Helping Thy Neighbor; Germany Demands Gold

Here’s the bottom line on the crisis in Europe:

The only way the European debt crisis could be put temporarily aside is if the European Central Bank (the “ECB,” our equivalent of the Federal Reserve) prints money. Since Germany is the main voice within the ECB, printing is not the solution, because Germany is refusing outright. This means the European debt crisis continues to escalate on a daily basis.

The German Council of Economic Experts has developed a creative way around the European debt crisis. They call their proposal the “European Redemption Pact” (source: The Telegraph, May 29, 2012).

Under the proposal, a certain percentage of a troubled eurozone country’s public debt would qualify to be placed in a special fund. From this fund, Germany would issue joint debt, so that the country would enjoy the low interest rates paid by the stronger northern countries of the European Union.

How to Invest in Gold

To back this debt, Germany is asking that these countries put up 20% collateral. The concept, dear reader, is similar to that of a bank; they will be more than happy to provide you with a loan if you have assets they can seize, just in case you don’t pay.

The assets Germany wants from these countries is either their foreign currency reserves—like U.S. Treasuries or gold bullion.

Now, this is not the first time that stronger eurozone countries have offered to help countries like Greece, Spain and Italy during the European debt crisis. China and Britain offered to provide money to these countries in exchange for their gold bullion. These countries flat out refused, opting instead to hold onto their gold bullion.

This solution will most likely not work, because these countries will not part with their gold bullion. But the fact that it is being proposed proves that gold bullion is money.

The countries in distress in this European debt crisis have some of the largest reserves of gold bullion in the world. I’ve been documenting China’s thirst for gold bullion, so it comes as no surprise that China offered to help these troubled eurozone countries for their gold bullion.

Imagine how desperate these countries are to rid themselves of their debt…but not at the cost of parting with their gold bullion!

The reason they won’t sell their gold bullion is because they understand the value of gold bullion, which has stood the test of time for 5,000 years. And the reason Germany purposed this offer is because it recognizes the value of gold bullion.

The reason Britain and China were willing to help these troubled countries is because they too recognize the value of gold bullion.

There are those who dismiss gold bullion as nothing but a useless metal. However, when it comes to issues of money, gold bullion is part of the agreements and reserves of countries around the world. (See: Central Banks Buy Another 70.3 Tonnes of Gold Bullion in April.)

I have been saying for weeks that the depressed stock prices of senior gold producers present investors with a great opportunity. That opinion remains unchanged.

Michael’s Personal Notes:

Spain’s third largest bank, Bankia, was declared fine just a month ago…

But, in mid-May, it was revealed that Bankia required a €4.1-billion government bailout. By the end of May, the government bailout required to help Bankia hit €23 billion (source: Telegraph, May 28, 2012).

Spain’s Orderly Bank is the country’s government bailout arm to manage all of the banks in Spain. It has only €5.3 billion allocated for government bailouts. So where does Spain get the money for the government bailout when the government has none?

Spain will have to try the debt market. Unfortunately, the debt market is well aware of Spain’s credit crisis and has sent interest rates that Spain now needs to pay on new debt back up to extremely high levels that the country can’t afford: 6.60% and climbing!

As I’ve written recently in these pages, Spain is experiencing its own version of a housing crash, on a larger scale. Property prices are estimated to drop at least another 20% due to staggering unemployment and the continued recession, further exacerbating the credit crisis, which is why a government bailout is a certainty.

The Centre for European Policy Studies in Brussels estimates that the Spanish banks would have to write off at least €270 billion in mortgage debt. There is no government bailout large enough to make up for this loss should it come to be!

It is critical to note, dear reader, that Spain’s two largest banks hold assets (debt and the country’s other loans on top of who knows what else) that are larger than Spain’s gross domestic product (source: Egan-Jones)!

What does this mean? It means the government of Spain has no money to provide a government bailout for the banks!

With the Spanish economy shrinking, unemployment at 24.4% and the housing market collapsing, the credit crisis worsens, because the banks’ “assets” are worth less and less with each passing day.

The people of Spain understand they are in a credit crisis and are moving their money out of Spanish banks and sending it to Germany or other northern European banks in order to protect themselves. What can be referred to as a “bank run” is occurring today, but on a small scale, at least for now.

This makes the situation for the Spanish banks even worse and ensures that the government bailout they are going to need will be large.

The situation has become so dire that this week the European Commission suggested a euro aid for troubled banks. Instead of funneling the money into the Spanish government, send it straight to the banks that need it instead, providing the government bailout the Spanish bank can’t.

However, Germany, Finland and the Netherlands are opposed to such direct government bailouts. So the stalemate continues, as Spain implodes. (See: A Problem Seven Times Bigger Than Greece.)

For the European Commission to suggest something like this means they know how dire the credit crisis has gotten in Spain. Something will have to be done soon, because if they allow even one bank to go bankrupt, the consequences will have global implications.

Financial institutions are connected worldwide. If banking institutions fail in Europe, it will have serious implications for the big banks here in the U.S.

Where the Market Stands; Where it’s Headed:

The official numbers are in: the Dow Jones Industrial Average lost 945 points in May, the equivalent of 7.1%.

What happens next?

More investors flock to the “security” of U.S. Treasuries, as they finally realize that the various recessions in Europe will affect the S&P 500 companies (40% of which have revenue streams in Europe), and China and the U.S. economy are slowing. The Fed gets ready for a third round of quantitative easing (QE3)…but it’s not enough to stop the bear market rally that started in March of 2009 from ending.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.

Japanese Pension Fund Buys Gold as Currency

Article By: Michael Lombardi

In the midst of the current market correction in the price of gold bullion, a Japanese pension fund, Okayama Metal & Machinery, is going to place 1.5% of its total assets ($500 million) in gold bullion-backed exchange-traded funds (ETFs) (source: Financial Times, May 16, 2012).

This is the first time the fund has bought gold bullion in its history.

The chief investment officer of the fund said explicitly that investing in gold bullion was meant to protect against sovereign risk.

Historically, the $3.4-trillion Japanese pension market has invested in bonds, with the balance finding its way to other assets, but not gold bullion…until now.

How to Invest in Gold

The perception in Japan has begun to change, as retail investors are beginning to view investing in gold bullion as a protection against a crisis—whether it is a tsunami or a debt crisis like in the eurozone.

The oldest and largest Japanese wealth manager, Normura, has added investing in gold bullion in its survey to retail investors. It has found—much to its surprise—that the average Japanese person views gold bullion as the third-most desirable investment.

The second-largest financial firm in Japan, Mizuho Financial Group, has begun to allow smaller Japanese pension funds to invest in gold bullion.

Unlike North America, the talk isn’t of investing in gold bullion as a commodity, but the perception is that of gold bullion as a currency.

Now that the tables have turned and Japanese pension funds are beginning to dip into gold bullion, while the average person in Japan is warming to the idea of investing in gold bullion, increased demand in Japan is just beginning.

Follow me here. If even five percent of assets are invested in gold bullion, then five percent of a $3.4-trillion dollar pension fund market is a staggering $170 billion.

You know what that would do for gold bullion prices…

I don’t believe I’m making an outrageous claim. If the perception of gold bullion as protection against a crisis takes hold in Japan, then five percent is a reasonable portion of one’s portfolio to set aside for insurance against a crisis. I’m not even counting the average person in Japan. The $170 billion represents just the pension funds.

Besides China, Japan is joining the group of gold bullion investors around the world. Central banks as well have been investing in gold bullion in the first few months of this year, as I’ve been writing about in these pages. (See: Half of World Gold Production Being Bought by Central Banks.)

If you want to sell your gold bullion, looks like there are plenty of Japanese investors who will be happy to take it off your hands.

Michael’s Personal Notes :

Last Friday came news that Hewlett-Packard Company (NYSE/HPQ) is considering cutting 25,000 jobs in an effort to help the company trim costs and increase profits.

With the second half of 2012 looking like a continued slowdown in economic growth, I believe we will see more companies like Hewlett-Packard announcing job cuts as the year progresses.

It’s been a snowball effect…

The recessions in various eurozone countries have resulted in big American companies that sell in Europe seeing softness in product/service demand. And the slowdown in China’s economic growth is causing a pullback in demand from one of the world’s biggest economies.

After a couple of years of solid earnings growth from big American companies, I believe earnings growth will falter this year.

Amid stagnant economic growth, companies are finding it difficult to deliver revenue growth. If revenue is not growing, and companies want to increase profits, their next logical move is to cut expenses.

Twenty-five thousand job cuts at Hewlett-Packard is a big number, but percentage wise, it’s only eight percent of Hewlett-Packard’s total workforce. As more companies cut payrolls in the second half of 2012, more pressure will be placed on the unemployment rate and, consequently, economic growth in this country could easily stall.

In a global economy, it is unreasonable to believe a country as big as America can isolate itself from worldwide slowdown in economic growth.

Because of what I have outlined above, the Fed will be forced to keep interest rates low for a very long period of time. As the stock market continues to struggle and economic growth falters, the Fed will be more aggressive in quantitative easing.

So, as investor, I believe you are looking at a prolonged period of low interest rates and more money printing by the Fed, both of which are inflationary.

Eventually, interest rates will be pushed up as a consequence of inflation. It’s just a matter of when. But in the meantime, just expect more of the same…record-low interest rates to continue, government debt to continue rising, and the monetary policy to be very expansive. Oh, and let’s not forget, economic growth to deteriorate rapidly.

Where the Market Stands; Where it’s Headed:

If I am correct, the stock market is just about finished putting in a huge top that will act as the right shoulder of a classic head and shoulders pattern. This means it is more likely stocks are headed down than up.

Facebook, Inc. (NASDAQ/FB) wasn’t able to change the market’s tide on Friday. If there is one thing I know about traders, when the market is fragile, like it was last week, they don’t like to go home for the weekend with too much stock on their books.

Expect a bad summer for the stock market. The economy is slowing rapidly, so corporate profits will be stretched. Those smart corporate insiders I’ve have written about a few times this year…they jumped off the bandwagon at just the right time. (For the benefit of my new readers, corporate insiders have been very big sellers of stock this year; see: Another Key Stock Market Indicator Flashes Red.)

What He Said:

“What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.

Why the Pathetic New Consumer Confidence Reading Is Good News!

The New York-based Conference Board’s household sentiment index has slumped to the lowest level since March of 2009…

But hold on…don’t dismiss it as more bad news! It’s actually good news.

Sure the U.S. unemployment rate has held at about nine percent for about 30 months now. Sure, 8.75 million jobs were lost in the recession that ended in June 2009. And, with only about two million jobs created since the recession ended, the unemployment picture is not looking good. How can consumer confidence not be taking a beating?

There’s also the poor housing market. The S&P/Case-Shiller Index reported yesterday that home prices in 18-out-of-20 major U.S. cities fell again in August. It’s difficult for consumer confidence to rise when one-out-of-five U.S. home is worth less than the mortgage on it.

But think about this…

What happened to the stock market when consumer confidence hit bottom in March of 2009. We all know that stocks rose almost 100% from March of 2009.

And this exactly what I have been writing about for a month now. A couple of weeks ago, the number of bearish stock advisors hit a high not seen since March of 2009 (Source: Investors Intelligence). Now consumer confidence is at its lowest level since March of 2009.

It is during times of extreme bearishness and negative consumer confidence that the stock market rises. No, I’m not predicting that the stock market is going to double from its current level. But I am saying that investors, stock advisors and consumers are usually wrong when the majority of them have the same opinion. The stock market has historically done the opposite of the herd mentality. And I believe this time will be no different.

The more negative the consumer confidence reading, the more stock advisors who have turned bearish, the more the chances the stock market will climb the “wall of worry” higher. And that’s exactly what I believe is going to happen now. The poor consumer confidence reading released by the Conference Board Tuesday is good news for the stock market.

Michael’s Personal Notes:

Quietly, with little fanfare, the U.S. dollar has fallen to its lowest level against the Japanese yen since World War II. Yes, the country we beat in World War II—its money is now worth more than ours!

But it’s not just the yen that has been rising against the U.S. dollar. So far this month, the U.S. dollar has lost 4.4% of its value against a basket of industrialized country currencies. Actually, I’m surprised the U.S. dollar hasn’t fallen more in value against other world currencies.

Let’s face the unpleasant facts again:

The Federal Reserve has kept short-term interest rates near zero for almost three years now. On top of that, the Fed has purchased $2.35 trillion in assets to help spur the economy. The “official” national debt sits at about $15.0 trillion. When you include off-balance sheet government obligations, our debt stands at between $100 trillion and $200 trillion depending on whose report you believe.

Yes, the stock market has been rallying as of late. But we all know the U.S. economy is very fragile, very sick. We have a currency that returns zero interest rates issued by country that is awash in debt. And there are plenty of U.S. dollars in circulation to boot, thanks to the Federal Reserve’s expanding balance sheet.

From March of 2009, when U.S. stocks fell to a 12-year low, to today, the U.S. dollar index (a measure of the value of the U.S. dollar relative to a basket of six currencies: euro; yen; pound; Canadian dollar; Swedish korona; and Swiss franc) has fallen 16%. During the same period, the price of gold bullion has risen by approximately 80%.

“Michael, what is the long-term play here for investors?” What I see few people talking about is the effect of the debt crisis in Europe on the U.S. dollar. When Greece’s problems started to flare up in 2010, we saw investors running to the U.S. dollar. And we had a corresponding spike in the value of the U.S. dollar in the summer of 2010.

But today, the crisis in the Europe is graver than last year. Greece is bankrupt. Italy and Spain are not far behind. Citizen rallies against austerity cuts in Europe are becoming larger and more violent (70,000 Greeks protested against government cuts on October 19, 2011). And, against the backdrop of all this, the U.S. dollar is not rising, which is obviously negative for the greenback.

My strategy has remained unchanged. I’m exiting U.S. dollars for gold. If I’m right about future inflation, the value of the U.S. dollar will only continue to deteriorate, while the price of gold bullion rises even further.

Where the Market Stands; Where it’s Headed:

The stock market opens this morning slightly above where it started 2011. I continue with my opinion that we are in a bear market rally that started in March of 2009. The strong combination of investor pessimism, an expansive monetary policy, and stronger than expected corporate earnings will see the bear market rally continue to climb the proverbial “wall of worry.”

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years about how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming?  No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.