It Was 10 Years Ago…

Posted On Mar 20, 2018 By Dave Gonigam

  • Stocks stabilize after Facebook freakout: Now what?
  • Fed meeting this week, and it’s nothing like 10 years ago
  • Housing prices and high taxes drive Californians elsewhere
  • The French connection… to Libyan gold
  • An embarrassment for “MBS”… another shutdown looms… tariff debate revives… and more!

The Facebook freakout is over — for now.

Yes, FB is down again as we write today — it’s down 6.8% since the news emerged over the weekend about customer data ending up in the hands of a Trump campaign consultant — but it’s not proving to be a drag on the rest of the market. The Nasdaq is up about a third of a percent at last check, and the Dow is up half a percent.

“Amidst the news flow, we’ve got to remain even-keeled,” says Alan Knuckman, our boots-on-the-ground presence in the Chicago options trading pits.

“Stocks may fall further in the short term and even test February’s lows,” he allows. “But as I’ve said time and time again… stocks have plenty of fuel to recover from the headlines of the week.

“So think of this dip as a great opportunity to buy ahead of what could be a phenomenal earnings season!”

[Ed. note: Even if earnings season disappoints, Alan has proven that the strategy in his 42-Day Retirement Plan can withstand swift and severe market sell-offs like the one in early February. Since we launched this service last October, Alan has closed 26 trades… and every one of them is a winner.

Alan’s convinced the best is yet to come — starting in just over three weeks. Wait till you see the charts — you’ll be convinced too. Please note that access to this service will close after tomorrow night. If you’ve been thinking about signing up but you haven’t pulled the trigger, now’s the time.]

Let’s take Alan’s thoughts as the jumping-off point to examine “where we are and where we’re going.”

For the last three months we’ve been fond of saying the market and the economy are in the late-boom stage of the boom-bust cycle.

To be clear, that’s not the same as saying “the top is in.” Or “it’s only downhill from here.”

That’s critical context for the meeting of the Federal Reserve’s Open Market Committee. It starts today. At the conclusion tomorrow, the FOMC will raise its benchmark fed funds rate another quarter percentage point.

It will be the fifth such increase in 18 months. A Fed rate-raising cycle is typical for a late-stage boom.

Contrast the present moment with what happened when the Fed was meeting 10 years ago this week.

It was the fifth anniversary of the misbegotten Iraq War. The big box office draw was Horton Hears a Who! Usher topped the Billboard Hot 100 chart with “Love in This Club.”

And the “Great Recession” was already three months old — although the National Bureau of Economic Research wouldn’t see fit to say the recession was in progress for several more months.

That week, the Fed slashed the fed funds rate three-quarters of a percentage point in one fell swoop — part of a continuing and failing effort to pull the economy out of an accelerating tailspin. “For the sixth time in as many months,” wrote our fearless leader Addison Wiggin here in The 5, “Bernanke and his brood pulled the lever labeled ‘easy money’ in the corner of the FOMC meeting room.”

The statement accompanying the rate cut conveyed, if not panic, at least a high level of concern. “Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”

We don’t know exactly what the Fed will put in its statement tomorrow… but we assure you it won’t read a thing like that. The bust isn’t here yet.

For a second day running, gold is testing its year-to-date lows at $1,311.

Indeed, much of the commodity complex is slumping of late. Copper is down to $3.05 a pound. Less than a month ago, it was above $3.20.

But crude is once again on a tear — a barrel of West Texas Intermediate up nearly 2.5% this morning at $63.58.

As long as we brought up oil, we see Saudi Arabia’s giant state-owned oil company Saudi Aramco is scrapping plans to list shares in either New York or London. It will stick to the Saudi Arabian stock exchange once it goes public next year.

In the end, listing shares in New York would have opened up the company to lawsuits by Sept. 11 families and survivors; evidence of the Saudi Arabian government’s complicity in the attacks is now way too strong for U.S. civil courts to overlook.

The timing is sort of embarrassing for Saudi Arabian Crown Prince Mohammed bin Salman; MBS, as he’s known, is paying a call on the White House as we write. Then again, MBS could stand to be knocked down a peg after getting — figuratively speaking — a sloppy wet kiss from Norah O’Donnell on 60 Minutes the other night. (“A crime against journalism” is the apt description by Mehdi Hasan at The Intercept.)

For the record, we’re only three more days from another “partial government shutdown.”

While the debt ceiling has been suspended for the next year, Congress still hasn’t passed a proper budget for fiscal 2018; they’re now nearly six months behind schedule.

The deadline is midnight Friday night.

OK, maybe the Great California Exodus is underway in earnest.

Earlier this year, we were a touch skeptical about the notion that everyone’s fleeing the Golden State for lower-tax Arizona and Texas. But that was based on a statistical curiosity — interstate moves performed by United Van Lines during 2017. California was solidly in the middle of the pack among the 50 states; it was Illinois people who were fleeing at the highest clip.

Now we have some more rigorous statistical data from the Census Bureau. It turns out California experienced a net loss of 138,000 people from interstate moves during the 12 months ended last July.

And researchers say the bulk of those people are lower- and middle-income. “The rate at which California has been losing people to other states has accelerated in the past couple of years, in part because of rising housing costs,” economist Jed Kolko from Indeed.com tells CNBC.

It will be fascinating to see whether that California exodus increases with the new tax law. As you’re likely aware, the deduction you can now take on state/local income taxes and property taxes is capped at a combined $10,000.

That’s bad news for people in high-tax states… and while the evidence to date is anecdotal, the change is prompting people to make major life changes.

Case in point: In January a fellow named Tom Gallagher announced he’s stepping down as CEO of the American Radio Relay League — the national organization for amateur radio hobbyists.

Said the press release: “Gallagher, 69, cited recent changes included in the new federal tax law that made it unattractive for him to continue working in Connecticut, where ARRL is headquartered.”

Surely he can’t be alone…

Wait a minute — Libya’s strongman Col. Gaddafi was best buds with the former French president Nicolas Sarkozy?

Chikere Ezeh

French police hauled Sarkozy into custody today. They want to ask him whether his 2007 campaign got illegal funding from Gaddafi. Which struck us as rather odd, considering how Sarkozy was the European leader most gung-ho to support Secretary of State Hillary Clinton’s Libyan regime-change project in 2011.

We take note of this development because of a fascinating gold-related story we recounted two years ago. At that time, the State Department released a trove of Clinton’s emails from 2011 in which we learned Sarkozy had become obsessed with Libya’s gold stash worth $7 billion.

“This gold was accumulated prior to the current rebellion,” says a memo to Mrs. Clinton, “and was intended to be used to establish a pan-African currency based on the Libyan golden dinar. This plan was designed to provide the Francophone African countries with an alternative to the French franc (CFA).”

The CFA franc, by way of background, is a currency guaranteed by the French Treasury, pegged to the euro and trades widely in France’s former African colonies.

You can imagine how the gold dinar would pose a threat to France’s continued influence in the region. The memo went on at length about how horrible it would be if North Africa achieved a new level of economic independence. It said nothing about Gaddafi’s human rights abuses — the alleged justification for taking him out.

Anyway, there’s some context for one of the day’s big headlines that you won’t see elsewhere…

“Tariffs = inflation. Seems pretty straightforward,” a reader writes, circling back to a recent topic here.

“Steel tariffs automatically add 25% to the cost of products made from steel (think metal buildings, metal roofs, automotive components, tractors, bulldozers, steel framing in commercial buildings… the list goes on and on).

“Those costs will eventually get passed onto the consumer, and thus our dollar doesn’t go quite as far as it used to.

And worst of all, manufacturers (companies that use steel or aluminum to make a product) that are sensitive to their raw material costs will simply make the products in Mexico or Canada using cheaper-cost material. If you were General Motors figuring out where to set up your next plant and your options were the USA with steel costs of 50 cents/lb. or Canada with imported Chinese steel costs of 30 cents/lb., which country would you choose? For the record, those are realistic prices, not just figurative numbers.”

“I find Bill Bonner’s reasoning about why America changed from a net exporter to a net importer to be shallow,” a reader counters.

“The driving force was not cheap money but cheap labor. The modern transport system and ease of moving money between countries made manufacturing in other countries practical, which U.S. companies acknowledged by moving their factories where labor was cheap.

“China took advantage of this opportunity to learn about and take control of the manufacturing process. Mexico did not do this. As result, China gained control and achieved great wealth while Mexico remained poor. In the process, American workers got the shaft, as was predicted.”

The 5: Nice try, no cigar.

There was no trade deficit until Nixon cut the dollar’s last tie to gold in 1971. The Bretton Woods system in place up to that time ensured that no one would experience a trade deficit or surplus for long. It was a self-correcting system.

As Bill explains, “If Americans bought too many goods from overseas, foreign banks showed up at the Treasury demanding gold in exchange for their paper dollars.

“The Treasury dutifully honored its obligations, as it had done for at least six generations.

“But this reduced the supply of gold… upon which the dollar rested, in effect reducing the available money supply and forcing up interest rates. The resulting correction dampened consumer appetites, shifted the trade deficit to a surplus and allowed the money supply to recover.”

“Are we going to get a good April 1 email worthy of The 5, maybe something snarky?” inquires our final correspondent.

The 5: Seeing as it falls on a Sunday this year, no.

That said, a few days after April Fools’ Day in 2010, the aforementioned Addison Wiggin engaged in a highly tongue-in-cheek episode of The 5 inspired in part by Jonathan Swift’s A Modest Proposal. It proved to be years ahead of its time with its advocacy of negative interest rates. Heh…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. This morning James Altucher showed a select group of readers how to collect an instant $100.

And that was on top of three trades yesterday from which they could have collected payouts of $220… $350… and a huge $840.

It’s all part of the “$36,000 income pledge” he made at the start of this year.

But all good things must come to an end… and the pledge comes off the table at midnight tonight. If you want the chance to pull down an average $3,000 in income every month… now’s your last chance.


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