Dear Readers
After five straight days of negative gains the market finally popped back.
The euro dropped to the lowest weekly level against the dollar in more than two years. Yet, European stocks climbed for a sixth straight week – the longest winning streak in more than two years.
China’s growth slowed for a sixth straight quarter, the weakest pace since the global financial crisis.
It’s no wonder China has already cut interest rates twice in the last couple of months. Despite the slowdown, China’s new loans exceeded estimates in June, proving that the recent rate drops are showing a positive effect. That means no more stimulus for the time being.
American cities continue to file for bankruptcy. In the last three weeks, three California cities – San Bernardino, Stockton, and Mammoth Lakes – filed for bankruptcy. So far this year 42 muni defaults have occurred. While it’s down from 68 in the same period last year and 83 in 2010, it still means there are more to come.
Back in December of 2010, Meredith Whitney infamously predicted a massive wave of defaults that never happened. But was it only her timing that was wrong? Stockton has now become the biggest city in the US to file for Chapter 9 (a muni-equivalent of Chapter 11). More could follow. Watch this video.
So why the heck are the markets rallying?
Why the markets are rallying
It seems the world is content on the promise of more stimulus. The more money you give us, the more we will spend. Everything will be better if we just had more money. Despite trillions of new dollars, the economy is no better. So let’s try to fix that with more money.
Beware the Number 13
Generally, the stock market responds positively to a low interest rate environment. But since 2000 it hasn’t done much, despite a gradual decline in interest rates. Does that mean our cycle has finally topped? Or does it show we’re in long stagnant period of sideways action, similar to the sideways action in the 1960s -70s?
I have compared our current situation to that of the 1970’s before; in particular, the 1973/74 bear market:
“What’s happening now is eerily reminiscence of what happened nearly 40 years ago: Devaluation of the Dollar, extreme rise in oil prices, UK in a recession, real GDP growth decline, rise in inflation, and money printing (as a result of converting the dollar into a full fiat currency backed by nothing more than a promise by the government.) In the year prior to the 1973 crash, stocks were doing incredibly well with the DJIA gaining 15% in twelve months. How much did the markets climb in the last 12 months?
The S&P has climbed more than 21% in the last 8 months and more than 12% in the last six; the DJIA more than 19% and at 8% respectively. The overall average of the two market combined in the last seven months is 15%
As stock markets peaked in 1972, the bears kicked in and stocks fell dramatically during that time. While stock markets rebounded eventually, the recovery was a slow process. The United States didn’t see the same level in real terms until August 1993: over twenty years after the 1973-74 crash began. While stocks lost nearly half their value during that time, many gold mining shares quadrupled in value. The surge in the gold and silver sector was dramatic and it changed the lives of the investors who took the risk to participate when no one else would.”
The sideways consolidation a few decades ago started in 1960 and lasted until around 1982. But during that time – about 13 years after the sideways consolidation begain in 1960 – the stock market crashed and gold and gold stocks rose dramatically.
Since 2000, we have been trading sideways (regardless of the cyclical bull market leading up to 2008) – very similar to the time between 1960 and 1973. As mentioned above, events leading up to today are so similar to 1973 that its scary.
We are now 12 years into the beginning of our sideways consolidation which started in 2000.
If you’re trying to time the market based on historical facts (including the sideways trading data from 1897 to 1925), we’re coming near Year 13.
Just some food for thought…
All Signs Point to Gold
The number of banks placing gold as collateral has continued to increase this year. Bullion is not only cheap to deliver, with low to negative gold interest rates, but collateral diversity is becoming much more important. Banks are already stockpiling gold before the new Basel III accord is put in place. This demand will continue to put upward pressure on gold prices.
June and August are generally weak months for gold and related equities, which means buying opportunity exists. Take the time to do some due diligence and I think you will be rewarded greatly for your efforts.
(You can also read my interview with the Gold Report I did a few weeks back to see how I am choosing juniors in this market.)
Owning big name gold producers or gold stream giants is smart. But there are a lot of junior producers that continue to meet or beat production expectations and are making strong positive cash flow. Follow them because they’ve been beaten up badly despite ongoing growth. I am looking at a few prospects and I’ll share them with you once I get a chance to sit down with their management.
Until next week,
Ivan Lo
Equedia Weekly
Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies – which means I am biased towards the sector. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.
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