- How Hurricane Joaquin might change Fed minds
- Deflationary breeze blowing through (shuttering) factories
- $5,000 gold: An extreme path to the inflation the Fed wants so badly
- A little-known reason why natural gas prices are set to jump
- How the SEC cooks its enforcement numbers… readers weigh in on the “hemline indicator”… all hail “B-Dud”… and more!
If the Federal Reserve needs an excuse to hold off raising interest rates till next year, this is it…
Last night, the center of Hurricane Joaquin’s projected track went right up the mouth of the Chesapeake Bay, making a beeline for Agora Financial HQ in Midtown Baltimore.
This morning, it’s moved east… But that’s small comfort, for us or anyone else.
“There is going to be catastrophic flooding from North Carolina to Massachusetts, and this is going to disrupt the economy regardless of whether or not Hurricane Joaquin makes landfall,” says meteorologist Mike Smith, senior VP at AccuWeather Enterprise Solutions. [Disclosure: Mr. Smith was a colleague during your editor’s broadcast career.]
That sounds like the setup for another bout of deflation — the sort that can scotch the Fed’s insistence on “talking tough” about raising rates before year-end.
But you don’t have to listen to a weatherman to know which way the monetary winds are blowing. We have precedent here… from a mere three years ago.
In September 2012, the Fed launched “QE3” — buying $40 billion in mortgage-backed securities every month. Then Hurricane Sandy struck the Eastern Seaboard in October — the second-costliest storm in U.S. history. (Katrina is still No. 1.) Come December, the Fed supersized QE3 and also started buying $45 billion in Treasuries every month.
The GDP numbers confirmed the Fed’s slowdown fears, registering an annualized 0.1% increase that quarter. And don’t forget how weak GDP in the first quarter of this year and last year were chalked up to an “unusually severe” winter.
“My expectation is that the Fed will soon reverse course and return to some form of easing — probably more forward guidance and a cheaper dollar,” says Jim Rickards — putting a finer point on remarks he made here last Friday.
Supporting evidence: As the fourth quarter of this year begins, the breezes from the outer bands of a deflationary storm are starting to blow through America’s factories.
The ISM manufacturing survey is out this morning. Not only did it come in below expectations, the reading of 50.2 is barely above the dividing line between a growing factory sector and a shrinking one.
Within the survey, we find new orders at 50.1 — the weakest since August 2012. And the prices manufacturers pay for raw goods clocks in at an ultralow 38.0.
In a sane world, that latter number would be a good thing — you know, manufacturers can pass along their lower costs to you and me. But it’s the Fed’s world we live in, and deflation is the last thing the Fed wants.
And yet deflation is what the Fed keeps getting, as we’ve pointed out regularly all year and persistently in the last week.
“A central bank’s worst nightmare is when they want inflation and can’t get it,” Jim Rickards goes on. “The Fed’s tricks have all failed. Is there another rabbit in the hat?”
Indeed, there is. “The Fed can cause massive inflation in 15 minutes,” says Jim. “They can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.”
Understand, like Jim’s dystopian “America 2024” presentation, this is not so much a forecast as a thought experiment.
Here’s how he explains it: “The Fed can make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct ‘open market operations’ in gold. They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher.
“They will print money when they buy and reduce the money supply when they sell via the banks. This is exactly what the Fed does today in the bond market when they pursue QE. The Fed would simply substitute gold for bonds in their dealings. The Fed would target the gold price rather than interest rates.
“Of course, the point of $5,000 gold is not to reward gold investors. The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,000 per ounce to $5,000 per ounce is really an 80% devaluation of the dollar when measured in the quantity of gold that one dollar can buy.
“This 80% devaluation of the dollar against gold will cause all other dollar prices to rise also. Oil would be $400 per barrel, gas would be $10.00 per gallon at the pump and so on.”
Impossible, you say? “It has happened in the U.S. twice in the past 80 years,” Jim declares:
- 1933: FDR orders the gold price raised from $20.67 an ounce to $35.00. “He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36”
- 1971: Nixon cuts the dollar’s last ties to gold. “Nixon did not want inflation, but he got it. Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase.
“History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.”
But it probably won’t come to that. “I expect that eventually the Fed will get the inflation they want,” says Jim — probably through forward guidance, currency wars and negative interest rates. When that happens, gold will go up.
“Still, if deflation does get the upper hand, gold will also go up if the Fed raises the price of gold to devalue the dollar when all else fails.
“This makes gold the ultimate ‘all weather’ asset class. Gold goes up in extreme inflation and extreme deflation. Very few asset classes work well in both states of the world. Since both inflation and deflation are possibilities today, gold belongs in every portfolio as protection against these extremes.”
And if you want to juice gold’s potential gains, Jim’s proprietary IMPACT system just uncovered an opportunity for 376% gains over the next 12 months. The recommendation went out to his premium subscribers on Tuesday, but it’s not too late to get in. Access here.
The major U.S. stock indexes are coughing up a hefty chunk of yesterday’s gains. At last check, they’re all down about 1%. For the moment, the S&P 500 is still above the 1,900 level.
Treasuries are benefiting from the risk-off atmosphere, with prices up and yields down. At last check, a 10-year note yields 2.03% — the lowest since late August.
Gold is not benefiting, but it’s not losing ground, either. At $1,116, the bid sits near where it did 24 hours ago. Crude continues to oscillate around $45 a barrel.
While oil prices are likely to stay stagnant a while longer, our natural resources team is spying a jump in natural gas soon.
On the demand side, power plants continue to shift from coal to natural gas. And plans are moving forward to export liquefied natural gas aboard specialized LNG containerships.
But it’s the supply side that’s about to move the needle, says Matt Insley: “Most of America’s natural gas comes from shale production. But what most folks don’t realize is that a good portion of that natural gas comes as a byproduct to crude oil production. In other words, when you drill for crude oil, a lot of the time natural gas comes up the pipe, too.”
Thus, as crude production declines, natgas production will likewise tumble. That’s already happening in the massive Eagle Ford shale region of Texas.
“It’s only a matter of time before that creates a strong rebound in prices,” says Matt — and that outlook doesn’t hinge on the weather, he adds.
“With average to increasing demand for natural gas (from future expectations of power plant use and LNG exports) and a coming pinch on supply (due to less byproduct production), I think the fundamentals are setting up for a nice snap-back move for natural gas prices.”
“That a government agency charged with insuring the integrity of corporate reporting should fudge its own numbers is troubling,” says Bartlett Naylor of the watchdog group Public Citizen.
For a second day running, we’re compelled to take a shot at the Securities and Exchange Commission — and not over something as innocuous as the agency’s inability to police obviously bogus public filings.
In recent months, SEC Chairwoman Mary Jo White has taken to defending her agency against accusations that it routinely looks the other way when public companies break the law. And she has the numbers that purportedly prove it — 755 enforcement actions yielding $4.1 billion in penalties last year, “the highest number of cases in the history of the commission.”
BS, says a group of scholars who are about to publish a study in the Cornell Law Review. They reviewed 9,679 enforcement actions listed in SEC reports from 2000-2014 — “a near equal split between Democratic and Republican control,” writes David Dayen at The Intercept, who’s had a sneak peek at the research.
“The commission’s methodology allows for double- and even triple-counting some offenders — along with counting fines ordered by other agencies, and penalties that are never collected.
“If you weed out the systematic overcounting and artificial boosts, the SEC’s enforcement levels have not significantly changed since 2002, despite the multitude of lawbreaking that led to the 2008 financial crisis, according to the study.”
We can’t say as we’re surprised in light of what we’ve documented periodically here in The 5. We’re talking about an agency that blew off whistleblower Harry Markopolos’ warnings about the massive Bernie Madoff fraud… and an agency whose employees have been caught surfing for porn while on the clock.
And Ms. White, the current chair? She was once the lawyer for disgraced Bank of America CEO Ken Lewis.
“Yes, hemlines are absolutely coming down,” writes a reader in response to yesterday’s mailbag and the famous “hemline indicator” — lots of leg during prosperous times, more modest attire in leaner years.
“In fact, with the newest styles,” she goes on, “they can even be mid-calf. Something I have not seen for about 25-27 years.”
“I just read an article regarding hemlines,” another reader writes. “It stated ‘Fall Fashion Forecast Extra — the Midi Skirt.’ McCall’s Pattern 6993 is a midi skirt pattern that’s come out.
“Hmmmm, maybe something to it…”
“Living as I do in a village of retirees,” writes a third, “and not going out on the town much of a weekend, I don’t have an opinion about hemlines (it’s my age, obviously), but another trend to watch is the number of cranes on the skyline. Not so many as the last ‘bubble,’ I would say.”
“Forget hemlines!” declares a fourth. “Keep an eye on yoga pants. Yoga pants are on the scene when the Dow is marching to all-time record highs. Anyone care to debunk this hypothesis?
“Keep up the good work.”
“I have good advice for your newby, novice investor in yesterday’s 5.
“He or she should just open up a brokerage account with a discount brokerage and buy a few options, ETFs and penny stocks and learn as he or she goes along. That person will lose money — we all have — but the growing pains pay off, after a while.
“Best way to amass knowledge is to ‘do.’ And of course, subscribe to one of Agora’s many helpful subscriptions, which could cut the losses.”
The 5: Well said. And for the experienced investor who’s put off by some of our more sophisticated strategies, you can always “paper trade” for a few weeks before you put real money to work.
“Dave, David Stockman’s reference to Bill Dudley is Bill Dud!” writes our final correspondent. “Nuff said.”
The 5: Heh, you’re right… or is it B-Dud?
Yeah, the New York Fed chief has made two appearances already this week in The 5 — three if you count today. And last Thursday too, when we had occasion to recall his edible iPad episode from 2011. He’s the gift that keeps on giving!
Best regards,
Dave Gonigam
The 5 Min. Forecast
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