Dave Gonigam – July 16, 2012
- An encore episode of Seinfeld, guest-starring Ben Bernanke: How much does the Fed goose stock prices, really? Candid answers from TV critic Chris Mayer
- Carrots or sticks? Lessons from India and Turkey about gold confiscation, the history of 1933 you might not know… and an actionable gold-ownership solution
- A real-life lesson in how regulations muck up everyday life… and your chance to spread the word about legal workarounds
- New chess moves in the Persian Gulf, and the X factor behind a new pipeline the media hasn’t revealed
- Why the bankers aren’t being jailed (or hanged)… an inquiry into Medicare’s vast unfunded liabilities… whom you can expect to meet next week if you’re joining us in Vancouver… and more!
“This market is like a Seinfeld episode,” muses Chris Mayer.
Warning: Today’s 5 is for mature audiences only. Reader discretion, while not strongly advised, is gently suggested here in our, um… domain.
“According to a new study from the Federal Reserve Bank of New York,” Chris writes by way of background, “about half of the stock market returns enjoyed in the past decade are a result of the actions taken by the U.S. central bank.
“The study guessed that if you excluded Fed actions over the last decade, the S&P 500 would be at 600 today — instead of 1,352. Put another way, the study essentially says that the gains we’ve seen in the market are mostly fake. They are not due to real earnings gains, but just manufactured good looks that come from printing money.
“This reminds me of an old Seinfeld episode with the following dialogue”:
“Jerry: What about the breathing, the panting, the moaning, the screaming?
“Elaine: Fake, fake, fake, fake.
“Likewise, we might say, ‘But what about all those earnings reports and conference calls, the boosted sales, the profit margins?’”
“Fake, fake, fake, fake!”
“It is self-serving,” Chris goes on, “for the Fed to say such a thing because the gut reaction of most people will be, ‘Whew, thank goodness we have a Federal Reserve!’”
“The reality is very different. The Fed is a great bubble blower in the world’s financial markets. Its easy-money ways helped seed the great stock market bubble that popped back in 2000. And the housing bubble would’ve been impossible without the Fed’s aid. Thanking the Fed for stock market returns is, in my mind, like thanking the fire department for putting out fires it started.”
Then there’s this: Even though the broad market makes major moves depending on what the Fed says or does, individual sectors can still outperform… or underperform. “If you owned commodity stocks in the past year, odds are you are not happy,” says Chris. “If you owned real estate stocks, you’re probably happy.”
“No matter what the Fed does, it can’t change the basic fact that some businesses will do far more and be worth far more than others. So there will always be rewards for those willing to cut through all the market noise and find them.”
Exactly what Chris does in Capital & Crisis. Since 2010, the average play has delivered a 42% annualized gain. We’ve gone out of our way to make his flagship advisory as accessible as possible… starting with the fact you don’t have to sit through a long-winded presentation before signing up.
The major U.S. stock indexes are taking a breather after Friday’s run-up. The S&P has retreated to 1,352.
Like it or not, traders will react to Fed chief Ben Bernanke’s testimony to Congress tomorrow and Wednesday. Earnings are also in view; 70 of the S&P 500 companies will report this week. There’s also no shortage of numbers to digest this morning:
- Retail sales: down 0.5% in June, according to the Census Bureau — way off the “expert consensus.” While the number is 3.8% higher than a year ago, we’re now looking at three straight months of decline
- New York state factory activity: modest improvement, according to the Fed’s Empire State Manufacturing Survey. Last month, it was barely positive, at 2.29. This month, it’s 7.39. But the improvement won’t hold if the new-orders component of the index stays as weak as it is.
“Since the market bottomed at the start of June,” writes our resident technician, Jonas Elmerraji, “it’s been making an orderly ascent in an uptrending channel”:
“That channel is important — it provides us with a very clear picture of how much the market can pull back before we should start getting worried.”
What’s more, the S&P bounced hard off that trendline support Friday. “And since it happened on essentially no news,” Jonas points out, “it means that it was entirely technically driven.”
Gold starts a new week where it left off last week, near $1,587. Silver’s at $27.17.
Uh-oh… India’s central bank is trying to figure out how to induce people to exchange their gold for paper instruments of one kind or another.
“Gold imports have been a substantial part of the current account deficit,” says Anand Sinha, deputy governor of the Reserve Bank of India. But instead of resorting to import curbs, the central bank is looking at incentives: “The gold that already exists in the country can be brought out to satisfy the demand by devising financial instruments that can mimic the returns on gold.”
Alert readers of The 5 will discern a trend: Last month, we explained how the Turkish government is encouraging people to store their gold in tax-free accounts at the bank, instead of at home.
Items like these are why we don’t worry here — not too much, anyway — about “gold confiscation.” It’s typically accomplished with carrots, instead of sticks.
In the run-up to Roosevelt’s confiscation, most Americans had already traded in their gold for pretty pieces of paper. Murray Rothbard tells the story in The Mystery of Banking: The government pumped out much propaganda portraying gold for day-to-day transactions as old-fashioned, “something that only hicks and hillbillies would wish to use as money,” Rothbard wrote in typically colorful prose.
“In this way, by 1933, very few Americans were actually using gold coins in their daily lives; gold was virtually confined to Christmas presents for children. For that reason, the public was ready to accept the confiscation of their gold by the Roosevelt administration in 1933 with barely a murmur.”
The dollar index begins the week near a two-year high, at 83.4. Last Thursday, it inched past 83.6.
At last check, it took $1.224 to equal one euro and 78.8866 yen to equal one dollar.
“The yen presents a great play for income this week,” says Abe Cofnas, introducing his suggested trade of the week. “The yen’s getting stronger against the U.S. dollar, and it’s going to be tough to reverse and go above 80.25”:
Abe’s counting on the yen to end the week below 80.25. If it does, it’s a 7% payout. Modest, but hard to argue with in a four-day time frame…
Crude trades this morning for $87.33 a barrel — at least the stuff that sloshes around the terminal at Cushing, Okla. In most of the rest of the world, the price at last check is $103.13.
Iran has one less card to play this morning in the grand geopolitical poker game over oil and the country’s nuclear program.
Yesterday, the United Arab Emirates opened an overland oil pipeline, allowing UAE oil exports to skirt the Strait of Hormuz.
As longtime 5 readers know, one-fifth of the world’s daily oil supply flows through the strait… and Iran often makes noises about shutting it down in the event of a U.S. or Israeli air strike:
The pipeline has a capacity to carry as much as 1.8 million barrels a day — roughly 2% of the world’s daily use. And it’s “another reason to see the UAE as a safe haven in the troubled Arabian Gulf this summer,” according to a post at ArabianMoney.net — helmed by The 5’s friend Peter Cooper.
“Money has been pouring into the UAE from the surrounding region since the Arab Spring started 18 months ago,” the post continues, adding context.
“One source estimated an inflow of $60 billion this year alone, although it is impossible to verify such guesstimates. Another cited $6 billion for Dubai property from Nigeria in the past three years.”
“Dubai is full this summer,” Mr. Cooper wrote us over the weekend, “with oil-rich Arabs spending like crazy. You can hardly move in the mall — we took ages to get a parking spot yesterday. I almost needed a mortgage to pay for my wife’s birthday dinner last week — and thought wistfully of prices in Vancouver… Yet the local stock market is still as low as a year ago.”
If you’re joining us in Vancouver next week, you’ll have a chance to say hi to Mr. Cooper; you never know who you’ll run into at the Agora Financial Investment Symposium.
“The regulators play with our products and our lives as if they know better than we do what’s good for us,” writes Laissez Faire Books executive editor Jeffrey Tucker.
Mr. Tucker has penned a provocative essay, drawn in part from Addison’s experience after a vicious thunderstorm swept through Baltimore the night of June 29.
Imagine: “A tree falls on your deck, and you need to cut it away just to get out the back door. You find your chainsaw, but it is out of gas. You reach for the gas can, but the new federal regulations make it nearly impossible to pour. You hack the can with a knife because the drill doesn’t work, and you transfer the gas to another bottle and adding the gas to the saw.” And still the saw won’t function, because ethanol-laced gasoline gums up the works.
That’s only the beginning. From here, it’s a surprisingly small leap to a situation in which “there is no way out. You are completely dependent on city workers coming around to fix things.”
Still, there are legal workarounds for situations like this: Did you know, for instance, some gas stations still sell ethanol-free gasoline?
Stories like these are one reason Mr. Tucker compiled a special report called Hack Your Shower Head: Plus, Nine Other Ways to Get Big Government out of Your Home. We offer it as part of the welcome package for every new member of the Laissez Faire Club.
Now we want to bring you in on the project: What sort of legal “hacks” have you discovered to poke a finger in the government’s eye? For a few days, we’ve been soliciting ideas.
Fed up with windshield washer fluid made useless by regulation? “A simple do-it-yourself,” suggests one reader, “is half a cup of soapy ammonia, 1 pint of rubbing alcohol and add water to make a gallon. It cleans and doesn’t leave streaks. In colder weather, you can add additional alcohol to get below 20 degrees.”
“Want clean clothes again?” suggests another. “Add TSP (trisodium phosphate) to your laundry detergent; as a bonus, it will keep your machine working better/longer by cleaning the accumulated soap scum out.”
Got some ideas of your own? We want to hear them at this email address: hackyourshowerhead@gmail.com.
“Hey people … wise up!” writes a reader in reply to the jail-or-hang-the-bankers thread last week.
“The government won’t put the big bad banksters in jail for a simple reason: The government and the banks are partners in a simple-but-effective scam. It works like this”:
“Step 1: The Federal Reserve Bank issues a lot of new paper money (or equivalent balance sheet entries somewhere)
Step 2: The Federal Reserve Bank loans it to super-big private banks at super-low interest rates
Step 3: The big private banks use the borrowed money to buy government bonds … Treasuries … or whatever is on sale at the Fed store.”
“The money travels in a full circle… from thin air… to the Fed… to the banks… and then back to the government… having been laundered nice and clean. For their trouble, the big banks get to take a small-but-sweet cut of the cash they process. Gee… this sounds like a fun game to play. I wish I were a big-time banker!”
“No one will ever go to prison,” writes another, “until specific individuals are called out by name as having committed a crime, i.e., actually broken a law and are then tried and convicted.”
“Rarely do the media or the SEC or politicians or blogs and newsletters ever name names. It’s typically ‘the banksters’ or ‘the cartel’ or ‘the NWO [New World Order]” or the “boogeyman,” etc. Who, specifically, are the real culprits? Why are they not named? Does anyone really know who they are? Until this happens, it’s all just making fists, stamping feet and turning red in the face.”
The 5: You’re waiting for trial and conviction? You could be waiting a long time. See “Corzine, Jon.”
“I have looked deeply into Social Security’s unfunded liabilities after deciding not to take other people’s word for things,” an independent-minded reader writes.
“It’s even worse than it looks, with unfunded liabilities in stone up to $20.5 trillion. But that doesn’t account for current bond yield drops — which, if things continue, will put it at nearly $22 trillion unfunded in the long-term time frame of 75 years. And nearly $10 trillion between now and 2021. Almost 1 trillion a year!”
“I have been trying to personally verify the same with Medicare and Medicaid. Since you are really one of the only groups I can trust, where in the U.S. budget are the line items that I can see for myself what the unfunded liabilities are, or are they buried in another document, and if so, what?”
“Have two MBAs, and I learn more about investing and finance from your publications than anyplace else. Thank you so much for the education and for the profits. Up from $61 on RGLD, sold out of SJT when you guys said get out of the natgas (for now) and stopped myself from taking a bath. I’m in good positions with gold and silver as well.”
“Thanks for everything. Please keep it up.”
The 5: The best source is likely the annual fiscal report of the United States government. This document applies GAAP — generally accepted accounting principles — to the federal budget. In recent years, it’s indicated an annual deficit of $5 trillion, driven largely by Social Security and Medicare.
Typically, the Treasury releases the report around Christmastime, when no one’s paying attention. Heh…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Someone else you might run into if you’re coming to Vancouver: reserve member John Englander.
After traveling as far as Greenland and Antarctica to perform research, he’s nearing publication of a book, long in the works, exploring the Earth’s rising sea levels and the economic impact on coastal communities.
Our Symposium gets under way one week from tomorrow. Being there and meeting smart folks like John is one of the greatest benefits. But if you can’t make it, you’ll want to keep an eye out for announcements about the high-quality audio recordings of the conference. As always, you save the most by signing up early. Watch this space…