Free Shares, Cheaper Gas and (Oh Yeah) The Fed

Posted On Dec 16, 2015 By Dave Gonigam

  • “Free shares” — yours for the taking no matter what the Fed does
  • Our long national nightmare is almost over (sort of): Seven years of Fed insanity in context
  • How U.S. oil exports might lower gasoline prices
  • Four economic numbers, three of them poor… the surveillance state metastasizes… a Chinese restaurant’s clean-air surcharge… and more!

“We’re entering a golden age of medicine,” enthuses Stephen Petranek of our science-and-wealth team — “a world of new treatments and cures that could soon help us live the kind of long, happy and healthy lives that used to be the domain of science fiction.”

Yes, we know, we know. Today’s The Most Important Fed Meeting EVAR™. But as fortune has it, our deadline coincides with the Federal Reserve’s big interest-rate decision this afternoon.

We’ll have a few thoughts about it forthwith — context to chew on while you absorb the news elsewhere. But in the meantime, we direct your attention to a phenomenon — and a time-sensitive opportunity — that’s impervious to whatever the Fed governors do or don’t do.

“For a few hundred dollars, you can buy a stake in a business that could completely change the way we fight diseases,” Stephen continues.

“Of course, you need to be careful. The human body is complex, and drugs to treat it can be tricky. Every potential new drug requires extensive testing to not only prove it’s safe but also that it works. That can easily cost $100 million… and if the drug stumbles, the company developing it might be forced to shut its doors forever.”

So our team thoroughly vets every biotech recommendation it makes. “The companies I look for don’t just have strong science backing them up… they also have strong contingency plans if their research in one area stumbles.”

In other words, diversification. Stephen is keen on one company in particular that’s like investing in your own mini-ETF of biotech stocks.

“The company is leading the way into the brave new world of stem cell cures for major diseases. Not only is this company on the verge of several breakthroughs — fighting everything from macular degeneration to lung cancer — it also provides the biologics that other companies need to develop breakthroughs of their own.”

And now’s an ideal time to buy. For the next four trading days, the firm is handing out “free shares” to its shareholders. The company did the same thing last year. If you’d been a shareholder at the time, you could have sat on 1,000 of these free shares for nine months… and then cashed them out for a quick $14,470.

Second chances don’t come around often. Now is one of those times. But… the window of opportunity slams shut next Monday. That’s the company’s deadline, not ours. We encourage you to examine the details and make an informed decision after you follow this link.

Assuming the Fed does what we expect it to do, America’s seven-year monetary state of emergency will be lifted this afternoon.

Again, the announcement comes around the time this episode of The 5 hits your inbox. Perhaps alarmingly, nearly everyone on our team is aligned with the conventional wisdom — expecting the Fed will raise its benchmark fed funds rate from the near-zero levels where the Fed set it on this day in 2008.

Which is enough for Addison Wiggin, our fearless leader and the founder of this e-letter, to take the other side of the trade. “I say… Yellen comes up with some lame reason for not raising. Maybe they change some wording in their statement. And get the chattering classes all aflutter.”

Even if the Fed does raise, we’re sure they’ll tuck a surprise or two into their statement. We’ll unpack it all tomorrow.

In the meantime, just remember we’ve become accustomed to ultra-low interest rates for so long, it’s easy to lose sight of the fact they were supposed to be a “temporary” measure that reflected the “emergency” conditions of late 2008.

How did it drag on for so long? You can think of the last seven years coming in four distinct phases, going by the Fed’s own statements.

Phase 1: The Fed promises rates would remain “exceptionally low”…

  • … first “for some time” (December 2008)
  • … then “for an extended period” (March 2009)
  • … which morphed into a target date of “at least through mid-2013” (August 2011)
  • … stretching to “at least through mid-2015” (September 2012).

Phase 2: Only three months after that last revision, the Fed throws out the chronological playbook and opts for numerical targets…

  • … “as long as the unemployment rate remains above 6.5%” (December 2012)
  • … “well past the time” that the unemployment rate declines below 6.5% (December 2013).

Phase 3: When Janet Yellen takes over from Ben Bernanke in early 2014 — and before the unemployment rate falls below 6.5%, heh — the target is shifted again. Now it’s based on the anticipated wind-down of quantitative easing (QE)…

  • … “for a considerable time after the asset purchase program ends” (March 2014)
  • … “for a considerable time following the end of its asset purchase program this month” (October 2014).

Phase 4: Once QE winds down, the whole thing jumps the shark.

  • First the Fed is studiously noncommittal: “The Committee judges that it can be patient in beginning to normalize the stance of monetary policy” (December 2014)
  • Then a new and fuzzy target is introduced: “…when [the Committee] has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term” (March 2015)
  • Finally, the term “further improvement” is amended to say “some further improvement” but the rest of the criteria are left alone. Now, that’s nuance only a central banker can appreciate! (July 2015).

“Don’t ever think for a minute that the central bankers know what they’re doing,” Jim Rickards told me on a fine spring day last year. “They don’t.”

He was eager to tell me about recent conversations he’d had with a member of the Fed’s Open Market Committee and a member of the Bank of England’s equivalent body. “And they said the same thing: ‘We don’t know what we’re doing. This is a massive experiment. We’ve never done this before. We try something. If it works, maybe we do a little more; if it doesn’t work, we pull it away and we’ll try something else.'”

Here’s something we can forecast with 100% certainty: This policy by improvisation will go on indefinitely, no matter what the Fed decides today. You and I are just lab rats in the Fed’s cage.

Stocks are generally drifting up as the Fed announcement looms. The S&P 500 is up a half percent at 2,054.

Gold has popped more than 1%, to $1,074, even as the dollar index is holding firm at 98.2. Crude is tumbling after the latest inventory report from the Energy Department — down more than 3% at last check, to $36.19.

We also have a handful of economic numbers filtering in as the Fed prepares its statement…

  • Housing starts: Up a healthy 10.5% in November. Permits, a better indicator of future activity, are up even an even stronger: 11.0%
  • Industrial production: Ouch. Down 0.6% in November, the biggest drop since mid-2012 and way worse than the “expert consensus” was looking for
  • Capacity utilization: Yuck. Only 77.0% of America’s industrial capacity is in use right now — down half a percentage point in a month, and three percentage points below the long-term average
  • “Flash PMI”: This early read on U.S. manufacturing in the month of December registers 51.3 — which indicates the factory sector is still growing, but at its slowest pace in more than three years.

Hmmm… Apart from the housing numbers, it sounds like a swell time to raise rates!

Congress is set to do something that might well lower gasoline prices, in the estimation of Byron King.

As you might have heard, late last night, congressional negotiators came to terms on a budget deal. Within that deal is a repeal of the 40-year ban on U.S. oil exports.

Wait a minute, you might be wondering: How would that lower gas prices? “U.S. refineries are geared to refine heavy grades of crude, such as the U.S. imported for much of the past 45 years,” Byron explains.

“The problem for many refiners is that much new U.S. oil, from fracking, is too light to run in most U.S. refineries. Thus, U.S. refineries still import foreign oil, such as heavy crude from Venezuela, or Canadian oil from oil sands. Then it all gets blended into the light oil from fracking.”

Lifting the ban means that light oil can go overseas to refineries equipped to handle it. That would have the effect of lowering the global oil price. In turn, “lower world oil prices would reset refined product prices lower,” says Byron. “You’d likely notice it at the pump.”

It’s not yet a done deal: The New York Times says House Minority Leader Nancy Pelosi might try to deep-six the budget agreement specifically because of the provision lifting the crude export ban.

But if the budget deal does pass, it includes good news for solar energy and other renewables. The 30% tax credit that was set to expire at the end of next year would be extended five more years.

Unfortunately, on Page 1,729 of the budget deal, there’s a plan to grow the surveillance state by leaps and bounds.

Slipped into the agreement is the entire text of CISA — the “Cybersecurity Information Sharing Act,” already passed by the Senate in October.

We told you about it in the spring: Its stated goal is to help businesses prevent cyberattacks by sharing information about threats with each other and with the feds.

In reality, the bill creates “yet another loophole for law enforcement to conduct backdoor searches on Americans,” according to a statement signed by everyone from the ACLU on the left to the Competitive Enterprise Institute on the right.

“In many ways,” says an update this morning at the tech site The Verge, “the bill currently facing the House is even more invasive than previous versions, stripping out crucial provisions that prevented direct information sharing with the NSA and mandated that data be anonymized before being widely distributed.”

Many powerful forces want it passed, though. Little wonder they’d have it tacked onto a “must-pass” budget deal that would avert another partial government shutdown. And so it goes…

Another sign of the times in smog-choked China: Yesterday, we told you how bottles of compressed air from the Canadian Rockies are a hot seller in Beijing.

Today comes word that a restaurant in Jiangsu province tried to add a surcharge to customers’ bills to cover air filtration machines the restaurant just installed — 15 cents per customer.

The South China Morning Post says customers complained to the city’s consumer pricing agency.

And the agency clamped down, ruling it was the restaurant’s responsibility to furnish a healthy environment for its customers. “Since customers haven’t asked to purchase ‘purified air,’ the restaurant owner couldn’t sell clean air as a commodity,” adds the state-run CCTV News.

Not everyone agrees. “They could have added the [15 cents] to the price of the dishes, but they didn’t,” says a user of the Twitter-like site Weibo.

Hmmm…. We daresay this development from China might give someone in Washington ideas. After all, we’ve heard about some restaurants adding a surcharge to cover Obamacare. Oy…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. The Fed’s decision this afternoon is important. But another recent decision from China is at least as important… and its effects are still rippling through markets worldwide.

Are you prepared? Check out this urgent market update from Jim Rickards


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