“In the third quarter, Wells Fargo was the top lender with loan origination volume of nearly $103 billion, followed by Bank of America with $74 billion.”
“China’s property market may be heading into a bubble as the economy’s reliance on real estate reaches a level close to the housing peaks in the U.S. and Japan, according to Citigroup Inc”
“A whopping 46 percent of refinance volume in the fourth quarter was cash-in, according to a report released today by mortgage financier Freddie Mac.”
“Buy a house, or continue renting and buy gold? The answer might surprise you.”
“Nearly half of Nevadans facing foreclosure hadn’t heard of federal loan mod program”
–Boy, it sure isn’t a good look for the land of the free and the home of the brave that American-made F-16s and M1 Abrams battle tanks are out in force across Egypt now. But cosmetics and theatrics aside, there’s a bigger story here: the entire geopolitical arrangement that has grown up around the U.S. dollar standard is unravelling. The modest task of today’s Daily Reckoning is to figure out what that means for your investments.
–First we should probably back-pedal on our statement above about Middle East tyrannies being supported by American policy and American weapons. Or wait, should we? Hmm. The fact the Egyptian Army is now in the streets of Cairo and NOT firing on people is an argument that the Army itself may force out Egyptian President Hosni Mubarak and end his 30-year U.S.-backed rule.
–Whatever happens in the next few days, it’s getting clearer by the day that as global food and fuel prices rise (Bernanke exports), so does political instability. Of course if you’re in Egypt and have been living under the heel of the State for 30 years, a little instability might be welcome. In fact, the desire for stability—to freeze things as they are so we can control them and manage them just the way we like—is often the motivator for more State control in private and public life.
–Financial markets continue to operate when geopolitical tensions rise. But they shift to risk aversion. For example, spot gold was up $23.50 in Friday trading. Short-sellers must have taken one look at the pictures coming from Cairo and decided to cover their bet on falling gold prices. Over in America the Dow fell 1.39%.
–It’s obvious that in the short-term, a crisis in Egypt is bearish for stocks and bullish for oil and precious metals. But you are not paying for the Daily Reckoning to read what is obvious to everyone. So what is the un-obvious point to take away from the last few days? Well we actually count four separate points.
–Watch out Europe. Energy is capital. A U.S. dollar rally cannot be ruled out. Seek out public companies with many years of energy reserves.
–Why should Europe watch out? Popular protests can spread like a bad cold. Egypt may not be experiencing a revolution so much as a changing of the institutional guard. And it’s unlikely, in our view, that the wave of anger/resentment/optimism spreading through North Africa will reach, say, Saudi Arabia and its 263 billion barrels of light sweet crude oil. But like a psychic tsunami, that wave could travel across the Mediterranean and into Europe.
–There are large populations of North African immigrants in Europe’s major cities. Many of them arrived at the end of World War Two. They provided cheap labour for Europe’s rebuilding economies. Are those large immigrant populations now a potential source of even more unrest in Europe?
–Well, the art of organising protests to take down the authorities is refined each time one of these “revolutions” takes place. Facebook, Twitter, YouTube, flash mobs, it’s all getting pretty sophisticated…and very difficult to shut down (even when the State does the ham-fisted thing and turns out the lights on the Internet.)
— Popular uprisings happen at the margin. A small, well-organised cadre of individuals can set a whole process in motion that reaches a tipping point. And after that, all bets are off. You never quite know where your revolution/uprising will take you.
–What’s happening in Egypt is not just something to watch on Sky News over dinner. It’s a preview of what may happen in the developed world too in coming years. The reasons will be different. In the developed world it will happen because of the corrupt and debt-laden financial system continues to reward the elites at the top at the expense of the Middle Class. But the results (a deposed or decapitated leadership) may be the same.
–So good luck Europe and good luck the Euro!
–The second point is energy itself (especially crude oil) is a kind of capital in a world where there’s a bear market in paper money. Energy is normally just a commodity. It’s an economic input that, along with labour, land, and capital combines to bring you goods and services.
— But the urbanisation and population of the modern world would not be possible without cheap energy. These days, access to cheap and abundant energy is as important as anything else if you want to ensure your economic competitiveness. If you don’t have energy, or at least a boatload of money to bid for it, you have nothing.
–You could further argue that the U.S. dollar is the world’s reserve currency because of its relationship with energy. The Saudis agreed to price oil in U.S. dollars in exchange for a U.S. security umbrella. But as the dollar is sabotaged from within by Ben Bernanke and Tim Geithner, all the geopolitical arrangements that evolved around the dollar standard—including the pricing of oil in dollars and the security of oil producing regimes—is slowly crumbling like the crust of a three-day old homemade apple pie.
–The unravelling of this strategic arrangement for energy puts a geopolitical premium on the actual ownership of oil, gas, coal, and uranium. Australia scores pretty well in three out of those four categories. But you still have to be careful. If you own a company that has large energy reserves, are those reserves located in politically risky areas?
–Point three: watch out for a U.S. dollar rally. You may disagree with your editor that the Euro could be a surprising next victim of the events in North Africa. But when S&P downgraded Japan last week, it was definitely dollar bullish. Betting on a dollar rally to contain inflation while U.S. deficits show no sign of getting smaller is admittedly pretty contrarian. But you shouldn’t rule it out.
–And keep in mind that dollar strength against the Yen and the Euro is only relative. You don’t have to be a dollar bull to see that it could go up against other paper currencies in the next few weeks. The important price to watch is gold. If gold goes up against all paper currencies even as the dollar clobbers the Euro and the Yen, you’ll know the primary trend of the last ten years is still firmly in place.
–Finally, alluding to the point we made above, the big takeaway for investors is to look at your portfolio and find out if you have enough exposure to energy stocks. The oil price climbed over the weekend. It wasn’t because Egypt is a major exporter of oil (it’s not) or that the Suez Canal is critical to the flow of oil to Europe (it’s not, the canal was built in the 19th century and is not big enough to handle modern super tankers).
–But it’s the speculation that U.S.-backed authoritarian regimes in the Middle East may now be living on borrowed time…THAT’s what has oil speculators worried. As well they should be.
for Daily Reckoning Australia
- Red Bear Rising: Russia’s Resource Based Geopolitical Strategy
- The Rising Price of Oil Has Done Less Damage in Europe Than in America
- The Rise in the Dollar Doesn’t Have Everyone Convinced
- The U.S. Dollar is Not the Euro
- Cold in July
Let’s throw out a few numbers. Numbers lie. The 5 is crooked. The 8 goes nowhere. The 0 is nothing, whatever that is.
So, let’s throw them out.
15, 34, 92, 98888, 21…
Throw them all out.
Or, how about this…?
$14. That’s how much gold fell yesterday. Why is gold going down? As expected, the Great Correction continues. Domestic consumer price inflation is still subdued. Speculators are getting worried. They bought gold at high prices. What if there really is a recovery; who will need gold? Now prices threaten to go down.
It wouldn’t surprise us to see gold under $1,300. Or under $1,200. Or even under $1,000.
But don’t mistake a dip for a change of direction. The bull market in gold won’t end until the financial crisis is over. And that’s not going to happen soon. Here’s another number we can throw out to prove our point:
What the heck is that?
That’s the number of dollars that the US government is supposed to need this year to fill the gap between what it collects in taxes and what it spends.
It’s the deficit, in other words. And it’s a lot of money.
But remember, it’s just a number. And you can’t trust numbers. Because it was just a few months ago that we were told the budget deficit would be much, much lower. Remember those numbers? Less than $1 trillion? Then, $1.2 trillion.
Numbers, numbers…1,2,3,4,5,6,7,8,9 – we’ve seen them all!
But the important thing is not the number itself… It’s like a Christmas present; it’s the spirit behind it that counts. And behind every number in the federal budget is the Spirit of Christmas…well, it would be the Spirit of Christmas if Santa was a kleptomaniac and he gave all the loot to himself and his friends.
We’re not complaining about it. It’s just what happens in an advanced, degenerate economy. More people spend their time trying to figure out how to redistribute wealth than trying to create it.
In the event, the Obama team is going to redistribute $1.5 trillion more than it can collect in taxes. Let’s throw out some more numbers. That’s $5,000 per person…$20,000 for a family of four. And we’re talking spending IN EXCESS of tax receipts. This is just the deficit. That’s in addition to the $8,000 or so per person that is taken from one taxpayer and given to others.
Okay… So the feds spend $1.5 trillion more than they take in. Or $4 dollars in spending for every $2.50 they get in taxes. Big deal?
Yes… You can imagine how long you could do that. It’s like earning $100,000 and spending $160,000. Do that once…maybe you could get away with it. Do that every year…?
And the feds are doing this when the economy is supposed to be growing at 3% to 4%. If it grows more slowly, or not at all, the deficit gets worse.
You’ll notice also that $1.5 trillion is about 10% of GDP. You’ll notice also – since we’re having such a good time with numbers – that if you keep adding 10% of GDP to the debt that pretty soon you have a lot more of it than you want.
That’s why we were so disappointed with Mr. Obama’s State of the Union address. He gave a false impression. He talked about “winning the future” and made it sound like it was just a matter of doing things better. Not so. Americans have to do things differently. They’ll never win the future this way.
They have to change the numbers. You can’t borrow 10% of GDP, year after year, with no end in sight, and still hope to have a healthy economy. You can’t expect to win the future that way. Let’s face it, that’s the way to be a big loser…
It took us 21/2 hours to drive home from work yesterday. We were lucky. Some people were stuck in the snow or the traffic all night.
The East Coast is getting hammered by snow. That’s what the news reports tell us. Here in Washington it seems like a normal winter.
But the drive last night was unusually difficult. We waited until 7 PM to leave the office. Most people were off the roads. It was snowing hard. The streetlights and the remaining Christmas decorations made Baltimore more beautiful than we’d ever seen it. A few people walked around. There were almost no cars moving. We figured we’d be able to take our F-150 and just cruise down I95 without any trouble.
Not that we have good traction. Without weight in the back, a pick-up truck is not particularly roadworthy in the snow. But you don’t need much traction on a flat road.
The trouble was that the snow had so slowed traffic that there were still drivers on the road who should have gotten home hours ago. They slipped. They slid. They wandered all over the road, trying to follow the tracks of the driver in front of them. There were too many of them.
We tried to stay away from other cars, but it was impossible. Soon, we were in the middle of them. And then, on Washington’s beltway, the traffic stopped all together. Drivers turned off their motors. Cleaned their windshields. Talked to their snow-locked neighbors. The atmosphere was almost gay and insouciant.
We turned off the highway and snaked our way through the back streets. The snow was higher. Power lines and trees were down. But we kept moving in the right direction.
It was hard driving. But it was remarkably pretty. Finally, we got home.
for The Daily Reckoning Australia
- Salt vs. Snowflakes
- Trust Funds Con
- Depending on the Landlord
- What’s Really in the Social Security Trust Fund?
- Investors Figure Jobs Picture Will Keep Fed from Raising Rates
An interview with Frank Holmes
For the BIG GOLD annual gold forecast survey published in January, Jeff Clark surveyed seven gold experts and nine top economists and fund managers, along with Doug Casey himself, to provide their best insight on what to expect in 2011 and how to invest.
One expert he interviewed was Frank Holmes, head of US Global Investors, which manages 13 no-load mutual funds, many of them recognized for consistently high performance by Lipper Fund Awards. Last year, Frank’s Gold & Precious Metals fund returned 36.8% – more than triple the Dow – and the World Precious Minerals fund gained 45.4%, outgunning the S&P almost four-fold.
Read on for Frank’s thoughts on gold and precious metals stocks…
BIG GOLD: Gold was up 30% in 2010; to what do you attribute its rise?
Frank Holmes: Investors have to look at gold demand as both the fear trade and the love trade. What most media focus on is the negativity of government policies to drive gold prices. I characterize this as the fear trade – deficit spending and negative real interest rates for the G7 countries.
More significant is the love trade – where more than 60% of the world’s population is in emerging countries averaging over 6% GPD growth and 8% rising personal income, and they believe in giving gold as a gift for birthdays, weddings, religious holidays, etc. This love trade is entrenched, and it is not going away.
Fears over the European debt crises were a big driver of gold in the first half of the year, as investors bought both gold and the dollar for safety. However, by mid-year, the dollar started to break down as smoldering budget woes in the US began to reignite concerns over the fiscal situation here.
Gold got a second lift by October as both the fear and love trade showed up together. We had the season of Diwali lights in India and we had QEII, so gold went to new highs. By year end almost all the gains made by the dollar were eroded away, while gold finished the year with a respectable rise of 29.5%.
BG: What forces will move gold this year? And what’s your price projection for 2011?
FH: US equity strategists are way too complacent and so are risk measures such as the VIX, which is back to pre-Lehman lows despite government debt levels at even higher levels. The broad view is that there will be no inflation in the US, as labor markets are slack, with 10% unemployment; however, rising commodity prices, which are controlled by international demand, will remain strong.
A second wild card will be whether the German public will go along with the “transfer society” concept. European woes are not over.
Third, US lawmakers will have a bitter potion to swallow, as the vote on raising the US debt ceiling will be a rallying point for the Tea Party this year. And if inflation, such as rising oil prices, starts to sap spending, wages in the US may have to rise, and then the cat would be out of the bag.
It’s been a great ten years for gold, which was fully justified due to the explosion in consumer credit and debt, but gold may still have a very important role to play going forward. I believe in the next five years the price of gold will double from current levels, and that means it has the potential to have a 15% annual compounded rate of return.
BG: How volatile do you expect gold to be?
FH: What is really key in understanding and managing expectations in the capital markets is that over any 12-month period, it is a non-event for gold to go plus or minus 15% in a year. This happens 68% of the time. The stocks of gold producers can go plus or minus 40% over any 12-month period, so they have greater risk but can also provide substantial returns. It is thus important to respect and look at volatility as an opportunity.
BG: Gold stocks as a group did not outperform gold in 2010 – does that change in 2011? And if the broader markets sell off, do gold stocks fall along with them or trade on their own?
FH: Actually, 2010 may have been a turning point, as major gold- producing companies, measured by the Gold Bugs Index (HUI), gained 34.1%. This hopefully has reversed the trend of the last couple years where bullion outperformed the stock. Junior gold mining companies, on average, returned roughly twice the gain of gold bullion, but some of those names were fairly silver rich, and we know how well silver did last year.
In the scenario of a market sell-off, gold stocks are still equities and can get pulled down with any surge towards liquidity. However, the price action since the 2008 credit crises showed us that gold stocks did very well for investors relative to the broader markets. In addition, while those of us in the gold business are very close to the story, there are a lot of people that are still coming around to investments in the precious metals sector.
When one looks at what has been some of the best-performing stocks over the last 10 years, gold and gold stocks may very well trade on their own as a preferred asset class.
BG: Silver was up 81.9% in 2010, but is still below its 1980 nominal high. What’s your outlook for silver in 2011?
FH: Silver may have gotten ahead of itself a bit. In the coin market, for instance, it is not uncommon to see certain gold coins sell for a 30% premium to the spot price, but in the last quarter we saw some collectable silver coins with asking prices as much as a 300% premium.
Silver does offer exceptional leverage to gold, almost 2 to 1. Right now, while it looks like the economy is getting stronger, silver could continue to benefit from a pick-up in industrial uses.
BG: What’s your best advice for precious metal investors in 2011?
FH: Investors should consider buying gold as insurance. We recommend having about 10% of their portfolio in gold and gold stocks, and rebalancing every year.
Two stocks that we like at current prices are Randgold (GOLD) and Silvercorp (SVM). Both companies focus on high-quality ore deposits that will be economic at prices substantially below current spot prices.
In Randgold’s case, their share price has fallen about 20% since the presidential elections in the Ivory Coast became locked in a stalemate. The company’s Tongon mine is their newest project and is currently being commissioned, but news flow has been slow and hasn’t drawn much attention. Look to see this issue resolved over the next couple of months.
Silvercorp is one of the few companies that has successfully navigated in China, and our models indicate there is much more upside available from these assets than where the stock is currently priced. SVM also has a very attractive relative valuation to its North American peers, where in some cases we have seen 5% of their market capitalization turn over fairly consistently everyday over the last month – those shareholders are obviously not around for the long term.
For Daily Reckoning Australia
Editor’s Notes: Jeff Clark is the editor of BIG GOLD, a Casey Research publication that pinpoints the safest ways to capitalize on the gold bull market. The next issue includes an interview with Doug Casey; learn what made Doug such a spectacularly successful gold investor, and where he sees gold and gold stocks going in the near future.
- Gold and Silver!
- Fear Is Cheap
- Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
- When People Fear Inflation or a Falling Dollar They Find Refuge in Gold
- Buying Before Main Street Catches Gold Fever Only Way to Play Trend
In today’s episode of “Flip That Bond”, the Primary Dealers succeeded in flipping a whopping 26% of the just auctioned off 1% of 1/25/2014 (912828PQ7) back to the Fed. Today’s POMO has closed with $7.720 billion in bonds maturing between 2013 and 2014 monetized by Sack Frost, of which, and this should come as no surprise to anyone, the bond most put back to the FRBNY, to the tune of $3.7 billion or 48% of all, was PQ7. Keep in mind that the PD take down in this bond was $14.2 billion. Just two weeks later the Primary Dealers have reduced their positions in this most recent auction by 26%. In other news, there is no monetization. And Tim Jeethner pays his taxes.
now I’ve been warning of a serious correction hitting the markets. Looking at
last week’s action it looks as though it’s begun. And it may very well prove to
be far greater than just a mere correction.
starters, the Emerging Markets (which have lead US stocks since the 2008 Crash)
have collapsed, breaking below the trendline that sustained them from their
all the insanity of the last two years… the Emerging Markets have never once
broken below this line before. Moreover, the fact that this line has held for
not a few months but 24+ indicates that breaking below this line was a MAJOR
last time the Emerging Markets broke below their multi-year trendline, things
got “interesting” really fast:
In light of
this, the fact the Emerging Markets have broken multi-year trend support now is
a MAJOR warning sign that we should all be on RED ALERT. Remember Emerging Markets
have lead the S&P 500 on EVERY MAJOR turn of the last four years.
definitely opens the door for a Crash similar to the one that hit in 2008
occurring. However, before we get there, we need to break initial support at
45. If we take that out, then we’ve got MAJOR support at 42.5. A break there
would mean we’re not just having your garden variety 10% correction. And if we
take out 37.5… WATCH OUT.
terms, the Emerging Market space could rapidly turn into a bloodbath for the
markets (in Egypt and other places it’s already a literal bloodbath). So be on
watch for these support lines.
major item to watch for is the US Dollar. Earlier last week the US currency
broke below CRITICAL support at 78. The Dollar is now trying to reclaim this
line, which it NEEDS to do if the US currency is not set to enter a MAJOR
inflationary (and potentially HYPER-inflationary) collapse within the next
As you can
see, if the US Dollar DOESN’T reclaim 78 NOW, it’s but a mere few ticks away
from taking out its MULTI-year trendline. This would be absolutely DISASTROUS
for the US currency and would mean the world is heading into an inflationary
collapse (markets AND the US Dollar drop) as opposed to another round of
deflation (the US Dollar rallies while “risk” assets such as stocks fall).
could very well be on the verge of one of two MAJOR Crisis:
inflationary death spiral.
round of Deflation similar to that of 2008.
out the lines for determining which one of these it is. But either way it’s
time to buckle up and start preparing for what could be a REALLY rough time in
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