Featured Trades: (GOLD), (GLD), (ABX)
3) You No Longer Have to Be Crazy to Buy Gold. The good news is that you no longer have to be crazy to buy gold. Until recently, certifiable believers chasing the barbaric relic were driven by a host of urban legends and wild conspiracy theories which frequently appear on the Internet, such as the imminent bankruptcy of the US Treasury, Fort Knox holding only titanium bars that had been painted gold, Weimar style hyperinflation that is just around the corner, or the gold ETF (GLD) owning only paper, and not physical gold.
No more. The long term structural demand for the yellow metal is now so well known, that I can read about it in the tabloids while waiting in line at Safeway. There is an emerging market central bank bidding war going on, with India and China trying to outmaneuver each other to raise their gold holdings to developed world levels. The EC or the IMF may sate that demand by selling off their remaining holdings to bail out Greece. A rising emerging market middle class also brings large, newly enriched consumers from countries that have long cultural preferences for owning gold and silver over paper fiat currencies.
Now that we have decisively broken through to a new all time high, how high can we go? Surely peak gold is upon us. Barrick Gold (ABX), the world's largest gold producer, would not be hacking out new mines under incredibly harsh conditions at 15,000 feet in the Andes if there were easier supplies to develop.
My own long term gold forecast has been the old inflation adjusted high of $2,300 (click here for the call). But higher altitudes beckon. If you want to take gold up to its historic peak in world GDP last seen in 1980, that would see gold at $5,300. Also, keep in mind that the total world gold supply has increased since then from 110,000 tonnes to 170,000 tonnes. For gold to recover the old peak percentage of the world monetary base, M3, it would need to rise to $5,700.
Then there is the grand daddy forecast of them all. After the US allowed the price of gold to float from $34/ounce in 1971, it rose 2,500% to $850. An equal move of the 1999 $250 bottom would take us up to $6,250. I think I'd be a seller there.
The great thing about gold is that, absent a dividend or a coupon, you can never claim it is too cheap or too expensive. While the current production cost at the big mines is around $400/ounce, the only certainty is that there are now more buyers than sellers. Look at the table below of the performance of gold so far, relative to other bull markets of the last three decades, and it is clear that we are only just getting started.
Featured Trades: (EMERGING MARKETS), (EWZ), (RSX), (PIN), (FXI)
Brazil iShares ETF
Market Vectors Russia ETF
PowerShares India ETF
iShares FTSE/Xinhua China 25 ETF
1) It's Off to the Races With Emerging Markets. Ben Bernanke's unprecedented announcement that he is buying $600 billion in medium dated Treasury securities is tantamount to the government ordering you to pour all of your money into emerging markets. The 'RISK ON' switch has been flipped, and the Feds have poured super glue into the mechanism. We could have a moon shot up until the end of the year from here. The only price to pay is rising risk levels.
Jim O'Neil is the fabled analyst who invented the 'BRIC' term a decade ago, and? has since been kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London. Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them.
As I have been pushing emerging markets since the inception of this letter, this is music to my ears. By 2018 the combined GDP of the BRIC's, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that requires is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate.
'BRIC' almost became the 'RIC' when O'Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
If you believe that the global financial markets are back into risk accumulation mode, as I do, then you probably should top up your Brazil position, as it has lagged in the smaller emerging markets so far this year. Jim Chanos, you may be right about a China crash, but you're early by a decade!
Featured Trades: (OIL), (XOM), (OXY), (COP)
2) The Price of Oil is Going Up. The free Ben Bernanke put also applies to the commodities markets. I received another scratchy, crackling cell phone call from my drilling buddy in the Texas natural gas fields today. You could almost choke from the dust on the line.
He told me that the BP Gulf disaster was turning the fundamental assumptions of the oil industry upside down, and that sharply higher oil prices were in the cards, probably $100/barrel by year end. Major oil companies with deep pockets at risk were rushing to offload their existing offshore leases and partnerships in producing wells to avoid BP's potential $30 billion hickey.
If nothing else, the majors have learned that liability caps are nothing more than wishful thinking. They can only speculate what a new round of vengeful regulation will cost them. Hedge funds looking for 'the next big play' were willing buyers, but only at substantial bargains. We are witnessing nothing less than the birth of a new distressed junk market.
It is all part of a repricing of risk that values offshore assets at a discount, and onshore ones at a new found premium. Only big swinging dicks need apply, as minimum participations are going for as much as $50 million.
The impairment of Gulf assets is also breathing life into the once moribund natural gas market. Enough gas supplies are being left under the Gulf to offset the enormous new production coming online through the new 'fracting' technology, where everyone is using a volume strategy to offset plunging prices. Gas is not heading off to the races, but supplies will be tight enough to sustain it in a $3.50-$5.00 trading range for the next 18 months.
It all makes me want to go back and buy more ExxonMobil (XOM) ( click here for my piece), Occidental Petroleum (OXY) ( click here for the report), and Conoco Phillips (COP). I'd love to get more out of my friend, but I don't think my aged, arthritic back could take another three hours driving down washboard roads in a beat up pickup truck with no springs to track him down at his newest drilling location. Besides, I already have enough 8 x 10 signed glossy portraits of George W. Bush to last a lifetime, and I didn't want to hurt his feelings by turning down more.
Featured Trades: (AUSTRALIA), (FXA), (FXE), (EWA)
Currency Shares Australian Dollar Trust ETF
PowerShares Indio Portfolio ETF
Currency Shares Euro Dollar Trust ETF
3) I'm Singing 'Waltzing Mathilda' Again. Many readers made a killing last February when I recommended they buy Australian dollars and short the euro against it (click here for the call). A lot of the hottest hedge fund money then poured into The Land Down Under, while the Euro has crashed. The outright Aussie/US Dollar (FXA) jumped from $AUS.85 to $AUS1.01, while the cross soared from AUS$.63 to AUS$1.41.
Last week, the Reserve Bank of Australia surprised observers and raised overnight interest rates to 4.5%. Ben Bernanke's QEII is triggering simultaneous quantitative tightening in the best managed, but inflation prone commodity producing or emerging countries of the world, like the Land Down Under, India, and of course China. All this does is widen the yield spread between their currencies and the dollar, making them even more attractive to speculators. You might as well be waving a red flag at a bull
I still think Australia is blessed, with that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women. Australian stocks (EWA), which have gained a mind blowing 45% since July, should be at the top of your list too.
Another Reason to Invest in Australia
Featured Trades: (SILVER), (SLV), (CDE), (SLW), (HL)
SPDR Gold Trust Shares
iShares Silver Trust
4) Silver Blasts Through to a New 30-Year High.? Those transfixed by gold (GLD) topping the $1,368 level again have been missing the real action in silver (SLV). The white metal has soared 45% to $18.46 since the July low, compared to a more modest 18% move for the barbaric relic, an outperformance of three to one.
I have been a raging bull on silver for two years now, grabbing you by the lapels and shaking you until your dentures fell out if you didn't buy it. It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from a weak dollar, always a risk that is out there. It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy.
If you don't think this move is real, check out my picks in the sector. Coeur D Alene Mines (CDE) has rocketed by 58% July, while Silver Wheaton (SLW) is up a staggering 75% and Hecla Mining (HL) has soared by 61%. To accumulate .999 fine Silver Eagles or silver bullion, click here.
All of a sudden, my $50 an ounce target is not looking so insane when I first made it two years ago. That is a mere double from here. How long will it take to get there? William Herbert Hunt, who engineered the 1980 squeeze with his brother Nelson with a 100 million ounce long position that last took it that high, could tell you, but only from the grave.
SPECIAL ELECTION ISSUE
Featured Trades: (MY ANALYSIS OF THE ELECTION)
1) My Analysis of the Election. Won the World Series, but lost the Speaker of the House. I guess San Francisco can't have everything. My expectation that demographic trends would limit Democratic losses turned out to be wrong. The kids stayed home and texted each other, partied, or watched MTV, and didn't go to the polls. I thought that if the Republicans won the House of Representatives, it would be by handful. They ended up taking 62 seats. Good thing my market calls are better than this, or I'd be washing windshields for a living at Park Avenue and 42nd Street. I nailed the Senate, which I correctly predicted the Tea Party would blow for the Republicans. I even called the spoiler states, Delaware and Nevada.
The West coast turned out to be a clean sweep for the Democrats, as I expected. Meg Whitman spent $35 per vote, versus 60 cents for Jerry Brown, and still lost by 13 percentage points. She probably would have done better if she just sent everyone a check. The sleeper that no one is paying attention to here is that simple majority rule for the legislature passed, dumping the 2/3 requirement. California taxes are about to go up a lot.
Still, without the presidency and the Senate, all conservatives have really won is the right to determine the House agenda, make speeches, and conduct investigations, which I am sure there will be a lot of. One newly elected conservative has even promised to hold McCarthy style un-American activities hearings. You can forget cooperation with the administration. These are not your father's Republicans. They have been rewarded for obstruction, the Senate setting an all time record for filibusters, so you can expect it to continue, or intensify. Bring on gridlock.
New Venue for the World Wrestling Federation
SPECIAL ELECTION ISSUE
Featured Trades: (WHAT THIS MEANS FOR ECONOMIC POLICY)
2) What The Election Means for Economic Policy. Let's put the economic polices the voters chose under the microscope and see what we got. It is not a pretty picture. The bottom line is that my scenario of a lethargic 2-2.5% GDP growth rate continues for the foreseeable future. Here are the reasons why:
1) The party with the worst job creation record in a century is now in charge of job creation. There were 23 million jobs created from 1992-2000. There were only 1 million created during 2000-2008 when the population grew by 22 million.
2) The party that presided over the biggest increase in the deficit in history, from $5 trillion to $10 trillion during 2000-2008, is now charged with reducing the deficit.
3) Republican deregulation policies favor large multinationals that have been the most profitable, because they have been the most aggressive exporters of jobs. Small businesses that generate the most jobs don't show up anywhere in this picture.
4) Without any further assistance from Washington, the states and municipalities are going to have to take an extra sharp hatchet to budgets for teachers, police and firemen, the most junior claims on local resources. The drag on the healthy parts of the economy increases.
5) Much of the campaign focused on cutting the deficit by reducing spending. Below, please find the six largest expenditures in the $3.5 trillion 2010 Federal budget:
$687 billion - Social Security
$655 billion - Defense
$564 billion - Unemployment and Welfare Payments
$448 billion - Medicare
$287 billion - Medicaid
$162 billion - Debt service
Notice, first of all, that you did not see these numbers anywhere during the campaign. They should have been posted at every ballot box along with a Sharpie marking pen. Looking at the list, I see three untouchable Republican sacred cows, social security, defense, and Medicare, taking up the bulk of the spending. Debt service is untouchable. That leaves unemployment and welfare payments and Medicaid as big fat targets.
But even if you completely end this spending, close the agencies involved, and sell off the buildings, as many conservatives have proposed, you have only cut spending by $851 billion, or 61% of the current budget deficit. Some $549 billion of deficit remains. And this assumes the tax rates remain the same. Cut taxes, and the Medicare, unemployment, welfare-free budget deficit rockets to $1.2 trillion, while at the same time slowing GDP growth substantially further. Did I mention that falling spending causes job losses? Talk about jumping out of the frying pan and into the fire.
The mostly closely guarded secret of this election is what spending the Republicans cut in their first budget. I am waiting with baited breath to see how they do this.
Looking for New Office Space
SPECIAL ELECTION ISSUE
Featured Trades: (WHAT THE ELECTION MEANS FOR THE MARKETS),
(SPY), (TBT), (YCS)
S&P 500 SPDR ETF
ProShares Ultra Short Lehman 20+ Year Treasury ETF
ProShares Ultra Short Yen ETF
3) What the Election Means for the Markets. Who really won this election? I did! It is setting up trends in the global financial markets that will be easy to identify and cash in on. If you want to jump on my bandwagon and get a peak at some market timing, then keep reading this letter.
While voters may be enthralled with empty promises, platitudes, spin, and sound bites, markets clearly aren't. Like a huge, dumb animal, they respect only the remorseless mathematics of supply and demand. QEII is still the principal driver, the first $600 million of which we got today. This promises to lift all boats, especially the yachts, to year end, and possible through Q1, 2011 (click here for 'Contemplations on Risk'). When it ends, the full impact of this election will bite. This will be the outcome:
1) There will be a major sell off next year, not just in stocks, but in all asset classes. The election results increase the certainty and the severity of this event. Volatility (VIX) will rise across the board.
2) The deficit will rise faster. The debt markets' breaking point will be reached sooner. This means we will get a collapse in bond prices, no matter how much liquidity floods the system. Whether this happens with the national debt at $15 trillion, $18 trillion, or $20 trillion is anyone's guess. We are headed towards all of those numbers trapped in a runaway Toyota with the accelerator stuck on the floor.
With the administration and congress gridlocked, the Federal Reserve is the sole functioning branch of government, and creating inflation is virtually the only thing they know how to do well. This nicely sets up my (TBT) trade, one of my core shorts for the coming decade.
3) A flight to safety will trigger an extended period of dollar strength. This is bad for stocks, commodities, emerging markets. Flip the 'RISK OFF' button. This sets up the crash in the yen, my other core short of the decade, and bodes well for the (YCS).
4) Since many conservatives believe that global warming is a leftist hoax, you can expect more favorable policies and tax treatment for oil, natural gas, and coal. Expect dependence on foreign energy sources to rise and crude prices to rocket. The congressman who apologized to BP for it harsh treatment is now the chairman of the House energy committee. The Bush administration took oil from $20/barrel to $150. Expect something similar going forward. The giant target on our backs in the Middle East stays there. Buy your electric car now.
Sorry, guys, but read it and weep. As with a World Series umpire, I call them as I see them. This is the letter where hard data and facts trump uninformed opinion every day of the week. There are thousands of letters out there whose primary goal is to make you feel better. This isn't one of them.
Featured Trades: (HOW BIG IS QEII?)
1) How Big is QEII? Speculation is rife in the Treasury markets on if quantitative easing has already started, and if it has, how big it is, or whether it will happen at all? Goldman Sachs has opened more than a few eyes when they put their $2 trillion forecast out there. The low-end estimate is $100 million between Fed meetings every six weeks.
Let me tell you how big that is. This month the Fed will buy $30 billion as part of its regular refunding efforts. The mean of these two predictions is $117 billion a month, or $1.4 trillion a year. That means that the Fed will buy the entire amount of debt created by the 2010 budget! This is why all asset classes are going up, even the wheezing, arthritic ones, like US stocks.
There are two great unknowns here. When does the Fed take the punch bowl away, and what will the markets do when it senses this is happening. My guess is that QEII will end sooner than later, because private investors have already done so much front running.
When it does end, the markets will sell off much more than in the past. The new, post crash risk control regime has a much finer hair trigger than before. Investors will no longer sit back and willingly take a 50% hit to their net worth. Buy and hold is dead, and the markets know it.
Alan Greenspan used to spike his punch with a surreptitious flask of Ron Rico rum. Ben Bernanke uses crystal meth, ecstasy, and steroids, and the hangover will be monumental. What will lead the downturn??? Wheezing, arthritic assets, like US stocks.
What's Really In There?
Featured Trades: (PALLADIUM), (PALL)
ETFS Physical Palladium Shares ETF
2) Palladium Hits a Seven Year High. Palladium has soared by 60% since my recommendation in January, hitting a seven year high yesterday, making it one of my better calls of the year (click here for the piece).? Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.
It's looking like the car manufacturers, which consume huge amounts of the white metal to make catalytic converters, could turn out as many as 12.5 million cars this year. This could rise to 15 million by 2015. The 2008 nadir was a paltry 8.5 million vehicles. You can forget seeing the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by another 1.5 million units a year.
Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. This means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.
Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF (PALL) this year. The fund is thought to be bumping up against its position limit of 1.29 million ounces, which amounts to a breathtaking 18% of global production in 2009.
If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100-ounce bars at $50 over spot, or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.
