Tuesday, April 07, 2009

Countdown To Spring Break, Gold Update, And More Sunshine From Bill


Tomorrow will be the final broadcast until April 24th. I will post random notes and interesting thoughts from Paris but I don't have any plans at the moment to key up the mic while I'm away.

Here are some thoughts from Bill Bonner whom I do hope to run into...

"Cramer: The Depression is over," says a headline. Jim Cramer says the bottom has come and gone. That's all we need to know. If Cramer thinks the worst is over...well, it must be so.

Even Nouriel Roubini, according to Forbes, thinks there is "light at the end of the tunnel."

Japan says it's going to announce another $100 billion stimulus program this week. That should do the trick. After 17 years of bailouts and stimulus programs, the Japanese should be getting good at them. But it's a little like a guy who's getting good at suicide - if he's so good at it, you'd think he'd be dead by now.

But no...the Japanese economy is still one of the worst performers in the world; their bailouts and stimuli have done no good...maybe they've even made the situation worse.

No matter, there's a rally on...this is not the time to ask questions. Our instinct tells us this rally is going to carry the Dow back above 9,000...possibly above 10,000. Why? Because people do not go directly from believing nothing can go wrong to believing that nothing can go right. The kind of delusional optimism that took stocks up to 14,000 on the Dow...and doubled property prices...and had sober bankers buying billions' worth of ticking debt bombs doesn't disappear overnight. It has to be killed like Rasputin - many times. Stab it. Shoot it. And then douse it with gasoline and set it on fire. Maybe then, it will finally die.

That's why this rally is just a trap for the unwary...a suckers' rally. Investors are getting back on their feet just so Mr. Market can whack them again. So, if you're playing this rally...be sure to keep those stops moving up behind your stocks.

So far, this rally has recovered less than 20% of the previous losses. Typically, at least one good rally in a bear market will recover more than half of the losses. Looking at the long term, the Dow rose from the low in the early '30s of only 41 points to the high in 2007, when it was over 14,000 points. This bear market wiped out more than half of the capital gains made by investors during that whole 76-year period. A 50% bounce from the January low would put the Dow back up close to 10,000.

But we gave you our forecast yesterday. Bulls, bears, spenders, savers - our guess is that Mr. Market intends to paddle them all.

The bulls will be whacked when the Dow falls another 50% from its low - down to, say, below 4,000. The bears will be whacked when the Fed seems unable to stop deflation...and the prices in the mining and commodities sectors collapse. Then, the spenders will be trapped in a burning house of debt - with the door barred by deflation. Later, the roof will fall on the savers too - when the feds finally manage to get an inflation backfire going. The fire will get away from them immediately, we predict, burning up trillions worth of savings overnight.

But let's go back to the cheerful tidings out in the press. Sallie Mae says it is ADDING 2,000 jobs. But wait...2,000 jobs isn't really very many. And who are they employing? Debt collectors?

"Consumers fall behind on loans at record rate," says a headline in USA Today.

"A record number of consumers are falling delinquent or into default on their loans, a problem that some economists say will only get worse this year.

"A record 4.2% of consumer loans were delinquent at least 30 days in the fourth quarter, the latest data available, according to the Federal Reserve. Another 4% of consumer loans were in default, meaning they'd been written off by lenders.

"Recent data from the American Bankers Association and Moody's rating agency show the same sobering trend: More consumers are paying late - or not at all - on home, car and credit card loans.

"Job losses are closely correlated to loan defaults, economists say. And as more people become unemployed, they're increasingly giving up on loan payments."

Even sports stars are taking pay cuts. The "incredible shrinking payroll," USA Today calls it. Nearly half the baseball teams in the major leagues have cut their salary costs...by more than $10 million each. The San Diego Padres, for example, took $20 million off their payroll expense.

"The wheels have fallen off the economy," says James Chessen, chief economist for the American Bankers Association. "There have been significant job losses, and that translates into people having a hard time paying their bills."

Employers cut 663,000 jobs last month. That puts the official unemployment rate at 8.5%. It will probably be 10% by the end of the year. Since December 2007, 5.1 million people have lost their jobs, more than 2 million of them this year alone.

But "the worst is likely yet to come," continues USA Today. "Chessen expects consumer loan charge-offs and delinquencies to continue rising through the end of this year."

Move up those trailing stops, dear reader.

How Long Will We Have to Wait?
by Jeff Clark
Rockland, California

You are traveling through a desert in search of a famed oasis and its promise of riches, rest, and drink. But your journey has grown long, you are weary, and you begin to doubt the oasis really awaits you. But then signs appear from those who have gone before you that your course is true, and the reward you seek in fact lies ahead. Your spirit is renewed and you press on.

Does this describe your journey with gold?

Although gold's had a good run, rising from a monthly average of $760.86/oz in November 2008 to $943.16/oz in February 2009, when will it take off? That's still going to happen, right?

Wimpy, Popeye's burger-loving pal, was always looking to get what he wanted today with a promise to pay tomorrow. Sound familiar?

In their thrashing attempts to get their economies going again, governments around the world have pounded interest rates into the floor and flooded their banking systems with liquidity.

Interest rates are at historic lows, an artifact of the robust, worldwide efforts to debase currencies. M2, one measure of money supply, is up in all G7 countries, which signals that tomorrow's inflation is being baked in the cake today.

Further, bailout numero dos, with a rich pork filling, has been signed, sealed, and is about to be delivered, including an endowment for a "bad bank" that will buy up the loans that troubled commercial banks would like to deny they ever made. In addition, it guarantees hundreds of billions of dollars in bank assets - all on top of bailout numero uno. And don't forget the estimated $493 billion the Treasury Department will have borrowed by the end of the first quarter 2008; that on top of $569 billion the government borrowed in Q408, an unprecedented amount for any quarter, ever.

The word "unprecedented" seems too weak to convey just how much money is being printed and/or borrowed to buy off the recession. So, when will all this money start showing up as higher prices at the supermarket and shopping mall? And when will gold react to this bumper crop of paper?

The historical record indicates that a surge in money growth has its peak effect on economic activity about 9 to 18 months later. Add another 12 months or so for the peak effect on consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle - not the kind of financial violence we've been seeing lately - which adds another variable. And on top of that, the numbers are about peak effect, not initial effect.

So the timing remains uncertain. But what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation.

We're beginning to see interest in gold from the mainstream, which is encouraging. And enthusiasm from the general investing public will be what ultimately sends gold to the moon. Here's what we've observed over the past 30 days:

1. A number of mainstream economists and fund managers are openly expressing interest in gold. "The government can print endless money, but they cannot increase the supply of gold," said Michael Pento, chief economist at Delta Global Advisors Inc. "Anything the government cannot replicate by decree, I want to own." The firm, with $1.5 billion in assets, is doubling its gold holdings to 8%. We saw very little of this six months ago.

2. The mining industry has recovered its ability to raise capital. Take a look at the recent financings for some gold companies:

# Newmont $1.2 billion
# Newcrest $476 million
# Kinross Gold $414 million
# Agnico-Eagle $290 million
# Red Back Mining $150 million

Compare this to the financial woes we hear continually about banks, brokerages, and government agencies. The only capital they can attract is government handouts.

3. While there are much better ways to turn gold into cash, Cash4Gold (who advertised during the Super Bowl) and similar businesses bombarding the airwaves with their pitches have sensitized the public to the topic of gold. Expect the interest in the yellow metal - and its price - to increase in a serious way.

4. January's Cambridge House Investment Conference in Vancouver was well attended, with the second day setting a record. Every session was packed, standing-room-only for most speakers, including Casey Research's Louis James and Marin Katusa.

While no one was emphatic about the timing, most speakers agreed that at some point gold will be sought as a safe haven by the masses, who will catapult the price to new highs. Here is a quote from John Embry, chief investment strategist, Sprott Asset Management:

"The average retail investor has little or no investment in gold and no understanding of how important it will be. The year 2009 will be volatile, but volatility is a small price to pay for where gold is headed. An explosion in gold and silver is inevitable in the years to come."

The overriding theme was clear: Gold is going up. Period. It may or may not happen as quickly as you want, but the recent range trading hasn't defused its explosive potential.

So when will gold take off? The signal won't be inflows to ETFs (although they are indicators), or jewelry sales (the '70s bull market had nothing to do with bracelets), or even sales of physical bullion (we had that in '08 and gold was up 5.5%, hardly meteoric). No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public.

And whether the glory days are just months from now or a year or two away, it's clear that the oasis is real and lies ahead. Is your cup ready?


Jeff Clark
for The Daily Reckoning

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