February 13, 2013
- Sixty-seven years after Hazlitt’s lesson, politicians still haven’t learned: two takeaways from the president’s minimum wage proposal you didn’t see in the morning papers
- Gold on the way to $1,550: Guenthner surveys yesterday’s chart damage, while we suss out a way to take advantage
- Nearly 14 years into a bear market in stocks, how close are we to the end? Ritholtz on what he wants to see before he knows it’s over…
- Taking the consumer’s pulse after the payroll tax increase… the return of the gold vending machine… reader musings on paper gold and real drones… and more!
“There is no escape from the conclusion,” wrote Henry Hazlitt, the great popularizer of economic common sense, in Economics in One Lesson, “that the minimum wage will increase unemployment.”
There’s no escape… but it doesn’t stop politicians from trying anyway.
We’re not going to spill too much virtual ink on the president’s call for an increase in the minimum wage last night. But we would like to share two observations…
First, the increase the president proposes still doesn’t keep pace with the shrinking dollar, the deleterious effects of which the minimum wage is supposed to soften. The current minimum of $7.25 an hour took effect in July 2009. Using the real-world inflation calculator at ShadowStats.com, the minimum would have to jump to $9.78 just to keep pace with the rising cost of living since then.
The president is proposing $9.00. Piker.
Second, recall the Fed threatened in December that it will keep the zero interest rate policy in place until the unemployment rate falls below 6.5%.
The higher the minimum wage, the higher unemployment remains… the longer the punishment of savers will continue. And the higher the gold price is likely to go… at least in the long run.
“I’ll cut right to the chase: Gold is set to drop to $1,550,” interjects our technician Greg Guenthner.
[Ed Note. This is what happens the moment we beef up our commitment to technical analysis: We get constant reminders that our long-term investment theses are, well, long term. Ahem.]
“I’m not some lunatic who doesn’t understand the strong fundamental arguments backing gold,” Greg cautions in today’s Rude Awakening. But we pay him to watch the charts, and that’s what he’s doing: “The damage is done,” he asserts.
“After a weaker push last summer that failed to break $1,800, gold has consistently trended lower for more than four months. Yesterday’s brief breakdown below $1,640 is just advance notice that lower prices are in store for gold in the near future…
“Gold’s decade-long bull market has attracted more than a few momentum buyers. And like it or not, these weak hands are adding to the selling pressure. Gold just can’t shake this slump. And as $1,650 falls this morning (gold sits at $1,647 now), $1,550 won’t be far behind.
“A bounce higher from the $1,550s is the perfect long-term entry point.”
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In the stock market, the Dow is adrift after reaching a new post-2007 high yesterday. It’s barely in the green at 14,020. Other indexes are up a bit more strongly.
“We appear to be much closer to the end than the beginning,” says Vancouver stalwart Barry Ritholtz of the bear market in stocks that began in 2000.
“Even skeptics have to agree that we are more likely in the seventh or eighth inning than earlier stages of the game.”
We pay heed to Barry on this score, since in late 2003 he said, “I suspect we are in for a harder long-term slog than the mere three-year bear market suggests.”
Back then, he offered up a formal definition of a “secular” bear market — “a long-term cycle that typically begins after a long-term bull market peak and crash. It is primarily characterized by strong, even excessive rallies and sell-offs, all occurring within a broad trading range. Despite the strong rallies, markets often appear to be unchanged a decade or so into secular bears.”
“The psychology,” he goes on, “is one of compressing price-earnings multiples as investors become increasingly unwilling to pay the same price for each dollar of earnings. There is often a general malaise to the broader society, sometimes encompassing political scandals and/or war.”
In addition to the current one, there’ve been three other secular bear markets since 1900. The average length is 14½ years.
Yes, that’s a small sample size. But the question lingers: “Here we are,” he writes now, “a few weeks away from the start of the 14th year of the secular bear market that began March 2000.”
This is where his seventh or eighth inning analogy matters: He’s not ready to call an end to the bear yet. “Under the ordinary end of secular bear market conditions, I would like to see P/E ratios even lower and stocks even more hated/ignored.”
The complicating factor is the Fed. “The Fed has disrupted those metrics and that makes seeing the end of the secular bear all the more challenging.
“The Fed’s extraordinary ZIRP/QE intervention creates an impression of inorganic gains. Without the unprecedented FOMC actions, I am unsure markets would be anywhere near current levels.”
“It is hard to be patient and disciplined when the market is going up,” adds our own Chris Mayer.
He’s been reading the year-end shareholder letter from Baupost Group chief Seth Klarman — the money manager legend whose book Margin of Safety sells on Amazon for $950 used. “Investing today,” Klarman writes, “may well be harder than it has been at any time in our three decades of existence.”
“The problem,” says Chris, “is all the crazy government interventions. There is hardly a market price anywhere that is not somehow distorted or managed by bureaucrats.”
“There is evidence of recklessness in some markets, like the junk bond market,” Chris goes on.
“The latter bonds pay less than 6% for the first time ever. Starved for yield, for some kind of return, investors are starting to accept large risks. They are starting to do things they will regret at the next undressing when the market turns.”
The Federal Reserve’s plan to force investors into risky assets has worked. Years of low interest rates provoked investors to pour money into not only stocks, but investment-grade and junk corporate bond funds. Not-creditworthy companies have been able to refinance debts and survive in current form, rather than restructure. Now overcapacity threatens profit growth, which caps the upside for the entire stock market.
[Ed Note. Like all manipulations of reality, the Fed’s plan will not end well. A backup in bond yields, when it arrives, will unwind the Fed’s success in prodding investors into risky assets. In today’s 5 PRO, we help you steer clear of the stocks most likely to melt down after the melt-up.]
Read whatever you want into the January retail sales figures — a 0.1% increase over December. The media sure are…
“The modest gain,” says Reuters, “suggested that households were responding to the expiration of a 2% payroll tax cut on Jan. 1.”
On the other hand, Bloomberg crowed about the figure rising “for a third consecutive month as labor market progress helped Americans overcome an increase in the payroll tax.”
Heh.
A better barometer of the payroll tax impact is the year-over-year change: There we see a decrease, though not much of one.
Maybe this gold vending machine thing finally has legs. Just in case you want to buy 5 or 10 grams’ worth on a whim.
Well-seasoned readers will remember we covered a similar machine almost three years ago. That was just a four-month trial run. PMX Gold Bullion, the company behind the first test, placed a new machine again at the Town Center in Boca Raton, Fla., on Jan. 4.
The look has changed from the German model used in 2010, but the concept is the same. SEC documents show the 2010 version made sales north of $250,000 during those four months.
Back in Boca: The 2013 model of the gold vending machine
Based on that trial, PMX managing director Meris Kott tells The Palm Beach Post that she hopes to have as many as 12 machines operating by the end of June. The current machine features unique bullion designs by PMX that were made in the USA. According to a PMX press release, they even offer a 5-gram bar that has a hole so you can wear it as a necklace.
The machine will accept only credit or debit cards (imagine smoothing the creases out of $1,648 in cash) so if it’s privacy and confidentiality you want, you’ll have to go elsewhere.
We like the idea, but it takes a certain kind of shopper. After all, it’s one thing to lose a buck when your candy bar gets stuck in a vending machine’s innards. But a gold bar…
“I am of the belief that gold is not going up,” a reader writes after yesterday’s episode, echoing Greg Guenthner in advance, “because of the sale of paper gold that doesn’t really have any gold backing it.
“If there is an unlimited supply of paper gold, then it is hard for supply and demand to make prices rise. My theory is that since Jon Corzine didn’t go to jail for commodities fraud and using depositors’ funds in his personal account, others have decided that they can sell gold they don’t own, declare bankruptcy, keep the money they got for selling paper backed by nonexistent gold and not get prosecuted as long as the paper trail looks reasonable and they are well connected.
“This theory is the next step up from the gold banks loaning out their gold though they don’t actually move the gold, but they just make a book entry. Could there be more than one book entry for the same gold bar? Who knew?
“Just sayin’.”
The 5: Hmmm… We’re not sure if those factors are suppressing the gold price now. But after interviewing Eric Sprott for the next issue of Apogee Advisory, we’re convinced those factors will in time set off havoc in the precious metals market.
It’s a future phenomenon we’re calling gold’s “breakaway day.” You want to be ready for it. We offer the tools in the next Apogee. Not a subscriber yet? Here’s where to become one.
“This idea popped up yesterday in our ongoing golf course discussion of just what the heck is going on,” writes another.
“Here are the puzzle pieces. One piece is China holding a lot of U.S. T-bills that are being devalued by excess money printing. You have to spend it while it still has value.
“Another piece is clandestine purchases of significant quantities of gold.
“The third piece is the trade arrangements that China is making with other nations of the world that won’t depend on the U.S. dollar to balance the books. So what if the yuan is put on a gold standard? Is that feasible? If so, what sort of hell would break loose?”
The 5: Chinese leaders are on record as saying their current gold reserve is “too small” and they aim to make the renminbi fully convertible to other currencies by 2015. As we mentioned, Byron King is putting the finishing touches on a special report teasing out all the implications. Stay tuned…
“Drones,” a reader writes on our big self-indulgent topic yesterday, “are like nuclear power in the sense that they can be wonderful like nuclear power generation or subverted like atomic bombs.
“Nothing wrong with targeting a citizen who defects to a declared enemy force and works to destroy the U.S. Or against a noncitizen who is declared an enemy of the U.S. by act of war. The U.S. and every other nation have done so in every war that they have fought. Nothing wrong with taking out a lawbreaker who has been found to be a bad guy by due process under the Constitution. Deadly force is legitimately accepted in certain law enforcement circumstances.
“The problem is that drones, bullets and indefinite incarceration are employed without due process (assuming, of course, that the Constitution still exists as the authority for our supposed rule of law). If the U.S. declares war on al-Qaida, for example, then members of al-Qaida are legitimately enemy combatants and subject to deadly force — both defected U.S. citizens and foreign nationals. If a bad guy is deemed a bad guy within the confines of due process and deadly force is required, then the drone strike is preferable. The kicker here is ‘due process.’ And what spews out of the Offal Office in an ex-Constitution manner is not ‘due process.’
“Unfortunately, we have a far more severe problem than drones — the United States Constitution, RIP.”
The 5: Amen. Our problem is the proliferation of folks who’ve got command over the darn things. And the relative anonymity with which they can be used. If you agree, we encourage you to take action here.
Cheers,
Dave Gonigam
The 5 Min. Forecast
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