Article Info
Jul
15
2009

Issue

Posted In
5 Min. Forecast

Inflation's Back Already, Sell This Sector, The Next Bubble, A Worthy "Green Shoot" and More!

by Addison Wiggin & Ian Mathias

  • Inflation back already? Data that’s surely giving Ben Bernanke a rash
  • If inflation is coming back, what should you own? Chris Mayer offers his advice
  • A strange call from a macro-master: Another housing bubble on its way
  • Byron King with a sector to sell
  • Plus, Rob Parenteau with the first “green shoot” Dr. Richebacher would applaud

 

  Could inflation be back already?

Yesterday, we told you about the latest PPI reading. If you recall, producer inflation popped 1.8% in June, twice as much as Wall Street was expecting and the biggest monthly gain since late 2007.

Today, it’s the same story for us lowly American consumers. The CPI rose 0.7% in June, says the Labor Department, also higher than expected.

Factor in CPI and PPI data from the last few months and we’re left to wonder… were rumors of inflation’s death greatly exaggerated?

“This, to me, is important,” says Addison Wiggin, our executive publisher, “because if inflation is already under way, how is Bernanke going to sop up the excess money in the system, as he claims he’s going to be able to do? This is the question of our time.”

  Of course, it’s easy to spin this story in the other direction. On an annual basis, consumer prices are down 1.4%, the biggest fall since January 1950. Music to Ben Bernanke’s ears, we’re sure. But since we’re looking back to 1950, we’d be remiss not to share this historic chart. Betting against American inflation has been a fool’s errand for a long, long time:

  “The market clearly is not worried about inflation right now,” says Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.5%. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.

“So, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. The theory seems to fit the facts of what we are seeing in the marketplace right now.

“I don’t dismiss these arguments easily — and there is more to it than what I’ve given you here. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates: money manager Van Hoisington, economist David Rosenberg and others.

“Still, I think the endgame is for inflation — which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.”

Companies rich with “real assets” make up the overwhelming majority of Chris’s Special Situations portfolio… check it out, here.

  The market certainly isn’t pricing in the full threat of inflation, but the thought is clearly creeping into traders’ minds. The yield on a 10-year note has risen over 20 basis points since Monday.

  Likewise, after a six-week slumber, gold has sprung back to life. The spot price is up over $30 from last week’s low, to just under $940 an ounce.

  Mortgage applications are up for the second week in a row – a trend we don’t expect to last given the recent rise in Treasury bond yields. The Mortgage Bankers Association’s index of applications rose 4.3% last week, led mostly by refis. The average rate on a 30-year fixed has fallen to 5.05%, the lowest level since late May.

  The stock market is back on the rise today. After another flat finish yesterday, the Dow is up nearly 2% as we write on another blue chip earnings surprise. Intel’s in the spotlight this time, up 7%, after topping second-quarter expectations by earning 18 cents a share, more than double the Street’s estimate.

  There could soon be another bubble in housing, pontificates famous Yale economist Robert Shiller. The father of the S&P/Case-Shiller home price index said this week that, yet again, “People have gotten very speculative in their attitudes toward housing." Unlike the previous bubble — when borrowers were convinced home prices would rise forever — Shiller is now concerned that ultra-low mortgage rates and the plethora of foreclosure and bank sale bargains will tempt too many back into the housing market.

“This is not my more probable scenario,” Shiller hedged, noting that the market is “still in an abysmal situation” and could “languish for many years.” But the man knows bubbles… so we’ll be keeping an eye out.

All that being said, there’s a good chance Shiller is just pitching some new products. His firm just launched two derivative investments: Major Metro Up (UMM) and Major Metro Down (DMM). As you’d guess, they rise and fall with the American housing market. They’re a lot like ETFs, but not exactly… if you’re interested, look here.

  Another desperate government housing fix: The Obama administration is mulling the idea of taking temporary ownership of soon-to-be foreclosed homes and renting them to their distressed owners. Still in the public vetting stage, the current plan would essentially allow the government to make mortgage payments on homeowner’s behalf and then collect rent until that owner is able to refinance (at a government-manipulated rate, no doubt).

No word yet on the real likelihood of this proposal. Oy… we don’t even want to know what it’ll cost.

  All the news above is putting new pressure on the dollar. The dollar index has broken below 80, its historical level of support. As we write, it’s down to 79.4.

  That’s good news for oil bulls. Light sweet crude has arrested its recent fall and is back up to $60 a barrel.

  “Sell Valero Energy, Tesoro and other pure-play refiners,” says Byron King. “These two refiners have been in the Outstanding Investments portfolio for over five years. Both companies refine lower grades of crude oil, which sell at a discount to the higher grades of crude. The idea is to buy the lower grade of oil, refine it into end product and sell at the going price. In the past, this translated into high margins per barrel.

“For much of the past five years, these two refiners spun off immense amounts of cash due to high crude margins. That ended during the oil run-up last year. I hoped that the high margins would come back with an economic recovery. Both companies have done an excellent job of internally managing the tight market. But the margins have not come back, due to the length and depth of the economic crash.

“If I thought that the U.S. economy was going to kick back into a recovery mode, I’d be more optimistic about the prospects for the refiners. But I don’t see things turning around soon. I foresee a future of tight margins on lower versus higher grades of crude. I expect lower margins at the gas pump due to continuing economic problems (especially for Tesoro in not-so-sunny California). And of course it doesn’t help that Congress wants to tax and regulate carbon dioxide emissions from refineries, which are among the most prolific of CO2 emitters.”

If you’ve been keeping up-to-date with your 5 Min. Forecasts, you’ll remember Byron’s advice last week to sell several different sectors. Late yesterday, he gave his readers specific advice to get rid of nine different Outstanding Investments stocks… as clear a sign as any that Byron expects heavy seas in the near future. If you want his advice as well, definitely check out OI. It’s a helluva value.

  Judging by one of our favorite data points, the recession is still alive and kicking. Industrial capacity utilization fell again last month, says the Fed today. June capacity utilization fell to 68%, another record low and down 13% from this time last year. As we’ve noted previously, a bottom in capacity utilization has marked the bottom of every recession since 1970.

  “For the first time in months, we can find evidence of higher new orders for capital goods,” says Rob Parenteau of The Richebacher Letter. “While fears of a relapse are still building, that is one green shoot we believe Dr. Richebacher would deem worth applauding.

“We are finding evidence that business capital spending has been cut so sharply over the prior three quarters that it is reasonable to expect some replacement demand to begin showing up. The Institute for Supply Management (ISM) new orders series has been signaling a revival in order flows, and with the usual three-four month lag, Commerce Department orders are, in fact, confirming the ISM improvements.

“Dollar levels of manufacturing orders are starting to make the turn, and capital goods orders are already showing improvement off levels that marked the end of the last recession. By composition, the order improvement is reported in the industrial machinery, materials handling machinery and nondefense aircraft and parts segments. Recent Boeing announcements call the improvement in the last category into question, but the key point here is that even at historically low rates of capacity utilization in the manufacturing sector, there are signs of life in new orders for capital goods. The initiation of replacement demand for some types of capital equipment may have begun given the sharp plunge in gross business investment to levels close to estimated depreciation.”

“I’m afraid Bill Bonner’s bias keeps him from thinking clearly,” a reader writes, responding to Bill’s reaction to the Obama administration’s “eat the rich” health care proposal.

“By taxing those who earn over $350,000, the money is still put to work in one way or another — but rather than at the direction of the owner of the money who may have wanted a new car or a vacation, So confiscation does not cause the money to ‘disappear,’ nor is it ‘sucked out,’ as stated, but rather reallocated to perhaps more government salaries, more money in the insurers’ pockets, more money to health care providers who have more customers — or whatever.

“His real argument should be on the issue of the lost personal choice of uses by the original owner of the money. All taxes involve the trade-off between our own choice if we kept the money and the government’s choice. Remember that voting closes the loop. We elect the government officials we think will make decent choices on our overall behalf. This is the heart of what we call the democratic process — grossly imperfect, but possibly better than most alternatives.”

  “We all know that poor people don’t want health care!” another reader adds. Do we detect sarcasm?

“Or maybe they want it, but simply can’t afford it. So what, says Bill, in emulation of Marie Antoinette. "Let them die instead!" It’s far more important that his over-$350,000 buddies keep their money to buy new cars or take vacations in the Riviera than a few million ‘peasants’ die for lack of adequate health care. Bill would have loved to live in the Middle Ages, when hundreds of serfs lived short and brutal lives to keep their lord in luxuries — unless he happened to be born a serf, of course.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Are you ready? Hundreds of Agora Financial readers, economic thinkers, money managers, independent investors and industry insiders are headed to Vancouver, BC next week for our annual Investment Symposium. If you’ve decided to join us – good call, we’ll see you there. If you couldn’t make it, fear not. The 5 will be publishing daily from Vancouver, a little bit later in the day of course. We’ll be sure to bring you the daily highlights.

Whether you’re with us in B.C. or following along by email, it’ll be a fun week. Stay tuned… 

 

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