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Eric Fry, reporting from Laguna Beach, California...
Like an inner-city schoolteacher, the stock market has been handing out
high marks to the economy...just for showing up. Unfortunately, the
economy never scores a passing grade on any of its achievement tests.
Maybe it doesn't matter that this F-student strolls home from Wall Street
each day with an A+ and a smiley-face stamped on his homework. But we do
worry that the stock market might begin handing out grades the economy
actually DESERVES. So we would not be a very aggressive buyer of US stocks
(at their current elevated prices) until the economy's achievement tests
show signs of genuine improvement.
That's not really happening yet...
Maybe the economy is less bad...maybe...but it is still very far from
good.
A few economic indicators - like industrial production, factory
utilization, auto sales and consumer confidence - have bounced off their
recent multi-decade lows. But these indicators still languish far, far
below their recent "Bubble Era" highs.
Meanwhile, several other indicators of economic vitality indicate no
vitality whatsoever. Unemployment continues to soar, for example, while
consumer credit continues to plummet. The chart below presents the REAL
unemployment rate - not the cosmetically enhanced number that captivates
Wall Street on the first Friday of every month.
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According to last Friday's report from the Labor Department, 10% of the
labor force is unemployed. That's bad. But the actual unemployment rate is
far worse. After including under-employed and "discouraged" individuals,
the unemployment rate soars to more than 17% of the work force!
Workers who don't work have a tough time getting a loan. Not surprisingly,
therefore, consumer credit continues to plummet. The math is pretty
simple, folks: declining incomes and declining credit add up to declining
consumption...which is not a great trend for an economy that relies on
consumption. Therefore, as the owner of one of the nations' largest
shopping malls quipped recently, "Flat is the new up."
Following this line of thinking, "miserable" is the new "bottoming out."
The chart below depicts a housing market that is truly miserable. And yet,
this is the very same housing market that so many economists and Wall
Street analysts declare to be "bottoming out."
We don't see it. In fact, we would repeat the identical prediction we
offered up nine months ago: "The housing market is 'bottoming' like an
anchor that has just snapped its chain above the Marianas Trench." (We
made our remarks in response to this declaration by David Wyss, chief
economist with Standard & Poor's: "We are seeing a bottom in housing
sales.")
To be sure, some bits and pieces of the housing market are showing signs
of life...or at least non-death. But the guys and gals who actually build
houses are seeing no recovery of any kind.
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The chart above shows the pathetic trajectory of the National Association
of Home Builders Index. According to the Association, its index is "based
on a monthly survey of home builders of single-family detached homes, and
is comprised of three survey components: present sales, six-month sales
expectations and traffic of prospective buyers... A reading over 50
suggests more survey participants are seeing 'good' economic conditions
than 'poor' ones for home sales." The Association does not explain what
the current reading of 16 would indicate, but since 16 is 34 points below
50, we can safely infer that conditions are not "good."
No matter how many A's and smiley faces the stock market hands out to the
economy, this kid still looks like an F-student to us.
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The Daily Reckoning
Presents: |
Long-time commodity traders identified a
curious connection between silver and soybean prices. "Silver follows
soybeans," they used to say. Why the close correlation between these two
unrelated commodities? Many theories...very few facts. Obviously, no one
sprinkles silver filings onto their tofu salad, and no one pierces their
ears with soybeans. Nevertheless, the correlation between silver and
soybeans continues to this day...to some extent.
In today's edition of The Daily Reckoning, Chris Mayer, editor
of Mayer's Special Situations, lays out a bullish case for
soybeans. James Turk, founder of goldmoney.com, lays out a bullish case
for silver. There is no connection whatsoever between these two
analyses...or is there?
Of Soybeans and Silver
by Chris Mayer and James Turk
First up, Chris Mayer:
China is buying soybeans...lots of them.
The US trade deficit ballooned by almost 10% to $36.4 billion in
November. Here's one very important highlight of that report: Chinese
demand for American goods climbed to a record $7.3 billion, led by - of
all things - soybeans. Drought in Argentina was partly to blame, but
there's a trend under there that can't be denied:
One of the more certain ideas on China hinges on its appetite for
something very basic: food. We've talked a lot about the world's growing
appetite for food and China's role in that. The shifting diets...the
straining of water resources...the diminishing acreage of arable land...
All of these things put pressure on the food supply. We've got a few
ideas that answer the bell here, but I want to focus for a minute on
just one - Saskatchewan, Canada.
We took note of this rich prairie to the north in a couple of letters in
2008. Half of all the arable land in Canada is here. It has one quarter
of the world's uranium production and one third of its potash reserves.
It produced 160 million barrels of crude oil last year.
Some of the growth in output here is astonishing. This from The
Globe and Mail:
"On the farm front, the surprise is that much of the new prosperity
comes from pulses, crops that were hardly known in the Prairies two or
three generations ago - peas, beans, chickpeas, lentils. In 1981, 85,000
acres of lentils were planted; this year, there were 2.3 million acres.
In 1976, 15,000 acres of peas were planted; this year, 2.8 million
acres. Canada is now the leading exporter in the world of both foods,
almost all of it from Saskatchewan."
We own one company that is in the heart of all this earthy goodness.
We've owned it since August of 2006. It's given us an 11% annualized
return since - which is one hell of a good return considering what the
broader market has done over that time. I view it is a core Special
Situations holding, and it still trades for just above book value.
Of course, you can access this pick by subscribing to Mayer's
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Next up, James Turk:
Silver jumped out of the gate to begin 2010 with a flying start. It
climbed a remarkable 9.7% in this year's first week of trading to end
the week at $18.45. From its $8.79 low barely fourteen months ago after
the de-leveraging and mass liquidation of assets resulting from the
Lehman Brothers collapse, silver has climbed an astounding 110%. But the
upside fireworks have hardly begun.
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I believe there exists the real possibility of a short squeeze in silver
this year or in 2011. That short squeeze will propel silver to - and
probably over - its January 1980 record high of $50 per ounce. That event
will mark an important step in silver's bull market. Everything that has
occurred in silver over the last thirty years is simply base- building, as
can be seen in the following chart.
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The base-building is marked by the two long-term gold lines that look like
a "huge smile," as one of my readers remarked.
From 1980 to the 1991 low, silver was being 'distributed'. In other words,
silver sellers were more aggressive than silver buyers. Eventually, those
circumstances changed, and silver's price stopped falling. The so-called
smart money started recognizing silver's extraordinary undervaluation.
Buying power began to exceed selling pressure. Its price began to rise and
has been working its way higher ever since. Silver has been rising this
decade within the uptrend channel marked by the two [red] parallel lines.
Silver's rise from $3.51 in February 1991 to $18.45 at present -
approximately a 9.1% annual rate of appreciation over this 19-year period
- pales in comparison to what lies ahead. Silver is still in stage-1 of
its bull market; the big price gains don't start occurring until
widespread participation by the public begins in stage-2, but that will
not begin until silver breaks out of its base when $50 is eventually
hurdled. With that event silver will start garnering worldwide attention
just like gold started doing
when gold entered stage-2 of its bull market by hurdling above
$1,000.
The speculative stage-3 for silver, which will be marked by extraordinary
price gains like those of silver's last stage-3 in 1979- 1980, is still
far in the future.
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And now over to Bill Bonner, who has today's reckoning from
Bethesda, Maryland...
What's the news? The Dow fell a little - off 36 points. Oil traded at $80.
And gold dropped $22, to close at $1,129. Nothing unusual.
But poor Mr. Obama... He seemed like a nice enough fellow. More and more
people seem to be mad at him.
What went wrong? It looks to us that he has been completely captured by
America's two most special interests - Wall Street and the Pentagon. Maybe
he was their man from the get-go; we don't know.
Yesterday, he announced that he was going to squeeze $120 billion out of
the banks over the next 10 years. Don't worry about the bankers, dear
reader; it's all for show. The feds pretend to punish the bankers and the
bankers pretend to suffer. They'll whimper and whine...all the way to the
bank!
How tough is it to make money when you can borrow money for nothing and
lend it back to the lender at 400 basis points more interest? Even bankers
can make money under those circumstances.
And that's not all. Don't forget that the feds are authorized to buy up
Wall Street's mistakes...and to make sure that the bankers don't have to
suffer from their own dumb mistakes.
Yesterday came news that the Fed had a very profitable year. It made more
money even than Goldman Sachs - $45 billion. How did it make so much
money? The papers report that it cleverly bought up debt that no one
wanted...Wall Street's mistakes. And then, lo and behold...it turned the
dross into gold. No kidding. Bad debt became good debt. And then it became
great debt...as it became clear that the US government stood behind almost
ALL DEBT issued by Wall Street's major players.
The financial press will spend a few days telling readers how smart the
Fed is. Ben Bernanke will stress how the Fed saved the economy. Pundits
such as Martin Wolf will claim they saved civilization.
But what is really going on? The Fed has a license to print money.
Sometimes...when it can get away with it...it prints a lot of money. And
it makes a lot of money. How cool is that?
And so, we turn to the story of Freddie and Fannie. The twins are double
trouble, as far as we can tell. They lent (or guaranteed the loans) to
people who couldn't pay the money back. Then, when the inevitable came to
pass they told the feds that if they didn't help them out, America's
entire financial structure would melt down...and almost every family in
the country would find itself underwater.
In 2006, Fannie Mae set aside $519 million just in case things went bad.
Things did go bad. And guess what. The half a billion Fannie had set aside
turned out to be laughably inadequate. Today it has had to come up with
ten times that amount...which is still not enough to cover the implied
losses at today's market prices. It needs about twice that amount. So,
along come the feds again...in a surprise move on Christmas Eve...with
billions more.
We try to imagine members of Congress working hard to understand the
complications of mortgage finance...giving the matter the solemn attention
and fair-minded deliberation it deserves. After all, hundreds of billions
of dollar were at stake. But try as we may, we just can't imagine it.
The pols didn't really try to figure it out. They didn't have to.
"You have no idea," said a source we won't divulge, "how much control the
bankers - especially Goldman Sachs - have on government. They have their
men in the key positions. And every politician and bureaucrat knows that
if he goes along with the game he could one day get a job at Goldman and
make millions. And I'm not just talking about the US. It's true of many
other countries too. Goldman is international. And they've got their men
in decisive posts in many countries."
One source of the bankers' power is money. The other is ignorance. They
have money to throw around. When it comes to money, they seem to know what
they are talking about. So, on Christmas Eve, 2009, rather than actually
debate and deliberate, Members of Congress deferred to the bankers'
lobbyists.
Who's going to argue with the bankers? They know how money works, don't
they? What politician has the courage...or the knowledge...to stand
against them? If they hadn't gone along with the bailouts, the whole
shebang might have gone down the tubes, right?
Right...
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And more thoughts....
The depression continues. The broadest measure of unemployment - U6 - now
stands at more than 17%.
The bad labor news last week didn't seem to bother investors. They're all
monetarists, optimists, or delusionists. They figure that the jobs picture
will keep the Fed from raising rates...and that the low interest rates
will keep stocks moving up.
They are wrong. Well, they are right about the first part and wrong about
the second. The Fed will not raise rates anytime soon. But it takes more
than low rates to create a durable boom on Wall Street. It takes earnings
growth.
Today's prices imply strong earnings growth in the next 12-24 months. But
it's not likely to happen. Ambrose Evans-Pritchard:
"Realtytrac says defaults and repossessions have been running at over
300,000 a month since February. One million American families lost their
homes in the fourth quarter. Moody's Economy.com expects another 2.4m
homes to go this year. Taken together, this looks awfully like Steinbeck's
Grapes of Wrath.
"Judges are finding ways to block evictions. One magistrate in Minnesota
halted a case calling the creditor 'harsh, repugnant, shocking and
repulsive'. We are not far from a de facto moratorium in some areas.
"This is how it ended between 1932 and 1934, when half the US states
declared moratoria or 'Farm Holidays'. Such flexibility innoculated
America's democracy against the appeal of Red Unions and Coughlin
Fascists. The home siezures are occurring despite frantic efforts by the
Obama administration to delay the process.
"...It takes heroic naivety to think the US housing market has turned the
corner (apologies to Goldman Sachs, as always). The fuse has yet to
detonate on the next mortgage bomb, $134bn (£83bn) of 'option ARM'
contracts due to reset violently upwards this year and next.
"US house prices have eked out five months of gains on the Case-Shiller
index, but momentum stalled in October in half the cities even before the
latest surge of 40 basis points in mortgage rates. Karl Case (of the
index) says prices may sink another 15pc. 'If the 2008 and 2009 loans go
bad, then we're back where we were before - in a nightmare.'
"David Rosenberg from Gluskin Sheff said it is remarkable how little
traction has been achieved by zero rates and the greatest fiscal blitz of
all time. The US economy grew at a 2.2pc rate in the third quarter
(entirely due to Obama stimulus). This compares to an average of 7.3pc in
the first quarter of every recovery since the Second World War."
You have to like automobiles...and traffic. We spent yesterday taking
Edward back and forth to school. Then, we got stuck in a traffic jam on
the beltway coming back from shopping.
It didn't help that there is road construction going on everywhere. A sign
tells us that this is thanks to the stimulus program. How nice. Taxpayers
from Maine and Montana are paying to pave the roads in Montgomery County,
Maryland...where practically everyone works for the government and earns
more than the taxpayers who support them.
It didn't help either that local road crews were out spreading more salt -
in anticipation of another snow storm; one that never came. The roads are
white - with sodium chloride. There's so much of it on the highways our
blood pressure rises just driving to work.
Regards,
Bill Bonner,
for The Daily Reckoning
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