasury yields are sinking further today.
A 10-year note is down to 1.78%. Lend your money to Uncle Sam for 30 years and you’ll get a princely 2.94%.
The situation can’t go on much longer, says Pimco’s Bill Gross.
“[With] the U.S. suffering a credit downgrade to AA+ and offering negative 200 basis point policy rates for the privilege of investing in Treasury bills, the willingness of creditors — as opposed to debtors — to support the existing system may soon fade,” Gross writes in today’s Financial Times.
“With dollar reserves widely dispersed in China, Japan, Brazil and other surplus nations,” he goes on, “it is fair to assume that there will come a point where 2% negative real interest rates fail to compensate for the advantages heretofore gained in buying sovereign bonds.”
And those rates remain negative, even by the twisted standards of the Bureau of Labor Statistics: Consumer prices as calculated by that agency were flat last month.
The year-over-year increase has calmed down to 2.3% — which is substantially more than the aforementioned yield on a 10-year Treasury.
Addison pinpoints this phenomenon in The Little Book of the Shrinking Dollar: “If you lend your money to Uncle Sam in ‘safe’ Treasuries, you lose all your yield, and a bit of your principal, to inflation.
“This is no accident. It’s policy (even if, in the end, we discover it is accidental policy). ‘Negative real interest rates’ are how the federal government will try to pay down some of its staggering debt.”
The Chinese appear to be catching on to that… Not that you’d figure it out from mainstream headlines today.
Yes, China beefed up its holdings of U.S. Treasuries in March, according to figures out this morning from the Treasury Department.
But if you widen the scope and go back six years, a couple of interesting things happen. First, the increase in March was so small as to barely show up on the chart…
And second… China’s holdings peaked last July. Coincidentally, that was the last month before Uncle Sam lost its AAA rating. The numbers declined markedly through the end of 2011, and stabilized in the first three months of 2012.
This is especially interesting when you consider how Chinese imports of gold grew at the same time Chinese purchases of Treasuries were shrinking.
And even though the purchases have dropped off in 2012, they remain — as we noted last week — many-fold higher than a year earlier.
“Gold,” Addison writes in the book, “is the only currency that no one controls. It knows no party partiality and can’t be produced from keystrokes. We expect that China will happily diversify its $3 trillion currency reserves into gold. They’d take payment in that form for sure!”
As we suffer more and more from Uncle Sam’s emissions of debt… and as the dollar buys progressively less… Addison realized the need for a comprehensive source of solutions.
Hence, The Little Book of the Shrinking Dollar — with no less than 47 solutions to preserve your purchasing power.
Negative real interest rates got you down? The book identifies income sources you might not have thought about before. Looking for another currency to hedge your dollar exposure? You’ll learn about how to get into five good ones with only a few mouse clicks. Wondering about the best ways to buy gold? Consider the “offshore gold storage programs” identified in the book.
“You better know Addison’s arguments in order to survive the next decade,” says commodity investing legend Jim Rogers, “whether he is right or wrong.”
“Wiggin’s exploration of investment alternatives,” says Rep. Ron Paul, “warrants a closer look.”
We think the guidance within its breezy 223 pages is so important, we’re going out of our way to get in your hands: You can claim a free copy right now. Here’s how.
U.S. stocks are generally up today, traders evidently deciding Greece is no longer a problem. Major indexes are up about a third of a percent.
Assuming things stabilize from here — heh — the Dow is down 4% from its post-2007 high set two weeks ago today.
The Greek government came through with a 430 million euro payment on a bond that matured today. Whew!
Never mind that the politicians fessed up to what everyone already knew: No one can form a majority in parliament, and Greeks will hold another election on either June 10 or 17.
Traders are also chewing over a raft of numbers, to wit…
- Retail sales: Slowing down big-time last month, to a 0.1% increase. For once, auto sales and gasoline didn’t distort the overall number
- New York state manufacturing: Improving again, according to the Fed’s Empire State Manufacturing Survey. The all-important “prices paid” component is looking better — again, thanks to falling energy prices
- Housing: As good as it’s been in the post-bubble era, according to the National Association of Home Builders’ housing market index; however, this has yet to translate into sales.
One final note about the aforementioned consumer price index: While the official year-over-year number is 2.3%, John Williams at Shadow Stats reckons your real-world rate is 10.0%.
The eurozone has whistled past the graveyard of a double-dip recession — if the official numbers are to be believed.
This is if you accept the common definition of a “recession” as “two straight quarters of negative GDP growth.” In the fourth quarter of last year, eurozone GDP fell 0.3%.
The first-quarter 2012 number came in overnight… and it was zero.
Voila… no double dip!
Credit goes to the Germans, whose GDP grew 0.5%. France was flat, while Italy contracted.
“It Might Not Wreck You — It’ll Just Rattle Your Cage,” is the engaging subtitle of a new study that demonstrates the impact of a rotten economy on stock car racing.
“The economic downturn that began in the late 2000s and persisted through the early 2010s has revealed how much NASCAR relies on a healthy, growing economy,” says a report issued by the Public Notice think tank, in conjunction with a group called Race Fans 4 Freedom.
As unemployment rose, attendance in 2010 fell back to 2003 levels, the report says. And the shrinking dollar is at work here too: Rising prices affect NASCAR “the same way it affects everything else,” the report says. “When prices rise, putting a race team together gets more expensive. Going to the track on race day gets more expensive. Even preparing for your party gets more expensive.”
Result? Shares of the two major track owners — International Speedway Corp. and Speedway Motorsports Inc. — have seriously underperformed the S&P…
All that said… this editor, a casual motorsports fan, humbly submits another factor the researchers failed to account for: compared with a few years ago, the racing is a bore.
Precious metals appear to have found a bottom, for now. The bid on gold is $1,558. Silver is at $28.15.
“Gold,” a reader carps, “has been your absolute favorite recommendation for over one year with zero return and your constant prediction of the demise of the dollar.
“On equities, you have missed the great global stocks which have delivered increasing earnings as well as increasing dividends in a difficult economy. Check out Altria Group, Philip Morris, Kraft, McDonald’s, etc.
“Buy and hold has been hugely rewarding, but you don’t have anyone who gets it. Am amazed you still have subscribers.”
The 5: This individual has written in before. At times, we find him entertaining. Now it’s just getting tiresome.
Is it “buy and hold” you want? Chris Mayer is one of the best Graham-and-Dodd guys in the business. I’m looking at a spreadsheet of all the open positions in his entry-level newsletter, Capital & Crisis. The average recommendation is up 50%. The positions he’s closed this year gained an average 47%. His closed positions last year, up 74%.
Is it terrific global dividend-payers you want? Jim Nelson is all over it. His open portfolio in Lifetime Income Report is up 28%, including dividends. His closed positions in 2012 gained an average 30%. And the ones he closed last year delivered a 45% total return.
Oh, yeah, and gold? We said at the start of the year it might take a breather in 2012. You can look it up.
“Why are the Treasury bills doing so well?” a reader inquires, rhetorically.
“If you were on a sinking ship, I suppose you could go to the trading desk and start shorting the front of the ship, where the bow is starting to go under the water, and go long the rear of the ship, where everyone seems to be going. I would be checking out the gambling lounge to see if the baccarat table would be making a good floatation device.”
“I’m an apartment locator in Austin (don’t come here if you don’t have a decent-paying job, or have any serious criminal background, negative rental history or any thought that landlords are going to bend over backward to lease to you in this overpriced market) and even though this area has fared better than most in the USA, I still see the wisdom of the Reckoners saying to buy on the dips for precious metals. We have one hell of a dip going on right now.”
“And as for bonds, I don’t think that long strategy is going to work well for all the people fighting for the best seats in the back of that ship.”
“Been enjoying The 5 since inception,” writes a reader catching up on recent issues. “I tweeted @ErinBurnett this morning to ask for a comment regarding the congressional testimony from the TARP inspector general” — that is, the fact that contra Ms. Burnett, the program is still a money loser.
“Should be an interesting *ignore*. Poor twit woman. Ah well, what fun is it when you can’t poke fun at self and self-appointed fluffs?”
The 5: Amen. But if you do hear back… by all means let us know!
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “Federal employee salaries exposed,” says a link at the Drudge Report. “1 Ag Dept worker made $241,895 in 2011.”
Can’t say we’re much surprised. But did you know there’s a way to profit — legally and ethically — from the actions our leaders take every day?
Their secrets can now be yours too. Give this a look.