Security – Oh Me - Oh My - Oh
Apologies for the lateness in this week’s report – as I’ve been in Chicago moving my son – and watching the premier of his first short film – called ‘Cadence’ – look for it on YouTube if you will!
This week the economic reports began to give us a clear view of what happens when your stimulus injections wear off. It’s no different than a heroin junkie – in the beginning a little goes a long way, but in the end even A LOT only goes a little way. And along comes ‘Rehab.’ That is indeed where we are right now in the economy.
- It wasn't just the $800 B in bail outs for the Banksters run amok.
- It wasn't only the $878 B in pure Stimulus.
- It wasn't just the $1 T in Treasury bills/notes that The Fed has had to buy.
- It wasn't only the toxic assets that The Fed has had to soak up.
- It wasn’t just the tax breaks to buy houses, or even cash for clunkers.
- It was ALL OF THE ABOVE and then some – and NOW the hangover is rearing it's head.
And then there is the issue of jobs. With Friday’s Non-Farm Payroll’s report we found out that there’s basically no hiring going on in the country! Instead of the 155K jobs they were expecting we got 54,000. Of those, 62,000 new hires were by McDonalds. But wait – it gets better – this month the ‘birth/death’ model said that 206,000 jobs were created by people starting their own business (just a made-up number). So from the 54k jobs – we subtract 62,000 ‘Do you want fries with that’ – and another 206,000 ‘fantasy job creations’ – and we really LOST 214,000 really GOOD jobs!
Add to that:
- The latest business survey suggested 62% are not hiring or expanding,
- The ISM manufacturing survey took it's biggest downward hit in years,
- Greece is folding like a cheap card table,
- Housing prices are plummeting and financing is really hard to come by,
- And Moody's is suggesting it might have to "put the US on review" if we don't move quickly to raise the debt ceiling.
In so far as ‘Quantitative Easing’ (QE) is concerned → The Fed has purchased roughly $1.5 T of Treasuries in the past 10 months. Now, if The Fed doesn’t buy our notes – our interest rates will need to rise substantially to entice others to buy ‘devaluing’ dollars. And if we can’t sell homes with 4% mortgages, we’ll never sell them at 7%. Now – would rising rates cause things to improve? Well YES is the answer – but it would take a couple of years as people returned to SAVING money if there was the return to be gained there. This would create a large pool of real dollars to borrow from, and we could then start expanding the way economics are supposed to work. But in the short term there would be an Economic Disaster – and what politician is going to promise that to his people? So, QE MUST continue (in some form) because no one wants to face the pain of “Mopping up that Mess in Aisle 4” – while they continue to whistle past the graveyard, hoping that something is going to catch on and life will be fine. Potential outcomes:
- Hyper inflation = probable,
- Deflationary spiral = possible,
- Stagflation = already here!
The Ben Bernanke knows we're on the verge of a depression. He also knows the people that make him who he is, the banking families - need to be made whole and rich. But there is the other side – there are ‘good people’ out there that (in normal times) would never consider sticking up a bank, might very well do so when their personal economic situation comes to a point where they see everything as hopeless. Well I spent this weekend in Chicago shops – and a visible level of increased store security. My son noticed it – and as I began to dig a little deeper, I found headline after headline of material crimes being committed with those being caught having had stellar backgrounds. The U.S. currently has 44 million on food stamps. What happens if this program ends as more and more social programs get cut? We’re beginning to see more and more criminal elements such as train derailments where people steal the tracks to melt them down for scrap. More high-end boats were stolen last month than ever before. “Home invasions” are on the dramatic increase, and many are beginning to fear a new level of soaring, violent crime.
I personally have not stopped buying gold. Many people think it's run is over; however, it’s run will only be OVER when our monetary policy will be grounded in reality – and that won’t be for a least several years.
If you look around the world, there’s a lot of evidence that global markets are receding. In the US, the market has risen in the face of what can only be aptly described as The Bernanke Put option. People naturally figure that if the market ‘blows-up’ – The Ben Bernanke will simply rush in and rescue it! But now what’s next? Of course QE will continue – but here’s where the ‘heroin junkie’ analogy gets interesting. Right now the Fed owns enough mortgages and treasuries that as they mature, they could conceivably put $600 B back into the system without printing more money. But just reinvesting into maturing assets isn't going to increase GDP, so The Ben Bernanke will need to come up with some other absurd plan to get more money into the Banker’s hands.
Now we’ve peeled off a little over 600 DOW points from the May first highs. Need I remind you of our letter on May 8th stating that the market ‘feels heavy’ and we were looking for a ‘rug pull.’
Frankly the word I use is fear. I've been afraid to short. The fact is some very good traders began shorting the market – “Sell in May and Go Away.” Now we've crashed through the 50-day moving averages AND the 100-day on the DOW and the S&P. Technically this is "Bad". The biggest support any market has is the 200-day moving average, and that’s still 600 points below on the DOW and 50 or so on the S&P. Are we actually going to go down and test this area? Good question given in the wings is Ben Bernanke and his darn POMO money – and his possible announcement of QE-3. If I had to guess I'd bet on a bounce Monday into Tuesday, but then a resumption of the slide lower. I'd continue to use the big index's for liquid trading like the SPY, and DIA's for bounces and the inverse ETF's like the DXD and SDS of those same vehicles to "short it". But on either side of the trade I'd sure be cautious and "quick to take profits"
Not much has changed actually:
Our long holds still look like: SLV, NG, AAU, DNN, AVL, SLW, SQM and USSIF.
We continued nibbling with small positions on SLV, SLW, GLD – and continue to purchase physical silver and gold with the profits on these short-term holds. Please be safe out there!
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