Goldsmith comment: Porter's in the mountains of Pennsylvania with no phone and no Internet. And although his longwinded tirades would have been a welcome substitute to the boring financial happenings of today, we were told not to contact him unless someone was dead or the business was getting sued. As of this publishing, neither has occurred, so...
Inflation is simple... but not too simple. Inflation is an increase in the supply of money relative to the supply of goods and services. The effect of inflation is usually rising prices of goods and services. Most people confuse the cause with the effect and say inflation is rising prices. That's not true.
Today, we have massive inflation. The total amount of Federal Reserve credit has risen from less than $900 billion as of September 3, 2008, (less than nine months ago) to more than $2.1 trillion as of May 13. Since August 2007, the Federal Reserve has created 12 new lending programs.
But, as the Financial Times reported today, prices fell faster in April than they have at any time since 1955. FT also noted, "The capacity utilisation rate, a measure of the proportion of [manufacturing] plants in use, across all industries fell from 68.1 per cent to 67.9 percent, the lowest level since records began in 1967." It's hard to make a case for inflation with prices falling faster than ever, housing prices still collapsing, and more factories going idle than at any time since record-keeping began 42 years ago.
Yet, we persist in our fears that inflation is the primary risk, not deflation. Gold is at $900 an ounce for a reason, and it's not just because the world has lost its mind. There's a reason why Zhou Xiaochuan, the governor of China's central bank, asked in February of this year, "Is it time for China to consider using the reserves somewhere else, instead of concentrating too much on the United States?" And why Chinese premier Wen Jiabao said in March, "I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises, and to guarantee the safety of China's assets." And why Luo Ping, of the China Banking Regulatory Commission, said in February, "U.S. Treasuries are the... only option... Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."
A short time ago, it was revealed China had nearly doubled its gold reserves. As John Burbank of Passport Capital put it to us last week in Pasadena, "From a game-theory perspective, China HAS to buy gold."
That means China has only one best move, and buying gold is it.
My friend Vitaliy Katsenelson (author of the excellent book Active Value Investing) said he'd never heard a bullish argument for gold that he liked until he heard Burbank's talk. Vitaliy is one of the smartest, most skeptical, and most rational investors I know. If he was convinced, I'm even more convinced. I respect his intellect that much.
Well, as I said yesterday, I'll put my gold/natural resource stock picks up against anybody's, even billionaire genius John Paulson. Mine are cheaper, safer, and have many times more upside than Paulson's pick (AngloGold Ashanti). One of my gold picks has a credible, documented shot at making investors 50 times their money. It's pursuing the same business model as a previous 50-to-1 shot. And the same thing is happening right now to my pick that happened just before investors in that 50-to-1-shot got super rich. If you want to read what I told Extreme Value readers about my three unique gold/natural resource stocks, click here.
Taking the opposite side of the popular bet is one of the most consistent and best ways to make money in the market. You want to sell when everyone is paying top dollar and buy when no one else will. As our friend Rick Rule has been saying for years, "You're either a contrarian or a victim."
My contrarian buzzer went off this morning when I read a story on the blog Zero Hedge saying a U.K. brokerage sent a letter to clients telling them they were not allowed to short certain stocks. No, the government has not stepped in again with an all-out ban... This time, there are simply no shares available to borrow and sell short. The list of stocks included financial companies like Citigroup and Bank of America and carmakers General Motors and Ford. You can see the entire list here. They are all stocks with maximum pessimism.
I called my broker this morning and asked him if he'd heard anything about this. He hadn't. I asked if I could sell shares of Citigroup short. I couldn't... There weren't any available.
Oddly enough, I heard the same thing about U.S. Treasuries from John Burbank. He said his firm had tried to short Treasuries directly a couple of weeks before, and none were available to borrow. Seems like everybody wants to be short everything.
While this massive short interest could cause a short-term short squeeze (when short sellers are forced to buy back shares on the open market and cover their positions), the fundamentals in financials still stink. And there is much easier money to be made in the market... Like Jeff Clark's latest S&A Short Report recommendation...
Jeff just recommended a great trade to take advantage of the coming fall in real estate prices to his Short Report readers this morning. He's been watching a certain security, and it just fell within his buy range... But he's waiting for the perfect entry price, so you've still got time to get in. This trade costs you zero money upfront – you can actually get paid if you enter this trade at the right time – and will skyrocket if real estate stocks fall in the next month. He conservatively expects to make 175% on this trade, but said the returns could be much, much bigger. To receive Jeff's buy recommendation for this trade, which should come next week, click here...
Our financial aggregator website, The Daily Crux, has been up and running for a little more than three months now. Judging by our daily traffic numbers and the feedback we've received, it's a hit. Every day, we deliver the best financial insight a
nd news from all different sources, all over the globe. Today, for example, you can learn why the iShares Silver Trust (SLV) will soon soar, how to save a ton of money on your credit-card balance, and a safe income stock you can hold for decades... worry free.
But we're always looking for ways to improve the site and make the user experience even better. And we'd like your feedback...
What kind of content would you like to see more of? Trading ideas? Macro trends? Money-saving tips? Guru outlooks? Can we make the website design better? Who should we interview for our next Crux Exclusive interview?
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The government is digging its claws a little deeper into its TARP recipient puppets...
Federal officials are now telling Bank of America to reshuffle its board and add more people with banking experience. And while we don't condone government interference in private business, we have to say the federales have a point this time. At best, a corporate board can spur a lethargic management team into action and bring great strategic ideas to the table. At worst, they are a hive of yes-men and college fraternity brothers who like picking up an extra $250,000 for four meetings a year.
We're not exactly sure where Bank of America falls between the two, but we do know the recently appointed chairman of Bank of America's board, Walter Massey, has ZERO banking experience. The guy is brilliant – he's got a B.S. in mathematics and physics and a Ph.D. in physics. He's also taught physics at some prestigious universities. Most recently, he was president of Morehouse College. But I don't see how a fabled career in academia makes Massey eligible to steer a flailing financial behemoth to safety.
New highs: none.
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"Regarding Senator Brown's comment that GM is getting funding from US taxpayers to help save the company and that taxpayers deserve more than Chinese imports in return, what taxpayers really deserve is to have dumbshits like Senator Brown booted out of office for using taxpayers' money to bail out a doomed company just so they can retain the unions' endorsement and contributions when they run again next time." – Paid-up subscriber Luis
"[Sherrod Brown] is my Senator... i write to him a lot bitching about TARP and the like. He asked me what i would do to fix the economy. Told him to read the constitution and what the founders had to say about limiting Goverment, Keeping bankers away from our money supply and backing the currency by something hard to get and valuable... once he gets that down... hit the reset button. Other then that... do nothing cause we are pretty much boned... nuthin much the Gov can do but make it worse." – Anonymous
Goldsmith comment: It's funny... Whenever I see a politician get grilled on TV, he almost always counterattacks with "How would you fix this problem?" Unfortunately for them, we didn't sign up for the job. One of the best examples is this video of a Harvard Law student who asks Barney Frank how much responsibility he has for the financial crisis. Of course, Frank freaks out and attacks the student. Watch it here...
Regards,
Sean Goldsmith & Dan Ferris
Baltimore, Maryland & Medford, Oregon
May 15, 2009