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Below is a preview of the CMV (Contrarian Market View) Newsletter for May , 2011. See the end of this post for a free book offer with the purchase of a subscription to the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)
The comparative YTD results for April, 2011 were as follows:
The CMV Portfolio + 7.63%*
Dow Jones Industrial Avg. + 10.65%
S&P 500 + 8.43%
NASDAQ Composite + 8.32%
* Realized gains in Silver and Gold shares in April are not reflected in this number.
To QE or not to QE? That is the question! Ben Bernanke’s soliloquy didn’t match the life-defining decision of Hamlet, but the immediate economic and career-defining significance of Ben’s June decision was eagerly awaited by an anxious audience on Wednesday, April 27th. The Shakespearean-looking Ben Bernanke said QE 3 will not follow QE2.
CMV, cutting through all the theatrics, poses a simple question. With the FY 2011 deficit of $1.5 trillion and the US Treasury requiring $5 billion a day in new money to keep the lights on at the Capitol, who, in the absence of the Fed creating $600 billion in six months, out of thin air, will step up and buy $900 billion or more of the bills, notes and bonds this year? And, what about that portion of the existing $14 trillion debt that has to be rolled over when the buyers elect not to renew? Certainly it won’t be the BRICS - Brazil, Russia, India, China and South Africa. They’re busy forming and funding reserves for the Shanghai Co-Operation Organisation that will not only compete with the world’s reserve currency (the USD) it intends to replace it. As a piece issued by the Daily Bell on April 9, 2011 stated, the Alliance of the BRICS:
“...has been watching the death throes of the American empire and is reacting by creating the groundwork for a post-American global construct. Following the recent BRICS summit on Hainan island in China, Brazilian Finance Minister Guido Mantega told the International Monetary Fund in Washington that the United States and other western countries were attempting to “export their way out of difficult economic situations” by printing money and driving down interest rates– which is the core principle of quantitative easing. It was clear that Mantega was speaking for the other BRICS nations in warning Washington that business as usual is approaching an end.”
A well-worn device utilized by the Fed and the Treasury could also run into a wall. To demonstrate to the world that the US Treasury has a plethora of suitors, a bond buyer bids at the Treasury auction and a sale is recorded and publicized. Three days later, the Treasury or the Fed repurchases the debt from the buyer under a pre-arranged Re-Po agreement. How long can this charade continue on the massive scale of financing and re-financing required? And, who would want to take on the ever-increasing risk with such a meager return? And, Mr. Bernanke assured us that interest rates will decline at the end of QE 2. We don’t have long to wait to find out how this tragedy ends. Hamlet, to those who don’t recall, met his demise in Act IV.
The US stock market discounting the “Perfect Storm” has rallied at the end of the First Quarter on positive earnings news provided by (in large part) QE 2. As of April 25, 2011, of the 137 companies in the S&P 500 who have reported earnings for the first quarter to date, 75% have exceeded their forecasts. According to Thomson Reuters, only 17% of their list of companies that have reported missed their targets. Early results indicate that higher raw material costs have yet to eat into earnings at this point. The VIX which measures market volatility reached a 52 week low of 14.30 on the index which usually indicates that the market could be poised for a major move. Unexpectedly, the initial estimate for the First Quarter GDP came in at 1.8% whereas 3% plus was anticipated. Also disturbing was the uptick in unemployment claims when most analysts expected a continued drop. The question is which way will the market move? A solid case can be made for north as well as south. Here’s what the experts say:
(Taken from Barron’s Mid-Year Big Money Poll)
Investment Outlook Through Year-End 2011
Very Bullish 2%
Very Bearish 1%
What Is The Major Risk To The US Economy?
None of These 15%
What Will Be The GDP Growth This Year?
What Will Be The 10 Year Bond Yield At Years End?
All told this consensus of BIG MONEY fund managers forecasts a favorable environment for equities and a seemingly nonplused concern about:
1. The S&P downgrade of US Sovereign debt from “Stable” to “Negative.”
2. The absence of buyers for US debt (see page 1).
3. The move away from the US dollar as the world’s reserve currency (see page 1).
4. Japan’s critical need to repatriate dollars for yen to rebuild their country. (They own $886 billion in US debt).
5. The rapid rise in the real inflation rate far exceeding the official Bureau of Labor Statistics Consumer Price Index (CPI) of 2.1% and the prospect of severe inflation or hyper-inflation.
6. The prospect that there will not be a meaningful cut in the federal deficit.
7. The acceleration of chaos in the Mid-East, a disruption of oil production and gas prices reaching up to $5 / gallon this year.
8. Greece’s inevitable default (see page 5) and an EU monetary crisis.
9. The recent suggested alignment of Afghanistan with Pakistan and its Chinese ally which is intended to oust the US from Afghanistan prior to the scheduled 2014 date. Now that the US has found and executed the mastermind of 9-11, we should pack our bags and leave. NOW!
CMV envisions a confluence of many of these events within the next twelve months. What is an unsustainable trend must end. The question is, how and when?
The Fed’s Credibility Gap
Ben Bernanke’s press conference on Wednesday, April 27th, was as unprecedented as it was disingenuous.
The Fed Chairman said that the Federal Reserve will phase out its’ controversial program of pumping money into the financial system in June completing its’ $600 billion bond-buying program and would maintain its’ unprecedented microscopic interest rates for an undetermined period. Bernanke’s critics, CMV amongst them, weren’t impressed by the Chairman’s remarks because he failed to address when the Fed would tighten monetary policy in order to fight inflation that now, more than ever, is impacting manufacturers and consumers.
It appears that the Fed is more concerned about creating jobs than combating inflation. Never in its near 100 year history has creating jobs been a core of the Fed’s mission statement but it fits with the Administration’s populist rhetoric. Bernanke said inflation was ‘transitory’ and rising gas prices were merely the result of growing global demand and potential disruption of the supply of oil in the Mid-East. That’s where Mr. Bernanke becomes a tad disingenuous. Why? The Fed’s ultra-expansive monetary policy has triggered a massive sell-off in the US dollar and directly caused a rapid rise in not only oil and gas prices but an explosion of all commodity prices. As CMV has reported ad nauseam, the USD is (presently) the world’s reserve currency and all commodities are priced in US dollars. When the dollar loses value, it takes more greenbacks to buy the commodity. Mr. Bernanke should look in the mirror as one of America’s most famous philosophers (Pogo) did when he concluded, “We have seen the enemy, and he is us.”
Mr. B added mightily to his credibility gap when he and Treasury Secretary Tim Geithner said in unison, “Our policy has been and will always be...that a strong dollar is in our interests as a country.” The USD crashed to 73.12, a new low on this outrageous proclamation. As Mr. B was speaking, the price of gold and silver took off like a rocket demonstrating the market’s conviction that the Chairman’s credibility was “suspect.” As the WSJ states, “One mystery is how Mr. Bernanke can take credit for a rising stock market while saying the Fed has nothing to do with rising commodity and other asset prices.”
The Defining Moment – Haves vs. Have Nots
When Paul Ryan (R-WI) produced his budget to solve the fiscal crisis he was reported to have said:
”This is a defining moment.”
And, the battle for America’s financial future has been joined and the rules of engagement have been posted. In response to Ryan’s proposal, it was expected that the President would offer an outline of his views on spending and deficits. Instead, as penned by Daniel Henninger in the April 14, 2011 edition of the WSJ, what the President delivered “was an invitation to the gunfight at the OK Corral.” (Who is Wyatt Earp?)
The Ryan-GOP budget core goal is to reduce spending to 20% of the GDP. President Obama has targeted federal spending at 24% of GDP. When you realize that our nation’s output is at $14 trillion, a 4% spread is a ton of money, and guarantees a trillion dollar deficit for as long as the eye can see. As Henniger says, “Inside those four points, you can define and decide the nation’s future.” He’s referring to the future of Federal spending, the future of entitlement programs and the future of taxes. Our future.
The President’s cry to raise taxes on the rich resonates loudly with those who believe any family with joint income over $250,000 is rich. The unspoken reality is that this group could pay 100% of their income over a quarter of a million in taxes and it wouldn’t come close to curing the deficit. The individual income tax brought in 7-8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92% and 8% of the GDP in 1993 to 1996 when the top rate was 39.6%. The President wrongly believes and defies history when he figures that raising taxes on the rich would significantly increase the tax take and reduce the deficit. Franklin Roosevelt raised taxes to 70% on the rich during the Great Depression which was largely responsible for causing a second depression within the depression in 1936. Individual taxes have consistently remained in the 8% of GDP range but demagoging the mythical rich is a populist theme that garners votes from the masses.
The bottom line? The way to raise tax revenue going forward is to raise the real GDP. Government spending and increased taxes won’t do it. Free enterprise and less government will.
The reality? The bond market will refuse to fund the Obama budget. The net interest cost to service the Federal debt will exceed all the estimates and create catastrophic results.
The Vanishing Dollar
The March, 2009 low for the Dow Jones Industrial Average (DJIA) was 6,440 down from a high of 14,198 in October 2007. Currently it stands at about 12,400 and in “unadjusted” terms, the Dow has rebounded a smart 92% from the March 2009 low.
Before you make a toast to your good fortune and savvy, what if someone told you that your “real gain” was only 19.6%?
Larry Edelson’s April 14, 2011 edition of Uncommon Wisdom (firstname.lastname@example.org) lays out effectively how the persistent devaluation of the US dollar erodes value when measured against real money – Gold. This is a critical exercise because you presently have and will continue to experience the loss of purchasing power going forward in all the goods and services you buy.
Suppose that at the end of 2001 you had (theoretically) invested $10,000 in the DOW which was equal to 10,000 on the DJIA. Gold was approximately $263/oz at that time. $10,000 would have purchased about 38 oz of gold bullion. At the end of 2007 when the DOW was close to its’ all-time high of 14,000, its’ equivalent in dollars would have purchased about 13 oz of gold. At the March 9, 2009 low at the bottom of the crash your investment would have purchased only 7 oz of gold since bullion had almost tripled and the DOW had crashed 50%. (In 1980 there was a 1X1 ratio. Both the DOW and Gold were 850.)
Theoretically today your $10,000 investment in 2001, in DOW terms, is worth $12,400 – a 10-year gain of about 24% – and up a seemingly robust 92% from the March 9th low. Observe however, what the dollar has lost in purchasing power. The DOW at 12,400 will only buy the same amount of gold in ounces as it did when the DOW was almost 6,000 points in dollars higher than it was in March, 2009. In “real money” terms, your gain since the market low in 2009 has only been 19.6%, when the value of real money has doubled to $1500/oz. The DOW will only buy 6.7 oz of Gold at present.
Assessing real estate values in terms of real money is equally as dramatic. At the market high in March, 2007 the median home price was $262,000 equivalent to 346 oz of gold. Today’s median price is $156,000 and in nominal terms has lost 40% of its value. However, in terms of real money the median home price has fallen 69%!
People often say, “What difference does it make if the dollar is devaluing?” Now you know the answer. Now you know why it takes so many more dollars to buy gasoline, groceries and all the stuff you need to live. Gold is not only a hedge against your loss of purchasing power, it is “real money.”
The Big Fat Greek Default
(The Wedding Is Over)
(The Wedding Is Over)
It has been a year since the financial travails of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) aroused the awareness of the world. A bailout was arranged by the EU and IMF at the eleventh hour to avoid default and the angst subsided – for the moment.
What has elapsed since has been ignored by the media but bears mention here for the significance of the aftermath. The problem is not Greece’s solvency but its’ governance or, lack of it. Takis Michas, the international secretary for Greece’s new Centrist-Liberal party (the Democratic Alliance) writes in an op-ed piece in the WSJ:
“The country is at the mercy of militant activists who are inspired by the various factions of the hard left. The heaviest hitters are Greece’s Communist Party and the Anarcho-Stalinist Coalition of the Radical Left ... their followers have taken to harassing citizens and destroying public property – even taking over whole villages ... The real Greek disease is the contempt for the law and the political failure to combat it.”
Greece, the birthplace of democracy and the ancient model for world governance, is on the verge of collapse. The government workers refuse to participate in an “austerity” program so Greece can reduce its’ deficit and stabilize its society.
The lesson to be learned by Americans is that these mobs number only 13% of the population but as Michas says, “The problem, rather, lies with the political and ideological passivity of the parties that do represent Greece’s broader middle class.” Mobocracy is spreading throughout the globe. The blight has already infected America and its’ goal is to preserve their entitlements without regard to fiscal reality. If we remain the passive silent majority, the radical left will destroy America as we knew it and ironically, they will lose the most.
ROUND TABLE APRIL 29th, 2011
On April 29, 2011 “Face Off On The Future,” a round-table discussion was held at Gainey Ranch and almost 100 people attended this event. The principal speakers were Elliott D. Pollack, the well-known economist and CEO of his own economic and real estate consulting firm in Scottsdale, Arizona, Fletcher Wilcox, V.P. of Business Development for Grand Canyon Title Agency, Inc., in Phoenix, Arizona and H. L. Quist, the author of CMV and expert in boom and bust economic cycles.
Mr. Pollack gave a very effective snapshot of the national as well as the Arizona economy. His command of the numbers backed up with power-point graphs was enlightening. He said, “You might not like what I’m going to say but the hard data supports what I’m about to say.” The most revealing conclusion that Elliot noted as far as Arizona is concerned is that “no one is showing up.” After the recessions in 1980-82, 1990-92 and 2001-02, the Arizona economy recovered quickly, largely due to the fact that Phoenix and Arizona had a significant increase in net population and growth. Mr. Pollack used the well-worn phrase, jokingly, “It’s different this time.” Go to:
www. arizonaeconomy.com which should have his entire presentation on his website this week.
Fletcher Wilcox is a numbers guy and he had all the recent real estate stats that revealed that residential sales hit 10,000 in March. The following is from the introduction of his presentation.
For only the fourth time ever in a month residential sales were over 10,000 this March. The three other months of sales over 10,000 were June 2004, June 2005 and August 2005.
Single family detached sales were 8,350 or 84% of the 10,000 sales. Seventy-seven percent of all single family sales were under $200,000. Single family sales under $50,000 were 862 with 90% purchased with cash.
Overall, 46% of the single family sales were purchased with cash, 26% with a conventional loan, 23% with an FHA loan, 4% VA loan, and 2% with other financing.
Phoenix led all cities with 2,024 sales. This was a 19% increase in sales over March 2010. The cities with the highest percentage increase in sales in March 2011 over March 2010 were San Tan Valley with a 66% increase, Tempe at 39% and Maricopa at 38%.
When combining all residential sales 43% were lender-owned sales (REOs), 19% were short sales and 38% categorized were neither a short sale nor a lender-owned sale, though many of the sales in the other category were recent lender-owned sales that were fixed and flipped.
The single family rental market remained hot with a 1.5 month supply of single family rentals in Greater Phoenix.
You can reach Fletcher at: email@example.com
H. L. Quist exposed the Federal Reserve’s “credibility gap” expanding on Ben Bernanke’s first press conference. Most of the “gap” is noted in this issue of CMV. The Myth Buster reminded the attendees that even in an “End of America As We Knew It” scenario, there is always opportunity. Two young entrepreneurs in California raised $100,000 in 2006-2007 and shorted sub-prime debt. They walked away with $10 million dollars when 98% of all investors were wringing their hands. A CONTRARIAN MARKET VIEW can be very rewarding.
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-- H. L. Quist