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Quote of the Day

Monday, May 14, 2012

May 14, 2012 -- I just received a large full-color pamphlet in the mail and in large letters it read, "The free ride is over. The dollar will soon be devalued and replaced." I thought the warning was interesting, but the operative word was "soon".

 

I've been writing about this same set of circumstances, but it's the timing that is unclear. When will the dollar be devalued -- in a month, six months two years? Actually, the dollar is being devalued each time the Fed comes up with another quantitative easing. But you don't know it unless you try to buy a car or a batch of food from Safeway. Whew!

 

We know that China has long been buying US debt by the billions of dollars. Writes one analyst, "China makes 1/2% on the dollar reserves that it holds. China then loses about 10% on the exchange rate, and in turn China suffers from a Chinese inflation rate of about 10%. This provides the Yuan with a total return of roughly - 15%. That's a huge loss of $270 billion dollars a year or an outrageous loss rate of 7.8% on their money.

 

Naturally, China and some other nations want to "get away" from the necessity of switching their currency into dollars in order to trade. The answer or escape from this is currency swaps. When China wants to trade with, say, Indonesia, they trade with Chinese Yuan, thereby side-stepping the dollar completely. China has arranged currency swaps with a number of Asian countries, but lately China has arranged currency swaps with Brazil, Argentina and other South American countries, thus avoiding the necessity of taking in dollars.

 

Russia, too, has climbed on the "avoid the dollar" bandwagon. What's happening is a quiet revolt against the world's reserve currency, the dollar. And why the revolt? Simple, the dollar has been losing purchasing power.

 

A nation like China is losing billions in purchasing power by collecting and holding dollars. It's more than the leaders of China are willing to suffer through.

 

Then the question -- why doesn't the US slow down on its fiat dollar printing? The answer is that the US wants to avoid the PAIN of deflation and slowing business. I don't want to make this site too long and complicated, but the fact is that the Fed's policy is for the US to sustain at least 2% inflation year after year.

 

Figure out what 2% inflation, compounded annually, does to the purchasing power of the dollar. The Fed's idea is that if it follows its inflationary policy, the current $15 trillion of Federal debt will be rendered feeble and insignificant in ten or twenty years, due to systematic inflation.

 

Furthermore, people like a "touch" of inflation each year. Business profits trend higher. People feel better when the price of everything they own increases. In other words, people like a LITTLE inflation, as long as it's manageable and not too insane.

 

The gradual decline of the dollar means that the world's other currencies must "come down" if they are to remain competitive in the world market.

Boil it down, and it means that the Fed's inflation policy is pushing the dollar towards eventual destruction. An increasing number of nations already consider the dollar "unfit" to be the world's reserve currency.

 

Some want a mix which includes a basket of commodities plus gold.

 

I'm thinking that the Chinese are on their way to backing their Yuan with part-gold, thus making the Yuan the most wanted currency on earth, and in due time the world's new reserve currency.

 

Below the dollar vs. the Yuan (as the line descends the Yuan is growing stronger against the dollar).

 

 

  

 

It's Sunday, and I'm still working on improving my walking. What's missing is my endurance. I've spent weeks recuperating, mostly in bed. To pass the time, I practice saying things or events that I am grateful for (after which I usually feel better).

 

There's always the fat Sunday New York Times. On yesterday's cover is a girl who owes $120,000 on her education. I think to myself, she'll never, ever, be able to pay it back. These kids go to college today, and they think that's a sure ticket to a good job. Well, it isn't any more. Their prize for getting an education is all too often just outrageous monster debt. I understand that the government is now owed over one trillion dollars in debt from kids who borrowed to go to college. Pretty soon, college is going to get a bad name. "Oh you went to college? Great! How much do you owe?"

 

Then in the Times, there's a full section on Zuckerberg and Facebook. The Zuck will be a 28 year old billionaire. I'm sure the Zuck has already paid Harvard whatever he owes them. How about a tip for dear old Harvard, Zuck?

 

I note in the engagement section of the Times every week we see pictures of two men who are engaged to be married. At first, I was a bit shocked by this, but now I'm used to it and the shock is gone.

 

I am shocked by the big full page ads for high-priced items like carrying bags and women's clothes in the newspapers. Who buys this stuff, I wonder, and where do they wear it? The same goes for jewelry. Some pieces are marked in the millions of dollars. Obviously there are still a lot of very wealthy people around. This goes double for the bulging new middle class in China. Gad, China is now buying more cars than we are. They say it will end when rich Chinese families are hiring American house boys.

 

Fred Hickey of the great High Tech Strategist got double pneumonia, and said he was going to quit writing. But now I see he's back. Fred can't stop writing, like your editor. But damn it, I am going to keep my promise to myself and write much shorter Tuesdays and Thursdays sites. I'm going to do it!

 

Yesterday was mother's day, and here's a heart-felt hug to all my subscribers who are moms.

 

TODAY'S MARKET ACTION:

 

My PTI was down 6 at 6378. The moving average is 6376, so my PTI is bullish by 2.

 

The Dow was down 125.25 to 12695.35.

 

Transports were down 40.37 to 5100.33.

 

Utilities were down 1.78 to 470.23.

 

NASDAQ was down 31.24 to 2902.58.

 

S&P 500 was down 15.04 to 1338.35.

 

There were 481 advances and 2,609 declines on the NYSE.

 

There were 35 new highs and 98 new lows.

 

Total Volume on the NYSE and associated exchanges was 3.66 billion.

 

Bonds: Yield on the 10 year T-note was 1.779. Yield on the long T-bond was 2.937. Yield of the 91 day T-bill was 0.091.

 

Dollar Index was up 0.412 at 80.67. Euro was down 0.79 at 128.45. Yen was up 0.02 at 125.25. Currency Prices as of 1 PM Pacific Time.

 

June gold was down 23.00 to 1561.00. July silver was down 0.537 to 28.35.

 

June light crude was down 1.35 to 94.78.

 

My Most Active Stocks Index was down 12 at 245.

 

The Big Money Breadth Index was down 6 at 1002.

 

GDX was down 1.45 at 40.97.

 

HUI was down 13.57 at 390.73.

 

CRB Commodity Index was down 3.35 at 288.45.

 

The VIX was up 1.98 at 21.87.

 

Permanent Portfolio Fund (PRPFX) was down 0.14 at 47.26 (previous day closing). YTD Return: 2.54%

 

Late Notes -- I've been saying that a primary bear market started in 2007 and that this bear market was interrupted by a terrified Fed in 2009 -- interrupted, but not ended. Once the primary trend of the market is established, it will go to conclusion despite the best intentions of the Fed, the Treasury, Congress and the president.

 

I am now saying that the primary bear trend is in force again. The first part of the primary bear market took about two years. It does not necessarily follow that the rest of the bear market will also take two years. Hopefully the second half will consume less time, but since I believe the Fed will step in again the Fed may easily lengthen the second half of the bear market which we are now moving into.

 

Counting today, the Dow has been lower an amazing nine out of ten days. This may give us some idea of the viciousness and relentlessness of this sector of the bear market.

 

The WSJ lists 18 indices every day. Today all 18 of these indices were down. There were 34 new highs today on the NYSE and 96 new highs. This is the start of the second half of the primary bear market, and from what I see so far, the rest of this bear market promises to be a living horror.

 

My advice now is to get OUT of all common stocks, gold mining included and most ETFs. This bear promises to take no prisoners. Subscribers who lose the least over the next two or three years will be the heroes. Come to think of it, it certainly is ironic that the Giant Facebook IPO should be coming out at this time. My guess is that the arrogant ZUCK (with his hoodie) will be surprised and disappointed by the results of his long-awaited IPO.

 

I've noted that the VIX has been "sneaking" higher of late. Today it is 21.66. I expect the VIX to start rocketing higher over coming days. The VIX is known as the "fear" index. And there should be plenty of fear to go around in coming weeks.

 

This bear market will be international in scope. For this reason, I suggest that my subscribers don't waste time looking for foreign markets that hopefully will offer safety.

 

The operative word now is deflation. Everything will be going down including the various fiat currencies as they compete against each other.

 

The last man standing will be gold bullion. Gold will be hit along with everything else, but when the smoke has cleared, gold will still possess purchasing power as it has for the last five thousand years.

 

By the way, I thought it was ironic that many art articles drew unbelievably high prices at auction recently. At least there are a few smart sellers.

 

Chart below of the world's stock markets minus the US. This is a down-slanting (bearish) head-and-shoulders pattern. As you can see, all of this year's gains have already been wiped out. 

 

 

 

 

 

Late, Late Notes -- Dow down 9 out of 10 days. Is it possible that by tomorrow we'll see 10 out of 11?

Would that be a record? I think it would.