Lots of folks are scratching their heads, wondering why the stock market seems to want to go straight up. Can it last much longer? Our top trader Jeff Clark says no. "Both the Nasdaq and NYSE summation indexes triggered sell signals this week. The last sell signal in May suffered a whipsaw and generated a loss. But in 10 years of following these indicators, they've never failed two times in a row."
I disagree with Jeff. That doesn't happen very often. And when it does, I usually end up with egg all over my face and a lot of money missing from my brokerage account. But what I think is happening in the markets right now is the early stages of a massive inflation.
No, we haven't seen inflationary pressures leak into most commodities or consumer goods yet. But that's normal. Big monetary inflations, like the one going on right now, always hit the banks first. Look at the chart below of the Financial Sector ETF (XLF).
As long as the banks and the brokers are making money, the stock market will keep going up. And as long as the government keeps printing trillions of dollars each year, while holding short-term interest rates at nearly 0%, financial stocks are going to keep going up, too.
I call what's happening the "run up." At the beginning of a big inflation, it feels good to everyone. Everything starts going up – stocks, real estate, agriculture, metals, etc. People begin to believe the government's inflation was the correct answer to all of our problems. They say: Just print more money – that way nothing bad has to happen.
Of course, the good times don't last. The purchasing power of the currency eventually collapses. But at the beginning... everything soars. I think we're in that period. And I think that's why so many of Jeff's normally reliable indicators aren't working right now. There's a huge wave of money surging into the market, and it's blowing past all of the regular limits.
More evidence of my "run up" theory: Sales of previously owned homes jumped 7.2% in July. That's the fourth month in a row sales increased. And July's number was the biggest increase since they started keeping track of these statistics in 1999. The last time sales rose four consecutive months was July of 2004 – smack dab in the middle of the real estate boom.
What accounts for this good news? Why should home sales be soaring when home prices are plummeting and mortgage defaults are rising? There's only one explanation – the "run up." And as if on cue, the financial pundits are already claiming the government's inflationary policies are what saved us. Wrote Paul Krugman last week: "We appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why."
Sure, if you're willing to ignore every single historical example of big government's runaway deficit spending and the impending bankruptcy of our entire country, then catastrophe no longer seems likely. But if you know anything about economic history and the compounding nature of interest, then you know catastrophe is now assured. The "run-up" will feel great. And the big government folks will claim they've saved the day. But just watch what happens to the value of our currency over the next two to three years.
To see how I'm playing the "run up" in my newsletter, PSIA, click here.
Here's something most people who invest in initial public offerings (IPOs) don't understand: Only two people get rich from an IPO – the owners and the underwriters. After all, if you owned a valuable business that was growing and poised to explode in value, why would you sell? This quarter, around 17 companies are trying to raise a combined $8.1 billion by going public – up from zero companies last quarter.
The reason? Buyout firms spent a record $1.6 trillion on takeovers between 2005 and 2007. Now, they're taking advantage of the market's rally to recoup some of their investments. Take the most recent IPO announcement, private-equity giant KKR's attempt to sell $750 million of Dollar General stock to the public... If the deal is successful, KKR will immediately pay itself and investors a $200 million dividend. But why is that good for the company? Or for the investors? Where are the customers' yachts, we ask.
One in eight U.S. households with a mortgage is either in foreclosure or fell behind on payments during the second quarter. And a story in today's Wall Street Journal shows foreclosures on prime mortgages, those for the most creditworthy borrowers, are outpacing subprime. At the end of June, 9% of prime loans were past due or in foreclosure, up from 5.35% one year ago. Compare that to 39.5% of subprime loans, up from 30% last year. And prime loans are now responsbile for 58% of new foreclosures compared to 33% for subprime.
New highs: none.
In the mailbag, Ferris hit a nerve with his sons of thunder remarks. I enjoyed them, too...
What would happen, I wonder, if our founding fathers could return to the country they fought and died to establish? What would they think of our political system today? Of our foreign wars? Of our worthless paper money? And of our sniveling bureaucrats, making one extravagant promise after another (cash for clunkers, tax credits for people who don't pay taxes, free health care, etc.) while ignoring a bankrupt Treasury. I bet they'd know exactly what to do... And I'm pretty sure it wouldn't include listening to a bunch of whipped dogs whine at town hall meetings. Send your thoughts to feedback@stansberryresearch.com.
"After reading your response to being called conservative and then shortly thereafter saying that you like to know who is on your side I decided I needed to let you know I greatly appreciate the no nonsense approach to money, life, and politics. Some people take it so personal when you call a spade a spade and it was their pet spade. Thanks for calling it like it is no matter which side of town it came from. I guess some do not understand that bad economic policy and loss of freedom is bad no matter where it comes from. Who cares what political party is tagged behind the name." – Paid-up subscriber Dan Whitney
Porter comment: Most people don't understand... We're not against the Democrats. We're not against the Republicans. We're against the government itself. We don't think the federal government provides a useful service in any capacity – with perhaps the exception of securing our borders.
Why not? There are lots of reasons, but the most basic is because we abhor violence, whether in foreign lands or in the collection of taxes at home. That's all the government really is: the barrel of a gun. You can dress it up anyway you like, but government relies on coercion. Nobody pays taxes because he wants to.
The free market, on the other hand, relies on persuasion. You pay for this newsletter because you choose to. That's a critical difference, one most people never consider. Systems built on free association and persuasion are vastly more efficient and productive than systems built on coercion. That's why Hong Kong became rich and the Soviet Union went broke. That's why as the government gets bigger in America our standard of living will decline. These ideas, by the way, aren't new at all. They're the ideas America was founded on. It's the idea that government should interfere in our lives that's new and radical.
"Your comment on 'Where are the sons of thunder today' called to mind the full context of the oft abbreviated Patrick Henry quotation:
Is life so dear or peace so sweet, as to be purchased at the price of chains of slavery? Forbid it, almighty God! I know not what course others may take; but as for me, give me liberty or give me death!
"Or if you prefer, Thomas Jefferson, given the context of the current debate over 'free' healthcare for everyone:
He who is willing to trade his freedom for the illusion of security deserves and will have neither.
"From these founders to a nation of helpless victims, what could have so diluted the genetic pool in such a short time?" – Paid-up subscriber Ken McGaha
"Buy some acreage and plant a big enough garden to provide food for a whole year at a time. You can live on potatoes if you have to. When you have acreage, bury your gold and memorize the GPS coordinates. Write the GPS location down and put it in an envelope marked 'to be opened in the event of my death' and give it to your estate attorney along with your will, just in case you die before you spend it all. Since GPS only gets you within about five to 10 feet, leave a metal detector for your kids." – Paid-up subscriber Al
Porter comment: Useful ideas, no doubt. But I'd recommend something a lot easier. Self-storage. It's like having a safe deposit box. But no government authority will know you have it. And nobody is going to ransack an entire self-storage facility looking for gold coins. You can find self-storage facilities in most countries around the world, too.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
August 21, 2009