June 18, 2013
- Expectation violation: What stock investors expect from “QE”… and what they’re getting instead. Dan Amoss with a warning going into today’s Fed meeting
- Not all fixed-income plays are alike: Neil George with better alternatives to Treasuries
- “A serious scientific accomplishment”: Ray Blanco on the science-and-wealth beat details a breakthrough against one of the most deadly cancers
- The return of the Christmas tree tax… an earnest inquiry into what “Zero Hour” is all about… Obama’s real retirement agenda… and more!
“By pushing U.S. stocks to new all-time highs,” writes Dan Amoss with a warning right out of the gate this morning, “investors have anticipated an early-stage inflationary boom.
“The Fed, investors believe, has ignited a new lending, borrowing and spending cycle.”
Another way of saying it: The addict has taken another hit and is feeling good.
“But in fact, the opposite scenario is playing out: The bond market is trading in a manner that we often see in the midst of a deflation scare. Real yields on Treasury bonds are rising, not falling.”
Uh-oh: Early signs of withdrawal…
We pause to get our bearings as the Federal Reserve’s Open Market Committee begins two days of meetings this morning.
- The major U.S. stock indexes are recovering some of yesterday’s late-day losses. At 1,645, the S&P 500 is about 25 points below its all-time closing high, set three weeks ago today
- The yield on the 10-year Treasury sits near a 14-month high, at 2.19%. Barely six weeks ago, the yield was 1.63%.
So what about that deflation scare? “In the real world,” says Dan, “official inflation statistics like the CPI have little accuracy or meaning. But they matter because central bankers think they’re important.”
As it happens, the Bureau of Labor Statistics issued its May CPI reading this morning: up 0.1% from the month before. The year-over-year increase works out to 1.4%.
As we’re fond of saying, any resemblance to your own cost of living is purely coincidental. Our point here is that inflation is slowing down — and has been since the Fed’s latest round of printing started in 2012.
Even the real-world inflation numbers kept by John Williams at Shadow Government Statistics are in a downward trend: Two years ago, they registered a year-over-year increase north of 11%. Now? Just under 9%.
“Expectations for future inflation are also down,” says Dan.
“The Fed watches an indicator called the ‘TIPS break-even inflation rate.’ It reflects investors’ expectations of future inflation over long time frames. Whenever this indicator falls much below 2%, the Bernanke Fed tends to panic and unleash another dose of printing.”
Behold…
“The downside of this policy,” says Dan, “is that each round of printing packs a weaker punch.” Consider Japan as an early warning in this regard: The aim of “Abenomics” — aka unparalleled money printing — is to “end deflation.” But with yields on Japanese government bonds spiking and their price falling, the aim may soon become one of “support the Japanese bond market.”
It’s only a matter of time before investors start asking tougher questions of the Fed. At tomorrow’s press conference, reporters may ask Ben Bernanke tough questions about his QE tapering plans; if not, investors will. Dan poses one such question: “What would be the Fed’s response to a deflation scare?
“It’s hard to imagine,” Dan concludes, “anything besides QE on an even grander scale.”
Good times, eh?
Gold is in a mild swoon this morning. It drifted down overnight and dropped like a stone at almost exactly 10 a.m. EDT.
At last check, the bid is $1,364. For once, silver is proving less volatile, down to $21.60.
“Bonds aren’t all alike,” says our income specialist Neil George.
As noted above, Treasury yields have spiked, driving down their prices. For the moment, the effect has spilled over to other fixed-income plays.
But Neil doesn’t expect that to last: “Bonds are much more disparate than stocks. Their values are based not just on the prevailing yields from Uncle Sam’s Treasuries, but on the underlying credit and credibility of the issuers of bonds.”
So Neil is still bullish on a well-chosen basket of government bonds in growing emerging-market economies. “And in the process, U.S. Treasuries will see selling because they won’t be needed as a safety hedge. As they do, bonds based on growth and expansion will rally.”
Neil sees a similar opportunity in another fixed-income sector — one that could put tax-free checks in your mailbox three times a month, if you follow his guidance. Learn how to start collecting these checks by following this link.
“Pancreatic cancer is incredibly deadly,” observes Ray Blanco of our high-tech and biotech team.
The American Cancer Society’s numbers are grim: The one-year survival rate is 25%. The five-year survival rate is a mere 6%.
But one company is making strides developing a new breakthrough treatment. As Ray explains, “The company modifies cancer cell lines to express an animal protein not found in humans and cultures them in large quantities.
“Since the human immune system reacts violently against these foreign proteins, injections of the inactivated cancer cells act as a vaccine.” The company is out with promising results from Phase 2 trials. “After three years,” Ray reports, “patients showed a disease-free survival rate of 26% and an overall survival rate of 39%.
“For nearly 40% of patients to still be alive after three years is a serious scientific accomplishment.”
Ray is just back from the annual conference of the American Society of Clinical Oncology. For access to his latest research into the most promising companies on the front lines of the fight against cancer, give this a look.
Trees: It’s what’s for Christmas…
In November 2011, we noticed the Obama administration approved a farm bill that included a program to “help” the Christmas tree industry promote its goods.
The visionaries at the freshly tagged Christmas Tree Promotion Board were on task to “enhance the image of Christmas trees and the Christmas tree industry in the United States.”
Surprise: The new program, to be effective, needed to enforce a 15-cent fee on fresh-cut Christmas trees, with the inevitable rise to 20 cents per tree. In the past, the National Christmas Tree Association tried three times to get their members to voluntarily pay this fee. Laughter ensued.
That’s when Washington’s tree promoters stepped in. The fee became an “assessment” — involuntary, of course. Luckily, heavy public resistance, spearheaded by the Heritage Foundation, led the administration to issue a stay on the tax on Nov. 17, 2011.
Alas, it’s back…
The stay has been lifted. Trees will finally get the PR love they’ve sorely lacked. And after perusing the farm bill, we suspect Washington may be running out of ideas.
“A 15-cent tax may not seem like much,” budget expert Daren Bakst reminds us. “However, taxes are a death by a thousand cuts. One of these cuts shouldn’t come from the Christmas tree.”
Of those thousand cuts embedded in the current farm bill, here’s what stuck out most: A guarantee in price for sushi rice, insurance for alfalfa, profit-margin protection for catfish and such “assessment fees” as:
- $1 per head of cattle, which pulls in up to $80 million a year
- Blueberries, assessed for $18 a ton
- Cotton, costing producers $1 per bale
- Dairy products: 15 cents per hundredweight on all milk in the “lower 48”
- And eggs, a fee of 10 cents per 30 dozen cases, pulling in $18 million annually.
The icing on the cake? The last farm bill, passed in 2008, committed to spending $288 billion over five years. The amount of money the farm lobby spent getting its goodies passed: $173.5 million.
Nice return on investment, eh? No word on how much has been spent for lobbying this time around… but the bill commits to spending nearly $1 trillion.
Sequester? What sequester?
“You and others are bandying about this ‘Zero Hour’ concept as if it has suddenly become a standard financial term,” a reader writes in frustration.
“I have absolutely no quarrel with this, but it has become absolutely essential for me to clearly understand it. I read the publisher’s definition of it. It is, obviously, clear to him and to all of you, but not to me. Am I the only reader out here swinging in the winds of the metals market desperately trying to understand you?
“Is Zero Hour a beginning point for a precious metals rally? Does ‘zero’ refer only to the ETFs? Does ‘zero’ refer only to precious metals? Does ‘zero’ refer only to a crash in precious metal ETF values?
“To me, Zero Hour means the very beginning of something. I am wondering if Zero Hour is likely to be a bad time for the metals ETFs… or will Zero Hour be a point when the metals themselves begin to rise significantly in price.
“Finally, how will Zero Hour affect the direction of the inverse metals ETFs?
“FYI, I place the greatest value on your 5 Min. Forecast emails. I read them religiously before, and in spite of, the 30 other newsletter emails that my screen is cluttered with daily. This is an important concept. Please help us zero in on what your Zero Hour really is.”
The 5: We’ll try to keep it as succinct as possible: Zero Hour is the moment that trust evaporates from the “paper” market for precious metals — when a major exchange like the Comex or the London Bullion Market Association defaults and settles a contract in cash and not real metal.
At that moment, the price of physical metal will zoom up and break away decisively from the “paper” price… because people will want the real thing, and not a promise. ETFs like GLD and IAU are a promise… so they won’t enjoy the price appreciation that comes with real metal.
The paper price will likely rise… but not to anywhere near the degree of real metal in your hands.
“Obama’s real idea,” a reader writes after our recent discussion of his proposed $3 billion cap on tax-advantaged retirement plans, “is to force all retirement plans to invest 50% of all pension funds in ‘U.S. government retirement bonds’ — thus solving the deficit problem. Just keep printing money when the bonds come due.”
The 5: What you describe is, indeed, the most likely scenario in which “401(k) confiscation” takes place. Readers of Apogee Advisory are clued in to two warning signs to watch — signs that it’ll be time to empty your account and take the tax hit regardless.
That said, we’re seeing rumblings in Washington that could put off such a day of reckoning — something we’ll explore later this summer in Apogee. (Not a subscriber yet? You can remedy that here.)
“Sure, the government would change the rules on 401(k)s,” writes one of our regulars. “Now expand that to every other thing the government can change to keep any of us working types from ever being very successful in acquiring great wealth.
“There is the first part that keeps me laughing when you and yours advocate plan A or B or C as a way to become wealthy. Please do not feel that I disagree with you. I read your writings with great relish and have no doubts about your sincerity and ability to offer good advice.
“The rub is that no matter what you do, the government is going to do its damnedest to keep anybody from getting wealthy, unless you can bribe them individually, as in the recent law allowing lobbyists to advise Congress members on info they could use to accomplish insider trading legally.
“The second part is your overall strategy to acquire wealth so that when TSHTF, I can be comfortable. Where in the real world would I go that would be any better than America? And even then, our government could, would and does reach across oceans and strip your bank account.
“I suggest you reread the SECOND paragraph of the Declaration of Independence, replacing ‘the present King of Great Britain’ with ‘our present government.’ Scary similarities.”
The 5: True enough, but there’s also the part about how “mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.”
An awful lot of people seem to have a high threshold of “sufferability”…
Regards,
Dave Gonigam
The 5 Min. Forecast
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