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Good News, but Stock Prices Frozen

All of the economic news for today comes with two-thumbs-up for a continuing robust recovery. Industrial production in the U.S. exceeded the anticipated gain of 0.8% when the Federal Reserve reported an increase of 1.1%, the biggest jump in nearly six years. Building permits rose to the highest level in more than thirty years. Economists forecast a drop in consumer confidence from 90.2 in May to 89.9 for June, but instead it roared-in at 95.2. Gasoline prices are at two-month lows. Southern California home buyers are in a feeding-frenzy bidding prices through the roof. The Consumer Price Index came in lower than expected and Alan Greenspan said inflation is nothing to worry about. The Fed’s Beige Book was released today and one reporter called it the “good news report,” claiming we’re in a “sweet spot” and the Fed is happy with the growth as manufacturing and employment are recovering. So with all this jump-for-joy economic news, why is the stock market struggling to show a gain for the day?

The biggest thing happening today is simply the fact that everything is moving exactly the opposite to what happened yesterday. The big trigger yesterday was the surprise from the release of the CPI numbers. Investors in the bond market were crowded-in on the wrong side of the trade with money positioned short on bonds in anticipation of stronger inflation numbers. Once the market saw a muted inflation report, they scrambled to buy Treasury debt driving interest rates lower, which weakened the U.S. dollar and pushed stocks higher. Mr. Greenspan backed-up the softer than expected CPI report by saying the Fed would stick to their measured rate increases that most analysts read as a quarter of a percent at a time. The strong economic numbers today had a negative effect on bond prices, ramped the dollar higher and left stock investors scratching their heads.

When reports and data have opposite effects, asset prices go sideways and nobody makes any money. In the stock market the bulls don’t have enough conviction to step up to the plate to do any serious buying and the bears are timid to heavily short stocks for fear of being burned again. Interest rates should determine the near-term direction and most speculators and investors expect them to move higher, but Greenspan says “not so fast.” In my mind the biggest confusion was created yesterday with the downplayed inflation data. More directly, I call the data fantasy numbers, especially when the focus of the report as “core inflation rising 0.2%,” which means inflation is only going up at a 2.4% annual rate. As far as I’m concerned, it’s not rocket science to see that inflation was clearly understated. Just remember the CPI is a manufactured number.

Complicating Factors

From an investment strategy perspective, we are in a very complex environment. Over the last decade we have had tremendous asset inflation in stocks, bonds and real estate primarily due to the constant expansion of credit. This unprecedented expansion has created a massive tug-o-war between the very powerful forces of inflation and deflation. Our current global monetary system is actually very similar to a “ponzie scheme” whereby the supply of money and credit need to continuously expand, otherwise there won’t be enough money to pay back existing debt. If the supply of money and debt contracts it will cause a chain reaction of debt defaults which means governments around the world will have to scrap the current global fiat merry-go-round money machine and start over with something new. They don’t want to do that because they would prefer to keep their current power structures in place.

The Fed has repeatedly said (and demonstrated through their actions) they will err toward the side of inflation since our debt-driven global system collapses with deflation. The game you are witnessing is one in which central banks need to expand the supply of money and credit, but keep their fiat monies from collapsing in value by showing there is no rampant inflation. From a historical perspective this experiment with a pure-fiat global money system has only been in place for a little over three decades. As far as the outcome, I foresee another stagflation scenario like we saw back in the Seventies. I believe assets with debt attached will deflate in value and tangible assets who’s value is not contingent on debt will appreciate in value. The alternative scenario would be something like a period where we go through hyper-inflation followed by massive deflation ushering in a new money system. If the globalists want to get to a one-world currency, that would be one way to achieve their goal.

The market players are struggling back and forth with these forces of inflation and deflation. To further complicate things, we are engaged in wars all around the globe and face the politics of a presidential election year. To add even more fuel to the fire, when we look at economic numbers and developments, we have to determine if we are looking at the picture from a country-specific point of view or a global point of view. I believe we are seeing a huge global expansion of economies, but I’m not sure how much the USA will participate since we are the largest debtor nation in the history of the world. We have debts and deficits like never seen before, but Japan, China and Europe have current account balances that are net positive and not bleeding red ink. We’ll see how it all goes!

Economic Jihad -- Lots on the Line

Japan is trying to get out of a decade-long recession, China is quickly becoming a huge economic force as the Chinese people get a taste of what it is like to enjoy many of the things we take for granted (energy, transportation, jobs and home comforts), and the European Union is working to place the euro at parity with the U.S. dollar as a world reserve currency. Have you ever noticed how upset the U.S. officials get when an oil exporting nation wants to trade their oil for euros rather than dollars? You can see the stakes are very high.

I got pretty fired-up yesterday when I read a column from one of the mainstream news media outlets about how all of the economic conspiracy theorists are a bunch of whackos. Names really aren’t important, so I’ll just say the author was trying to discredit writers that claim the markets are not manipulated by entities that are “in the know.” The columnist likened them to “black helicopter” writers and saying their ideas are far-fetched at best. An investor today would have to be really naïve to think that the Fed doesn’t work to influence the economy and markets with their rhetoric, open market operations, inflation expectations and through their dealers via the Fed repo pool. Additionally, what do you think the Exchange Stabilization Fund controlled only by the President and Treasury Secretary is used for? How much influence does the Working Group on Financial Markets have on the stock, bond and commodity trades?

Under our current circumstances, many would say they are completely justified in what they do to protect all of us in the U.S. and others would say they are wrong by not allowing the free-market system to determine asset values. Folks, we are at war! A great part of the war is what happens economically. Money means power and there are a lot of players around the globe that want more money and more power! I’ve gotten away from today’s market actions, so I’ll just use one example from today to highlight my case for market intervention.

In the Middle-East we have soldiers getting killed and oil pipelines getting blown-up that cut-off 1.6 million barrels of oil per day from reaching the markets. Global demand for oil is running very high and most exporting countries are already producing as much as they can. With the current developments I would have expected crude to add at least a dollar per barrel, but it barely budged today by only gaining thirteen cents to close at $37.32 per barrel. I could be wrong, but I take the lack of price movement as our guys sending a message to the pipeline terrorists that they can’t win by threatening supplies. There was also added pressure for higher prices because U.S. inventories grew less than expected. Crude was expected to add 1.15 million barrels, but only managed a build of 800,000 and gasoline inventories were forecast to grow by 1.25 million barrels, but actually declined by 500,000. Believe it or not, with inventories declining the price of gasoline futures went down fractionally on the day to close at $1.147 per gallon.

Stocks Treading Water

If you’re bullish on the stock market, you have reason to think twice. With all the great economic news, stocks could never get going. The Dow Industrials dropped a point to close at 10,379, the NASDAQ added two points to 1,998 and the S&P 500 added one point to 1,333. Most all of the sector indices flip-flopped around break-even, but the AMEX Oil Index managed to gain eight points or 1.3% to close at 621.81. One of the reasons for the pop in oil company shares was probably the news release saying the U.S. House of Representatives passed an energy policy bill that gives oil and natural gas producers a tax break and protects manufacturers of the gasoline additive MTBE from product liability lawsuits.

One of the stock indices that surprised me a bit today was the positive action in the HUI Gold Stock Index. I watch the index price relative to the changes in the price of bullion, so let me set it up a bit. On Monday, gold was down $2.50 (0.6%) and the HUI was nailed for a loss of 4.2%. Tuesday gold was up $4.70 (1.2%) but the HUI only gained 2.4%. So after two days gold was higher by $3.30 to $388.90 (continuous contract), but the gold stock index was lower from 185.51 to 182.09. Today the June gold contract dropped $3.50 to $384.60, but the HUI Index was fractionally higher. The gold share movement relative to the gold price could be telling us a move higher could be just around the corner. For gold stock investors this has been a big exercise in patience. We just have to keep waiting to see how much longer the shorts can keep a lid on both oil and gold. These are both critical commodities with regard to keeping a lid on inflation. If you believe as I do that inflation is understated, then the coiled spring of commodity price suppression will pay off in the end. Silver put on a very nice show toward the end of the trading session with a nice shot higher in the last couple hours to close with a one cent gain at $5.74 per ounce. I’ll continue to wait patiently with my silver holdings for this paper game to come to an end when the Bozos run out of physical because of the artificially low prices. Waiting is sometimes very difficult, but our day will come again!

Hope you have a great evening!

Mike Hartman

Chart courtesy of StockCharts.com

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