Barton Biggs, Traxis Partners managing partner, didn’t own Japan before, but says he jumped in yesterday. Biggs believes the radiation levels will not present a serious problem, and that the economic impact will be negligible.
Thursday, March 17, 2011
This chart has an uncanny ability to call tops and bottoms in the market
Investors can use the 15-year falling yield channel to make quality "big picture" buy and sell decisions for stock holdings.
Is the recent decline about the situation in Japan or the repeating dance between yields and stock prices?
Stock to Watch: Cameco (CCJ)
Investors have been dumping Uranium Stocks left and right - and with good reason.
Earlier on Wednesday, the Chinese government said it was tightening it approvals and safety procedures for new reactors as Japanese authorities scrambled to bring a quake-damaged nuclear power plant back from the brink of disaster.
"We will temporarily suspend approval of nuclear power projects, including those in the preliminary stages of development, before nuclear safety regulations are approved," China's State Council said in a statement.
The announcement came as Japan struggled to cool down a nuclear power plant north of Tokyo that was severely damaged by the 9.0 magnitude quake and tsunami.
Enter Cameco (CCJ)
Cameco Corporation operates as a nuclear energy company. The company operates through three segments: Uranium, Fuel Services, and Electricity. The Uranium segment involves in the exploration for, mining, milling, purchase, and sale of uranium concentrate
So why on earth would you want a Uranium stock in your portfolio?
The Uranium selloff, and China's reaction, seems to be knee-jerk reaction to the Japan crisis. However, China has announced plans to boost nuclear power output to at least 80 gigawatts from a current 11 gigawatts.
Earlier on Wednesday, the Chinese government said it was tightening it approvals and safety procedures for new reactors as Japanese authorities scrambled to bring a quake-damaged nuclear power plant back from the brink of disaster.
"We will temporarily suspend approval of nuclear power projects, including those in the preliminary stages of development, before nuclear safety regulations are approved," China's State Council said in a statement.
The announcement came as Japan struggled to cool down a nuclear power plant north of Tokyo that was severely damaged by the 9.0 magnitude quake and tsunami.
Enter Cameco (CCJ)
Cameco Corporation operates as a nuclear energy company. The company operates through three segments: Uranium, Fuel Services, and Electricity. The Uranium segment involves in the exploration for, mining, milling, purchase, and sale of uranium concentrate
So why on earth would you want a Uranium stock in your portfolio?
The Uranium selloff, and China's reaction, seems to be knee-jerk reaction to the Japan crisis. However, China has announced plans to boost nuclear power output to at least 80 gigawatts from a current 11 gigawatts.
Mastery Bottom Line:
People aren't going to just flip the switch and shut off Nuclear Power overnight.
CEO Jerry Grandey said the market’s reaction which Cameco’s share price 12% lower on Monday was “largely driven by emotion”, and that the “fundamentals of the industry remain positive".
“We do not anticipate significant effects on Cameco’s business in the short or long term,” he said.
Shares of CCJ are down 30% in the last month. We do not recommend running out and buying CCJ today, but add to your watch list - anything under $25 a share would be a great buy opportunity.
Commodities Advance, Snapping Four Days of Losses, as Oil Gains on Mideast
Commodities rose for the first time in five days as crude oil rebounded on renewed concern about supply disruptions amid increasing Middle East tension.
The Standard & Poor’s GSCI Spot Index of 24 commodity futures climbed 1.6 percent to 684.32 as of 12:04 p.m. in London after plunging 3.8 percent yesterday, the most since July 2009. Crude oil advanced as Bahrain suspended stock-market trading after the government declared a state of emergency. Gulf-nation troops poured into the island country, which is off of Saudi Arabia, the largest oil exporter.
“What people have in the back of their mind is the Middle East,” said Michael Haigh, global head of commodities research at Standard Chartered Plc, in Singapore. “Disruptions in the Middle East and places like Libya tend to be long-lasting.”
The GSCI index has advanced 8.3 percent this year, with gains in the past month coming mostly from political unrest that started in Tunisia and spread to Egypt, Libya and Bahrain, sparking speculation oil supply may be disrupted.
Libya’s oil exports may be halted for “many months” because of damage to facilities and sanctions following a rebellion against leader Muammar Qaddafi, the International Energy Agency said in its monthly Oil Market Report.
The Middle East unrest outweighed concerns about radiation from a Japanese nuclear plant damaged by the country’s strongest earthquake on record and subsequent tsunami. The country is the world’s third-biggest user of crude oil, the top importer of corn and the second-largest buyer of copper ore.
Fuel Rods
Military helicopters were deployed to drop water on the crippled Fukushima Dai-Ichi power plant as officials battling to prevent a meltdown said fuel rods at two reactors may have been damaged and temperatures at spent fuel pools were rising.
Clouds of white smoke or steam rose from the reactor buildings following a fire at Dai-Ichi’s No. 4 reactor this morning. Chief Cabinet Secretary Yukio Edano said radiation levels at the plant then rose, forcing a brief evacuation, but have since fallen. About 70 percent of the fuel rods at the plant’s No. 1 reactor and a third of the No. 2 reactor’s fuel may have been impaired, Tokyo Electric Power Co. said. The Dai- Ichi nuclear complex has six reactors.
“Investors’ greatest worry is a meltdown of that nuclear plant,” Ker Chung Yang, an analyst at Phillip Futures Pte, said today by phone from Singapore. “It is less than a week after the Japanese quake. The outlook is still uncertain.”
Oil, Copper
Oil for April delivery gained 2 percent to $99.11 a barrel on the New York Mercantile Exchange after falling as much as 1 percent to the lowest level in more than two weeks. About 1.3 million barrels a day, or 29 percent, of Japan’s refining capacity was closed after the temblor and tsunami.
Copper rose for the first time in six days on speculation reconstruction in Japan will boost demand. The contract for three-month delivery on the London Metal Exchange added as much as 2.9 percent to $9,382 a metric ton and last traded at $9,341.75.
“Following the steep losses in the last few days, the price now looks attractive to some buyers,” Li Peiying, an analyst at Essence Futures Co., said by telephone from Beijing. “People have started to shift their attention to the rebuilding that will boost demand in the next few months.”
Corn for May delivery dropped as much as 2 percent to $6.235 a bushel, the lowest level for the most-active contract in two months, before erasing the decline and adding 1.1 percent to $6.4275.
Declines in commodity prices because of the Japanese earthquake are likely to be temporary, according to Standard Chartered’s Haig. “We expect a V-shaped recovery” that will boost demand for steel and industrial metals, he said.
The Standard & Poor’s GSCI Spot Index of 24 commodity futures climbed 1.6 percent to 684.32 as of 12:04 p.m. in London after plunging 3.8 percent yesterday, the most since July 2009. Crude oil advanced as Bahrain suspended stock-market trading after the government declared a state of emergency. Gulf-nation troops poured into the island country, which is off of Saudi Arabia, the largest oil exporter.
“What people have in the back of their mind is the Middle East,” said Michael Haigh, global head of commodities research at Standard Chartered Plc, in Singapore. “Disruptions in the Middle East and places like Libya tend to be long-lasting.”
The GSCI index has advanced 8.3 percent this year, with gains in the past month coming mostly from political unrest that started in Tunisia and spread to Egypt, Libya and Bahrain, sparking speculation oil supply may be disrupted.
Libya’s oil exports may be halted for “many months” because of damage to facilities and sanctions following a rebellion against leader Muammar Qaddafi, the International Energy Agency said in its monthly Oil Market Report.
The Middle East unrest outweighed concerns about radiation from a Japanese nuclear plant damaged by the country’s strongest earthquake on record and subsequent tsunami. The country is the world’s third-biggest user of crude oil, the top importer of corn and the second-largest buyer of copper ore.
Fuel Rods
Military helicopters were deployed to drop water on the crippled Fukushima Dai-Ichi power plant as officials battling to prevent a meltdown said fuel rods at two reactors may have been damaged and temperatures at spent fuel pools were rising.
Clouds of white smoke or steam rose from the reactor buildings following a fire at Dai-Ichi’s No. 4 reactor this morning. Chief Cabinet Secretary Yukio Edano said radiation levels at the plant then rose, forcing a brief evacuation, but have since fallen. About 70 percent of the fuel rods at the plant’s No. 1 reactor and a third of the No. 2 reactor’s fuel may have been impaired, Tokyo Electric Power Co. said. The Dai- Ichi nuclear complex has six reactors.
“Investors’ greatest worry is a meltdown of that nuclear plant,” Ker Chung Yang, an analyst at Phillip Futures Pte, said today by phone from Singapore. “It is less than a week after the Japanese quake. The outlook is still uncertain.”
Oil, Copper
Oil for April delivery gained 2 percent to $99.11 a barrel on the New York Mercantile Exchange after falling as much as 1 percent to the lowest level in more than two weeks. About 1.3 million barrels a day, or 29 percent, of Japan’s refining capacity was closed after the temblor and tsunami.
Copper rose for the first time in six days on speculation reconstruction in Japan will boost demand. The contract for three-month delivery on the London Metal Exchange added as much as 2.9 percent to $9,382 a metric ton and last traded at $9,341.75.
“Following the steep losses in the last few days, the price now looks attractive to some buyers,” Li Peiying, an analyst at Essence Futures Co., said by telephone from Beijing. “People have started to shift their attention to the rebuilding that will boost demand in the next few months.”
Corn for May delivery dropped as much as 2 percent to $6.235 a bushel, the lowest level for the most-active contract in two months, before erasing the decline and adding 1.1 percent to $6.4275.
Declines in commodity prices because of the Japanese earthquake are likely to be temporary, according to Standard Chartered’s Haig. “We expect a V-shaped recovery” that will boost demand for steel and industrial metals, he said.
The Bull Market Is Over It's a bear market now
It's a bear market now
The disaster in Japan has hit stocks across the world. But the bull market was already rolling over even before the quake hit. Dominic Frisby asks: what happens next?
It's taken the devastating combination of an escalating sovereign debt crisis in Europe, revolution across the Arab world and one of the most horrific natural disasters in modern history to finally take this two-year bull market down, but take it down it has.
Until mid-afternoon yesterday, when we saw some welcome respite, this week has seen nothing but inexorable, across-the-board selling.
It's felt like 2008 all over again. It doesn't matter what you own, quality or not, everything has been sold. The baby has been thrown out with the bathwater. Panic has set in.
This is one of those times, if ever there was one, to 'keep your head when all about you are losing theirs'.
So let's take a step back and think…
This sell-off started before the Japanese disaster
Historians may well look back and see it differently, but this sell-off began before the Japanese quakes. Emerging markets have been trending down since December last year. Despite new highs in gold and silver, the major gold stocks also made their highs late last year. The DAX, the FTSE, the Dow, the S&P 500 and the Nasdaq all peaked later, around February 21st.
Even uranium stocks, which are down by about 40% in barely two days (!) this week, were trending down a good three weeks before the earthquake hit. In fact only the CRB, the commodities index (which is heavily weighted to oil), was making new highs last week.
It has hugely exacerbated it, yes – it has turned it into something more serious. But the Japanese crisis wasn't the initial cause of this sell-off.
In fact just last week [1], the day before the quake, I wrote: "It could be that this turn down (in the gold-silver ratio) is the beginning of the next phase of the financial crisis. It wouldn't surprise me. It's long-overdue and there are bearish signals all over the place. Senior gold stocks have been in a downtrend since late last year, even although gold has been rising. Emerging stock markets have been falling, although their Western counterparts have been rising. And a spike down in the gold:silver ratio often marks a major market turn".
But this is all academic. We need to recognize the environment we're now in. And the short of it is this: the bull market is over. We're in a bear market now.
It's time to sell the rallies
The first thing we can expect in the coming days is huge volatility. We've seen that to the downside already. At some stage – hopefully sooner rather than later, and it may even have started yesterday – we’ll get the bounce. And we’ll be able to learn a lot about what lies in store by the magnitude of that bounce.
Trade this volatility at your peril. Some will earn fortunes doing so, but many will not. Once the dust starts to settle, we can get a clearer idea of where things are trending.
Those that went defensive and started to take cash off the table as this bull market became more and more extended will be mightily relieved they did so. Those that didn't should use rallies to build up cash for the opportunities that bear markets inevitably create.
For my part, this is what I see ahead.
The Nikkei has already been the hit hardest of any market. I hate to say it - and not everyone in the MoneyWeek office agrees - but I think that’s likely to continue. It's rallying as I write this, and should bounce from these oversold levels. There will also be some buing opportunities in individual stocks. But I'm afraid it looks doomed to eventually retest its 2009 lows around the 7,000 mark. Too many Japanese companies have been too badly beaten up by all of this.
But who knows? Maybe that will mark the final low at the end of Japan's interminable bear market, just as in 2001 commodities retested their 1999 lows and finally ended their 20 years in the doldrums. Here we see a log chart of the Nikkei since 1988.
The Dow hasn't been much better than the Nikkei
Many may look at the Dow over the last two years and think what a wonderful market it's been, while they look at the Nikkei over the same period and think, 'What a dog'. But this has largely been a result of the relative currency weakness. This week aside, the Nikkei's recent performance isn't as bad as it may seem.
If you take the Nikkei and measure it in US dollars, and take the Dow and measure it in Japanese yen, the performance has been virtually identical. This is shown in the chart below.
The strength of the Dow has been an illusion created by currency weakness.
The yen has been rallying as stocks are liquidated and cash pours into the area. This might well continue for as long as the stock market declines. Then these two may well turn together, perhaps as soon as early summer, as the spending and inevitable money-printing continues. (I bet the Japanese government will wish they hadn't spent as much these last 20 years and got into so much debt, when they didn't really need to).
For now, the Japanese must enter a period of mourning. And our thoughts and prayers should be with them as they do so. But once they start that rebuilding process, they will do so with great persistence and energy. And they're going to have to import a lot of iron, a lot of copper, a lot of cement, a lot of energy. The Daily Telegraph says this "tragedy is expected to become the costliest natural disaster in history, with the repair bill likely to top £100 billion".
So as we emerge from this panic, and the dust settles, commodities will likely resume their secular bull market, while stock markets and currencies continue to meander.
U.S. Stocks Fall as S&P 500 Drops to Lowest Level Since December
U.S. stocks retreated, sending the Standard & Poor’s 500 Index to the lowest level since December, amid concern that Japan’s nuclear crisis will worsen.
The iShares MSCI Japan Index Fund (EWJ) tracking 323 securities slumped 3.7 percent. KB Home and D.R. Horton Inc. slid more than 2.2 percent, pacing declines in homebuilders, as housing starts plunged to the lowest level in almost a year. International Business Machines Corp. (IBM) fell 3.8 percent as Sanford C. Bernstein & Co. cut its rating on the shares. Apple Inc. (AAPL) sank 4.5 percent after JMP Securities LLC downgraded the maker of iPads.
The S&P 500 fell 2 percent to 1,256.88 at 4 p.m. in New York. The Dow Jones Industrial Average slid 242.12 points, or 2 percent, to 11,613.30, the biggest drop since August. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, rose 21 percent to 29.40, the highest level since July.
“The risks have risen and you have to be mindful of them,” said David Joy, chief market strategist at Columbia Management in Boston, which oversees $350 billion. “It’s difficult to nail down what’s accurate information coming out of Japan and what isn’t. There’s concern that the problems at the nuclear plants are far more serious than the problems associated with the earthquake. In addition to that, there’s ongoing housing weakness in the U.S. and a fear premium built into the oil market. That’s why you have to hedge your bets.”
Emergency Meeting
The United Nations’ nuclear agency will call an emergency meeting to discuss the crisis in Japan as a breach at the stricken Fukushima Dai-Ichi plant increased the risk of a radioactive leak. IAEA Chief Yukiya Amano is flying to Tokyo to talk with authorities today and will return for the meeting as soon as possible, he told reporters in Vienna. It will be the first extraordinary meeting of the agency’s 35-member board since his election to succeed Mohamed ElBaradei two years ago.
The S&P 500 pared its retreat after the Associated Press reported Tokyo Electric Power Co. says a power line that may solve the nuclear crisis at its facility is almost ready. Tokyo Electric Power has not determined the timing for when a new power line can restore electricity to a tsunami-crippled nuclear power plant, Sakio Iwamoto, a spokesman, told Bloomberg News. Iwamoto said he couldn’t confirm how much progress has been made in installing the new power line.
The S&P 500 has slumped 3.6 percent over the last three days after a 9-magnitude earthquake, the biggest in Japan’s history, struck the northeast part of the country on March 11.
‘Armageddon Scenario’
“Investors have priced in an Armageddon scenario,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “If we find that there’s stabilization coming into those nuclear facilities in Japan, investors will turn around and look at the alternatives. People are wary, but at the same time there’s a notion that the economic basis continues to show strength.”
Japan’s earthquake should have a “limited” impact on U.S. growth, said Alec Phillips, a Goldman Sachs Group Inc. economist based in Washington. Disruptions to Japanese output could shift demand to U.S. products, according to Phillips.
The iShares MSCI Japan Index Fund declined 3.7 percent to $9.66 in U.S. trading, dropping to the lowest level since September. Qualcomm Inc. (QCOM), the biggest maker of mobile-phone chips, and Coach Inc. (COH), the largest U.S. maker of luxury leather handbags, slumped at least 2.6 percent amid concern Japanese sales will suffer.
Housing Starts
Earlier today, equity futures fell after the Commerce Department said housing starts dropped 22.5 percent to a 479,000 annual rate. The decline from January was the biggest since March 1984. The median forecast in a Bloomberg News survey called for a 566,000 rate. Building permits, a proxy for future construction, fell 8.2 percent to a 517,000 annual pace.
The producer-price index climbed 1.6 percent from the prior month, the most since June 2009, Labor Department figures showed today in Washington. The median projection in a Bloomberg News survey was for a 0.7 percent gain. The so-called core measure, which excludes volatile food and energy costs increased 0.2 percent, matching forecasts.
A gauge of homebuilders in S&P indexes declined 2.3 percent, as 11 of the 12 stocks retreated. KB Home (KBH) slumped 3.8 percent to $12.71. D.R. Horton sank 2.3 percent to $11.70.
IBM declined 3.8 percent to $153. The computer services company was cut to “market perform” from “outperform” at Sanford C. Bernstein. IBM, which makes up 10 percent of the gauge, contributed 45.60 points to the index’s slump.
Apple fell 4.5 percent, the most since June, to $330.01. The world’s most valuable technology company was cut to "market perform’’ from “market outperform” at JMP Securities. Alex Gauna, an analyst at the brokerage, citing risks related to manufacturing partner Foxconn Technology Corp.
Pessimism Rises
Pessimism on U.S. stocks rose for the third straight week, according to Investor Intelligence’s analysis of investment newsletters between March 9 and yesterday. About 22 percent of writers were bearish on U.S. stocks, up from 21 percent last week, according to the New Rochelle, New York-based firm, which has examined forecasts in newsletters since 1963. About 52 percent of investors were bullish, while 26 percent anticipate a correction, or 10 percent decline, in the market.
Barclays Plc’s Barry Knapp forecast that the U.S. stock market will dip in the third to fourth quarter this year, once the Federal Reserve starts to unwind its stimulus program.
The Fed is “likely to keep the balance sheet static after they stop expanding in June,” said Knapp, head of U.S. equity strategy at Barclays Capital, in an interview today on “Bloomberg Surveillance” with Tom Keene. “In the September to November time frame, they’ll allow it start contracting, and that will be the necessary condition to trigger an equity market correction.”
Wednesday, March 16, 2011
U.S. Dollar Collapse Could Occur at Any Time
China this morning reported 4.9% price inflation for the month of February, exceeding analyst expectations of 4.8%. With China now mimicking the U.S. Bureau of Labor Statistics and taking steps to artificially manipulate their consumer price index (CPI) numbers as low as possible, it is likely that real price inflation in China is now closer to 10%. China was at least smart enough to raise interest rates last month by 25 basis points to 6.06%, while the Federal Reserve continues to leave interest rates near zero with there being absolutely no talk of the Federal Reserve ever raising interest rates again. China will be successful at containing inflation, as U.S. inflation spirals out of control and becomes the greatest economic crisis in American history.
China this week reported a $7.3 billion trade deficit for the month of February, its largest trade deficit in seven years, which surprised many global economists. NIA believes China's trade deficit is temporary and that China will quickly return to having a trade surplus. The Federal Reserve's QE2 along with China's destructive monetary policies, which artificially devalue the yuan, have led to a massive rise in China's raw material costs this year. NIA believes that in the upcoming months, Chinese manufacturers will raise the prices of their products that get exported to the U.S., to counteract rising commodity prices. With most products used by Americans today having been manufactured in China, this will mean Americans will soon see massive price inflation in just about all consumer goods they use. NIA projects that by the end of 2011, we will begin to see the U.S. CPI increase by 4.9% or higher on a year-over-year basis, with real U.S. pric e inflation rising north of 10%.
The mainstream media is proclaiming that China's trade deficit will silence calls for the Chinese to allow their currency to strengthen against the U.S. dollar. The fact is, China's government has for long been making the major mistake of printing too many yuan in order to artificially prop up the U.S. dollar. Their fear was, if the U.S. dollar was allowed to decline too rapidly, prices of Chinese goods would rise in terms of U.S. dollars and Americans would no longer afford to import them.
The truth is, if China allowed the yuan to strengthen, the Chinese would have enjoyed a much higher standard of living. Sure, prices would rise in dollars and Americans would import less, but the Chinese would have the ability to consume more of their own products. Now, as a result of China expanding its own money supply in order to keep the yuan pegged to the U.S. dollar, Americans will be forced to pay a much higher price for Chinese goods anyway. The same higher prices Americans were going to pay as a result of exchange rate appreciation, Americans will now pay as a result of inflation. For the Chinese, the exchange rate appreciation route would have been a much better route to take than the inflation route, because now the Chinese will also be forced to pay higher prices. In the very short-term, China might actually suffer more than the U.S. because they lack the social safety nets that have been implemented here in America.
The U.S. government has been successful at temporarily paying off Americans into not rioting in the streets like in Arab nations. It was just announced a few days ago that the number of Americans on food stamps in the month of December of 2010 was a record 44,082,324, up 13.1% from one year earlier and 1.1% from one month earlier. That is more than 14% of the total U.S. population! Combined with President Obama extending unemployment benefits up to 99 weeks, American citizens are too busy and distracted playing with their iPad 2s and gossiping on Twitter about Charlie Sheen, to have any time to protest in Washington, DC.
NIA believes the U.S. government's entitlement spending is currently having the unintended consequence of making Americans dependent on government. It is like when you take wild animals into captivity and you feed them, teach them to do tricks and take care of them for a period of many years; if you just dump them one day back into the wild, it will be very difficult for them to survive. Americans who have become dependent on unemployment checks and food stamps will likely soon abruptly find out that they must begin to fend for themselves without any help from the government. The result will be many Americans turning into wild animals and becoming so desperate that they will have to rob and burglarize their fellow neighbors who were smart enough to prepare, or else they will risk starving to death.
As a result of QE2, the Federal Reserve is now buying 70% of U.S. treasuries, up from previously only buying 10% of treasury bonds. Foreign central banks are now buying just 30% of U.S. treasuries, compared to previously buying 50% of treasury bonds. The U.S. budget deficit in the month of February reached a record $222.5 billion or $2.67 trillion on an annualized basis. With the Federal Reserve now monetizing our debt in full swing, a complete and total loss of confidence in the U.S. dollar could be imminent.
Just like how nobody in the mainstream media was calling for the collapse of Egypt's government a few months ago, almost nobody in the media believes a collapse of the U.S. dollar could possibly take place anytime soon. NIA members are educated enough to see that the writing is on the wall. The Federal Reserve can deny all it wants that the U.S. is experiencing inflation, but with the cost to print a single U.S. dollar paper note rising by 50% since 2008, massive inflation is here right under Federal Reserve Chairman Ben Bernanke's nose. Every day that goes by, China is quietly implementing more and more steps that expand the yuan's use in cross border trade, in order to position the yuan as the world's next reserve currency.
So few Americans are presently preparing for hyperinflation that if hyperinflation broke out today, approximately 90% of Americans won't have the means to put food on the table or put fuel in their automobiles. During the upcoming hyperinflationary crisis, food stamps will no longer have any value at all and all U.S. entitlement programs will come to a complete halt. Americans will take to the streets like the world has never seen before.
The biggest question NIA has today is, will the U.S. government resort to firing at its own citizens, if major riots take place in Washington, DC. On Thursday, police in Saudi Arabia shot and wounded three protesters. The price of oil rose by a few dollars per barrel as soon as this news hit the wire, which shows just how nervous the world's financial markets have become in recent weeks. The fact that the Dow Jones has declined significantly in recent days, in our opinion means that the odds of QE3 being launched as soon as QE2 is over, are now much higher than they were several weeks ago.
The other big question NIA has today is, if in the unlikely event there is no QE3, who will fill in for the artificial buying demand currently coming from the Federal Reserve. After all, with no QE3, the Federal Reserve will go from buying 70% of treasury bonds to being a seller of U.S. treasuries. NIA is 100% sure that foreign central banks aren't itching to jump back in to fill the hole. While in the past, the private sector may have picked up the slack, we believe individual investors will now be more reluctant to jump into government bonds, especially with bond king Bill Gross reducing the government bond holdings in his Pimco Total Return Fund down to zero. The bottom line is, no QE3 means interest rates will fly sky high and destroy the phony so-called "economic recovery".
From April to August of 2010, the last time the Federal Reserve allowed its balance sheet to shrink, the Dow Jones fell by over 1,000 points. If Bernanke doesn't soon begin to leak out the strong likelihood of QE3, we could see the stock market decline by 1,000 points or more, which will force Bernanke into launching QE3. If we see a major sell off in stocks, NIA doesn't necessarily think that precious metals prices will follow. In fact, we could see gold and silver rise along with the Dow Jones falling. NIA projects the Dow Jones to gold ratio to decline to 6.5 in 2011. This means even if the Dow Jones fell to below 11,000, we still believe gold is likely to rise to around $1,600 to $1,700 per ounce this year, with silver soaring to around $42 to $44 per ounce. NIA believes the worst decision any American can make is to sell their gold and silver and go long U.S. dollars, hoping to buy their precious metals back at a lower price in the future.
China this week reported a $7.3 billion trade deficit for the month of February, its largest trade deficit in seven years, which surprised many global economists. NIA believes China's trade deficit is temporary and that China will quickly return to having a trade surplus. The Federal Reserve's QE2 along with China's destructive monetary policies, which artificially devalue the yuan, have led to a massive rise in China's raw material costs this year. NIA believes that in the upcoming months, Chinese manufacturers will raise the prices of their products that get exported to the U.S., to counteract rising commodity prices. With most products used by Americans today having been manufactured in China, this will mean Americans will soon see massive price inflation in just about all consumer goods they use. NIA projects that by the end of 2011, we will begin to see the U.S. CPI increase by 4.9% or higher on a year-over-year basis, with real U.S. pric e inflation rising north of 10%.
The mainstream media is proclaiming that China's trade deficit will silence calls for the Chinese to allow their currency to strengthen against the U.S. dollar. The fact is, China's government has for long been making the major mistake of printing too many yuan in order to artificially prop up the U.S. dollar. Their fear was, if the U.S. dollar was allowed to decline too rapidly, prices of Chinese goods would rise in terms of U.S. dollars and Americans would no longer afford to import them.
The truth is, if China allowed the yuan to strengthen, the Chinese would have enjoyed a much higher standard of living. Sure, prices would rise in dollars and Americans would import less, but the Chinese would have the ability to consume more of their own products. Now, as a result of China expanding its own money supply in order to keep the yuan pegged to the U.S. dollar, Americans will be forced to pay a much higher price for Chinese goods anyway. The same higher prices Americans were going to pay as a result of exchange rate appreciation, Americans will now pay as a result of inflation. For the Chinese, the exchange rate appreciation route would have been a much better route to take than the inflation route, because now the Chinese will also be forced to pay higher prices. In the very short-term, China might actually suffer more than the U.S. because they lack the social safety nets that have been implemented here in America.
The U.S. government has been successful at temporarily paying off Americans into not rioting in the streets like in Arab nations. It was just announced a few days ago that the number of Americans on food stamps in the month of December of 2010 was a record 44,082,324, up 13.1% from one year earlier and 1.1% from one month earlier. That is more than 14% of the total U.S. population! Combined with President Obama extending unemployment benefits up to 99 weeks, American citizens are too busy and distracted playing with their iPad 2s and gossiping on Twitter about Charlie Sheen, to have any time to protest in Washington, DC.
NIA believes the U.S. government's entitlement spending is currently having the unintended consequence of making Americans dependent on government. It is like when you take wild animals into captivity and you feed them, teach them to do tricks and take care of them for a period of many years; if you just dump them one day back into the wild, it will be very difficult for them to survive. Americans who have become dependent on unemployment checks and food stamps will likely soon abruptly find out that they must begin to fend for themselves without any help from the government. The result will be many Americans turning into wild animals and becoming so desperate that they will have to rob and burglarize their fellow neighbors who were smart enough to prepare, or else they will risk starving to death.
As a result of QE2, the Federal Reserve is now buying 70% of U.S. treasuries, up from previously only buying 10% of treasury bonds. Foreign central banks are now buying just 30% of U.S. treasuries, compared to previously buying 50% of treasury bonds. The U.S. budget deficit in the month of February reached a record $222.5 billion or $2.67 trillion on an annualized basis. With the Federal Reserve now monetizing our debt in full swing, a complete and total loss of confidence in the U.S. dollar could be imminent.
Just like how nobody in the mainstream media was calling for the collapse of Egypt's government a few months ago, almost nobody in the media believes a collapse of the U.S. dollar could possibly take place anytime soon. NIA members are educated enough to see that the writing is on the wall. The Federal Reserve can deny all it wants that the U.S. is experiencing inflation, but with the cost to print a single U.S. dollar paper note rising by 50% since 2008, massive inflation is here right under Federal Reserve Chairman Ben Bernanke's nose. Every day that goes by, China is quietly implementing more and more steps that expand the yuan's use in cross border trade, in order to position the yuan as the world's next reserve currency.
So few Americans are presently preparing for hyperinflation that if hyperinflation broke out today, approximately 90% of Americans won't have the means to put food on the table or put fuel in their automobiles. During the upcoming hyperinflationary crisis, food stamps will no longer have any value at all and all U.S. entitlement programs will come to a complete halt. Americans will take to the streets like the world has never seen before.
The biggest question NIA has today is, will the U.S. government resort to firing at its own citizens, if major riots take place in Washington, DC. On Thursday, police in Saudi Arabia shot and wounded three protesters. The price of oil rose by a few dollars per barrel as soon as this news hit the wire, which shows just how nervous the world's financial markets have become in recent weeks. The fact that the Dow Jones has declined significantly in recent days, in our opinion means that the odds of QE3 being launched as soon as QE2 is over, are now much higher than they were several weeks ago.
The other big question NIA has today is, if in the unlikely event there is no QE3, who will fill in for the artificial buying demand currently coming from the Federal Reserve. After all, with no QE3, the Federal Reserve will go from buying 70% of treasury bonds to being a seller of U.S. treasuries. NIA is 100% sure that foreign central banks aren't itching to jump back in to fill the hole. While in the past, the private sector may have picked up the slack, we believe individual investors will now be more reluctant to jump into government bonds, especially with bond king Bill Gross reducing the government bond holdings in his Pimco Total Return Fund down to zero. The bottom line is, no QE3 means interest rates will fly sky high and destroy the phony so-called "economic recovery".
From April to August of 2010, the last time the Federal Reserve allowed its balance sheet to shrink, the Dow Jones fell by over 1,000 points. If Bernanke doesn't soon begin to leak out the strong likelihood of QE3, we could see the stock market decline by 1,000 points or more, which will force Bernanke into launching QE3. If we see a major sell off in stocks, NIA doesn't necessarily think that precious metals prices will follow. In fact, we could see gold and silver rise along with the Dow Jones falling. NIA projects the Dow Jones to gold ratio to decline to 6.5 in 2011. This means even if the Dow Jones fell to below 11,000, we still believe gold is likely to rise to around $1,600 to $1,700 per ounce this year, with silver soaring to around $42 to $44 per ounce. NIA believes the worst decision any American can make is to sell their gold and silver and go long U.S. dollars, hoping to buy their precious metals back at a lower price in the future.
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