Addison Wiggin – April 10, 2012
- Bernanke fesses up to Fed fallibility… one day before “stimulus” evaporates…
- Europe, the Dow, small caps all get whacked as “backdoor bailouts” fail… again…
- How to mine some of the world’s most sought-after resources (without all the dirt and grime!)…
- “Things are getting expensive” over there… manufacturing fleeing China for… Chicago?
- A contest to develop new fiat currency (grand prize: gold)… new evidence foreigners are eyeing U.S. real estate… a caveat before you go house shopping… and more!
The 50-cent bureaucratic word of the day is: “macroprudential.” Mr. Ben Bernanke, chairman of the Federal Reserve, used the term nine times yesterday during a speech at an Atlanta Fed conference in Stone Mountain, Ga.,
The obfuscatory trick, no doubt learned from his predecessor, sent us scurrying for a dictionary for a definition. Realizing we no longer have one, we resorted to the Internet.
“The term macroprudential regulation,” explains Wikipedia, “characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole. Also known as ‘systemic risk.’”
(Somehow, it seemed more entertaining when googly-eyes Greenspan was in the hot seat.)
During his address, Bernanke — shockingly — seemed to confess that Federal Reserve governors are human… and thus fallible. Gasp!
“The financial system,” writes an anonymous reporter from The Associated Press (AP) summarizing the chairman’s speech, “is constantly evolving and unanticipated future risks to stability will develop.”
Mr. Bernanke was himself paraphrasing from Hyman Minsky’s Instability Hypothesis, which we pulled apart in Chapter 2 of Financial Reckoning Day in 2003 and again in 2009. Hy’s theory states that capitalism breeds within itself the very seeds of its own instability. The longer prosperity reigns, the more risky choices entrepreneurs and business managers will make.
Our assertion: The Fed itself removes from the firing line the very actors who are making the risky moves. “You make a risky bet,” the Fed says, “No worries, we got your back.” Even if the actions are not overt.
“Efforts are under way,” Mr. Bernanke announced on time, “both at the Federal Reserve and elsewhere to evaluate and develop new macroprudential tools and to develop early-warning indicators that could help identify and limit future buildups of systemic risk.”
One such effort: “[the Fed’s] response to the European sovereign debt concerns that emerged in the spring of 2010. Since those concerns arose, we have been actively monitoring U.S. banks’ direct and indirect exposures to Europe and tracking the banks’ management of their exposures.”
And stepping in with billions to backstop those exposures, he failed to add.
Last fall, the Fed launched a backdoor bailout of Europe, using an arrangement known as “currency swaps.”
“Whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, ” explained The Daily Reckoning’s Eric Fry in January, “not to worry, a central bank can still provide indirect, covert assistance.”
After the market meltdown in late 2008, some $600 billion in currency swaps infested the Fed’s balance sheet. By early 2010, the borrowers unwound those swaps. But the new swap lines opened on Nov. 30 — totaling $108 billion by mid-January.
As of last week, the swap lines had receded to $46 billion. That’s a drop of more than half in only a few weeks. Sounds impressive until you realize it’s still 19 times the amount of swaps that sat on the Fed’s balance sheet before this unseemly process began. Again.
The S&P 500 rose 14%.
For a while, it “worked.” After the swap lines were opened last fall, we were assured Europe was “fixed.”
Today, however, yields on 10-year Italian bonds blew out today… from 5.36% to 5.67%. Ten-year Spanish debt, meanwhile, is pushing 6%. Reality is setting in.
Thus, European stocks got clobbered today. The blue-chip STOXX 50 index dropped 3%. Italy’s main index fell 5%.
Likewise, the waves of fear are crashing ashore in the U.S. As of this writing, the Dow is down 180, to 12,750.
The S&P has shed nearly 20 points. The small caps are taking it even worse.
And money is fleeing for — what else? — U.S. Treasuries. The yield on the 10-year has tumbled to 1.98%. (See: “The Irrational and Unholy Cartel: Why You Are Still Holding Treasuries” in the April 2012 issue of Apogee Advisory.)
Which, as EverBank’s Chuck Butler reminds us this morning, is still higher than the 1.79% it was on Sept. 21, 2011 — the day the Fed launched “Operation Twist.”
“The Fed’s target here was to lower interest rates… So once again, a Fed scheme is proven to have little firepower.”
If only they had a little more macroprudential foresight… sigh.
Before the market took a tumble today, small-business owners added their own gloom to the zeitgeist. The optimism index put out by the National Federation of Independent Business fell in March for the first time in six months.
“Nine of 10 index components dropped last month,” says the NFIB’s summary, “most notably hiring plans and expected real sales growth each taking a significant dive, in spite of owners reporting the largest increase in new jobs per firm in a year.
“It looks like a replay of 2011,” the summary added, “a few months look good early on, and then it all fades.”
Money is fleeing not only into Treasuries… but also to gold. The Midas metal is pushing $1,660, up more than 1%, while other “risk assets” are beaten up mercilessly.
Speaking of which, silver isn’t sharing in the love. It’s more or less flat at $31.72.
“The rare earth investment boom of the past two years has been, at root, about building new, non-Chinese sources for RE materials,” says Byron King, revisiting a familiar and at times lucrative sector.
“China’s global market share for RE is in the 95% range” — a situation that won’t be helped by industry darling Molycorp’s acquisition of a company called Neo Material. Neo’s manufacturing facilities are in… China.
“If Molycorp ships RE ores and concentrates to Neo factories in China,” writes Byron, “it actually deepens the strategic problem.”
So the race is on to be first into production with the first rare earth mine outside China. And Byron has uncovered a new candidate with a distinct advantage: It doesn’t have to build a mine.
Rather, it’s going to take “unwanted” ore from other mining operations for things like iron or titanium or tin. Once other miners are done extracting those materials, it then will turn over its ore to this tiny company to extract the rare earths.
“What if,” Byron suggests, “you could eliminate that ‘building a mine’ issue? Wouldn’t that eliminate a lot of management and engineering steps? Save a lot of permitting and headaches? Require far less funding upfront? Be quite a bit faster?”
He’s found a company doing just that. He recently added it to the rare earth picks in his premium advisory, Energy & Scarcity Investor. For the next week only, we’re making this service available at an unheard-of price. If you missed out on Byron’s recommendation of Molycorp for a 178% gain in four months… here’s your chance to make up for it.
“Things are getting expensive in China, pure and simple,” says one of Chris Mayer’s contacts there.
This individual is a design engineer from Chicago. “In 2004, after spending three months in the country in two-week blocks in the first half of the year, I figured maybe I ought to just move here.” So he did.
Business was good… but things started changing last year. “I realized it when I was getting price quotes for some injection-molded plastics. Chicago used to be a center of excellence for this, and it’s since been decimated by overseas competition. Suddenly, prices from them weren’t that different from what you could get in China when you factored in transportation costs.
“It looked better and better as we took another big labor increase in China in the third quarter of last year. Of the last four out of five jobs I quoted for injection molding in the U.S. versus molding in China, the U.S. won. Most people don’t believe me when I tell them I’m getting better prices in the U.S.”
“Labor costs have gone up substantially in China. That’s not a mystery to anybody. The amount of labor available at any price for some jobs is just not there.”
This is one of the more startling observations Chris has found in two years of travel: Manufacturing that once took place in China is moving either to cheaper countries like Cambodia… or it’s moving back to the United States.
This yields up scads of investment ideas that would never occur to you… unless you expended the shoe leather and frequent-flyer miles to do so. Chris will reveal some of these ideas — complete with names and tickers — in an “online adventure tour” this coming Thursday. There’s still time to sign up.
The Royal Canadian Mint has launched its “MintChip Challenge” — which, disappointingly, has nothing to do with ice cream. But does make us crinkle our brow with a skosh of confusion.
You see, the Mint is looking for online developers “to create innovative digital payment applications” for mobile phones, tablets or “maybe on some future device that doesn’t even exist yet.
“MintChip brings all the benefits of cash into the digital age,” chirps the mint’s announcement. “Instant, private and secure, MintChip value can be stored and moved quickly and easily over email, software applications or by physically tapping devices together.”
How this differs from the dozens of mobile payment systems being developed in the private sector we have no clue. But hey… there’s C$50,000 in prize money up for grabs… paid in gold bullion.
That’s correct. The mint wants their own digital fiat currency… and they’re willing to pay for it with gold. Heh.
“Prizes include over 2 pounds of gold (29.65 ounces) from the Royal Canadian Mint!” says the Challenge Web page. “Prize values are based on the market value of gold in Canadian dollars as of March 12, 2012 and are subject to change based on the market value of precious metals.”
Work it. If you’ve got the skills, go for the gold.
“In the last few days,” a reader inquires, “I noticed how the USD continues to lose strength against the CAD even as the USD gains strongly against other major currencies (GBP, EUR, etc.). What gives?”
The 5: “The Canadian dollar is in a conundrum,” Abe Cofnas wrote his readers yesterday morning. “Canadian job growth is stronger than expected, but 80% of Canadian exports depend on the U.S. economy.
“The result is an oscillating Canadian currency against the dollar.” And so it has been for nearly two months.
“The Vietnamese guy who bought the 10-acre town, house and gas station,” a reader writes, “is buying himself a green Card from the good ‘ole USA. Some places are worse than the U.S., or at least their government isn’t trustworthy, either.
“It’s good to have options.”
The 5: Our point exactly.
“See if the Vietnamese guy wants a house in north Florida,” writes a second: “70-acre cattle ranch with four bedrooms, 3.5 baths, 4,000-square-foot brick home (very nice): $900,000.”
“Keep up the good work, guys!”
“My contacts in China (and in the U.S., among the Chinese-Americans) indicate a lot of people putting greater faith — followed by money — into the U.S. housing and real estate market,” chimes in another.
“China will likely see a bubble burst, while U.S. is often bargain-priced. Not only is this seen as an investment, but a hedge against revaluation of the renminbi/yuan. Plus, anyone hoping to send a child to school in the U.S. thus has potential living quarters — and, I suspect, a tax write-off when ‘inspecting’ their investment.”
“BTW, my moniker is ‘Jin Si Hou’ (golden monkey) in Mandarin.”
The 5: Nice… we’re enamored with our own Mandarin moniker: “Wei Jin,” aka “danger gold.”
“Good thing you don’t need the Internet to grow rice. You would harvest once every five years at the current speed,” writes a reader who recently returned from Burma. “Amazing that no motorbikes are allowed in Yangon. That sure made crossing the street safer than in Saigon or Bangkok!
“Please tell your readers not to access any bank or brokerage accounts while there,” he adds. “E*Trade froze my account for almost two weeks even after I left and was in Thailand. Makes me rethink my trip to Persia.”
The 5: Thanks for the tip.
On the question of what to call the country, Chris Mayer checks in: “I take my cue from Thant Myint-U, who was born there and calls himself a Burmese and the country Burma.”
“His new book, which I highly recommend for anyone looking to learn more about the country, is called Where China Meets India: Burma and the New Crossroads of Asia.”
“Besides the dropping costs of houses (yeah, there are some super-cheap ones),” a reader writes in response to our latest post in The Daily Reckoning, “a big concern remains: title questions.”
“Even if one pays the money — will s/he ever really own the house? With all the slice-and-dice done with mortgages, titles remain deeply in question, especially for the repos that are going ‘cheap.’”
“Plus, there remains an attitude barrier against ‘fixing up’ — for one’s own usage. To ‘flip’ remains more attractive and debilitating for the market overall. There’s a lot more ‘bottom’ to find, not to mention real productive ‘growth’ to happen before real estate climbs out of its pits.”
“And did I forget to mention anti-ownership attitude of IRS and courts toward rental owners, not to mention deadbeat renters to deal with, too?”
“No, thank you.”
The 5: Indeed, 1.25 million foreclosures got stuck in the pipeline after the robo-signing scandal broke, which is now over following the multistate settlement agreed to on Feb. 9. The very concerns you raise are part of the reason why houses are, and will likely remain, cheap. We’ll add one more…
The “shadow inventory” banks are holding because they don’t want to sell at these prices remains at 2.1 million homes. Down just 400,000 from two years ago… that’s a lot of inventory.
For the record, we still think there’s a long way to go before “housing” recovers. Likewise, the U.S. economy, which had become so dependent on housing and related spending, will likely continue to limp along, despite any political claims to the contrary.
Your investment opportunity comes from the fact that no one wants to touch real estate right now. And the Fed is promising to keep rates low for the next two years, at least. If you find properties you like, and can lock in and hold on for the ride, you can potentially build a portfolio of decent real estate inexpensively… but it’s a long-term play.
And we don’t recommend you consider your primary residence as part of that portfolio.
The 5 Min. Forecast
P.S. WikiLeaks strikes again: News just crossed our desktop revealing the seamy underside of Invisible Children, the outfit behind the “Kony 2012” video phenomenon we unpacked last month. More tomorrow…
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