Time to Feel the Pain

When you can create as much value as you want out of thin air, you create an economy full of false hope. There’s a reason why worldwide food prices are higher. There’s a reason why you’re paying more at the pump. While each scenario has its own implications, they all end up back at the printing press. That leads us to what has been happening in the markets…

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We live in a world where value no longer exists. Be it a diamond ring or a 10,000 sq ft mansion, nothing tangible in today’s existence is worth anything.

When you can create as much value as you want out of thin air, you create an economy full of false hope. There’s a reason why worldwide food prices are higher. There’s a reason why you’re paying more at the pump. While each scenario has its own implications, they all end up back at the printing press.

That leads us to what has been happening in the markets: light volume, whether we move to the upside or downside – in particular, the Canadian markets.

This past week, the markets were once again down with low volume – down for the sixth straight week. The buyers have taken an early vacation, leaving panicked sellers without anyone to sell into and thus forcing many stocks – particularly the juniors – down further. Bid support has disappeared.

Despite being down for the sixth straight week, we’ re down less than 7% with no major technical support levels broken. The markets look oversold and I think we’re moving closer to the bargain entry points I’ve been looking for. Sooner or later, the stink bids I told you to put in a few weeks ago (see Age of America Over?) will be filled giving you some great bargains to ride out until year end.

While there will be bargains, that also means the overall markets may still have further downward pressure. Especially when Federal Reserve Chairman Bernanke looks so defeated.

Last week I said, “With all of the money spent through all of the US’ loose fiscal policies, nothing has changed.” On Tuesday, Bernanke reiterated those statements causing the markets to fall even further down south.

In his Tuesday speech, he said that seven months after the central bank began a historic round of monetary stimulus, growth in the broader economy has been disappointing. But with the amount of money printed and no real results, Big Ben has planned to stay on course, ending stimulus on schedule this month and keeping monetary policy steady for the immediate future.

Bernanke has finally admitted what we already know. The recovery has fallen short of the central bank’s expectations by a number of different measures. Six out of ten leading indicators are bad and the other four appears to be getting worse: Unemployment is high, and anyone who has found work must accept lower wages than they previously earned. Home prices are falling at a newly accelerating rate (see The Greatest War in History), making homeowners more vulnerable to default and foreclosure. Manufacturing is down and oil is trading at levels reminiscent of 2008, when months of record-high fuel prices helped drag the economy into recession (combine that with OPEC’s recent objection of raising supply.) All obvious points that I have mentioned in previous letters.

The central bank’s ability to boost the economy, or its willingness to attempt to do so, has reached a limit. Or has it? Was the amount of money being spent really used to bolster the economy or was it used to bolster the wallets of the Fed by lending as much money as possible to the world’s most powerful nation?

Bernanke has made it clear that there will be no QE3…yet. But before we make any judgements, let’s not forget that after QE1, he hinted there wouldn’t be a need for QE2.

The truth is, the next QE, be called QE3 or something completely different, will eventually happen. But before it does, America will need to feel the pain. Without pain, there will be no political will.

Canadian Housing Market

I am calling for a Canadian Housing bubble. While the markets have slowly climbed, especially in Western Canada, it has all been false hopes provided by foreign investors.

Sellers are beginning to feel the pressure of trying to sell at peak prices. Homes being listed now are taking months to sell, as opposed to days. New homebuyers are being forced into other markets. The peak is here.

Within the next 3-5 years, I am calling for up to a 25% dip in the Canadian real estate market.

Leading indicators are already telling the story. Building permits posted an unexpected 21% decline in April. The value of building permits issued in Canada in April unexpectedly plummeted 21.1 percent from March on weakness in the powerful province of Ontario. The month-on-month fall was the largest since the 23.7% drop recorded in January 2006.

Its not just Ontario experiencing a fall in both residential and non-residential real estate.

The total value of permits fell in seven provinces with Ontario – which accounted for over a third of all permits issued in April – posting by far the largest decline of 41.9 percent. Compared with April 2010, total building permits declined 19.7 percent, with residential permits down 7.8 percent and non-residential permits down 35.2 percent across Canada.

While these are just short term statistics, I believe we’re about to see a decline in housing prices sooner than later.

Gold and Gold Stocks

My sentiment towards gold has not changed. When you look at the broader picture of the US and the world economies, the flight to safety and wealth preservation remains a top priority. Gold will climb higher – ’nuff said.

The biggest emphasis I want to make is the disconnect between gold and gold stocks. While gold has performed incredibly well, gold equities have underperformed. But sooner or later, as I have mentioned time and time again, it will change. When it does, we’re going to see some spectacular gains in gold stocks (and other silver stocks, as well) – including the more speculative issues – as they play catch up.

Patience is a virtue. When you invest in gold equities in this market, you need both risk tolerance and patience. There is a reason we invest in gold equities and there is a reason why we invest in gold. When we trade our money for gold, we’re trying to preserve wealth. When we put our money into gold equities, we’re looking for higher returns knowing we’re taking a higher risk.

The market swings in gold equities can be big, as we have already witnessed. Don’t be suckered in by selling at the bottom and trying to play catch up when the market turns. I haven’t sold any of my gold and silver stocks recently (the last time I sold was the week right before the correction – see Age of America Over?) because I strongly believe that the equity side of precious metals will turn and my patience will be rewarded with some phenomenal gains.

Despite the markets looking grim and uncertain, there are bright spots ahead – if you believe as I do.

Until next week,

Ivan Lo
Equedia Weekly

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