August 30, 2012
- Market tanks a day before Bernanke’s big speech: We step back and search for truths that are immune to anything he says tomorrow
- Bullish sign for gold: Wedding season in India. Even more bullish sign for gold: Metal being smuggled into India!
- Merkel pushes, Draghi pulls: Dan Amoss on the asset class set to lose biggest from the eurozone power struggle
- When expatriation costs more than it’s worth… reader reflections on jury duty and the justice [sic] system… another of our concepts gone mainstream… and more!
“I hate writing about the Federal Reserve,” says Chris Mayer. “I hate writing about politics.
“I’d much rather focus on great ideas and companies. I’d much rather spend my time exploring the wonders of this great planet of ours. But sometimes big-picture events impinge on that process. It would be foolish to be blind to them.”
We offer Chris’ musings this morning as prologue to the Most-Anticipated Market Event of the Last Four Weeks — to wit, Fed chief Ben Bernanke’s annual address in Jackson Hole, Wyo., tomorrow.
It was at this event in 2010 that he signaled the advent of “QE2.” His explicit aim — to goose the stock market. When the Fed actually unleashed QE2 in early November, he crowed in The Washington Post: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most-recent action.”
At this point, we introduce a favorite chart, updated to the present day. It speaks volumes about what fund manager Steve Romick — the man behind the phenomenal FPA Crescent Fund (FPACX) — calls “Red Bull economics. Drink it and get jacked up only to come down hard later.
“We can draw a simple conclusion here,” says Chris. “Every time the Fed stops serving Red Bull, the market sags.”
So now what? It’s late August. We know that Operation Twist will continue at least to year-end.
“This stock market rally we’ve had since early June,” Chris declares, “smells like banana oil to me.
“The market ran up about 11% since that little sell-off from the April highs that hit bottom in early June based on nothing but the expectation the Fed is going to serve up some more Red Bull.
“Instead, we deserved to move lower as the market digested slower growth and tepid earnings in the second quarter. We would’ve had the opportunity to pick up some bargains then or add to our favorites. But here we are within a handshake’s distance of all-time highs.
“Can such a pattern go on indefinitely? At some point, the economy needs something of nutritional value. It needs its fresh fruits and vegetables. At some point, Red Bull loses its effect. And then what happens?”
Before Chris answers that, he offers a disclaimer: “I don’t usually comment on the market overall, because it’s a silly and pointless exercise. No one knows where the market might go — despite the juvenile pretensions of so many otherwise rational people to the contrary.”
With that out of the way, here’s his answer: “I don’t know. On the evidence, I’ll hazard a guess: The stock market will go down.”
Which it is as we write. Whether in anticipation of a disappointment tomorrow or some other reason, the S&P has given up 1,400 and the Dow is about to surrender 13,000.
As for whether Bernanke will take the wraps off a new easy-money policy tomorrow, we revisit another favorite chart.
This one, first offered up in May by our resident technician Jonas Elmerraji, is the Fed’s own guess at investors’ inflation expectations five years into the future — using a formula involving Treasury Inflation Protected Securities (TIPS):
With that, we offer an additional disclaimer: We don’t presume to read the minds of the anointed personages that EverBank’s Chuck Butler calls “Fed heads.” If we did, we’d occupy our daily 5 Mins. parsing their speeches for clues to their future actions.
And then we would gouge our eyes out from boredom…
Precious metals are resisting the risk-off trade today. Gold sits about where it did after yesterday’s late-morning sell-off, at $1,655.
Silver has taken a hit, but remains comfortably above $30, at $30.47.
Gold priced in Indian rupees hit a record this week… but that’s not crimping seasonal demand
“High price levels,” writes Mineweb’s Shivom Seth from Mumbai, “have not really dampened retailers’ seasonal buying mood in the run -up to the festive season that kicks off this week in India. Bulk purchases for marriages continue, with most retailers stocking up and individuals buying smaller items of gold jewelry.”
Demand is so intense that Seth reports an “unprecedented increase in the smuggling of the precious metal.” That’s because in a two-month span this year, the Indian government jacked up the import duty on gold fourfold.
“Given the prohibitive prices of the yellow metal and the delayed monsoon, bullion traders were expecting gold imports to nose-dive by 40% this year. The slump in imports is, however, being met through smuggling, spawning a revival in the trade, say traders.”
Vancouver favorite Frank Holmes of U.S. Global Investors speaks frequently of the “love trade” in gold — Indians loading up for wedding season and Diwali, followed a few months later by Chinese loading up for Chinese New Year. That is, we’re heading into seasonal strength — which means if you’re going to add to your metals position, now’s the time.
Our friends at the Hard Assets Alliance want to remind you that their offer to waive the account setup fee expires tomorrow at midnight. For the next day and a half, you can start your own account free. I did it myself yesterday. The website promises the process takes about 10 minutes. I took a stopwatch and it was only three minutes, five seconds. (OK, I’m a fast typist.)
I don’t know when or if I’ll fund my account, but it’s good to know that it’s ready to go if the time comes. There’s literally nothing to lose by signing up… at least through midnight tomorrow. Sign up for your free account while you still can. Full disclosure: We may be compensated when you fund your account.
“Time to sober up, EU bureaucrats!” pronounces Dan Amoss of Strategic Short Report. “The adults are back from vacation, and they’re bringing along a dose of reality.
“German Chancellor Angela Merkel seems like the only political force fighting to keep Europe from turning into an inflationary banana republic.”
And now, Dan goes on, “Merkel is back from vacation, spoiling the party that European Central Bank (ECB) President Mario Draghi threw for bullish speculators when he said the following on July 26: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.'”
You see, “Merkel and the hard money camp believe we should at least pretend fiat currency can retain purchasing power over a lifetime,” he says.
“The ECB will be unleashed to print, probably in tandem with the ESM — but not before Merkel and other hard money advocates put up another fight in favor of euro integrity.”
Draghi struck back, insisting “exceptional measures” are needed to stabilize markets. The push-pull between Merkel and Draghi is spilling over into the investment space.
“Long-term investors know destruction of paper money is inevitable,” Dan notes, “and are steadily adding to tangible assets on weakness. But the rapid-fire speculators that dominate trading will probably sell off everything and bid up perceived safe havens: government bonds.
“Keynesian and monetarist economists claim all that’s needed to return prosperity in the PIIGS countries is looser money and their own currencies.” According to them, “the next best thing would be transforming the character of the euro from that of the German mark to the Italian lira.
“They’re wrong,” Dan makes clear.
“A policy that tries to restore conditions that existed before the euro crisis will fail, just like the foolish U.S. policy effort to reinflate the housing bubble. Prosperity comes from savings and investment,” Dan concludes, “not government deficits and welfare state programs financed by the printing press.
“At the end of this process, many businesses that buy scarce commodities and resell them to overstretched consumers will be ruined.”
With Facebook trading this morning at barely half its IPO valuation, we see that co-founder Eduardo Saverin — the poster child for Americans who surrender their citizenship — has ended up overpaying his tax bill by about $180 million.
As you may recall, last spring Saverin was sitting on about $3 billion in Facebook shares as the IPO arrived.
When he decided to renounce his citizenship, all the cries of tax dodging and shunning disapproval started to drown his own explanation out… some politicians, of course, missing out on a few things.
“Mr. Saverin has decided to ‘defriend’ the United States of America just to avoid paying his taxes. We aren’t going to let him get away with it so easily,” Sen. Chuck Schumer jumped out of the abyss to tell The New York Times.
“It’s infuriating to see someone sell out the country that welcomed him and kept him safe, educated him and helped him become a billionaire,” he thundered, probably pounding some table to prove to himself and others how mad he was.
What did Sen. Schumer, and all the other tax criers miss out on? “The first was that he had to pay tax on his Facebook stock as if he sold it on the day of his citizenship renunciation,” writes Tim Worstall at Forbes, who’s run the numbers.
“The value then was some $2.4 billion, leading to a $365 million tax bill. That tax bill is fixed, of course: Now that he’s no longer a citizen, he doesn’t get any tax breaks or credits on losses he might make…
“Since he crystallized that tax bill, his stock (assuming he’s still holding it, and he would have been until just now because of the lock-in around the IPO) has halved in value to about $1.2 billion,” notes Worstall. “But he still owes that $365 million.
“So at least so far,” Mr. Worstall concludes, “the net effect of his renunciation has been to double his tax bill, not reduce it.”
Betcha Tim Geithner doesn’t even send him a thank-you note…
“I’m not a tax expert,” Saverin told the public, a week after his renouncement went viral.
Geez… Hard way to go about proving it…
“About six years ago, I was called for jury duty on a drug case,” writes a reader carrying on our thread of the week.
“When they asked me about my politics, I replied truthfully that I was a libertarian. The defense agreed to a plea deal just before the jury would have been seated, and we were all dismissed. I doubt seriously if they will ever call on me again for any case. The last thing that the system wants is a jury of people who think for themselves.”
The 5: Some time ago, a dear friend was assigned to a drug trial and told the judge she objected to the war on drugs.
The judge, suspecting this was a ploy to get off the jury, pressed her: “If you believe there’s evidence beyond a reasonable doubt the accused violated the law, you would still vote to acquit?”
“Yes,” she replied. That got her excused.
“OK, I’m a lawyer,” writes a reader and Reserve member. “And when I would impanel a jury, I would go for intelligent, analytic people — well, the two out of the 100 that were in the room, that is.
“But you never know about juries. I fondly remember the one that I swore up and down didn’t understand my case, and they came back with $2.6 million for my client in a real estate deal. Afterward, we talked to them and they told me they decided for my client because I was nicer to everyone than the other mean lawyers on the other side and they liked my socks.
“I wore cartoon character socks each day in trial. Respectful patterns, but Taz and Marvin the Martian and Bugs and Daffy and Wile E. Coyote and so on. The jurors told us that before they came out each morning, they had a betting pool on which cartoon character would be in court that day.
“I managed to keep a straight face and thank them for their service. You should have seen the look on the opposing lawyers’ faces. Then I and my co-counsel did some serious drinking and laughed until we were hoarse.
“Anyway, all lawyers spend a lot of time on those instructions and such. Most of them are standardized for consistency. And our system is centuries past independent verdicts and fairness decisions.
“But fun to see the debate. Thanks again for your work.”
“Here,” a reader writes, “is an Ayn Rand quote that seems to fit in with the current discussion: ‘The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.'”
“As Lavrentiy Beria allegedly said to Stalin, ‘Bring me the man and I’ll find you the crime,'” writes a reader along the same lines.
“To paraphrase Richard Nixon, ‘We’re all criminals now.’ If you keep a low profile and accept your meek and humble position, you should be safe. If, however, you should question the arbitrary and capricious enforcement of the laws, or if you are audited and found to have violated the IRS Code as interpreted by the IRS, then you are in a heap of trouble. It sounds as if the prosecutors bully the jury into a guilty verdict. So much for blind justice.
“We are all in danger if we file a tax return. Interpreting the Tax Code is more art than science. That is how it can be most effectively used for political rewards and punishments. The amorphous threat of punishment is very effective. If you don’t know when you break the law, you will constantly be fearful of prosecution. Filing a tax return is like driving down a highway full of state police when there isn’t a speed limit sign in sight. Proceed at your own risk. The IRS has more of a terrorist effect on the average American than al-Qaida ever will.”
“To paraphrase Capt. Renault in Casablanca,” writes a reader of a disclaimer we’re wont to cite: “I am shocked — shocked — to find that you may be compensated by the Hard Assets Alliance.
“I have often thought that somehow the good folks at Agora were compensated every time someone bought gold, given the attention it gets in your publication!
“Enjoy reading The 5.”
The 5: Heh. Fact is, it took us a long time to find a precious metals dealer we could unreservedly endorse. We could have struck up a business relationship with a dealer long ago… but we wanted to make absolutely sure they’d treat our readers right.
One more time, HAA’s offer to waive the account setup fee expires tomorrow at midnight. Learn about the easy and — for the next day and a half — free signup process at this link.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “An underreported development of this campaign season,” writes Seth Lipsky in The Wall Street Journal, “is the Republican Party’s decision this week to send Gov. Mitt Romney into the presidential race on a platform effectively calling for a new gold commission.
“The realization that America’s system of fiat money is part of its economic problem is moving from the fringes of political discussion to the center.
“This is a sharp contrast from the last time a gold commission was convened, in 1981, a decade after President Nixon abandoned the Bretton Woods system and opened the era of a fiat dollar. The 1981 commission recommended against restoring a gold basis to the dollar. But two members — Congressman Ron Paul and businessman-scholar Lewis Lehrman — dissented and outlined the case for gold.”
“Uh-oh,” Addison wrote via IM this morning. “We’re going mainstream again!”
We don’t share Mr. Lipsky’s sense that the outcome now will be any different than three decades ago, for reasons we laid out earlier this week. But the Paul/Lehrman manifesto — suppressed, dismissed, and denigrated at the time — remains surprisingly relevant to events today. That’s why we republished The Case for Gold last year… and we’re making it available in this one-of-a-kind offer.