November 11, 2013
- Is David Stockman reading from our playbook?
- Why the “mother of all asset bubbles” will inevitably burst… but not yet
- How China’s Third Plenum could prop up gold
- Could Obamacare end up burning down your house?
- Only in Venezuela: “Leave nothing on the shelves”… the Roach Motel revisited… Aussie vs. Kiwi… and more!
Hmmm… Do we have a celebrity reader?
The Federal Reserve’s post-2008 money pumping is “the greatest gift to the 1 percent, to the speculators, to the leveraged traders, to the carry trade ever imagined,” said President Reagan’s first budget chief, David Stockman, last week.
He said that by way of teeing up his next remark…
“Now,” he continued, “we have the greatest mother of all bubbles. And there’s nobody left in the stock market today except drugged-up day traders and robots who are being mainlined by the daily injections of liquidity from the Fed. This is utterly irrational.”
Keen-eyed readers will recall we first forecast “the mother of all asset bubbles” long ago — January 2012, to be precise. The forecast remains valid. We updated it only last month in light of recent events; you can examine it for yourself right here.
“The clear and present danger in America,” he added in his Fox Business interview, “is that the Fed is run by people who are in some medieval castle somewhere, and they’ve lost track of the real world.”
“Economists pretend to have some idea of what Fed policies ought to do,” chimes in our Chris Mayer. “In reality, they have no idea. And there are all kinds of bubbles inflated in the process.
“So the easy money of the 1990s gave us a bubble that finally popped in 2000. The easy money of the 2000s gave us an epic housing bubble that burst in 2008. What will the easy-money policies since give us? The prior two bubbles look like igloos next to the Empire State Building when compared with this one.”
It’s at this moment, however, we remember the words of Doug Casey: Just because something is inevitable does not make it imminent.
So let’s briefly ponder whether we’re headed into another recession. “I hesitate to answer this question,” Chris prefaces his remarks, “because it doesn’t have much to do with investing. You can have a lousy economy and a bull market (like now), and you can have a great economy and lousy market.”
Still, the chart below caught Chris’ eye. Consider this fact: The U.S. has never entered a recession unless short-term interest rates are higher than long-term rates — an “inverted yield curve.” That’s when the line on this chart goes below zero. Every time that’s happened during the era of the “Great Dollar Standard,” without fail, the economy has fallen into recession — as indicated by the shaded areas:
“Keep in mind,” Chris cautions, “there is a first time for everything. Correlations, like records, are made to be broken.”
The chart came to Chris’ attention in a recent letter from Evergreen Capital Management. “U.S. stocks have recently made new highs,” writes Evergreen’s chief investment officer David Hay, “but the disconnect between economic fundamentals and the ebullience of the equity market is striking.
“A key reason for the disparity,” he adds, “is almost certainly the $3 trillion the Fed has printed into existence.”
[Ed. Note: Chris has had to work extra hard of late to dig up investment ideas that aren’t held aloft by puffs of air from the Fed, ideas that can stand on their own merits. But he’s still keen on an unconventional type of play with a history of outperforming regular stocks by 300-500%.
Thing is, plays like these don’t come along every day. In fact, this opportunity opened up only recently, after an 11-year hiatus. So give it a look while there’s still time.]
The S&P 500 is ruler-flat as we write. The Dow is up a bit, the Nasdaq and the Russell 2000 down a bit.
It’s the proverbial “thin holiday trading,” which in the current day and age means the high-frequency trading robots have an even bigger presence than usual.
The bond market is closed today. Gold is slipping further after Friday’s losses, to $1,283. But crude is firming up, back above $95 for the first time this month.
Not a peep has emerged from China’s Third Plenum — now in its third day.
Those commies know how to keep a tight lid on things — almost as much as the Federal Reserve, which keeps transcripts of its deliberations under wraps for five years.
But the mainstream is now buzzing about some of the same things we hit on last Friday — “a freer yuan exchange rate, most likely in the form of a wider daily trading band for the tightly managed currency,” The Wall Street Journal wrote yesterday, and “further interest rate liberalization.”
The confab in Beijing might even put a floor under gold.
No one’s expecting an immediate move to a gold-backed yuan or an announcement from the Chinese central bank about how much gold it’s accumulated since 2009.
But whatever is announced, it’s liable to push ordinary Chinese further into gold. “Meaningful reform will be painful and disruptive,” says Patrick Chovanec from Silvercrest Asset Management, “and I suspect a lot of Chinese will seek the perceived safety and portability of gold.
“That will be particularly true if the bubble in China’s property market pops,” Mr. Chovanec tells CNBC. “For the Chinese, buying and stockpiling empty properties serves much the same function as investing in gold, since they are both unproductive stores of value, so if real estate sees a major correction, many Chinese will turn to gold.”
Hmmm… For years, our friend Frank Holmes from U.S. Global Investors has spoken of Westerners buying gold as the “fear trade” and Easterners buying gold as the “love trade” because of tradition and cultural affinity for the Midas metal.
Sounds as if the Chinese are getting a whiff of fear now. Staggering when you stop to think that China is already set to surpass India as the biggest buyer of gold this year…
Unintended Obamacare consequences, continued: The law could cripple some volunteer fire departments.
“We will have to eliminate quite a few volunteer positions,” says Chief John Grimes of the Leland, N.C., Fire Department, “because we won’t be able to afford to provide them with health care.”
Under IRS rules, volunteer firefighters and EMS personnel are “employees” of the agencies they serve. And the law says all employers must provide health insurance if they have 50 or more full-time employees.
Leland’s fire department has more than 100 volunteers. He’d be down half a department unless something changes. “This is something new, never been done in our lifetime,” Grimes tells WECT-TV. He says the National Volunteer Fire Council does have a lobbying force in Washington trying to get the regulations rewritten.
Euphemism of the day: The penalty — er, tax — for failure to buy health insurance is now an “individual shared responsibility payment.”
Right… It’s individual… but it’s shared.
So it’s not only a euphemism, it’s an oxymoron. Brilliant.
Whatever you want to call it, it’s buried on the HealthCare.gov website. “The state and federal health insurance exchanges are using all manner of humor and happy talk to sell the Affordable Care Act’s products,” says this morning’s New York Times. “But the one part of the new system that they are not quick to trumpet is the financial penalty that Americans will face if they fail to buy insurance.”
Meanwhile, have you noticed how quiet the feds have gotten about their promise to fix the “glitches” on the website by Nov. 30? Twenty days to go…
Many of the law’s provisions kick in Jan. 1. Are you ready?
From the “it could always be worse” file, we turn to our favorite basket case, Venezuela.
When last we checked in with the government of Hugo Chavez’s handpicked successor Nicolas Maduro, they’d seized a toilet paper factory, the better to avert shortages (caused by government price controls, natch).
Now Maduro has ordered the seizure of the Daka chain of electronics stores. Daka must charge “fair prices,” he said.
“Daka’s owners have not responded to the allegations,” reports the BBC. “But BBC Caracas correspondent Irene Caselli says goods at state shops are often very difficult to find and sell very quickly when available.”
Ditto for the goods at Daka now. Said Maduro on Friday night: “We’re doing this for the good of the nation. Leave nothing on the shelves, nothing in the warehouses!”
Ordinary Venezuelans quickly obliged…
Uh… Where will the replacement inventory come from?
Inflation in Venezuela is now running officially at 54%. Unofficially, according to the Troubled Currencies Project maintained by Cato Institute senior fellow Steve Hanke, it’s running 320%.
Maybe the new Vice Ministry of Supreme Social Happiness can do something about that.
Seriously. About three weeks ago, Maduro formed the new agency, “in an attempt to coordinate all the ‘mission’ programs created by Hugo Chavez to alleviate poverty,” according to an Associated Press account.
The ministry, says Maduro, is tasked with taking care of the most “sublime, vulnerable and delicate, to those who are most loved by anyone who calls themselves a revolutionary, a Christian and Chavista.”
The AP found a fruit vendor in downtown Caracas who’s now looking forward to a vice ministry of beer. “That would make me, and all the drunks, happy.”
Not if the beer is cleaned off the shelves the way the electronics were, heh.
If you’re of the opinion happiness is something you have to achieve on your own… and that if government is determined to get in the way of your happiness, you have to be even more determined to reclaim it… you really have to click on this link.
“It is true,” writes a reader picking up a thread from last week, “that Australian salaries are much higher than in New Zealand, but so is the cost of living.
“Everything in Australia is very expensive, while NZ prices are more in line with U.S. prices, although a bit higher. Minimum wage in NZ is $13.75 (US$11.30) an hour. But one big difference: Kiwis are allowed to own guns (with some restrictions), while Australians are not. So if you are a freedom-loving American, NZ is the better choice.”
“Every time I see a comment mentioning the possibility of tapering, I laugh out loud,” a reader writes. “The Fed will continue printing until the inevitable reset.
“As well, the imaginary numbers published by the government are, hmmm, let me see, oh, yeah, imaginary.”
The 5: You’re in good company. Our macro strategist Dan Amoss has likened quantitative easing to a Roach Motel — “easy to get into, impossible to get out of.”
Currency Wars author Jim Rickards says the printing will continue until the Fed gets the desired inflationary outcome. So far, no dice: Its favorite measure of inflation, a number called “core PCE,” was updated by the Commerce Department on Friday. It’s grown 1.2% year over year — way below the Fed’s 2-2.5% target.
Yes, never mind your own experience: The Fed says we don’t have enough inflation. Oy…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Did you play it? Options Hotline editor Steve Sarnoff urged his readers to take profits today on Wal-Mart call options.
Since late August, WMT stock has risen 8%. But during that same time, Steve’s recommendation leaped 135%.
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