Here is a free preview of the June issue of the Contrarian Market View Newsletter, May issue. (Due to the format limitations of a blog, the actual newsletter is better looking.)
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June, 2010 H. L. Quist's Contrarian Market View Newsletter
This June edition of CMV is critical because your author is forecasting a major cyclical change in the economy going forward. Since January CMV has forecasted a Pro-growth, asset inflation based economy and a Bullish outlook. Up to May this picture has remained intact with equity and commodity prices providing positive returns and precious metals enjoying exceptional double-digit returns. Despite a slight increase in interest rates our three long bond recommendations all exhibited positive returns. Real Estate seemed to be turning the corner as our recommended REIT was up 17% YTD and the Empire Residential Opportunity Fund, LLC, private placement was meeting its forecast.
That picture has now changed. A Market decline that could test the 2009 lows is a distinct possibility. Why?
1. The Greek Tragedy:
The unexpected awareness that Greece was about to default on its' sovereign debt owed to global banks, made the rest of the world painfully aware that all was not well in Euroland. Fear that four other EU members (Portugal, Ireland, Italy and Spain) were all in the same boat (Titanic II) unnerved the capital markets. Greece, the worst of the lot (which should never have been admitted to the EU), has government debt which is 124% of the country's GDP. The US is now at a 90% ratio to GDP which is a signal of future declining economic growth. More detail is discussed below but the lesson to be learned (but won't be) here is that any welfare state dominated by public unions, onerous regulations, a growing government bureaucracy, high taxes and political allocation of capital is doomed to fail. The PIIGS ‘R' US.
2. Chinese Checkers:
Most of us played the game as kids. It was easy until you lost your marbles. The Chinese had an easy game also. They manufactured cheap goods, sold them all over the world and built up fat profits and reserves. Trouble is they had their own version of the Greenspan Plan — cheap easy credit that created a speculative bubble that has now burst. The Shanghai stock market is down almost 30% YTD and their real estate bubble has also burst. China is the number one customer for EU goods. A contraction in China would further impair EU growth.
3. The Flash Crash:
On May 9,2010, CMV issued a SPECIAL BULLETIN in response to the Flash Crash suggesting to Conservative investors that they raise cash (Bonds) 80% (#1) and retain 20% in Gold & Silver (#5) and other suggestions based upon our Risk Tolerance Model. At this point the crash was an unexplained glitch and the economic fundamentals hadn't significantly changed. By May 18th, however, the equity markets penetrated the lows of the Flash Crash and it was evident to CMV that a major change was in the wind. CMV issued another SPECIAL BULLETIN on May 18th that suggested that all investors go to a minimum of 50% cash in Sectors #2 and #3 and hold on Hard Assets (#4), Precious Metals (#5), Commodities (#6), Real Estate (#7) and Special Situations (#8).
Based upon fundamental and technical data as of May 30th, CMV concluded that there is a high degree of probability that signs of Disinflation are evident which could precipitate a major market reversal beyond a 10% to 20% correction.
Is The Pro-Growth / Inflation Trade Over?
For those of you who follow The Myth Buster on Internet Radio (Gabcast) you're familiar with the "Inflation Jeannie" who (anthropomorphically) is a dead ringer for Barbara Eden from the 60s sitcom "I Dream of Jeannie" who escapes the narrow confines of her bottle at the command of her Master.
On the April 26, 2010 broadcast the evidence that Jeannie had escaped from her bottle was evident everywhere. The March Producer Price Index (PPI) had a dramatic 1.4% increase. Food prices were up year over year — Vegetables 56%, Fruits & Melons 29%, Eggs 34% and so on. Oil was up 120%, Lumber 59% and Rubber 74%. The signs of an Inflationary Trend were conspicuous. Suddenly, however, Jeannie disappeared. What happened? The Myth Buster suggested on a May 25th YouTube video that the "Deflation Devil" may have kidnaped Jeannie. Lo and behold, CMV has discovered that this seemingly odd couple who are as divergent as fire and ice have Hooked Up! Could there be such a phenomenon as an Inflationary Depression? A strange occurrence but let's look at what is happening.
The Greeks started it all in May when the country was faced with a default on its sovereign debt. Suddenly the global recovery was in question. And, the prospect of a debt default in additional Euroland countries (PIIGS — Portugal, Italy, Ireland, Greece and Spain) created a crisis of liquidity and confidence. The perception that the global economic recovery was over became the theme and Deflation became the focus. The International Monetary Fund (IMF) (to which US taxpayers contribute 17% of the capital) and the European Central Bank created a one trillion dollar bailout package to stem the crisis. The real Greek tragedy however, is that this play is written to fail. Loans made by the German and French banks to the PIIGS exceed their total capital. Once the contagion spreads to the other PIIS the European Union and the Euro are TOAST.
Like a playwrite, the Banksters and the politicians know the tragic end of this drama. They have scripted the bailout to fail. Why? The goal is a one world government and a one world currency — the WOCU. The coming financial panic and crash of the USD and Euro will usher in a cleverly-crafted script that will roll up all of the US and Euroland debt and turn the last act to FARCE.
Remarkably, within a month the US economy has seemingly reversed from a pro-growth, asset inflation trade to a ‘double-dip' Deflationary contraction. On May 22nd the DJIA fell 376 points or 3.6% as the "Smart Money" (hedge funds and traders) began unwinding highly leveraged trading strategies. (2008 revisited?) Commodities were hit hard as oil was off 2.7% and gold also took a similar drop as fear again emerged. Investors took profits and raised cash. Reflecting the perception of deflation the 10 year T-Note yield dropped to 3.26% — a 60 basis decline from its recent high yield. On May 20th, a lead article in the Wall St. Journal headlined, "INFLATION AT 44-YEAR LOW" which cited that consumer prices had increased only 0.9% in April. In the same issue, however, the WSJ reported that beef prices were up 14% to 32% and cotton prices rose 70% in the past year which would soon be reflected in apparel prices. A mixed bag of "flations" for sure.
The strongest evidence that the US is in a calm before the storm comes in the form of the US money supply growth and the velocity (turnover) of money. The Federal Reserve discontinued a public release of M3 (a broad range of money in circulation) five years ago to obscure transparency. British and European monetarists however, have continued to track the numbers and the stock of money in the US has dropped 9.6% in the three months ending in April 2010. Tom Congdon, a Professor from International Monetary Research said, "It's frightening. The plunge in M3 has no precedent since the Great Depression." Why is this occurring when the Keynesians in Washington are deficit spending like crazy to simulate the economy? (And buy votes.) The FDIC is pressuring banks to raise capital asset ratios and shrink their risk assets by not making new loans. Absent bank lending to small businesses and real estate, the recovery will fail.
Back to the improbable "hook up" between the Inflation vixen Jeannie and the dastardly devil Deflation. Is there such a beast as an INFLATIONARY DEPRESSION? Yes! As the economy slows in the US during the second half of 2010 toward the mid-term elections, disinflation will alarm consumers, investors and the politicians who are in the majority. To counter the sudden trend change, the Fed, the US Treasury and the Keynesian-Controlled Congress will resort to creating more fiat currency and deficit spending and potentially mandate bank lending that will cause inflation and the prospect for hyper-inflation. Once the American public losses confidence in the value of its currency, the game is over. The Devaluation of the US Dollar will make almost all goods and services more expensive — thus Inflation. CMV forecasts a +50% probability that this scenario will unfold within the next year.
The Precious Metals Group
This sector has emerged as a focal point for a number of reasons, therefore warrants special consideration in this issue.
On May 18, 2010, CMV sent out a SPECIAL BULLETIN which issued a SELL recommendation on GLD and SLV — the gold and silver ETFs. As previously documented in prior issues, CMV is deeply concerned that these two ETFs trusteed by J. P. Morgan Chase and HSBC banks could conceivably NOT have 100% of the gold and silver bullion backing the outstanding shares. IF that ultimately proves to be true, the spot price of both gold and silver could increase significantly but the shares of GLD and SLV may not appreciate correspondingly. Rather than assume an additional risk that, at this point, is difficult to assess, CMV felt the best course of action is to replace these two ETFs with new shares that represent that they have 100% of the bullion. The results in the Portfolio on May 19, 2010 were as follows:
Sales Price/Share Profit/Loss YTD
GLD $119.49 11.35%
SLV 18.57 12.27%
CMV recommended new positions in PHYS (Sprott Physical Gold Trust) which was at $11.96/share on May 19, 2010. Sprott recently announced that they raised $243 million through an offering in order to purchase more bullion. The offering was dilutive to existing shareholders and the stock declined about 10%
CMV also recommended SGOL ETFs Gold Trust which is also the Trustee for PPLT and PALL on our list. (Go to www.etfsecurities.com). It was added to the CMV portfolio at $121.80/share. These shares track the spot price of the underlying metal, the shares are 100% backed by gold bullion, the bullion is stored in Switzerland and the holdings are audited twice a year. ETFs also offers silver shares SIVR and CMV has added it to the portfolio at $17.00 / share.
In order to get a grasp of the magnitude of the greatest financial scam not yet exposed, go to Adrian Douglas' www.marketforceanalysis.com and read LMBA OTC Market "Alchemists" Turn Paper Into Gold. The LMBA is the London Bullion Marketing Association which is the largest bullion exchange in the world. Douglas reports that LMBA's website shows that a net of 20 million ounces of gold are sold every day which translates to an equivalent of 25% of the annual global gold production changing hands on the LMBA each day or $5.7 trillion per year.
Bottom line — that amount of gold simply doesn't exist! With demand skyrocketing in Euroland with citizen's trading the sinking Euro for bullion and millions of Chinese hoarding the shinny metal, demand far outstrips supply. Douglas estimates that 50,000 tonnes of gold has been sold that doesn't exist and there's anecdotal evidence that LMBA is offering large premiums of cash in lieu of bullion for settlement of future contracts. Enough said?
In 1980 Au (Gold) was worth $800/oz. The DOW Jones Industrial Average was near 800 and the Au/DJIA ratio was one to one. The DOW enjoyed a ratio of 40:1 in 2000 over gold when paper (.com) assets were the most valuable. Today the ratio is 8.5:1 and some experts are forecasting that the ratio will soon return to 1:1 with Au and the DJIA at 5000. Think about that as people throughout the world are losing confidence in their fiat currency and paper assets.
CMV has consistently taken the position since its' first issue in January that the commercial and residential real estate markets would improve as the overall economy exhibited positive growth. The Wall St. Journal, in a May 19, 2010 feature article, "Home Prices projected to begin Rebound in 2011," cited a survey of 92 economists completed by MacroMarkets LLC. Despite a very wide divergence in five year projections in price increases from a high of 37% to a decline of 18%, the consensus was a 12% increase by 2014. The very next day (May 20th) the WSJ ran another feature article that indicated that 14% of mortgage loans were delinquent or in foreclosure process as of March 31, 2010, but that didn't include about 2.6 million households that were 90 days or more past due but weren't in the foreclosure process. The first article will elicit optimism, the second, a decidedly pessimistic view as more foreclosures would come on the market. CMV's observation is that neither of these reports takes into consideration a weakening economy and more job losses.
The commercial real estate market, at least in the Phoenix Metropolitan area, represents a more ominous picture. A feature article that appeared in the May 30, 2010 Arizona Republic entitled "Brokers Project Cascade of Failure" featured prominent Real Estate professionals who maintain that both commercial lenders and borrowers are continuing "to live a lie" by refusing to respond to billions of dollars of bad loans. They call this approach to the problem as "Extend and Pretend" which means lenders continue to renew the delinquent loans in hopes that the market will improve. Banks do not want the property back because "They don't want to sell it for $.25 on the dollar," one Broker said.
The Metro-Phoenix vacancy rates have climbed to 12% and the average rent has dropped to $16.61/sq. ft.. The article said that 25% of the existing loans are doomed to foreclosure and another 50% could go either way. Again, this outlook is ‘considering' an improving economy. If CMV's current assessment of a second recession is correct, this market will worsen and property values will decline significantly. CMV recommends a Sell on all shares of the Vanguard REIT (VNQ) which locks in a gain of 10.66%.
The Coming Break-Up of the United States?
While all the angst and turmoil has been focused on Arizona's Senate Bill 1070, racial profiling and amnesty, there's a much larger issue at stake in the immigration debate. Let's look at a historical perspective that most readers won't have in focus.
There are various anti-American Irredentists groups (Mexican) that are strongly advocating the return of Southwestern lands (including a portion of Arizona) unjustly taken by the US after the Mexican-American War.
The following summary of these anti-American groups is taken from Allan Wall's website VDARE.com. Wall is an American citizen living legally in Mexico and is married to a Mexican citizen.
Reconquista: Calls for the formal return of Mexico's lost territories to Mexico. As early as 1982 a Mexican columnist, Carlos Loret de Mola, visiting Los Angeles (even then) saw massive emigration as an opportunity for re-conquest. He wrote a column entitled "The Great Invasion: Mexico Recovers Its Own." By shear demographics de Mola believed Mexicans would control the Southwestern US.
Aztlán: Chicano activists living in the US created this movement. The Chicanos believe that Aztlán was the homeland of the Aztec people but there's no consensus over where Aztlán was located. The activists claim that their origins can be traced linguistically to various American Indian tribes but at least one Mexican archaeologist believes Aztlán was in Central Mexico in the state of Nayarit. The principal organization teaching the Aztlán doctrine is MECH a or Movimiento Estudiantil de Chicanos de Aztlán. They strongly believe that it's their destiny to reclaim the territories of their forefathers taken by "the Brutal ‘gringo' invasion." The Mayor of Los Angeles, Antonio Villariagosa is a Mechista. One could argue that the Mayor has already achieved the Mechista's goal.
Rebubulica del Norte: This movement which advocates the break-up of the US is the creation of the University of New Mexico Chicano Studies Professor Charles Truxillo. He wants the Southwest to secede from the US and form the Republica del Norte with its capital in Los Angeles. This probability is not as far-fetched as you may think. There is presently a bill in Congress to grant indigenous Hawaiians their own territory. And, the Virgin Islands are an "insular" territory of the US which has self-rule but the islanders are US citizens.
Why is this important to CMV? Your author has an ability to see mega-trends that could effect all aspects of our lives. It is our view that there is emerging a convergence of a major economic crisis with the above immigration/reconquista issue which could have dramatic political, social and economic ramifications for our city, state and our country.
Politically, the right and left are becoming polarized over this issue — particularly in Arizona and the Southwest. Watch the recent YouTube video where the Deputies in Maricopa County Sheriff's Office told Mayor Phil Gordon (who favors a "Sanctuary City"), to "Shut up and don't call us racists!" There is an inevitable ugly and violent confrontation ahead unless reason and debate intercede. What most Arizonans don't know is that Gov. Jan Brewer has also signed HB2281 which bans ethnic studies in Arizona schools that are race-based, radical, separatist or revolutionary and promote the overthrow of the US which Wall asserts on his website.
Financially, the cost of welfare, food stamps, school lunches, medical, education, border control and imprisonment for illegal aliens is bankrupting states and the country. One estimate indicates that the cost is $338 billion per year. The problem is certain to become more acute as the states and the US enters a second recession.
The above figure is not adjusted for the estimated $428 billion paid by illegal immigrants in various taxes and purchase of goods - GDP. Since the numbers of either side of the issue can't be accurately verified, states and the US will look to the economic impact of laws like SB1070 either through enforcement or reaction to the laws.
The convergence of these two issues will in CMV's opinion occur within a year. Incidentally, CMV has read SB1070 in its entirety, as everyone should.
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-- H. L. Quist
SEE ALSO, my youtube video on the Deflation Devil on the side bar.