Yesterday, we drank coffee and waited…
To pass the time, you’ll recall, we muddled through an Edinburgh University study of former Fed chair Alan Greenspan’s confidence level and whether it could be used to forecast movements in the gold price.
Now we know the answer to a slightly different question. The lack of confidence others have in current Fed chair Ben Bernanke’s statements can certainly move the gold price… and the price of everything else, too.
“Pick your poison,” chimed in The Rude Awakening’s Greg Guenthner this morning. “Bonds. Stocks. Emerging markets. Commodities. Wherever you decide to turn this morning, you’ll see red on your screen.”
Crimson Shades of ’08
Ouch. Where does all that money go?
“Money heaven…” Dave Gonigam, our compatriot at The 5 Min. Forecast, suggests. What comes “out of thin air”… returns from whence it came.
“American investors have taken out more margin loans than ever before,” observes Floyd Norris in The New York Times. When the stock market hits consecutive highs, as it has for the past 6 months, individual investors pile in… and are willing to borrow money to speculate.
“Speculative investing has grown among retail investors,” Norris continues, “reaching levels that in the past indicated the market was getting to unsustainable levels and might be in for a fall.”
Floyd offers U.S. margin debt as a percentage of U.S. GDP as a guide:
“The first time in recent decades that total margin debt exceeded 2.25% of GDP came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom — when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes.
“That boom in margin loans also ended badly.”
Will this time end badly? We don’t know… but we’re willing to hazard a guess.
“The rising level of debt is seen as a measure of investor confidence,” says Alexandra Scaggs in today’s Wall Street Journal, “as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against.
“The latest rise has been fueled by low interest rates and a 16% year-to-date stock market rally.”
Summary: The Fed pumps hot money into the banking system. Excess reserves beget margin loans. Margin loans, by definition, fuel speculation.
“In my opinion,” writes one contemplative reader following our investment thesis with some skepticism, “trying to use gold, tulips or any substance to control bankers and politicians is a cop-out. It’s like using burqas in Islam to prevent men from getting bothered by attractive women… [these speculative rallies] are part of our nature.”
Indeed, the easy money works great… until it doesn’t work anymore.
“I am sure politicians,” the reader goes on, “if really interested in devaluing the dollar with gold as a backup could figure a way to manipulate the price of gold for their own use. Isn’t this what politicians do best?”
Perhaps they ought to try it. Just a little…
for The Daily Reckoning
P.S. We followed up this piece in the Daily Reckoning email edition with an essay by Jim Rogers on the coming currency wars of the global economy. It was just one example of how we strive to give our readers both a day-to-day rundown and effective analysis of the markets at-large. If you’re not yet receiving the Daily Reckoning email edition, you’re only getting half the story. Click here to sign up, for free, right here.
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
Yup, small-caps are setting up for a comeback year. In fact, I believe they'll retake a leadership role in the markets in 2015. So now's your chance to set yourself up for potentially massive gains before these stocks start grabbing headlines again. Or... you can simply wait until some ex-purt on CNBC or Fox recommends them - and miss out on half the party. Your choice...
"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...
The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”
Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...
The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.
The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.
It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.