Larry Summers is among the frontrunners to replace Ben Bernanke when he steps down as chairman of the Federal Reserve at the end of the year. Unfortunately, he's also one of the stupidest people ever placed in a position of leadership in the history of the United States.
Larry is a former president of Harvard and Treasury secretary under President Bill Clinton. He's also held various Wall Street jobs.
The press is mentioning Larry along with a few other candidates… notably current Fed Vice Chairwoman Janet Yellen. But don't be surprised if Larry wins the post. I feel like that's how this tragedy has been scripted.
One of the stupidest leaders in U.S. history…
"We are concerned that the Fed is starting to lose control of the bond market, which is not good news for the stock market or the highly leveraged U.S. economy," market research firm TrimTabs said in its latest report on the movement of money into and out of mutual funds.
According to TrimTabs, investors have pulled $19.7 billion out of U.S. bond-focused mutual funds and exchange-traded funds so far this month. August's outflows are already the fourth-highest on record... And bond funds have lost $103.5 billion, or 2.7% of total assets, since the beginning of June.
Meanwhile, yields on the 10-year Treasury hit 2.87% on Monday morning – the highest since July 2011.
We had no doubt the Federal Reserve wouldn't be able to manage the rising interest rates and inflation following its quantitative easing (bond-buying). It's much easier to create trillions of dollars and inject it into the economy than it is to rein it back in.
The bond market is selling off, in part, because investors are anticipating the Fed will begin tapering its $85 billion in monthly bond purchases next month.
The market is also digesting Fed Chairman Ben Bernanke's potential replacements – Larry Summers and Janet Yellen.
Summers is reportedly more likely to take Bernanke's seat... And he's also expected to cut quantitative easing more quickly. In a closed event in California, Summers said he didn't believe unemployment could drop much more without creating greater-than-expected inflation.
In general, he has also questioned how effective quantitative easing was in stimulating economic growth.
Yellen, on the other hand, is a strong supporter of Bernanke's policies... And she would encourage a focus in lowering unemployment, even if it resulted in high inflation.
We hate to break it to these two potential Fed chairs… but the damage has been done. We're already starting to see the effects of the Fed's massive bond purchases. And despite what they say now… whoever steps into the role will continue printing money. The temptation is too great...
So where is all this money that's leaving bonds going? U.S. stocks...
Investors have poured money into stock funds every month since November – a total of $95 billion. July was the strongest month with $32 billion of inflows, the most since September 2008.
Folks are also buying physical gold...
Global sales of gold coins and bars jumped 78% last quarter from a year ago to 507.6 metric tons, according to the World Gold Council, a gold industry trade association. The increased sales were largely driven by demand doubling in India and China. That equals about $22.4 billion at current gold prices.
And we're continuing to see strong demand for physical gold, as evidenced by negative "gold forward" rates.
The gold forward rate is essentially the interest rate charged in swapping gold for dollars. Say you're holding gold but need dollars for liquidity. You can use gold as collateral. Normally, you would pay for this privilege. But today, the folks with the dollars are willing to pay a bit extra to borrow gold. In short, gold in hand today is worth more than dollars.
We previously discussed gold forward rates going negative. This has only happened four times in the past 14 years (1999, 2000/2001, 2006, and 2008). And each time, it's marked a bottom in the gold market.
Today, the one-, two-, and three-month gold forward rates are all negative. The question we have is what happens when the folks swapping their gold want it back... Will it be there?
Another hedge-fund billionaire is following Bill Ackman into the battle for profits with J.C. Penney.
Last week, hedge-fund manager Richard Perry, of Perry Capital, announced his hedge fund holds 16 million shares, or 7.3%, of J.C. Penney.
In a letter to JCP's Board of Directors, Perry said his firm supported a return to the company by Allen Questrom and Ken Hicks – the former chief executive officer and chief merchandising officer, respectively. Perry wrote:
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At least Perry has experience in the retail world... He took control of luxury retailer Barney's New York last May. Perry bought a controlling interest in Barney's distressed debt (when it was then owned by Istithmar World, Dubai's sovereign wealth fund). He saw an overleveraged asset with a strong brand name. While Perry recognizes retail isn't a great business, he was happy to own Barney's for a few hundred million dollars. Istithmar bought the company for $942 million in 2007.
We hope Perry will have more success with his investment than Ackman...
Dr. David "Doc" Eifrig, editor of Retirement Trader, closed out his 129th straight winning position last Friday...
He sold puts and calls against data storage company EMC and closed those positions for gains of 13% and 5% in less than two months, respectively.
His incredible streak continues...
New 52-week highs (as of 8/16/13): Fission Uranium (FCU.V), SPDR Euro Stoxx 50 (FEZ), and a short position in iShares Barclays 20+ Year Fund (TLT).
If you aren't reading Stansberry's Investment Advisory yet, you should be… The latest issue is worth a year's subscription by itself. At least, so says one subscriber. (We swear there's no relation. But we can't vouch for his sobriety.) Send your comments to feedback@stansberryresearch.com…
"I must confess that your latest edition of PSIA is one of the most interesting pieces of business/investment analysis I have ever read. Given the ridiculously low price you charge for the subscription this one issue alone is worth the price of a full year. I would pay the annual fee just for this one issue even if I had no interest in buying the stock!
"I must confess that I have been watching this same situation unfold over the last few years while wondering if this brilliant investor had lost his ever-loving mind all of a sudden. After reading your latest letter, all of his actions make perfect sense.
"Yesterday, I entered a Buy/Write order on these shares that will produce a 43.99% annualized rate of return on my capital if the shares are not called away and a 99.44% annualized return if the shares are called 37 days from now. Brilliant piece of work; absolutely brilliant." – Paid-up subscriber Ken McGaha
Goldsmith comment: I agree, Ken. It was an impressive issue. Stansberry's Investment Advisory subscribers can access the issue, "How a New Berkshire Hathaway is Being Born in Secret," on our website. And if you'd like to sign up and access Porter's latest issue, you can do so risk-free, here...
Regards,
Sean Goldsmith
Miami Beach, Florida
August 19, 2013