Gold and Commodities Supercycle

The Dow rose 74 points yesterday. Gold dropped $3 an ounce. 

What do you expect? Yesterday was April Fools’ Day. 

This should be a good quarter for stocks, according to economist Richard Duncan. He believes “excess liquidity” – cash and credit in excess of what borrowers and spenders actually need – drives asset prices. 

We haven’t been able to connect every tarsal, hallux and tibia of Duncan’s theory. But the skeleton, as he presents it, is serviceable… even attractive. The more excess liquidity, the more people use it to bid up asset prices. As excess liquidity goes down, so do asset prices – particularly stocks. 

Duncan expects the coming quarter to produce a record of excess liquidity. The Fed is still pumping liquidity into the market at the rate of $65 billion every month. Meanwhile, it is tax time, so the government’s needs for borrowing will be relatively low. And according to Duncan, the difference between the available liquidity and the need for it in the regular economy has to go somewhere. 

But after this quarter, the outlook changes. The Fed is scheduled to wind down QE by the end of the year. And the federal government’s rosy budget scenario will begin to fade – meaning more government borrowing. That means the third quarter is expected to produce only a slightly positive excess of liquidity. And in the fourth quarter, says Duncan, the excess turns into a shortage. 

If the Fed persists in its plans to taper QE, in other words, the third quarter will likely see a selloff in the US stock market. This will give the Fed’s forward guidance a kick in the rearward quarters. 

Instead of continuing to taper, the Fed will panic. Its entire theory of life… its philosophy… and its sacred religion will be challenged. In its view, credit, prices and stocks must ALWAYS go up. 

There was a time when the Fed was merely charged with making sure the value of the nation’s money was stable. It failed miserably. So it was rewarded with more responsibility. Its mission creeped toward making sure the nation had full employment. 

At that, too, it fails regularly. So, now it has taken upon itself (Congress never authorized it) to hold interest rates down and push consumer prices up. 

Actual consumers prefer lower, not higher, prices. But such is the hubris of central bankers that they are willing to contradict 100 million households. They insist on dollar earners and savers losing about 2% a year of their buying power. 

As we have been saying, it is an odd recovery that leaves the average American with less income than he had before it began. But it is an odd recovery that we have. 

Stock prices – not to mention prices for antique guitars and gaudy modern “art” – have soared. Incomes, meanwhile, have limped downward. This leaves the typical American feeling richer… but with less money in the bank. 

At $81 trillion, total US household wealth has never been higher. But it is supported by precious little household income. 

Duncan tells us the ratio of household disposable income to household wealth is important. That’s because wealth must be supported by income… or it disappears. 

This is exactly what happened – twice – in the last 15 years. From 1952 until the 1990s, the ratio of household wealth to disposable income was fairly stable – at about 525%. Then it rose above 600% – on two occasions. At the end of the 1990s, before the dot-com crash. And in 2006-07, before the global financial crisis. 

Today, once again, the ratio is above 600% – for only the third time in history. And once again, we should be prepared for a crash – or at least a substantial bear market – in US stocks. 

That will probably happen in the third or fourth quarter of this year. And it will probably be followed by an announcement by the Fed that, instead of taking QE off the table, it will continue the program. 

And instead of allowing short-term rats to rise six months after QE ends, as Janet Yellen suggested in her recent post-FOMC press conference blooper, the target rate will stay at zero for this year… and all of 2015, too. 

Duncan believes “QE 4” will produce the same results as QE 1, 2 and 3: It will send stocks flying again. If so, we could be looking at another big run-up in the stock market… after, of course, a substantial decline. 

Our advice: Get out of the US stock market now. This market is manipulated, overpriced and dangerous. 

Regards,

Bill 

P.S. Will has put together a detailed report on the coming central bank-induced crash… and how to protect your savings. To learn more, follow this link.

From the desk of Braden Copeland, Editor, Building Wealth

If you saw the latest 60 Minutes bit about Michael Lewis’s new book, Flash Boys: A Wall Street Revolt, you’re probably eager to know how you can avoid being exploited by the nasty trading activity the book exposes. 

Here you will find your answer… 

Flash Boys goes behind the scenes to reveal certain truths about high-frequency trading (HFT). This is where computers trade billions of dollars in and out of the market at lightning-fast speeds. 

Their goal is to scalp money off of investors by taking advantage of inefficiencies in the electronic execution of trades. Think of them as modern-day “Mohawk Indians.” 

Lewis’s show-stopping quote at the start of the 60 Minutes segment was, “The stock market’s rigged. The United States stock market, the most iconic market in global capitalism, is rigged.” 

Lewis went on to explain how HFT operators are abusing investors. (To see the entire segment, go here. The video will open in a new window so you may close it and easily return here to finish reading.) 

In case you have any doubt, I want to tell you Lewis is right. The proof is undeniable. But I also want to tell you this… 

If you are an individual investor managing your own account – and making investments with time horizons of months or years instead of seconds and days – this big Lewis reveal does not matter, as long as you:

1. Use “limit orders” when buying and selling

2. Use “stops” based on closing prices and do not enter them in the market

First, let me explain what “limit orders” are. They are orders that include instructions for your trade to be placed only at a certain price or “limit.” 

For example, when you want to buy a stock trading for about $20, entering a “limit order” with a limit price of $19.80 will tell your broker not to buy the shares unless they are trading at or below that price. 

Entering a “market order” will tell your broker to make the trade at the best market price he can get when he places your trade. It could turn out to be more than you expect (or want) to pay – $20.20, for instance. 

Sell limit orders work exactly the same way. The limit price in this case tells the market the minimum price you are willing to accept for your shares. 

Placing a simple market order would again put you at the mercy of the market. And that, in turn (although practically guaranteeing your order will be completed) puts you closer to the situation Lewis’s story exposes. 

A limit order keeps you in control. 

Now, let’s turn to the second rule about “stops.” 

Stops are something I discuss in detail in my upcoming special report, “Two Simple Ways to Keep the Wealth You Build.” (You can learn how to find out more about it below.) A stop in this case is a trigger – a price you have set that, should the price of shares fall below it, signals it is time to sell. 

To protect yourself from the situation Lewis has outlined, there are two simple parts to the rule about using stops that you need to follow: 

1. Only let closing prices trigger your stops. (Don’t let intraday volatility – much of it caused by HFT scalpers – stop you out of your positions.)

2. Don’t enter your stops in the market. (Keep them away from your broker and monitor them yourself.)

Properly managing your stops this way will help you avoid nasty, unexpected surprises. It will keep you in control of your trades. It’s that simple. 

If you follow the rules here with your independent investing – use limit orders for buying and selling and make sure to follow both parts of the stop rule – you’re set. Lewis’s revelation about the market’s modern-day “Mohawk Indians” will not be your problem. 

Editor‘s Note: To learn more about Braden’s new report, “Two Simple Ways to Keep the Wealth You Build,” you can email him at bwfeedback@bonnerandpartners.com. Include “Two Simple Ways” in the subject. You can also follow him on Facebook atfacebook.com/braden.copeland or Twitter with @BradenCopeland.