Daily Updates

Bob Hoye: “So we’re fairly confident that the recession will have been seen to have started in the month of May”. Michael Campbell: Since we are talking about pivotal times what is the interest rate scenario?

Bob Hoye: It’s a Pivotal Time

Michael Campbell: Very pleased to have with me on the show again Bob Hoye Institutional Advisors.

Bob can you provide some perspective for us on the kind of movements we’ve seen in the markets. Is that the beginning of something far more significant or is this the buying opportunity I’ve been waiting for?

Bob Hoye: Well it was violent that was for sure Mike. Going back some months ago we have a model we call the Momentum Peak Forecaster, and when it clicks in it means that speculation is going to surge and become absolutely irresistible. Now the signal was given at the end of December and typically, like for example in commodities in 1973 or in the big gold and silver market that peaked in January 1980, it really just goes straight up. When it gives the signal typically the play will blow out about three months later, or in this case around the end of March. Now we’ve seen the end of February the agricultural commodities stocks stopped going up and then later in March you saw the base metal prices stopped going up. Within our work we also expected that gold and silver would run further than the rest of the pack, and then separately on a seasonal basis we had crude oil, it would rally through April. Well that was the change. So here you a raging speculation, but we it reached measures. We do the silver gold ratio, and when you have a good bull market for these two markets silver will outperform gold, so the silver gold ratio was going up. We watched RSI momentum, and if it gets into the high 80s that’s dangerous territory. Well this got up to 92 which was in the neighborhood of where the speculation got in gold and silver in 1980.

So we had momentum, we had the timing within the window from which a violent reversal could follow and that was indeed our April 25th brief comment on gold and silver was that the reversal would be violent. Last Thursday’s pivotal events comment we sent out used the term violent, and then wham it came in violent.

Mike there’s a bigger picture here than making just the call, it’s that the street was fully believing that the Federal Reserve and the Treasury operations in the states would depreciate the dollar forever, and you could get on board and you could ride commodities all the way up. But what happens is that the fed can’t control the speculation and any speculator [worth his salt] is going to be highly leveraged in this. Of course a futures contract is greatly leveraged. So when the play runs out of momentum and you get the first crack in the price, the speculators are forced to sell. On the way up everybody believes the fed can drive prices forever, then when the price drops the power shifts immediately to the margin clerks and they can outdo a fed or a central bank any time.

Michael Campbell: You said in October of 2007 the tsunami’s coming, the credit crisis is going to be in earnest and we are going to feel it in the most abrupt and aggressive ways. Clearly that came to pass but that it was a financial issue and the economics were the byproduct of that. What you’ve just described is the same thing meaning people borrowed money, those that have a lot of profit so they say this is an excuse to take profit. Others are getting forced out of the markets they borrowed too much to get into. Is that the dynamics of what’s going on?

Bob Hoye: Yes, but then you have the silver community. They were all doing the supply demand analysis and you can go year after year and it’ll always show silver in short supply, like there’s greater demand than what’s coming. That’s a misleading game because in the credit cycle the gold silver ratio will ultimately perform like a credit spread. So this is where silver gave up 25% in four trading days and that’s horror show stuff. Then of course what you had was an artificially high price for crude oil. You had the seasonal rally and then you had an artificially high price because the terrorists were not taking shots at oil production or oil transportation and yet there was a big bid there on the fear that that might happen. It didn’t happen and silver and crude oil more or less reversed at the same time. What we want to look at is how severe this is beyond just the 25% drop in silver. How severe beyond the sell-off in crude, so horrendous it took three trading days to take away about three months of advance including dropping 9% in one day.

Again we’ve referred to our model the Momentum Peak Forecaster. When we had a big mania for commodities in 1973 you also at that time had trouble in the Middle East with the Yom Kippur war. The signal was given in November and the markets completed three months later. After that the National Bureau of Economic Research came along and said that the recession started in November of ’73 and that happened to be the month our Momentum Peak Forecaster gave its signal. Then we move ahead to the next big event which was the gold and silver speculation of 79/80, On that one our model gave the signal in November and the play blew out, and I always remember the date, January 21st of 1980. Later on the National Bureau of Economic Research, which is the semi official body that determines when recession starts and when they end, said that the recession started in January i.e. the month that this speculation completed. So here we are now. You had the signal of the Momentum Peak Forecaster given at the end of December, you had the play complete in March April, and now you’ve had the harsh hit to it. So we’re fairly confident that the recession will have been seen to have started in the month of May. It reminds me of the line “sell in May and go away” even though we didn’t get much into May.

Now, on crude oil that reminded me of the top of the bubble in crude oil in 2008 when it soared up to 147. That of course gave us all kinds of excessive signals on the way up. My colleague Ross Clark had a very good technical call on that one. The action in July of that year was that crude had a higher high than the month before, a lower low and then a close with a lower low. Here we are only a few trading days into the month of May and it’s already set the first part of an outside reversal to the down side. It’s had a higher high and a lower low and now we just have to be patient to the end of the month to see if it closes with a lower close. When we had the crude crash after that one from 147 it went all the way down to the 35 level. So yes, I think the speculative community has had severe damage.

Michael Campbell: You’re saying that this is a very pivotal time. Should we wait to see how it closes in the next three or four weeks, wait to and see how the market behaves despite the bounces that happening now?

Bob Hoye: The market’s are experiencing a bounce because it was a high velocity drop. I think that a lot of damage has been done. Also there’s other markets out there. For example the sovereign debt bonds, you had those out to new high yields some of them at 20%. Since the crash in March of ’09 you’ve had a fabulous rally, bull markets for corporate bond prices, they’ve been away up there. Nothing technically excessive over the last while, but back in ’07 what we were watching that was very good for us was those evil sub prime mortgage bonds. Well I’ve been watching those and they’ve had a good rally out of the disaster in ’09. Then in February a couple of the issues we were watching did a spike up in price and came down. One has broken down completely which says that that fun in the sub prime market is over and there’s going to be problems.

Also you had a very good rally in the municipal bonds out of a horrendous disaster and it’s now up to a technical top and could roll over in the next little while. So the damage, or let’s say the future troubles may not just be in what follows an excessive bubble in commodity prices. You have other markets out there. The corporate market is now vulnerable, and the sub prime market is telling us as it did in ’07 that there could be problems in credit markets. So it’s best to be wary in all departments.

Michael Campbell: What does that tell you interest rate wise? Your models which I find absolutely fascinating are suggesting that maybe we are entering another slow growth period recessionary period. Do interest rates go up against that back drop?

Bob Hoye: Oh yes. The debt has to be serviced and the US is a terrific example now whereby government employees, municipal employees have unions and they are they are taking above market returns for their wages and also for their pension benefits and they won’t back off. I figure we’re just in the next recession already so you’re going to have tax revenues flowing down while you have horrendous demands by the Government unions. So I think the only way out is that these many cities have to go broke in order to get the pensions and the power of the union’s diminished. I think that’s probable so you don’t want to be in those bonds. Then on the corporate bond side, for ages, for most of financial history rising prices are associated with good times, and falling prices with hard times. Indeed it shows up in, for example, S&P earnings. They go up and down with commodity prices. The way it works is that when commodity prices are going up it reflects a good pricing power by businesses and then when they go down that shows the pricing power is not so good. Their margins begin to get tight, their earnings diminish, and when earnings go down they have difficulty servicing debt.

Then of course you always got the rating agencies out there looking and watching for credit changes. When you’re in a condition where companies are unable to service debt they get the down grade and the price of their bonds go down. So it’s not a pretty picture. It’s highly probable that another business cycle recession is will be the dominant feature for the next year or so.

Michael Campbell: Since we are talking about pivotal times what is the interest rate scenario?

Bob Hoye: If you’re talking about the Treasury bill rate I don’t see it going up too much. We were on a very good long government bond rally with US Treasuries then they got super bearish a couple of months ago on the credit down rating. Bill Gross at Pimco said that he was actually short US Treasuries at the 118 level and now they are up to 124. All of these instruments have to be traded but then what you do for the quiet investor? Well this government rally is on and it could go for a while yes, but one would be a little careful in here and you’re going to get the safest return out of the three to four year maturity. If you’re in too short an instrument every roll over you’re going to get next to nothing. If you’re out at the long end and the bond market decides to take a price drop you get hit that way. In stormy times we kind of like to be in the three to four year maturity and just on what we call the cusp of the curve there. As for mortgages I guess lock in short rates, because mortgages will eventually be a problem in a market where credit worthiness is disappearing quickly.

Michael Campbell: What’s your forecast for the Canadian dollar?

Bob Hoye: I like the high price Canadian dollar. I think it’s good all around. It’s forcing business in Canada to be competitive rather than have the prop of a depreciating dollar.

From the point of a trader it went up with commodities and it was particularly tied to crude oil and now it’s heading down. We think we’re in a cyclical decline in all commodity prices, so I think the Canadian is going to go down. But if this new government is wise, and I don’t think they can move quickly on it, it would be best all round to keep the Canadian dollar at par with the US, it takes a whole lot of friction and hedging out of the game. I think the Canadian dollar will drift down and one obvious target is tar.

Michael Campbell: I want to just sum up. We should be very vigilant in the next four weeks and people have to check their risk profile and what kind exposure they have. Do they want that level of exposure? Do they want to get some powder dry?

Bob Hoye: Yes. Another one way you can look at this, for example, I think we are in a long bull market for junior gold exploration stocks, it’s just the way it works after a great bubble. But a number of the ones I was in just got up in price, I mean a great zoom and as a trader you just can’t help but trade. So you got the end of the month and you’ve got a large amount of cash in my account. So you’ve got a cushion so that if there are some stocks that are not yet moved yet you can acquire those, or you can reenter the ones you bought previously at lower prices. The way Ross and I work is that we have some targets for the decline in gold, for the decline in silver and crude oil. When those targest approach then we’ll have opportunity and buying levels for individual gold and silver stocks. You end up being methodical and it’s a nice thing, it’s a nice place to be so.

Michael Campbell: That’s great advice. Institutional Advisors Bob Hoye

Economic recovery? ShadowStats Editor John Williams reads between the government-economic-data lines. In this exclusive interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation.

The Gold Report: Standard & Poor’s (S&P) has given a warning to the U.S. government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What’s the real impact of this announcement?

John Williams: S&P is noting the U.S. government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.

There’s good reason for fear about the debt, but it would be a tremendous shock if either S&P or Moody’s Investor Service actually downgraded the U.S. sovereign-debt rating. The AAA rating on U.S. Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With U.S. Treasuries denominated in U.S. dollars and the benchmark AAA security, how can you downgrade your benchmark security? That’s a very awkward situation for rating agencies. As long as the U.S. dollar retains its reserve currency status and is able to issue debt in U.S. dollars, you’ll continue to see a triple-A rating for U.S. Treasuries. Having the U.S. Treasuries denominated in U.S. dollars means the government always can print the money it needs to pay off the securities, which means no default.

TGR: With the U.S. Treasury rated AAA, everything else is rated against that. But what if another AAA-rated entity is about to default?

JW: That’s the problem that rating agencies will have if they start playing around with the U.S. rating. But there’s virtually no risk of the U.S. defaulting on its debt as long as the debt’s denominated in dollars. Let’s say the U.S. wants to sell debt to Japan, but Japan doesn’t like the way the U.S. is running fiscal operations. It can say, “We don’t trust the U.S. dollar. We’ll lend you money, but we’ll lend it in yen.” Then, the U.S. has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you’re looking at U.S. debt denominated in yen, most likely you would have a very different and much lower rating.

TGR: Is there a possibility that people would not buy U.S. debt unless it’s in their currency?

JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar-denominated assets and move into currencies they consider safer. And you’ll see other things; OPEC might decide it no longer wants to have oil denominated in U.S. dollars. There’s been some talk about moving it to some kind of basket of currencies—something other than the U.S. dollar, possibly including gold. This would be devastating to the U.S. consumer. You’d get a double whammy from an inflation standpoint on oil prices in the U.S. because the dollar would be shrinking in value against that basket of currencies.

TGR: Different countries are starting to discuss the creation of an alternative to the USD as reserve currency. How rapidly could an alternative currency appear?

JW: That would involve a consensus of major global trading countries; but just how that would break remains to be seen. Let’s say OPEC decides it no longer wants to accept dollars for oil. Instead, it wants to be paid in yen. It’s done. It’s not a matter of creating a new currency—it’s a matter of how things get shifted around.

TGR: What other commodities or monetary issues would that create?

JW: Again, the dollar’s weakness is doubly inflationary. It is the biggest factor behind the ongoing rise in oil prices. Let’s say you’re a Japanese oil purchaser. Oil, effectively, is purchased at a discount in a yen-based environment due to the dollar’s weakness. Usually, the market doesn’t let such advantages last very long. As the dollar weakens, you see upside pressure on oil prices. If, hypothetically, you’re pricing oil in yen, there’s no reason for anybody to hold the USD. The dollar would sell off more rapidly against the yen and oil inflation would be even higher in a dollar-denominated environment.

TGR: You’ve mentioned that hyperinflation will happen as soon as 2014. If that is true, wouldn’t OPEC want to shift off dollar pricing as quickly as possible?

JW: From a purely financial standpoint, that would make sense. Other factors are at play, though, including political, military and unstable times in both North Africa and the Middle East. Those who are able to get out of dollars, I think, will do so rapidly and as smoothly as possible.

TGR: And how will they do that?

JW: They will sell their dollar-denominated assets. They will convert dollars to other currencies. They will buy gold. Generally, they will dump whatever they hold in dollars and sell the dollar-denominated assets they don’t want. There’s a market for them; it’s just a matter of pricing. As the pressure mounts to get out of the USD, the pricing of dollar-denominated assets will fall, which in turn would intensify that selling. The dollar selling will intensify domestic U.S. inflation, which is one factor that picks up and feeds off itself and will help to trigger the hyperinflation.

TGR: The U.S., even in recession, is still the largest consuming economy. If the U.S. continues in, or goes into a deeper, recession, doesn’t that impact the rest of the world?

JW: If the U.S. is in a severe recession, it will have a significant negative economic impact on the global economy. That doesn’t necessarily affect the relative values of other currencies to the USD. If you look at the dollar against the stronger currencies, a wide variety of factors are in effect—including relative economic strength. The U.S. is probably going to have an economy as bad as any major country will have, with higher relative inflation. The weaker the relative economy and the stronger the relative inflation, the weaker will be the dollar. Relative to fiscal stability, the worse the fiscal circumstance in the U.S., the weaker is the dollar. Relative to trade balance, the bigger the trade deficit is, the weaker the currency. As to interest rates, the lower the relative interest rates in the U.S., the weaker will be the dollar.

Part of the weakness in the dollar now is due to the way the world views what’s happening in Washington and the ability of the government to control itself. That’s a factor that may have forced S&P to make a comment. So, even having a weaker economy in Europe would not necessarily lead to relative dollar strength.

TGR: If the U.S. experiences a continued, or even greater, recession, doesn’t that impact spill over into Canada?

JW: The Canadian economy is closely tied to the U.S. economy, and bad times here will be reflected in bad times in Canada. However, I’m not looking for a hyperinflation in Canada. Its currency will tend to remain relatively stronger than the U.S. dollar. Canada is more fiscally sound; it generally has a better trade picture and has a lot of natural resources. Keep in mind that economic times tend to get addressed by private industry’s creativity and, thus, new markets can be developed. For instance, you’re already seeing significant shifts of lumber sales to China instead of to the U.S.

TGR: What about the effect on other countries?

JW: The world economy is going to have a difficult time. You do have ups and downs in the domestic, as well as the global, economy. People survive that. They find ways of getting around problems if a market is cut off or suffers. I view most of the factors in Canada, Australia and Switzerland as being much stronger than in the U.S. Even when you look at the euro and the pound, they’re generally stronger than in the U.S. Japan is dealing with the financial impacts of the earthquake. There’s going to be a lot of rebuilding there. But, generally, it’s a more stable economy with better fiscal and trade pictures. I would look for the yen to continue to be stronger. Shy of any short-term gyrations, the U.S. is really in the worst condition of any major economy and any major country in the world and, therefore, in a weaker currency circumstance.

TGR: Then why are media analysts talking about the U.S. being in a recovery?

JW: You’re not getting a fair analysis. There’s nothing new about that. No one in the popular media predicted the recession that was clearly coming upon us, and the downturn wasn’t even recognized until well after the average guy on Main Street knew things were getting bad. We have some particularly poor-quality economic reporting right now. The economy has not been as strong as it advertised. Yes, there has been some upside bouncing in certain areas, but it’s largely tied to short-lived stimulus factors.

Let’s look at payroll numbers and the way those are estimated. In normal economic times, seasonal factors and seasonal adjustments are stable and meaningful. What’s happened is that the downturn has been so severe and protracted it has completely skewed the seasonal-adjustment process. It’s no longer meaningful, nor are estimates of monthly changes in many series. The markets are flying blind—it’s unprecedented, in terms of modern reporting.

Are we really seeing a surge in retail sales? If so, you should be seeing growth in consumer income or consumer borrowing—but we’re not seeing that. The consumer is strapped. An average consumer’s income cannot keep up with inflation. The recent credit crisis also constrained consumer credit. Without significant growth in credit or a big pick-up in consumer income, there’s no way the consumer can sustain positive economic growth or personal consumption, which is more than 70% of the GDP. So, you haven’t started to see a shift in the underlying fundamentals that would support stronger economic activity. That’s why you’re not going to have a recovery; in fact, it’s beginning to turn down again as shown in the housing sales volume numbers, which are down 75% from where it was in normal times.

TGR: But we were in a housing boom. Doesn’t that make those numbers reasonable?

JW: Housing starts have never been this low. Right now, they are running around 500,000 a year. We’re at the lowest levels since World War II—down 75% from 2006—and it’s getting worse. I mean the bottom bouncing has turned down again. We’re already seeing a second dip in the housing industry. There’s been no recovery there.

In March, all the gain in retail sales was in inflation. Retail sales are turning down. You’re going to see a weaker GDP number for Q111. The GDP number is probably the most valueless of the major series put out; but, as the press will have to report, growth will drop from 3.1% in Q410 to something like 1.7% in Q111.

TGR: You’ve stated that the most significant factors driving the inflation rate are currency- and commodity-price distortions—not economic recovery. Why is that distinction important?

JW: The popular media have stated that the only time you have to worry about inflation is when you have a strong economy, and that a strong economy drives inflation. There’s such a thing as healthy inflation when it comes from a strong economy. I would much rather be in an economy that’s overheating with too much demand and prices that rise. That’s a relatively healthy inflation. Today, the weak dollar has spiked oil prices. Higher oil prices are driving gasoline prices higher—the average person is paying a lot more per gallon of gas. For those who can’t make ends meet, they cut back in other areas. The inflation of Q410, which is now running at an annualized pace of 6%, was mostly tied to the prices of gasoline and food.

You also have higher food prices. It’s not due to stronger food or gasoline demand—it’s due to monetary distortions. Unemployment is still high, even if you believe the numbers. I’ll contend the economy really isn’t recovering. At the same time, you’re seeing a big increase in inflation that’s killing the average guy.

TGR: Why isn’t there more pressure on the U.S. government to reduce the debt deficit?

JW: When you get into areas like debt and deficit, it’s a little difficult to understand. The average person, though, should be feeling enough financial pain that political pressure will tend to mount before the 2012 election; but whether or not the average person will take political action remains to be seen. I don’t think you have until 2012 before this gets out of control and there’s hyperinflation. It could go past that to 2014, but we’re seeing all sorts of things happening now that are accelerating the inflation process.

TGR: Like the dollar at an all-time low.

JW: If you compare the U.S. dollar against the stronger currencies, such as the Australian dollar, Canadian dollar and Swiss franc, you’re looking at historic lows. You’re not far from historic lows in the broader dollar measure.

TGR: In your April 19 newsletter, you stated, “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial market expectations catch up with the underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results.” What do you mean by “until such time as financial market expectations catch up with the underlying reality?”

JW: A lot of people look closely at and follow the consensus of economists, which is looking at (or at least still touting) an economic recovery with contained inflation. I’m contending that the underlying reality is a weaker economy and rising inflation. I think the expectation of rising inflation is beginning to sink in. Given another month or two, I think you’ll find all of a sudden the economists making projections will start lowering their economic forecasts. Instead of looking at half-percent growth in industrial production, they’ll be expecting it to be flat; if it comes in flat, it will be a consensus—and the markets will be pleased it wasn’t worse in consensus. But the consensus outlook will have shifted toward a more negative economic outlook.

TGR: Do you think economists will shift their outlooks before we get into hyperinflation or a depression?

JW: In terms of economists who have to answer to Wall Street, work for the government or hold an office like the Federal chairman, by and large, they’ll err on the side of being overly optimistic. People prefer good news to bad news. If Fed Chairman Ben Bernanke said we were headed into a deeper recession, it would rattle the market. People on Wall Street want to have a happy sales pitch. What results may have little to do with underlying reality.

TGR: In your April 15 newsletter, you mentioned that a signal of an unfolding double-dip recession is based on the annual contraction of the M3, which was the Fed’s broadest measure of money supply until it ceased publishing it in 2006. Recent estimates show that the annual contraction of M3 went down from 4.3 in February to 3.6 in March. Is this good news?

JW: No. It doesn’t have any particular significance as a signal for the economy. You do have recessions that start without M3 going negative year over year. In the last several decades, every time the M3 went negative, there followed a recession—or an intensifying downturn—if a recession was already underway. If you tighten up liquidity, you tend to tighten up business conditions. Again, though, you’ve had recessions without those signals. When it goes positive, it does not signal an upturn in the economy. It doesn’t make any difference if it continues negative for a year or two, or if it’s negative for three months. The point is—when it turns negative, that’s the signal for the recession.

We had a signal back in December 2009, which would have indicated a downturn sometime in roughly Q310. We already were in a recession at that point. According to the National Bureau of Economic Research, the defining authority in timing of the U.S. business cycle, the last recession ended in June 2009. So, this current recession will be recognized as a double-dip recession. The Bureau doesn’t change its timing periods.

I’ll contend that we’re really seeing reintensification of the downturn that began in 2007. Although it’s not obvious in the headline numbers of the popular media, you’ll find that September/October 2010 is when the housing market started to turn down again. That is beginning to intensify. We’ll see how the retail sales look when they’re revised. When all the dust settles, I think you’ll see that the economy did start to turn down again in latter 2010. Somewhere in that timeframe, they’ll start counting the second or next leg of a multiple-dip recession.

TGR: Does M3 have anything to do with calculating potential inflation or hyperinflation?

JW: It does; but when you start looking at the inflation picture, you also have to consider that we are dealing with the world’s reserve currency and the volume of dollars both outside and inside the U.S. system. Right now, M3 is estimated at somewhat shy of $14 trillion. You have another $7 trillion outside the U.S., which is available for overnight liquidation and dumping into the U.S. markets. It’s not easy to measure how much is out there, but that has to be taken into account to assess the money supply related to inflation. Again, that’s where the Fed chairman’s policies come into play.

Efforts have been afoot to weaken the U.S. dollar. Usually with the weakening of the U.S. dollar, you see increased repatriation of dollars from outside the system. If everyone is happy holding the dollars, the flows can be static; but when they start shifting and the dollars are repatriated, you begin to have currency problems. That’s when you have the money supply and the inflation problems we’re beginning to see.

TGR: This has been very informative, John. Thank you for your time.

Walter J. “John” Williams has been a private consulting economist and a specialist in government economic reporting for 30 years, working with individuals and Fortune 500 companies alike. He received his AB in economics, ***** laude, from Dartmouth College in 1971 and earned his MBA from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. John, whose early work prompted him to study economic reporting and interview key government officials involved in the process, also surveyed business economists for their thinking about the quality of government statistics. What he learned led to front-page stories in the New York Times and Investor’s Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all of the government’s statistical agencies. Despite a number of changes to the system since those days, John says that government reporting has deteriorated sharply in the last decade or so. His analyses and commentaries, which are available on his ShadowStats website have been featured widely in the popular domestic and international media.

To be successful in the stock market, you have to understand how people think?

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The Devil’s Market Has Done It Again …

Given the absolutely wild market moves over the past week, I’m going to use today’s column to tell you — in no uncertain terms — what’s happening and what I expect to happen over the next few months in the most important markets: Gold, silver, oil, the dollar, bonds, and the Dow Industrials.

I am going to start first with silver, and I’m going to spend a little more time on it than the others, for obvious reasons.

I have been warning for some time now about the dangers in the silver market. It is, bar none, the wildest, most manipulated market on the planet, full of thieves, charlatans, and pundits who have no idea what they are talking about.

Many of them have attacked me verbally in the past. Some even threatened my life back in the mid-1980s. The reason: I know of their nasty, dirty game and how they rip off tens of millions of innocent investors.

The latest manipulation in silver and its near vertical ascent to $50 an ounce has added a new component: While silver inventories were “allegedly” draining away to next to nothing, JP Morgan and other big investment banks were also allegedly short massive amounts of silver.

So, the story goes, the combination of very low supplies and massive short positions that would have to be covered — made for some fantastic reasons why silver had nowhere to go but straight to the moon — and great sales pitches to get every Mom, Pop, Grandma, Grandpa and even the kids and grandkids into silver.

But as I told you before, I’ve known of these charades in the silver market for decades. It never changes.

All this is also why I have recommended very strongly to my followers that they stay largely out of the silver market during this period.

It’s also why — even though I am now long-term bullish on silver per the signals my systems generated in March and April — I still refused to buy any silver bullion or silver miners on an aggressive basis, waiting instead for the inevitable crash to unfold first.

Now, in just the past week, silver has crashed a full 30%, one of its worst slides of all time.

ast week’s silver panic has wiped out many who didn’t listen to me, many more who bought into silver at or near the $50 level, and it’s been such a price collapse that the margin calls in the silver futures market are reverberating all over the world.

It’s the charlatans, thieves and fraudsters in the silver market who are at it again. Profiting at the average investor’s expense.

The charlatans in the silver market are big inside speculators who routinely take delivery of the nearby silver futures contract, in physical form — but instead of keeping it stored in official warehouses, where the movement of silver is reported publicly, they move it offshore, to places like Switzerland and London, and into warehouses where the holdings do not have to be reported.

They do this over a period of time, draining official reporting warehouses of silver to make it look like there’s a massive silver shortage.

Then, as silver prices start to rise, the little guy gets sucked into the rally. This charade keeps going until silver’s price action goes parabolic and the average investor is jumping into it with both feet.

Next, the charlatans who have removed silver from reporting inventories then begin to dump the silver back on the market, all over the world, in London, Singapore, Zurich. This starts a cascade of selling and liquidation, slamming the unknowing, innocent investor.

All along, this operation, a giant market manipulation, is aided and abetted by silver dealers, who make their living selling you silver ingots, bars and coins. They can’t sell silver unless it’s going up.

And most recently, by investment banks that do nothing but deny that they’re building up massive short positions to take advantage of the inevitable crash that will come.

The only ones who make money are A) the large speculators who take the silver off the market to make it appear that there’s a shortage … B) the dealers selling investors silver … and C) the investment houses who have sold short into the rallies.

The average investor loses, usually big time, getting caught in the middle.

The fact of the matter is that, yes, while demand for silver is rising and silver is now in a long-term bull market — these silver manipulations will continue, there will be many of them going forward, creating giant rallies and crashes …

And if you don’t know what’s happening in the silver market, you are bound to buy at the wrong time and get slaughtered by those who continue to play with this market.

There’s a reason traders in the know call the silver market the “devil’s metal.” It is, I repeat, the most manipulated market in the world.

I will recommend aggressive investments in silver. But not until I see that this latest manipulation has run its course.

So that you fully understand the risks in this market, here are the critical levels that could easily be tested before the latest silver crash is over, and before the real, long-term bull market in silver really gets going …

Major support levels in silver …

$37.00
$30.52
$29.05
$23.84
$23.25

Since silver has now already broken the first level of support at the $37 level, I fully expect we will see at least a test of the $30.52 level, and probably even lower, as low as $23.25, before the long-term bull market in silver resumes.

Until then, or until I give you the all clear to start buying silver and silver-related investments, I strongly suggest all investors steer clear of “the devil’s market.”

Now, let’s take a look at gold: Naturally, gold has pulled back along with the crash in silver. But, gold has held support at much higher levels than silver has. That’s a testament to why I believe gold is a much safer bet than silver over the long haul. It’s far more stable, and while it too can be manipulated, it is not manipulated like the silver market is.

Look for support in gold at the $1,477 level followed by $1,423. If gold should fail to hold the $1,423 level on a closing basis, the short-term picture in gold will change to bearish.

Crude oil: As you know, I forecast a topping formation in oil at the $108 to $110 level. Oil has now plunged from $114 to back under $100 a barrel.

I believe an intermediate-term top is in place in oil, and we could see it move back to the mid-$80 level before the next bull leg unfolds.

The dollar: I remain long-term bearish on the dollar. There is no question it is headed much lower. However, in the short term, a rally is way overdue. It has likely begun this past week, with the U.S. Dollar Index holding the 72.50 level. The triggers: The ECB holding rates steady, while more and more talk of the Fed exiting its loose monetary policy is high.

The Fed will try to exit, but it won’t work. When they come back into the economy with QEIII, the dollar will start tumbling again.

The Dow Industrials: Expect a very wide trading range over the next two to three months, with the Dow ranging between 12,170 on the lower end, and 13,800 on the upper end. Yes, that’s a wide range, but I see no disasters ahead for the Dow. Even though it may be very choppy for stocks over the next few months, the blue chip Dow Industrials and S&P 500 are preparing to make a major move higher in the coming years.

Bonds: Yields may fall a tad going forward and bond prices bounce, as the economy slows, but stay out of U.S. and European sovereign bonds, no matter what. They are a disaster in the making.

Best wishes,

Larry

P.S. For just $99 a year you can get ALL of my timing signals, recommendations, risk reduction strategies, insights into the markets, and more. It’s a freaking bargain. Join now by clicking here.

Larry Edelson has nearly 33 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Resource Windfall Trader (weekly) provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management. He is also editor of The Foundation Alliance, an exclusive stock and ETF trading service that leverages the his vast experience in the study of cycles and how they impact market timing.

Market Buzz – April Job Report Positive but Commodities Decline Significantly for the Week

The TSX Composite index closed on Friday, May 6th at 13,556 points, down 383 points, or 2.7%, for the week. Over the past five trading days, investors have seen the market in Canada slide primarily as a result of declining commodity prices, some of which posted intra-day declines not seen in years. The most notable of the declines was silver, which only a few weeks ago was trading at its all-time high of $48.70 and has since suffered a precipitous decline of 27% to close the first week of May at $35.31. Crude oil also felt the crunch with WTI spot prices declining nearly 13% through the week to $97.75 per barrel.

The weekly news was not all negative with the April job report indicating positive gains in both Canada and the United States. For the month of April, Canada added 58,300 new jobs, exceeding consensus expectations. Surprisingly, the majority of the jobs creation was in Ontario, which has stubbornly maintained one of the highest unemployment rates in the country. The downside of the news was that most of the job creation was part time. This is in contraction to the March job report which indicated lower than expected employment growth but surprised markets with higher than expected creation of full time jobs. In the U.S., the month of April brought an additional 244,000 jobs to the national economy and the unemployment rate actually moved up to 9%. This might seem counter-intuitive; however, the unemployment rate is based on the number of people actively looking for work and not on the total number of people without jobs. Better job prospects trend to bring more discouraged workers back into the pool of job seekers, which has the effect of increase rate of unemployment.

Short-term interest rates remain a topic of focus moving into the summer with many analysts previously having forecasted that the Bank of Canada would begin raising rates as early as June. Although job growth and the return of mild inflation are in support of the likelihood that the Bank of Canada (BOC) will start to increase short-term rates, the recent decline in commodity prices may have central bankers questioning whether or not rate increases should wait until at least after summer. Considering the dependency of Canada’s economy on commodities, rate increases coinciding with further commodity price declines could have a substantially damaging impact to further economic recovery.

The question on everybody’s mind right now is whether or not the recent commodity price declines are simple corrections or the reversal of a cyclical trend. One factor to consider is the U.S. dollar which appreciated in value over the course of the week. All internationally traded commodities are priced in U.S. and tend to decline as the U.S. dollar appreciates. This relationship is what keeps commodity values in equilibrium with global currencies. Some analysts are assigning at least some of the cause to the recent death of Osama Bin Laden and believe that the event has removed risk premium added to oil prices in relation to global terrorism. China as well has its place in the mix with some investors questioning the sustainability of its economic boom and the consequences if its rapidly growing economy is no longer capable of supporting global energy and metal demand.

All of these perspectives play their part in the ever more complicated world of global finance and it will be interesting to see how the market absorbs new information over the next few weeks and months. Thankfully, the April job report at the very least helped to end the week on a positive note, with the TSX Composite posting a daily gain of 111 points on Friday.

Looniversity – Tips on Evaluating Tech Companies

With many pundits (rightly or wrongly) suggesting tech may lead the markets out of the current bear, we thought we would take a brief look at some key points to look at when considering investing in a technology based company.

Look For:

Earnings/Cash flow: Although tech companies are often emerging companies, we suggest you stick with those posting strong cash flow and earnings, not just an interesting concept.

Strength of Management: More so than in most other industries, much of the value of a high-tech company can be found in the knowledge, creativity, or intellectual property belonging to the driving forces behind the company. Look for strong, highly skilled management.

Research and Development: In technology, remaining on the cutting edge of your market is critical to future success. As such, ensure the companies you are evaluating continue to spend a healthy amount of current revenues on research and development.

Market Leadership/Scope of Market: For established companies, a strong market position is usually a positive sign. If you insist on looking at concept companies, evaluate whether or not there is a sustainable market for the company’s products or services. Of course, a company may have developed a “best-in-class” software program that revolutionizes the method of teaching “Hip-Hop dancing” to the African Pygmy tribe, yet the practical market place is so minute that profitability is clearly impossible. Identify tech companies that service or sell products to relatively substantial growing markets.

Put it to Us?

Q. ave an investment that, according to the listing in the paper, is up 3.5% this year. I initially got into the fund at the start of the year and I am losing money. How can that be?

– Harvey Daniels; Calgary, Alberta

A. Well Harvey, timing is everything, especially in investing. It’s no good investing in a hot stock or mutual fund if you buy in at the top.

Without looking at your statements, I will take a guess that you have some sort of staged contribution to your investment in the fund and that you may have added to your position at or around the time the share price was peaking. Let’s take an example. Say you own 1,000 shares of a mutual fund that began the year at $10, which puts the value of your holdings at $10,000. And let’s say the fund ran up to $15 a share on March 20th, then fell to $10.35.

The mutual fund company would accurately report that the fund itself is up 3.5% this year. Here’s how the weirdness occurs. Let’s say you bought an additional $2,000 worth of the mutual fund when the share price peaked on March 20.

Your portfolio’s cost basis has changed. Yes, your initial investment was $10,000. But you added $2,000, or 133.33 shares, at $15. That means you have 1,133.33 shares with a basis of $12,000. But those 1,133.33 shares, at $10.35, are only worth $11,729.97 at the latest price ($10.35). You can measure this by multiplying 1133.33 by $10.35. This means you suffered a loss.

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