The Daily Reckoning November 14th
“I don’t think markets are going down because of Greece,” our old friend Marc Faber offered as an alternative explanation for the market’s recent malaise to CNBC’s Squawk Box yesterday.
“I don’t think the markets are going down because of the ‘fiscal cliff,’” he added, “because there won’t be a ‘fiscal cliff.
“The market is going down because corporate profits will begin to disappoint,” Mr. Faber dolefully explains, “the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20%, in my view.”
“Dr. Doom’s” gloominess stands in stark contrast our resident tech traders Jonas Elmerraji and Greg Guenthner.
“Stocks are flailing again,” Jonas Elmerraji reports, “threatening to plunge lower in this morning’s early action after moving sideways since the end of last week.
“It’s not just us,” Jonas goes on, “all markets are off today. But that shouldn’t come as a huge surprise. The media will probably blame selling on the latest news from Greece (even though they were giving a Greek debt deal credit for moving futures higher much earlier this morning).
“Greece, the fiscal cliff, doomsday on Dec. 21, 2012… Whatever news is getting the blame for the most recent rally or the latest drop, it all comes down to buyers and sellers. Right now, with the S&P pushing just below 1,400, the weak hands are getting squeezed out and fear is the biggest factor affecting stocks.
“Relying on the news cycle won’t make you rich — but identifying those pockets of buyers and sellers can.”
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“Why do we not switch, then, to a monetary unit such as gold,” Turkish Prime Minister Recep Tayyip Erdogan asked openly to the International Monetary Fund (IMF) and the U.N. yesterday, “which is at the very least an international constant and indicator that has maintained its honor throughout history?
“This is something to think about.”
Indeed. Why don’t they…
Erdogan’s questions and criticisms were the highlight of the fifth Bali Democracy Forum in Indonesia last week. (Iranian president Ahmadinejad’s mockery of the U.S. elections took second place, dubbing them a “battleground for capitalists and an excuse for hasty spending.”)
“It is thought-provoking,” Erdogan goes on, “that the IMF is not using gold as a global currency rather than any currency, and it only gives aid on a where and what basis.”
His tartness most likely stems from a raw deal with the IMF sticking Turkey with over $23.5 billion of debt. But the challenge remains… if the rest of the world’s financial community can, as they have been trying to do for years, agree on a viable alternative to the dollar as a “reserve currency,” holders of dollar assets will get crushed.
Turkey’s Erdogan has been a busy man… He has systematically ended Turkey’s half-century “Era of Coups,” sliced the country’s IMF debt down to $1.3 billion (with plans to wipe it out next April), and has stealthily crept Turkey away from dependence on the U.S. dollar.
The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.
People often say of a weak candidate, “He couldn’t get elected dogcatcher.” But actually, this isn’t a sensible criticism at all.
If someone were actually running for dogcatcher, I would want to know his previous experience in catching dogs. This is a demonstrable, objective skill that someone either has or does not have. I certainly couldn’t get elected dogcatcher. Could you? In any event, it would be silly to pick dogcatchers via elections — we should let the market do so, so we end up with professional companies using trained professionals, just as the market for squirrel catcher demonstrates.
I’m thinking about this because for at least two years, I had simply ignored the fact that there were clearly squirrels living inside the front wall of my house. Several times a week, I could hear them scampering around and even scratching away as they gradually expanded their domain. As I type these words, I can’t believe how long I let the situation persist, but money was always tight, and once you let the first six months go by, the next 18 are a blur…
What finally snapped me out of my paralysis was talking with some of my childhood friends on a trip back to my hometown. One guy pointed out that in addition to whatever damage the critters were surely doing to the physical structure, there was a danger that they might have fleas. Up until this point, I had been amusing myself remembering a scene from a Chevy Chase Christmas movie, thinking that the worst-case scenario would be chasing a cute little guy out of my house. But fleas?! That was serious.
My childhood friend was quite sure that I would end up with several dead squirrels in the wall of my house, because he assumed the only way to deal with them would be to seal up the hole(s) they were using to come and go.
I scoffed. “Nah, surely there’s a way to flush them out of there. Like somebody could pump in a chemical that irritates them, or something.”
But my friend laughed, thinking I was dreaming. He assured me there would be rotting carcasses once I “solved” the problem.
But it turns out my friend’s cynicism was unwarranted. When I got home, I did some quick searching on the Internet and decided to have a guy from Critter Control come give me a free consultation. After walking around on my roof and listening to my explanation of the sounds I had been hearing — and the fact that I had once actually seen a squirrel poke its head out at me from a hole they had burrowed above my garage — the guy told me his plan. It was far more sophisticated than I had envisioned.
First, he would lay mesh all along the underside of my roofline on the front of my house, because there were numerous spots where the squirrels had been coming and going. Then, at the main hole (where I had seen the one poking its head out), he would install a one-way door. That’s right, he had a contraption that he could fasten to my house that would let the squirrels leave, but not come back in.
I loved this plan and wanted him to start right away. But he said no, that would be a bad idea. It was the time of year when the squirrels would have recently given birth, and he didn’t want to trap the mother outside the house while the babies were still inside, too young to be able to walk outside on their own. If that were to happen, the mother would go crazy trying to claw her way back into the house through some other area. So he would come back in a few weeks to implement the plan.
After this initial consultation, I was simply amazed at the wonders of the division of labor. Not only was this guy an expert on the behavior of squirrels, but there were obviously companies that produced specialized equipment for home squirrel removal. Before seeing it with my own eyes, I wasn’t sure such options existed — remember my friend’s cynicism.
Now, I do want to be honest, I did have some trouble with the company after this initially very pleasant consultation. A subordinate came and installed the mesh, as well as a trap. The service plan involved someone from the company coming to check the trap daily, because they prided themselves on being humane — they would take a captured animal and release it away from the neighborhood. (This also was useful for public relations, so that the squirrels wouldn’t simply leave my house and “move into” my next-door neighbor’s.)
Well, I think the guy who had been assigned my house must have been overtaxed, because he certainly wasn’t checking the trap daily. So I called and complained to the older guy who had given me the initial consultation. He apologized, and from that point forward, the service was snappy. Since their last visit to remove the fourth (I think) trapped squirrel, I haven’t heard any more sounds from my wall.
After thinking about it some more, I realized that this aspect of my story too was a sign of the wonder of market capitalism — people aren’t perfect, but the boss knows he has to get his employees back on track in order to keep the customer happy. If squirrel removal were a government monopoly and the person assigned to my house weren’t doing his job, I don’t know that his boss would have been so alarmed by my complaint.
In conclusion, when people run for positions far more significant than dogcatcher — such as “murderer catcher” or “bank robber catcher” or “foreign terrorist catcher” — we don’t see just how unqualified our politicians (and the judicial/military/espionage personnel they appoint) really are, because the market isn’t allowed to operate in these arenas. But if we imagine how much worse squirrel catchers would be if selected by elections, rather than market competition, then we get a sense of the tremendous waste and tragedy caused by our present political institutions with their monopolies on legal and military services.
Original article posted on Laissez-Faire Today
A hidden time bomb ticks away inside the government budget: Within a handful of years, US taxpayers will be on the hook for over $100 billion in student loan defaults.
Just last Friday, the US Department of Education released new data on student loan defaults. In short: The hissing sounds coming from the student loan bubble are getting louder.
I doubt it’s a coincidence the Department of Education chose last Friday (when attentions had shifted to the weekend) to release new three-year cohort default rate data for federal student loans. The three-year cohort default rate is defined as follows: the percentage of borrowers who enter repayment on certain loans during a particular federal fiscal year (Oct. 1-Sept. 30) and default or meet other specified conditions prior to the end of the second following fiscal year.
The default rate is horrendous, and it’s only going to get worse. These are uncollateralized loans, so losses given default will be orders of magnitude higher than losses on subprime mortgages; in subprime, losses were mitigated by the value of housing collateral.
“More than one in 10 borrowers defaulted on their federal student loans, intensifying concern about a generation hobbled by $1 trillion in debt and the role of colleges in jacking up costs,” a Bloomberg story notes. The story continues:
“The default rate, for the first three years that students are required to make payments, was 13.4%, with for-profit colleges reporting the worst results, the US Education Department said today.
“The Education Department has revamped the way it reports student loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.”
This 13.4% figure will surely go higher. The post-2008 surge in student loan volume won’t season and start defaulting until after the Class of 2013 graduates. Then we will see the real fireworks. This crisis will finally capture the public’s attention.
What are the investing implications of these defaults-in-waiting? An obvious conclusion is to avoid owning the for-profit education stocks, no matter how cheap they may appear. Education stocks including Apollo Group (APOL) and ITT Educational Services (ESI) probably face a surge in legal and regulatory risk once the enormous scale of student loan defaults comes to public attention next year. In fact, even after they’ve suffered large declines, the for-profit education stocks are starting to look like attractive short sales.
Since Obama entered office 2008, gold has been on an unbelievable tear. But will the momentum continue during the president’s second term?
Let’s zoom out and see:
Over the last five years, gold’s spot price has only two spots where it lost significant momentum. Once was during the 2008 financial crisis (where the term “sell everything” took on a whole new meaning) and once again earlier this year.
Still, I wouldn’t put gold’s 2012 action in the same category as 2008. It’s sideways movement—nothing more. Also, I wouldn’t put too much stock into the presidential elections and the price of gold—other than the fact that we now know that there will more than likely be no changes to monetary policy anytime soon. Of course, that bodes well for gold bulls.
Gold’s Next Spike Could be Right Around the Corner
Gold has outperformed the S&P 500 over the past three-plus years. But gold and stocks have essentially traded in the same direction over this same timeframe, with the exception of the late 2011 correction:
The arrows on the left side of the chart mark where stocks and gold diverged. You probably remember this gold rally coincided with a nasty drop in stocks fueled by the eurozone crisis and the U.S. Congress’ ill-advised debt ceiling bluff. Both these events spooked investors enough to shoot gold to new highs.
As the crisis became old news, the relationship between gold and stocks returned to “normal” for the time being. My original thinking was that if gold and stocks’ relationship remains intact, the yellow metal could correct with the stock market. But as the calendar flipped to November, you can see the S&P and gold beginning to diverge once again—a potentially ominous sign for stocks, an a catalyst that could set up a gold rush like we saw in 2011.
Two words could help send gold significantly higher: fiscal cliff.
If investors continue to fret about the looming fiscal cliff and all of the surrounding media attention, it’s entirely possible for gold to put in a repeat performance similar to its 2011 spike.
When to Buy Gold—and What to Expect
If you’re a holder of physical gold, you probably aren’t interested in stop-losses—or any talk about selling your holdings, for that matter. That’s fine. Instead, I want to reveal a gold roadmap that will show you what you can expect from the yellow metal over the long-haul:
The two blue lines tell the story here. Gold is trading in a range between $1,550 and $1,800. These levels are both important psychological price points. Here’s how you can plan your purchases:
First if gold drops below $1,550, hold off on buying for several weeks and/or months. A break of $1,550 signals that lower prices are in gold’s future. If you’re able to wait, you could easily get a better deal—perhaps prices between $1,300-$1,400.
On the flip side, a breakout about $1,800 would signal that higher prices are in store in the near future—possibly even another attempt at $2,000.
With congressional fireworks set for the halls of the capitol in the next few weeks – and more talk of the looming fiscal cliff – I’d err on the upside of the estimates above.
Greg Guenthner, CMT
Original article posted on Daily Resource Hunter
These Two Words Could Send Gold Soaring: Fiscal Cliff appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.