New Uranium ETF Supported By Demand For Nuclear Energy

November 5th, 2010

As emerging markets continue to grow and have insatiable energy demand, there are numerous reasons to watch nuclear energy and the Global X Uranium ETF (URA). 

URA will be the first ETF to give exposure to a global pool of companies which include uranium miners, refiners and equipment makers.  Uranium is important because it is a primary component in the production of nuclear energy and is used in nearly 4 percent of the globe’s traditional non-renewable energy. 

On the demand side, the largest push is expected to come from increased demand for nuclear energy.  According to the Nuclear Energy Agency, the number of nuclear reactors to generate electricity around the world is expected to grow from by nearly 133 percent over the next 40 years.  Furthermore, nuclear energy’s appeal is expected to increase due to its eco-friendliness.  Nuclear energy doesn’t produce carbon dioxide like its fossil fuel competitors.  Lastly, nuclear energy is getting political support around the globe, in particularly from emerging markets.  China, for example, is expected to have as many as 150 new nuclear power reactors become operational over the next 10 years and India plans on doubling the share of nuclear power on its grid to greater than 8% over the next 20 years. 

In a nutshell, the demand for uranium is expected to increase as a direct result of its uses in the production of nuclear energy is likely to provide positive price support to URA.

Disclosure: No Positions

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New Uranium ETF Supported By Demand For Nuclear Energy




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ETF, Uncategorized

New Uranium ETF Supported By Demand For Nuclear Energy

November 5th, 2010

As emerging markets continue to grow and have insatiable energy demand, there are numerous reasons to watch nuclear energy and the Global X Uranium ETF (URA). 

URA will be the first ETF to give exposure to a global pool of companies which include uranium miners, refiners and equipment makers.  Uranium is important because it is a primary component in the production of nuclear energy and is used in nearly 4 percent of the globe’s traditional non-renewable energy. 

On the demand side, the largest push is expected to come from increased demand for nuclear energy.  According to the Nuclear Energy Agency, the number of nuclear reactors to generate electricity around the world is expected to grow from by nearly 133 percent over the next 40 years.  Furthermore, nuclear energy’s appeal is expected to increase due to its eco-friendliness.  Nuclear energy doesn’t produce carbon dioxide like its fossil fuel competitors.  Lastly, nuclear energy is getting political support around the globe, in particularly from emerging markets.  China, for example, is expected to have as many as 150 new nuclear power reactors become operational over the next 10 years and India plans on doubling the share of nuclear power on its grid to greater than 8% over the next 20 years. 

In a nutshell, the demand for uranium is expected to increase as a direct result of its uses in the production of nuclear energy is likely to provide positive price support to URA.

Disclosure: No Positions

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New Uranium ETF Supported By Demand For Nuclear Energy




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ETF, Uncategorized

Playing Gold Exploration With ETFs

November 5th, 2010

With the implementation of QE2 around the corner, fears of inflation have elevated and the US dollar has been diminishing in value making precious metals even more appealing.  As a result, ETF provider, Global X, launched the Gold Explorers ETF (GLDX), which is the first pure play ETF offering exposure to gold exploration companies.  

GLDX seeks to replicate the performance of the Solactive Global Gold Explorers Index, which is a benchmark that measures the performance of companies engaged in exploration for precious metals.  Furthermore, GLDX is expected to carry an expense ratio of 0.65% and consist of 30 different holdings, with the majority of the holdings involved with exploring for gold reserves throughout the world.  Lastly, from a country exposure, the index is heavily concentrated to Canada and the United States. 

As for the future, there are many forces that are likely to further support the price of gold.  The monetizing of debt by the US as well as enhanced concerns of a sustainable global economic recovery are just two of these many forces. 

Although there is a lot of upside potential for gold exploration companies in the near future, it is important to keep in mind that the holdings of GLDX are the smallest, and therefore riskiest, companies that are engaged in gold production. 

Some other ways to gain exposure to companies that are involved in gold extraction and production include the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ).  One major difference between these Market Vectors ETFs and GLDX is that the holdings of GLDX generally focus on early stage activities of gold exploration. 

Disclosure: No Positions

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Playing Gold Exploration With ETFs




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ETF, Uncategorized

Playing Gold Exploration With ETFs

November 5th, 2010

With the implementation of QE2 around the corner, fears of inflation have elevated and the US dollar has been diminishing in value making precious metals even more appealing.  As a result, ETF provider, Global X, launched the Gold Explorers ETF (GLDX), which is the first pure play ETF offering exposure to gold exploration companies.  

GLDX seeks to replicate the performance of the Solactive Global Gold Explorers Index, which is a benchmark that measures the performance of companies engaged in exploration for precious metals.  Furthermore, GLDX is expected to carry an expense ratio of 0.65% and consist of 30 different holdings, with the majority of the holdings involved with exploring for gold reserves throughout the world.  Lastly, from a country exposure, the index is heavily concentrated to Canada and the United States. 

As for the future, there are many forces that are likely to further support the price of gold.  The monetizing of debt by the US as well as enhanced concerns of a sustainable global economic recovery are just two of these many forces. 

Although there is a lot of upside potential for gold exploration companies in the near future, it is important to keep in mind that the holdings of GLDX are the smallest, and therefore riskiest, companies that are engaged in gold production. 

Some other ways to gain exposure to companies that are involved in gold extraction and production include the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ).  One major difference between these Market Vectors ETFs and GLDX is that the holdings of GLDX generally focus on early stage activities of gold exploration. 

Disclosure: No Positions

Read more here:
Playing Gold Exploration With ETFs




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ETF, Uncategorized

4 ETFs To Play Ethanol

November 4th, 2010

As governments continue to place an emphasis on renewable energy, many suggest that the future prospects for corn and sugar cane-based ethanol is promising giving support to the Teucrium CORN (CORN), PowerShares Global Agriculture (PAGG), Market Vectors Agribusiness (MOO), and ELEMENTS MLCX Biofuels ETN (FUE).

In Brazil, the main source of fuel in automobiles is already ethanol as most of the nation’s vehicles used for transportation can either run solely on ethanol or utilize a flex-fuel system which uses a mix of gasoline and ethanol.  The success of Brazil’s use of ethanol has many other nations looking at it as a viable power source. 

In Sweden, which has the highest number of ethanol stations in the Europe Union, a law has been enacted which requires every gasoline station in the country to provide an alternative fuel.  Furthermore, oil companies in Australia have started to provide E10 fuel, a blend of 90 percent petroleum and 10 percent ethanol, in ther gas stations and Thailand has started actively selling E20, an 80/20 blend of petroleum and ethanol, and E85 fuel blends. 

The trend towards using ethanol has even emerged in the world’s two largest energy consumers.  China, the world’s second largest energy consumer, has started to embrace the idea of an ethanol blended fuel that would be used in automobiles and has started conducting preliminary implementation in five major cities.  As for the US, the Renewable Fuels Association reports that US demand for ethanol is at an all time high and is expected to continue to grow as the importance of cleaner energy sources remains intact as the US Environmental Protection Agency (EPA) has increased the amount of ethanol that can be blended into gasoline by 15 percent, up from 10 percent, for cars and light trucks built in 2007 or later.

In a nutshell, it appears like Biofuels are going to be a significant part of the road transport fuel mix going forward and the aforementioned ETFs are likely to feel the effects.

  • Teucrium Corn (CORN), which is a pure play on corn, the primary commodity behind the production of ethanol, through futures contracts.
  • PowerShares Global Agriculture (PAGG), which includes companies in its holdings that are likely to benefit from increased demand of ethanol such as Monsanto (MON) and Wilmar International.
  • Market Vectors Agribusiness (MOO), which includes companies like Potash (POT) and Deere (DE) in its top holdings, both of which are likely to reap the benefits of increased demand for ethanol and commodities that other commodities that are used in the production of ethanol.
  • ELEMENTS MLCX Biofuels ETN (FUE), tracks a benchmark that consists of futures contracts on physical commodities that are either biofuels themselves or feedstock commonly used in the production of biofuels. FUE is heavily weighted in soybeans, corn, soybean oil, and sugar.

Disclosure: No Positions

Read more here:
4 ETFs To Play Ethanol




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Commodities, ETF, Uncategorized

4 ETFs To Play Ethanol

November 4th, 2010

As governments continue to place an emphasis on renewable energy, many suggest that the future prospects for corn and sugar cane-based ethanol is promising giving support to the Teucrium CORN (CORN), PowerShares Global Agriculture (PAGG), Market Vectors Agribusiness (MOO), and ELEMENTS MLCX Biofuels ETN (FUE).

In Brazil, the main source of fuel in automobiles is already ethanol as most of the nation’s vehicles used for transportation can either run solely on ethanol or utilize a flex-fuel system which uses a mix of gasoline and ethanol.  The success of Brazil’s use of ethanol has many other nations looking at it as a viable power source. 

In Sweden, which has the highest number of ethanol stations in the Europe Union, a law has been enacted which requires every gasoline station in the country to provide an alternative fuel.  Furthermore, oil companies in Australia have started to provide E10 fuel, a blend of 90 percent petroleum and 10 percent ethanol, in ther gas stations and Thailand has started actively selling E20, an 80/20 blend of petroleum and ethanol, and E85 fuel blends. 

The trend towards using ethanol has even emerged in the world’s two largest energy consumers.  China, the world’s second largest energy consumer, has started to embrace the idea of an ethanol blended fuel that would be used in automobiles and has started conducting preliminary implementation in five major cities.  As for the US, the Renewable Fuels Association reports that US demand for ethanol is at an all time high and is expected to continue to grow as the importance of cleaner energy sources remains intact as the US Environmental Protection Agency (EPA) has increased the amount of ethanol that can be blended into gasoline by 15 percent, up from 10 percent, for cars and light trucks built in 2007 or later.

In a nutshell, it appears like Biofuels are going to be a significant part of the road transport fuel mix going forward and the aforementioned ETFs are likely to feel the effects.

  • Teucrium Corn (CORN), which is a pure play on corn, the primary commodity behind the production of ethanol, through futures contracts.
  • PowerShares Global Agriculture (PAGG), which includes companies in its holdings that are likely to benefit from increased demand of ethanol such as Monsanto (MON) and Wilmar International.
  • Market Vectors Agribusiness (MOO), which includes companies like Potash (POT) and Deere (DE) in its top holdings, both of which are likely to reap the benefits of increased demand for ethanol and commodities that other commodities that are used in the production of ethanol.
  • ELEMENTS MLCX Biofuels ETN (FUE), tracks a benchmark that consists of futures contracts on physical commodities that are either biofuels themselves or feedstock commonly used in the production of biofuels. FUE is heavily weighted in soybeans, corn, soybean oil, and sugar.

Disclosure: No Positions

Read more here:
4 ETFs To Play Ethanol




HERE IS YOUR FOOTER

Commodities, ETF, Uncategorized

Profiting As the Fed Creates More Money

November 4th, 2010

The latest news to depress me is that incomes were reported down 0.1%, and the latest news about spending is that spending is up 0.2%.

The reason that it was extraordinarily depressing for me is that I was trying, in vain, to explain to the drooling half-witted pinhead idiot seated next to me at the bar that I think that “spending” is actually waaAAAaaay down, because, while total spending is up, it is mostly because prices have risen so much that people buy fewer things overall, but pay more per item that they do still buy, which they do because of the rapid decline of their standards of living caused by the loss of buying power of the dollar as a result of the Federal Reserve creating so many more of them.

Until now, the inflation in prices was disguised by the slimy trickery of the government’s/Fed’s distortion of reality by their hedonically-adjusting downwards actual price increases to account for “quality” improvements and other un-quantifiable tangible and intangible benefits.

I told him, as a way of impressing him so that he would not think I was not as stupid as I look or sound, that I was entrepreneurially-inspired by such government arrogance that this was when I first threw a packet of vitamin C tablets into the file marked “Mogambo’s Wonderful Investment Portfolio (MWIP).”

In doing so, I completely changed my whole marketing thrust. Previously, I had gone with the slogan, “Profit by the stupidities of the Federal Reserve creating excess money, and the deficit-spending madness of the federal government, by buying gold, silver and oil stocks today, using the wisdom of the Mogambo’s Wonderful Investment Portfolio (MWIP), which is to buy gold, silver and oil, ya moron!”

The fabulous new marketing slogan that I came up with was, “Be wealthier and be healthier! Invest with Mogambo’s Wonderful Investment Portfolio (MWIP) and be both!” which still recommends that investors buy gold, silver and oil to make them wealthier – guaranteed! – by profiting from the stupidity of the Federal Reserve creating too much money, but now with a recommendation to take vitamin C to make them healthier, too!

Finally, this drunken barfly turns to me and says, “Huh? You talkin’ to me?” which lets me instantly know that he is an idiot, because I have been talking to him for over ten minutes about how the evil Federal Reserve is destroying us by creating so much new money, so freaking much new money, so terrifyingly much new money so that the government can borrow and spend that it creates terrible inflation in prices! “Yikes!” I said.

Well, actually I only claim that I said, “Yikes!” but I was pretty smashed by this time, and what I really said was a lot of obscene cursing at the Federal Reserve for creating so much new money and loud burst of Mogambo Bellow Of Outrage (MBOO) at that arrogant socialist Obama monster for borrowing all that money to spend on socialist dreams and schemes that are doomed to failure.

Indeed, it started out as a long and loud disparagement of the Federal Reserve, but was soon replaced with hushed and obscene-yet-gratuitously-lewd comments about a bunch of hot young ladies seated over there by the pool table, who think they are so hot, and who had previously laughed at me and said, “Go away, grandpa! We’re looking for hot, handsome hunky men, and you are blocking the view! Hahaha!”

Well, as punishment for their insults, I decided to let them suffer by not telling them, as I ordinarily would, to buy gold, silver and oil, and that We’re Freaking Doomed (WFD) because the Federal Reserve, under the horrible Alan Greenspan from 1987-2006, created so much money and distorted the economy into a giant, bloated, disgusting, government-centric economic monstrosity, where the government is sucking the life out of the economy through over-taxation and over-regulation, and then spitting it (if that is the correct orifice) back into the economy via huge budgets and deficit-spending oceans of new money created by the Federal Reserve and that, tragically, even Greenspan’s horrifying monetary excesses pale to seeming insignificance compared to the unbelievable infamy of the new chairman of the Federal Reserve, Ben Bernanke, and all his unbelievable inflationary intent, because inflation is, of course, the One Big Freaking Thing (OBFT) that you do NOT want to happen, and this insane monster is trying to make it happen! Gaaahhh!

So, I laugh in scorn while I am screaming in outrage, which is harder to do than it looks, as I think to myself, “Let the young ladies have their fun, blissfully ignorant about how having the Federal Reserve monstrously creating $2 trillion, or maybe $4 trillion, or more in a year, year after year, all in a lousy $14 trillion economy, so as to allow the federal government to borrow it and spend it, is what we professional economists call Absolutely Freaking Insane (AFI)!”

I’m not sure I could impress upon these nubile little temptresses that this is a stunningly huge clot of new spending-money that is appearing, literally, out of nowhere, to join other money coming out of nowhere, such The Wall Street Journal reporting that a lot of people are defaulting (i.e. haven’t made a payment in 16 months or more) on their mortgages, but are managing to still live in the house without paying a dime, giving them a “free” place to live, which is (you gotta admit!) a pretty sweet deal for them!

The moral and ethical ramifications aside, and the banker’s desire to keep the house occupied so as to prevent vandalism and looting of an empty dwelling, this brings up, as it does, the moral and ethical ramifications of these defaulting squatters perhaps routinely vandalizing surrounding vacant dwellings so as to make a few bucks selling the appliances and wiring, thus actually increasing the desire of petrified bankers to let these defaulting deadbeats stay in the houses – and maybe even pay them! – un-molested.

And then (pause), as there always is (pause), there is the subject of (pause) money.

And the money that I am talking about is, of course, “How come the rest of us, who do not have a mortgage to default upon, can’t get in on some of this ‘free housing’ gravy? It’s justice denied and unequal protection of the laws, I tells ya!”

And what about the people who rent their homes and apartments? Don’t they equally deserve to live someplace for free, too, since all it takes to be able to do so is creditors and landlords to voluntarily not throw them out?

And what about Lefty and Pinhead, the two thieving, lying, cheating, filthy, worthless, lazy, dropout, alcoholic, drug-addicted mental defectives and personal friends of mine who currently live in a storm culvert, and who get to smoke all the cigarettes they want, drink all the booze they want, eat all the crappy fast-food they want, any time they want, and who don’t have to always worry about remembering to pull up their stupid zippers after they take a whiz? Shouldn’t they get some of that “free housing” gravy, too?

And gravy it is, too! “Defaulters living in the homes” is calculated to be “a subsidy worth about $2.6 billion a month,” which is a lot of money that would otherwise flow to creditors, who would otherwise pay tax on the money, but who are now looking at tax-deductible losses which, in the case of the USA, means more deficit-spending to continue bailing out Fannie Mae and Freddie Mac, the two gigantic, laughably incompetent, loss-producing, loser organizations which together own almost all the mortgages in the Whole Freaking Country (WFC) so that, as the loathsome and disgraceful Christopher Dodd of Connecticut once said, home ownership would not be limited “only to those who can afford it.”

So Fannie and Freddie operate with a $2.6 billion monthly deficit, a loss which is paid by the federal government deficit-spending another $2.6 billion a month, which it borrows when the money is created by the Federal Reserve, which increases the money supply, which makes prices go up.

That’s the theory, and it has always held, sort of like the theory of gravitation, the practical application of which is to simply make the sensible decision to invest following a regimen of frantically buying gold, silver and oil to capitalize on the inflationary horror about to befall us, which is So Freaking Obvious (SFO) and so easy that you shout huzzahs of thankful happiness to the beautiful blue skies and shout, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Profiting As the Fed Creates More Money originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Profiting As the Fed Creates More Money




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Profiting As the Fed Creates More Money

November 4th, 2010

The latest news to depress me is that incomes were reported down 0.1%, and the latest news about spending is that spending is up 0.2%.

The reason that it was extraordinarily depressing for me is that I was trying, in vain, to explain to the drooling half-witted pinhead idiot seated next to me at the bar that I think that “spending” is actually waaAAAaaay down, because, while total spending is up, it is mostly because prices have risen so much that people buy fewer things overall, but pay more per item that they do still buy, which they do because of the rapid decline of their standards of living caused by the loss of buying power of the dollar as a result of the Federal Reserve creating so many more of them.

Until now, the inflation in prices was disguised by the slimy trickery of the government’s/Fed’s distortion of reality by their hedonically-adjusting downwards actual price increases to account for “quality” improvements and other un-quantifiable tangible and intangible benefits.

I told him, as a way of impressing him so that he would not think I was not as stupid as I look or sound, that I was entrepreneurially-inspired by such government arrogance that this was when I first threw a packet of vitamin C tablets into the file marked “Mogambo’s Wonderful Investment Portfolio (MWIP).”

In doing so, I completely changed my whole marketing thrust. Previously, I had gone with the slogan, “Profit by the stupidities of the Federal Reserve creating excess money, and the deficit-spending madness of the federal government, by buying gold, silver and oil stocks today, using the wisdom of the Mogambo’s Wonderful Investment Portfolio (MWIP), which is to buy gold, silver and oil, ya moron!”

The fabulous new marketing slogan that I came up with was, “Be wealthier and be healthier! Invest with Mogambo’s Wonderful Investment Portfolio (MWIP) and be both!” which still recommends that investors buy gold, silver and oil to make them wealthier – guaranteed! – by profiting from the stupidity of the Federal Reserve creating too much money, but now with a recommendation to take vitamin C to make them healthier, too!

Finally, this drunken barfly turns to me and says, “Huh? You talkin’ to me?” which lets me instantly know that he is an idiot, because I have been talking to him for over ten minutes about how the evil Federal Reserve is destroying us by creating so much new money, so freaking much new money, so terrifyingly much new money so that the government can borrow and spend that it creates terrible inflation in prices! “Yikes!” I said.

Well, actually I only claim that I said, “Yikes!” but I was pretty smashed by this time, and what I really said was a lot of obscene cursing at the Federal Reserve for creating so much new money and loud burst of Mogambo Bellow Of Outrage (MBOO) at that arrogant socialist Obama monster for borrowing all that money to spend on socialist dreams and schemes that are doomed to failure.

Indeed, it started out as a long and loud disparagement of the Federal Reserve, but was soon replaced with hushed and obscene-yet-gratuitously-lewd comments about a bunch of hot young ladies seated over there by the pool table, who think they are so hot, and who had previously laughed at me and said, “Go away, grandpa! We’re looking for hot, handsome hunky men, and you are blocking the view! Hahaha!”

Well, as punishment for their insults, I decided to let them suffer by not telling them, as I ordinarily would, to buy gold, silver and oil, and that We’re Freaking Doomed (WFD) because the Federal Reserve, under the horrible Alan Greenspan from 1987-2006, created so much money and distorted the economy into a giant, bloated, disgusting, government-centric economic monstrosity, where the government is sucking the life out of the economy through over-taxation and over-regulation, and then spitting it (if that is the correct orifice) back into the economy via huge budgets and deficit-spending oceans of new money created by the Federal Reserve and that, tragically, even Greenspan’s horrifying monetary excesses pale to seeming insignificance compared to the unbelievable infamy of the new chairman of the Federal Reserve, Ben Bernanke, and all his unbelievable inflationary intent, because inflation is, of course, the One Big Freaking Thing (OBFT) that you do NOT want to happen, and this insane monster is trying to make it happen! Gaaahhh!

So, I laugh in scorn while I am screaming in outrage, which is harder to do than it looks, as I think to myself, “Let the young ladies have their fun, blissfully ignorant about how having the Federal Reserve monstrously creating $2 trillion, or maybe $4 trillion, or more in a year, year after year, all in a lousy $14 trillion economy, so as to allow the federal government to borrow it and spend it, is what we professional economists call Absolutely Freaking Insane (AFI)!”

I’m not sure I could impress upon these nubile little temptresses that this is a stunningly huge clot of new spending-money that is appearing, literally, out of nowhere, to join other money coming out of nowhere, such The Wall Street Journal reporting that a lot of people are defaulting (i.e. haven’t made a payment in 16 months or more) on their mortgages, but are managing to still live in the house without paying a dime, giving them a “free” place to live, which is (you gotta admit!) a pretty sweet deal for them!

The moral and ethical ramifications aside, and the banker’s desire to keep the house occupied so as to prevent vandalism and looting of an empty dwelling, this brings up, as it does, the moral and ethical ramifications of these defaulting squatters perhaps routinely vandalizing surrounding vacant dwellings so as to make a few bucks selling the appliances and wiring, thus actually increasing the desire of petrified bankers to let these defaulting deadbeats stay in the houses – and maybe even pay them! – un-molested.

And then (pause), as there always is (pause), there is the subject of (pause) money.

And the money that I am talking about is, of course, “How come the rest of us, who do not have a mortgage to default upon, can’t get in on some of this ‘free housing’ gravy? It’s justice denied and unequal protection of the laws, I tells ya!”

And what about the people who rent their homes and apartments? Don’t they equally deserve to live someplace for free, too, since all it takes to be able to do so is creditors and landlords to voluntarily not throw them out?

And what about Lefty and Pinhead, the two thieving, lying, cheating, filthy, worthless, lazy, dropout, alcoholic, drug-addicted mental defectives and personal friends of mine who currently live in a storm culvert, and who get to smoke all the cigarettes they want, drink all the booze they want, eat all the crappy fast-food they want, any time they want, and who don’t have to always worry about remembering to pull up their stupid zippers after they take a whiz? Shouldn’t they get some of that “free housing” gravy, too?

And gravy it is, too! “Defaulters living in the homes” is calculated to be “a subsidy worth about $2.6 billion a month,” which is a lot of money that would otherwise flow to creditors, who would otherwise pay tax on the money, but who are now looking at tax-deductible losses which, in the case of the USA, means more deficit-spending to continue bailing out Fannie Mae and Freddie Mac, the two gigantic, laughably incompetent, loss-producing, loser organizations which together own almost all the mortgages in the Whole Freaking Country (WFC) so that, as the loathsome and disgraceful Christopher Dodd of Connecticut once said, home ownership would not be limited “only to those who can afford it.”

So Fannie and Freddie operate with a $2.6 billion monthly deficit, a loss which is paid by the federal government deficit-spending another $2.6 billion a month, which it borrows when the money is created by the Federal Reserve, which increases the money supply, which makes prices go up.

That’s the theory, and it has always held, sort of like the theory of gravitation, the practical application of which is to simply make the sensible decision to invest following a regimen of frantically buying gold, silver and oil to capitalize on the inflationary horror about to befall us, which is So Freaking Obvious (SFO) and so easy that you shout huzzahs of thankful happiness to the beautiful blue skies and shout, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Profiting As the Fed Creates More Money originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Profiting As the Fed Creates More Money




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Buying U.S. Junior Gold Miners During A Dollar Debasing

November 4th, 2010

There have been some exciting mergers and acquisitions (M&As) within the junior mining sector over the past few months. As gold and silver settle from the previous move, many projects will be re-rated and acquired by majors that are struggling with decreasing resources. I believe the industry is undergoing consolidation and we’re seeing the beginning of a major international race to control future gold and silver ounces in the ground. The bull market in gold and silver is intact, and though we may see some short-term pullbacks in bullion prices, the junior mining sector will continue to outperform.

Investors are aware that the sector is ripe with takeover candidates as the junior miners outperformed bullion since the late-July rally began; not until mid-September did they underperform. Now it seems like the previous uptrend is continuing after finding support at the 50-day moving average. Junior explorers are gaining interest as investors transfer their strategically devalued fiat currencies into valuable precious metals resources in the ground.

As the dollar collapses to three-year lows, I expect more companies to acquire projects or consolidate to gain control of and leverage their exploration assets. The Federal Reserve has been quite vociferous about its goal of pumping the economy with more cash. And it appears the US is leading the race to devaluation, as many emerging markets have been critical of the Fed’s dovish actions. This is creating a domino effect wherein other countries are now forced to devalue their currencies in order to prevent the collapse of their own economies. A devalued currency helps an economy by making its products cheaper domestically and increasing exports.

The recent surge in M&A activity suggests the mining industry is predicting the price of gold will continue to appreciate for the foreseeable future. High-quality projects with high-grade mineralization and low cash costs are receiving a premium. As the price of gold rises, high-grade deposits with good assets will be accelerated into development and production.

I expect aggressive miners to buy out partners to gain 100% control of projects in order to expedite resource and reserve growth. When a miner controls the project completely, it can be more aggressive with resource expansion and development of a discovery. It also has leverage to the expansion of the resource. Particularly in an industry that’s interested in growth stories, companies are hungry for large open discoveries to replenish their reserves.

One company that’s taken a 100% control of a discovery is Fronteer Gold Inc. (FRG). The company bought out AuEx Ventures, Inc. for a premium due to the upside leverage to the expansion of the Long Canyon Project. The Long Canyon Project in Nevada has great potential for expansion because it’s completely open in all directions, is high-grade, and has exceptionally low cash costs. The cost to get this project into production is very low because it’s a heap-leach operation.

The $100 million cost is well within Fronteer’s ability to finance the development completely. With its asset base in Nevada, Labrador, and Northwestern Turkey and its current cash position of over $140 million, there should be no dilution to shareholders. This is a rare situation in the junior mining sector where investors constantly face share-dilution risk when companies need to raise capital to fund exploration or develop projects.

Long Canyon has been compared to an early stage version of Newmont Mining’s (NEM) Midas Gold Mine, which is a huge Carlin deposit. Carlin deposits continue to expand because they usually have deep, underground sulfide roots. Fronteer has not yet discovered these at Long Canyon. Both Fronteer and AuEx believe Long Canyon and West Pequop may be connected by a huge sulfide root system. And both believe what’s been found to date on both sides of the mountain is on the periphery of the main deposit. The closer the company gets to the center of the mountain, the higher the grades. Fronteer is now looking for the sulfide roots as it’s expanding a near-surface, high-grade oxide and trying to fast-track the project into production.

It seems Fronteer is getting a better view of where the high-grade stuff is located in Long Canyon. I believe the Pequop District could be Nevada’s next major mine with multimillion ounces of high-grade gold. A new resource estimate, expected in early 2011, will take into account the progress of the 2010 drilling program, which has expanded the project’s size and grade. I expect further drill results to continue to drive cash costs down and bring further recognition to this world-class discovery.

One company that I’m convinced is catching the eye of majors is International Tower Hill Mines Ltd. (THM). The company has resources of more than 10 million ounces (Moz.) gold on its Livengood Project in Alaska. As gold has made a significant move in 2010, International Tower Hill Mines has consolidated. Now, with the recent volume surge and break of the upper resistance line, I believe International Tower  Hill Mines could continue the 2009 price trend and outperform bullion as the company develops different mining options that drive down costs.

I believe the company has the best development project in Alaska. In my opinion, it has the greatest chance of becoming a successful and operational mine. International Tower Hill Mines has what many of its competitors are struggling for: a favorable permitting and infrastructure situation. The mine is close to infrastructure, right off a central highway, and doesn’t have the same permitting issues as other major mines being developed in Alaska.

After many years of investing in mining companies and seeing the downfall of many mining investments, I’ve realized these two features are key to success. The Livengood Project is on an all-weather highway in a major mining center. The state of Alaska is also proposing a natural gas line that would connect and provide power to the mine. And there are no native claim issues. In addition, the project is in the top 2% of gold discoveries with more than 10 Moz. gold. The big producers are looking for large deposits to expand their resource bases, but they don’t want the risk associated with projects that have permitting issues or that lack infrastructure.

Down the road from Livengood is Kinross Gold Corp.’s (KGC) Fort Knox mine, which produced more than 260,000 ounces of gold in 2009. It’s only natural to assume that when a suitor comes to make an offer for Livengood, Kinross — with the infrastructure and labor force already there — will make a counter offer. The Fort Knox mine life will be nearing completion as Livengood begins.

International Tower Hill Mines has come to long-term trend support and broken to the upside. Major volume is moving in, and the second uptrend may be beginning. As it moves closer to a prefeasibility study and improves the project economics, the share price should receive a premium.

The global credit crisis and the low-interest-rate environment facilitated by central banks are causing more producers to find ways to utilize cash positions to gain resources with huge growth potential. This fiscal environment of currency devaluation and quantitative easing, which may continue for some time, will force the producers sitting on large cash positions to acquire more assets. There’s a lack of major discoveries, and companies showing impressive, high-grade results have seen huge share appreciation.

Read more here:
Buying U.S. Junior Gold Miners During A Dollar Debasing

Commodities, OPTIONS

Buying U.S. Junior Gold Miners During A Dollar Debasing

November 4th, 2010

There have been some exciting mergers and acquisitions (M&As) within the junior mining sector over the past few months. As gold and silver settle from the previous move, many projects will be re-rated and acquired by majors that are struggling with decreasing resources. I believe the industry is undergoing consolidation and we’re seeing the beginning of a major international race to control future gold and silver ounces in the ground. The bull market in gold and silver is intact, and though we may see some short-term pullbacks in bullion prices, the junior mining sector will continue to outperform.

Investors are aware that the sector is ripe with takeover candidates as the junior miners outperformed bullion since the late-July rally began; not until mid-September did they underperform. Now it seems like the previous uptrend is continuing after finding support at the 50-day moving average. Junior explorers are gaining interest as investors transfer their strategically devalued fiat currencies into valuable precious metals resources in the ground.

As the dollar collapses to three-year lows, I expect more companies to acquire projects or consolidate to gain control of and leverage their exploration assets. The Federal Reserve has been quite vociferous about its goal of pumping the economy with more cash. And it appears the US is leading the race to devaluation, as many emerging markets have been critical of the Fed’s dovish actions. This is creating a domino effect wherein other countries are now forced to devalue their currencies in order to prevent the collapse of their own economies. A devalued currency helps an economy by making its products cheaper domestically and increasing exports.

The recent surge in M&A activity suggests the mining industry is predicting the price of gold will continue to appreciate for the foreseeable future. High-quality projects with high-grade mineralization and low cash costs are receiving a premium. As the price of gold rises, high-grade deposits with good assets will be accelerated into development and production.

I expect aggressive miners to buy out partners to gain 100% control of projects in order to expedite resource and reserve growth. When a miner controls the project completely, it can be more aggressive with resource expansion and development of a discovery. It also has leverage to the expansion of the resource. Particularly in an industry that’s interested in growth stories, companies are hungry for large open discoveries to replenish their reserves.

One company that’s taken a 100% control of a discovery is Fronteer Gold Inc. (FRG). The company bought out AuEx Ventures, Inc. for a premium due to the upside leverage to the expansion of the Long Canyon Project. The Long Canyon Project in Nevada has great potential for expansion because it’s completely open in all directions, is high-grade, and has exceptionally low cash costs. The cost to get this project into production is very low because it’s a heap-leach operation.

The $100 million cost is well within Fronteer’s ability to finance the development completely. With its asset base in Nevada, Labrador, and Northwestern Turkey and its current cash position of over $140 million, there should be no dilution to shareholders. This is a rare situation in the junior mining sector where investors constantly face share-dilution risk when companies need to raise capital to fund exploration or develop projects.

Long Canyon has been compared to an early stage version of Newmont Mining’s (NEM) Midas Gold Mine, which is a huge Carlin deposit. Carlin deposits continue to expand because they usually have deep, underground sulfide roots. Fronteer has not yet discovered these at Long Canyon. Both Fronteer and AuEx believe Long Canyon and West Pequop may be connected by a huge sulfide root system. And both believe what’s been found to date on both sides of the mountain is on the periphery of the main deposit. The closer the company gets to the center of the mountain, the higher the grades. Fronteer is now looking for the sulfide roots as it’s expanding a near-surface, high-grade oxide and trying to fast-track the project into production.

It seems Fronteer is getting a better view of where the high-grade stuff is located in Long Canyon. I believe the Pequop District could be Nevada’s next major mine with multimillion ounces of high-grade gold. A new resource estimate, expected in early 2011, will take into account the progress of the 2010 drilling program, which has expanded the project’s size and grade. I expect further drill results to continue to drive cash costs down and bring further recognition to this world-class discovery.

One company that I’m convinced is catching the eye of majors is International Tower Hill Mines Ltd. (THM). The company has resources of more than 10 million ounces (Moz.) gold on its Livengood Project in Alaska. As gold has made a significant move in 2010, International Tower Hill Mines has consolidated. Now, with the recent volume surge and break of the upper resistance line, I believe International Tower  Hill Mines could continue the 2009 price trend and outperform bullion as the company develops different mining options that drive down costs.

I believe the company has the best development project in Alaska. In my opinion, it has the greatest chance of becoming a successful and operational mine. International Tower Hill Mines has what many of its competitors are struggling for: a favorable permitting and infrastructure situation. The mine is close to infrastructure, right off a central highway, and doesn’t have the same permitting issues as other major mines being developed in Alaska.

After many years of investing in mining companies and seeing the downfall of many mining investments, I’ve realized these two features are key to success. The Livengood Project is on an all-weather highway in a major mining center. The state of Alaska is also proposing a natural gas line that would connect and provide power to the mine. And there are no native claim issues. In addition, the project is in the top 2% of gold discoveries with more than 10 Moz. gold. The big producers are looking for large deposits to expand their resource bases, but they don’t want the risk associated with projects that have permitting issues or that lack infrastructure.

Down the road from Livengood is Kinross Gold Corp.’s (KGC) Fort Knox mine, which produced more than 260,000 ounces of gold in 2009. It’s only natural to assume that when a suitor comes to make an offer for Livengood, Kinross — with the infrastructure and labor force already there — will make a counter offer. The Fort Knox mine life will be nearing completion as Livengood begins.

International Tower Hill Mines has come to long-term trend support and broken to the upside. Major volume is moving in, and the second uptrend may be beginning. As it moves closer to a prefeasibility study and improves the project economics, the share price should receive a premium.

The global credit crisis and the low-interest-rate environment facilitated by central banks are causing more producers to find ways to utilize cash positions to gain resources with huge growth potential. This fiscal environment of currency devaluation and quantitative easing, which may continue for some time, will force the producers sitting on large cash positions to acquire more assets. There’s a lack of major discoveries, and companies showing impressive, high-grade results have seen huge share appreciation.

Read more here:
Buying U.S. Junior Gold Miners During A Dollar Debasing

Commodities, OPTIONS

All Treasuries All the Time: The Impact of QE2

November 4th, 2010

So… This is what life after “QE2” looks like:

  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

[Pause for back-of-the-envelope math]

…then we quickly see the Fed plans to monetize all of all the debt that Treasury plans to spit out from now through the middle of next year, and then some.

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back.

“If this were Greece or Ireland,” Bill Bonner wrote yesterday before the announcement, “the government would be forced to cut back. With quantitative easing ready, there is no need to face the music. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand-spanking-new money as necessary.”

The main difference between QE2 and its predecessor is this: The bulk of the junk the Fed put on its balance sheet during QE1 was mortgage securities, with about $300 billion of Treasuries thrown in for good measure. Now it’s all Treasuries, all the time.

And most of those Treasuries are of medium-term duration – very few 30-year bonds are in the mix. Thus, the yield on the long bond rocketed past 4% yesterday. It sits at 4.05% as we write.

Still, what’s really notable about QE2 is the form it did not take. In August, former Fed vice chair Alan Blinder wrote an Op-Ed in The Wall Street Journal. He tossed out a number of suggestions for QE2 that, for better or worse, would actually goose the economy and not just shore up the banks’ balance sheets:

  • The Fed could buy assets beyond the realm of Treasuries and mortgage securities. It could buy corporate bonds, small business loans, or credit card receivables
  • The Fed could stop paying interest on excess reserves to member banks. And if that didn’t encourage them to make more loans…
  • The Fed could start charging the banks interest to stash their excess reserves.

Yesterday, the Fed chose “none of the above.”

It didn’t even take up Blinder on his suggestion to adopt new language hinting at an even-longer lasting commitment to near-zero rates. We just got the same old blather about “exceptionally low” rates “for an extended period.”

Yawn.

Stretch.

“Today,” Fed chief Ben Bernanke wrote in this morning’s Washington Post by way of explaining himself, “most measures of underlying inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

Of course, that “underlying” inflation level does not take into account your need to eat, or heat your home or drive to work.

And it’s only going to get worse. Your neighborhood grocer is seeing his costs rising. “The big challenge,” says the CEO of a California grocery chain to The Wall Street Journal, “will be how much can we swallow and how much can we pass along?”

He’s holding out as long as he can, but skimping on tires for your delivery trucks (seriously, that’s one of his cost-cutting measures) only gets you so far.

Yesterday, we discussed rising food, gold and commodities costs in the context of the Fed decision during this interview with Financial Survival Radio. Have a listen here:

Addison Wiggin
for The Daily Reckoning

All Treasuries All the Time: The Impact of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
All Treasuries All the Time: The Impact of QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

All Treasuries All the Time: The Impact of QE2

November 4th, 2010

So… This is what life after “QE2” looks like:

  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

[Pause for back-of-the-envelope math]

…then we quickly see the Fed plans to monetize all of all the debt that Treasury plans to spit out from now through the middle of next year, and then some.

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back.

“If this were Greece or Ireland,” Bill Bonner wrote yesterday before the announcement, “the government would be forced to cut back. With quantitative easing ready, there is no need to face the music. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand-spanking-new money as necessary.”

The main difference between QE2 and its predecessor is this: The bulk of the junk the Fed put on its balance sheet during QE1 was mortgage securities, with about $300 billion of Treasuries thrown in for good measure. Now it’s all Treasuries, all the time.

And most of those Treasuries are of medium-term duration – very few 30-year bonds are in the mix. Thus, the yield on the long bond rocketed past 4% yesterday. It sits at 4.05% as we write.

Still, what’s really notable about QE2 is the form it did not take. In August, former Fed vice chair Alan Blinder wrote an Op-Ed in The Wall Street Journal. He tossed out a number of suggestions for QE2 that, for better or worse, would actually goose the economy and not just shore up the banks’ balance sheets:

  • The Fed could buy assets beyond the realm of Treasuries and mortgage securities. It could buy corporate bonds, small business loans, or credit card receivables
  • The Fed could stop paying interest on excess reserves to member banks. And if that didn’t encourage them to make more loans…
  • The Fed could start charging the banks interest to stash their excess reserves.

Yesterday, the Fed chose “none of the above.”

It didn’t even take up Blinder on his suggestion to adopt new language hinting at an even-longer lasting commitment to near-zero rates. We just got the same old blather about “exceptionally low” rates “for an extended period.”

Yawn.

Stretch.

“Today,” Fed chief Ben Bernanke wrote in this morning’s Washington Post by way of explaining himself, “most measures of underlying inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

Of course, that “underlying” inflation level does not take into account your need to eat, or heat your home or drive to work.

And it’s only going to get worse. Your neighborhood grocer is seeing his costs rising. “The big challenge,” says the CEO of a California grocery chain to The Wall Street Journal, “will be how much can we swallow and how much can we pass along?”

He’s holding out as long as he can, but skimping on tires for your delivery trucks (seriously, that’s one of his cost-cutting measures) only gets you so far.

Yesterday, we discussed rising food, gold and commodities costs in the context of the Fed decision during this interview with Financial Survival Radio. Have a listen here:

Addison Wiggin
for The Daily Reckoning

All Treasuries All the Time: The Impact of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
All Treasuries All the Time: The Impact of QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

China’s Leg Up in the Rare Earths Market

November 4th, 2010

Basically, rare earths are exotic elements that are critical to the future of high tech, clean energy, Big Science and – oh by the way – national defense. The list includes 17 elements like terbium, ytterbium, and yttrium.

Back in chemistry class you may have heard of the “Lanthanide Series” of elements, which includes 15 of the 17 elements. Also back in chemistry class, somebody doubtless raised their hand and asked the teacher what you needed to know about the Lanthanides. If your chemistry class was like most chemistry classes, the teacher probably said, “Don’t worry, they’re not on the test.”

Periodic Table of Elements

Well, these elements are on the test now. Why? Because the Chinese control 97% of world output of rare earths, and have tight control over much else as well in the realm of technology metals. Recently the news is that the Chinese have been restricting exports of rare earths, and apparently some other metals. That’s a problem.

All of the rare earth elements have one or more excellent atomic properties. These include incomparable chemical, electrical, magnetic and/or optical properties. For example, neodymium (Nd) makes strong magnets even stronger. Europium (Eu) is necessary for television screens to show color images. Lanthanum (La) is useful in high energy-density batteries, as well as being critical in petroleum refining.

Now think about all the rhetoric you’ve heard about how “we” are going to transition to a high tech/clean tech future of solar panels, windmills, electric cars, smart grid, wired-world. Oh yeah? Problem is, most of these technologies simply WILL NOT WORK without large amounts of rare earths.

That is, the electric cars, wind turbines, solar panels, miniature electronics, smart grid, etc. will not get built in the US (or Canada, Japan, Europe, Australia, etc., for that matter) if industries cannot secure long-term supplies of rare earth minerals. And, oh by the way, that goes double for advanced defense technologies. For example, EVERY missile in the US arsenal uses some quantity of rare earths – every single one!

What’s the problem? In the past 15 years or so, the West closed down essentially all of its rare earths refining capability. The entire market (well, 97% of it) was conceded to the Chinese, for a lot of reasons – economic, wages, resource-base, environmental and much more. Now that the West wants to build out a different energy and technology future, the Chinese control critical substances from ore bodies through to final oxides and metals.

It’s as if somebody (the West) wants to set up a fancy, Napa Valley-style winery (new, clean, high tech), but doesn’t have any grapes (rare earths). This vintner-wannabe will have to buy the grapes from a producer in China. Do you really think that the Chinese will sell the guy the best grapes, and help him create a world-class brand of wine?

What do the Chinese say? They say that they’re just acting rationally. They’re closing down unsafe mines and controlling past environmental pollution. They’re consolidating the industry, as most other industries consolidate over time.

The Chinese say that they’re just encountering natural issues of depletion, from mining their ore bodies over the years. They say that they just don’t have “more” rare earths to export, because of natural economic and market forces.

Of course, the Chinese also say that if you move your factory to China, they’ll put you on an allocation for rare earths. You’ll have enough to operate. That is, you’ll have enough raw materials as long as you set up a joint venture with a Chinese firm and share all your technology. Of course.

Byron King
for The Daily Reckoning

China’s Leg Up in the Rare Earths Market originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
China’s Leg Up in the Rare Earths Market




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Why Printing Money Won’t Correct the Correction

November 4th, 2010

Well, dear reader, you know the story as well as we do.

“US Stocks Rise as Fed Announces Additional Treasury Purchases,” says Bloomberg.

US stocks advanced, with banks helping benchmark indexes erase losses, after the Federal Reserve announced an additional $600 billion of Treasury purchases through June in a bid to boost growth in the world’s largest economy.

The S&P 500 climbed 0.4 percent to 1,198.03 as of 3:16 p.m. in New York. The measure had fallen as much as 0.8 percent. The Dow Jones Industrial Average added 26.64 points, or 0.2 percent, to 11,215.36.

“Nothing in here tells me that we should be selling stocks,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “The latest economic figures have been good. We have the Fed and the elections behind us. So there’s less uncertainty.”

The S&P 500 surged 17 percent since July 2 through yesterday as odds increased that Republicans would take control of the House. The GOP, while falling short of winning the Senate, narrowed the chamber’s Democratic majority yesterday in an election shaped by voter anxiety over jobs and the economy.

Republicans gained at least 60 House seats across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.

The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.

What? Does he just make this stuff up? Maybe stocks will go up. Maybe they’ll go down.

We don’t know. And we don’t care. Stocks aren’t cheap. And the country is still at the beginning of a major adjustment…a Great Correction that will probably depress business profits for many years.

Besides, the stock market never has completed its historic rendezvous with the garbage pile. Yes, every investment asset class goes from the trash heap to the penthouse – and then back. By our calculations, US stocks are on the downside of that slope. We’ll wait ’til they reach the dump – that is, when they’re at giveaway cheap prices – before we get excited about them again. We want to pick them out of the trash at pennies on the dollar.

Of course, we could wait a long time. From trough to peak typically takes 16 to 20 years. If you take the peak as of January 2000…when the NASDAQ hit its high…we have another 6 or so years to wait. But if the peak was the peak in the Dow of 2008…heck, we could wait until 2028 until we finally hit bottom.

And don’t forget. Japan waited 20 years between its glory days of 1989 and its low of 2009. We could do the same. But so what? We can wait….

But let’s talk about happier things. This year the voters – God bless ’em – threw out more bums than usual. The Republicans gained 60 house seats.

That means Congress is gridlocked. Obama doesn’t seem to understand what is happening. And Ben Bernanke is cranking up the presses.

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.

Bill Bonner
for The Daily Reckoning

Why Printing Money Won’t Correct the Correction originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why Printing Money Won’t Correct the Correction




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

From Stagnation to Stagflation

November 4th, 2010

With economic growth as measured by real final demand so weak, any increase in inflation which is not associated with a higher rate of real growth will represent a transition from the economic stagnation of the past few years to an even more unsatisfactory state of affairs, a dreaded “stagflation”, which came to plague the US and, to a lesser extent, global economy in the late 1970s.  But wait, some might object, US CPI reached double-digits in the late 1970s/early 1980s, surely this is not a fair comparison? To which we reply: Good point. Let’s make certain that we are comparing like with like and adjust for changes that have been made to the CPI calculation methodology in the interim, as these have been substantial.

A respected independent economist, Mr. John Williams, maintains an excellent website publishing what he has termed “Shadow Government Statistics”, which show how the economy is performing today, using statistical methodologies from the 1970s for GDP, CPI and so on. These statistics allow for a proper comparison of contemporary and past US economic data. The results are illuminating, to say the least. Whereas the official, current rate of CPI is at a “59-year low” 1.1% y/y, when applying the same statistical methodology that prevailed in the 1970s–comparing like with like–in fact US CPI is currently 8% y/y! 8%! And there is a substantial food and import price inflation shock about to arrive!

TIPS may not be pricing in 8% y/y inflation or higher, but why should they? They don’t pay the old CPI as a coupon, they pay the current CPI. As such, TIPS implied inflation rates simply can’t tell us that we are perhaps already deep into an economic stagflation comparable to the late 1970s!

For those skeptical that this is a legitimate line of inquiry, consider some ominous parallels between current financial market developments and those of the late 1970s:

•    The dollar is weak nearly across the board;
•    The gold price has soared to records;
•    The prices of commodities generally are now also rising rapidly;
•    The stock market is rising;
•    Yet all of the above are occurring alongside generally weakening US leading economic indicators

The evidence strongly suggests that US CPI is not 1.1% y/y but rather somewhat higher. But if US CPI is in fact somewhat higher then this implies that the real rate of GDP growth is commensurately lower, as real growth = nominal growth – price inflation. Yet with official GDP growth as weak as it is, then that would imply that, in fact, true real GDP growth is outright negative. Impossible? Well, consider some other interesting economic facts:

•    The economy is not adding jobs and, in fact, employment remains far below the peak reached in 2007;
•    State sales tax revenue growth is negative, implying negative real retail sales growth;
•    The Conference Board consumer survey of inflation expectations is around 5%

Isn’t it far, far easier to understand the behavior of financial markets and the broader range of economic data hiding behind the headline figures, by assuming that CPI is somewhat higher, and real GDP growth somewhat lower, than official figures suggest? We leave it to the reader to decide.

If the real state of economic affairs in indeed as bad as Mr. Williams’ data imply, then we are, in fact, already deep into a stagflation which is only going to get worse. The financial market implications are significant.

First of all, it is likely to become increasingly evident that current US bond yields are far too low to compensate investors for the increasingly rapid loss of purchasing power. As such, either yields are going to have to rise or, to the extent that the Fed stands in the way, the dollar decline.

Second, corporate profits are going to suffer in a severe squeeze between sharply rising input prices on the one hand and poor real final demand on the other. This is likely to weigh on equity markets although equities are likely to outperform bonds as corporations, in particular those producing/providing relatively non-discretionary goods and services, are able to pass on some costs to consumers.

Third, within equities, financial shares are likely to underperform, possibly dramatically. The more severe the stagflation becomes, the more likely that, eventually, interest rates are going to rise. While goods-producing firms able to export might benefit in time from a weaker dollar and lower relative wage costs, financials do not benefit directly from such developments. Rather, their valuations are a direct function of the level of interest rates. A glance at the relative performance of US financials during Fed Chairman Volcker’s 1979-82 assault on inflation, via higher interest rates, is instructive in this regard.

Fourth, commodities are likely to remain the best performing asset class. Gold and other precious metals may, or may not, lead the way, as their prices are already elevated relative to those for other commodities. Crucial here will be the perceived risk of the US financial system. If confidence in the financial system deteriorates substantially, precious metals are likely to be the best performers. If financial conditions are relatively stable, a more balanced and widespread outperformance of commodities becomes more likely.

Needless to say, this is not a benign investment environment. Those living on fixed incomes are going to see their purchasing power substantially eroded over time. Those who think that stocks are cheap due to highly misleading comparisons with the unsustainable asset bubbles of the past are going to be disappointed. Adding to the misery for stock market investors will be the “green-tape” associated with new environmental and natural resource regulations; a more aggressive regulatory regime generally; tremendous political and hence tax policy uncertainty; and an astonishingly widespread culture of corporate fraud, which has no doubt been substantially facilitated by the complete lack of even basic enforcement of US contract and securities laws before, during and following the financial crisis of 2008.

While the above comments are rather specific to the US, certain other developed economies, including parts of the euro-area, the UK and Japan, have issues which are in many cases similar and in some cases even worse. And while emerging markets are likely to continue to outperform on trend, at least in relative terms, investors should be cautious regardless of where they are looking for value around the world.

For those readers who have been following the Amphora Report, no doubt this edition represents another rather depressing installment. We are long on criticism and rather short on proposed solutions.  From time to time we do try to offer reasons for hope and, this time around, we close with a few.

First, we note that alternative, non-Keynesian economic thinking is beginning to find its way into the mainstream press. Regular readers of the Wall Street Journal (US), Financial Times (UK) and Daily Telegraph (UK) have probably already noticed this. Policymakers are more likely to listen to these sorts of media sources than those of the blogosphere, however pertinent, sophisticated and credible the latter.

Second, economic policymakers in a growing number of countries, in particular in Europe but also in certain emerging markets, are beginning to take proactive measures to place their economies on a more sustainable path, even if this places them in direct confrontation with the US. Germany is an important case in point, as are France, Brazil and India. We would even place the UK in this group.

Third, some influential business leaders in the US are now speaking out against plans for additional stimulus, arguing instead that more fundamental economic restructuring is now necessary, however painful it might be in the near-term. This is a welcome contrast to the near universal acceptance of the business community back in 2008-09 that, without substantial fiscal and monetary stimulus, the US would somehow become an economic wasteland overnight.

Fourth, while we are not partisan in our politics, we welcome the growing political activism in the US, Europe and elsewhere. In all cases, there is much more citizen engagement and fundamental debate taking place around all manner of economic issues. While in certain cases demonstrations are turning violent, it is important to understand that this is an unfortunate symptom of supposedly representative political systems not living up to the spirit of their specific constitutions or of their democratic traditions generally. Long may the activism continue.

These are all important developments. The first step toward curing an addiction–in this case artificial, unsustainable and ultimately counterproductive economic stimulus–is to recognize it for what it is. As the media, policymakers, businessmen and all citizens wake up, the odds grow that we might just manage to avoid an even worse fate than that which already awaits us as the consequence of colossal past policy mistakes.

No, there is no easy way out. There is no free lunch. Indeed, that lunch is going to get much more expensive before long.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

From Stagnation to Stagflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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From Stagnation to Stagflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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