The nation is approaching the “fiscal cliff.” This is a negative for the market.  On January 13, Congress will have to vote on whether to increase the national debt, which is now over $16 trillion and counting.  Fiscal cliff and debt ceiling are both momentous decisions for Congress, problems that they’d rather not face.

The stock market also has its problems.  Last week the Industrial Average closed above its May 1st peak — the Industrial move was not confirmed by the Transports.  This leaves the stock market in limbo, and it leaves investors in a quandary. My choice for an investment position is — gold coins (bullion) and GLD and enough cash to pay your bills.  If the Fed acts to stimulate the economy, it would be bullish for gold.  If the nation goes over the fiscal cliff, such an emergency would probably be bullish for gold.  If Congress fails to raise the debt limit, it should be bullish for gold (another emergency). 

If absolutely nothing happens, the prevailing forces of deflation will kick in, and that would be bearish for all commodities and probably bearish for gold.  But wait — if the whole scene turns deflationary, that would be a situation that Bernanke would not tolerate (the Fed is terrified of deflation), and Bernanke would almost surely flood the system with truck loads of fiat money — that would be bearish for the dollar and bullish for gold. 

Big picture — emerging nations are slowing down.  China’s economy is slowing, Europe is in recession, employment in the US has stalled and unemployment remands high.  In the face of this, the world forces of deflation are continuing.  The US could now be suffering long-term structural damage, as the Fed has feared. 

This all militates toward Fed action, but many question whether Fed action will do much good.  The European Central Bank unveiled a bond-buying program last Thursday, and China announced major infrastructure projects last week.

The Fed can bull the markets, but it can’t directly create jobs.  During the Great Depression, the government created jobs through its alphabet agencies such as the CCC and the WPA.  I wouldn’t be surprised if the current government chooses that path again.  In the meantime, the stock and bond markets are in a quandary.  The trend, if there a trend– where is it?

Below, the US dollar is looking bearish and has just broken below both moving averages.  A cheaper dollar is bullish for gold.

Is world commerce slowing down?  You wouldn’t know it from ‘Dr. Copper,’ which is busting out from a good base and is now above both MAs.

Below is a chart I’m keeping an eye on. It’s the YIELD on the bellwether 10-year T-note. I think we’ve seen the low on this critical note. As bond yields rise, it’s going to put competitive pressure on stocks, which is one reason why I’m still very conservative. This is no time to be a wild man in the stock market. With the chart below imbedded in my thinking, I now advise more cash and less gold in the mix.

As my friend, Bob Prechter once said, ‘There’s nothing wrong with cash — it gives you time to think.’  The only question in my mind is — is it better to have your currency in paper, or is it better to have it in gold, better known as real tangible money?  Personally, I trust gold more than I trust paper, but that’s just me and hard experience.”

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Global authorities are ramping up the stimulus… the Authorities hit the accelerator, the ECB plans to buy bonds, the Chinese announced big infrastructure spending programs, the Fed looks set for QE3 come Sept 13, and the BOJ will likely add to the joy come Sept 19.

Market reaction: Gold rallied over $150 since mid-August to its best level in 6 months, the S+P 500 had its best weekly close since 2007, the recently suspect EURUSD rallied to a 4 month high and the CAD closed over 1.02 for the first time in a year.

Trading: US Stock Indices: I’ve been on the sidelines since selling out Sept 21. Gold: I missed the rally, I’m tempted to sell short here but that would break my trading rules, CAD: I’m watching for a set up to sell OTM calls to rebalance my long term savings currency hedge, Crude: I’m lightly short (the rally off the June lows stalled at .618 of the Mar/Jun decline, Ross Clark has a Sequential Sell Setup, COT analysis.) My trading instincts tell me that this rush higher in risk assets has been a “sugar rush” and I am strongly tempted to sell it short across the board…I haven’t because that would be top picking…and picking tops and bottoms has a low probability of success! (Very tempted, though!)

Big Picture Thoughts: These days the Authorities would rather see inflation than deflation and they will act accordingly…but do they have the power to counter the forces of deflation in today’s world…is inflation or deflation in our future? For me this is not an academic question…getting this right could be the biggest and best trade I ever made!

The Authorities didn’t always prefer inflation. Volker took bold steps 30 years ago to “break the back” of inflation and inflationary expectations…he obviously had the power to succeed.

At the root of my skepticism about the Authorities having the power to counter the forces of deflation is the notion that the deflationary forces they hope to overcome have been precipitated by something far larger than a typical post WW2 recession…that these deflationary forces have been created by the confluence of a number of contributing factors…starting with the credit bubble collapse after the biggest credit boom in human history…but certainly also including deflationary demographic trends…the deflationary impact of globalization…the Internet…and good old over-supply in the face of falling demand!

I’m not an economist, and I’m not trying to win hearts and minds here, I’m just a trader posing a question…but as noted above, I think getting the answer to this question right could lead to the biggest and best “trade” of my life. Bill Gross HERE and Frank Giustra HERE have both recently made a strong case that expecting inflation is the way to bet. They are both very thoughtful men with impressive track records. Who am I to disagree?

Well, we could all be right…it’s a matter of timing and definition. As a trader I’m always trying to sync my trading with the time frame of my analysis…to do otherwise usually causes confusion and losses. But how do I define inflation and deflation? Yes, I’m aware of the classic monetarist view of, “Too much money chasing too few goods,” but for the purposes of “finding the trade” I’m going to take the view that inflation means rising prices…and that is not monolithic…therefore the Authorities could cause inflation (or price increases) in some things while the prices of other things are pulled lower by deflation…and some things will be “on the bubble”…maintaining a shaky price equilibrium while being buffeted by both inflationary and deflationary forces. (The Authorities may also be more interested in rekindling inflationary expectations than actual inflation…but that will be an uphill battle given the weakness in the labor and housing markets.)

Financial assets and commodities (not including iron ore and coal) have been bid higher as the market perceives another period of stimulus. Will these markets continue higher or is this “Financial Heroin,” to use Donald Coxe’s term, going to wear off quickly leaving financial assets and commodities to fall? Do the Authorities have the power to make inflation happen…or not?

It seems that consumer spending is the biggest force in the economy…and I wonder if consumers aren’t getting tapped out…financially and demographically. I wonder if they have used too much credit to buy “stuff” and are now at risk of setting off a vicious circle of deflationary trends if either the economy slows or interest rates rise…or both of those things happen. I wonder if manufactures made a boo-boo and figured that consumers would keep buying “stuff” and now those same manufacturers are sitting on warehouses full of inventory…financed by banks…and if that inventory doesn’t move the manufactures will have to lay off workers…making their contribution to the vicious circle of deflationary trends.

Inventory is not just in warehouses…for instance, I see a “shadow inventory” of nearly new Harley Davidson motorcycles sitting in consumer’s garages all over North America…if the economy goes soft these used Harleys will be on offer…deeply discounted to the new ones in the showrooms. My mechanic friend tells me that the bottom has fallen out of the used car market as new car lease terms have been extended past 8 years…lower prices on used cars may become a “shadow inventory” that haunts car makers…an over-supply of “stuff,” in other words, may strengthen deflationary trends.

My deflation bet:  I rent a lovely condo on Vancouver’s waterfront…I have no interest whatsoever in buying real estate here. My long term savings are mostly in cash (I note that BOC Governor Carney has been hectoring Corporate Canada to start spending some of the record large mountain of cash they are sitting on…I therefore take some comfort in sitting on my own record large pile of cash!)

Article provided by:

Drew Zimmerman
Investment Advisor
Union Securities Ltd. | Vancouver, BC
Tel: 604-646-2031 | Fax: 604-646-2067
Email: dzimmerman@union-securities.com
Web: www.union-securities.com

Victor Adair

Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell’s weekly Moneytalks radio show. Victor’s trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.

You can reach Victor Adair at: 

E-mail: vadair@union-securities.com

 

Being deeply in debt is like being grossly overweight. You’re carrying around this extra baggage that slows you down, and without continuous, conscious effort you tend to stop moving.

That’s the situation in which the world finds itself. The debts accumulated in the past couple of decades are weighing down the major economies, threatening to pull them back into recession if not countered by massive deficit spending and monetary ease. This, according to the following Bloomberg article, is causing prices to fall in most sectors:

IPhone Price Cuts Send Bond Inflation Bets to 11-Year Low
Price cuts on everything from iPhones to Folgers coffee show why investors in U.S. government bonds anticipate low inflation for the next decade even as the Federal Reserve considers injecting more cash into the economy.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast that 10-year government bonds will yield 1.76 percent by Dec. 31, down from 2.76 percent in 2011 and 3.19 percent in 2010.

Bond yields show investors expect that soaring gasoline and corn prices will fail to spread throughout the U.S. economy amid a slump in wages and unemployment at more than 8 percent since the beginning of 2009. That’s giving the Fed scope to add to the $2.3 trillion of government securities it has bought since 2008, an option Chairman Ben S. Bernanke said last week is possible amid “grave concern” about joblessness.

“The bond market doesn’t view inflation as a problem,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets, said Aug. 28 in a telephone interview. “The bond market still views deflation as a greater risk to the economy for the next one to maybe two years.”

‘Constrained’ Budgets 
Retailers are responding to sluggish economic growth by cutting prices. Sales rose 0.8 percent in July from the previous month, the biggest increase since February, government figures showed Aug. 14. That followed three straight months of declines, including a 0.7 percent drop in June, the most since May 2010.

“What we’re suffering through in the job market is reverberating through the economy,” Adolfo Laurenti, deputy chief economist in Chicago at Mesirow Financial Inc., which oversees $61.7 billion, said in a telephone interview Aug. 27. “These lackluster sales at many major retailers are really reflecting the fact that budgets are still constrained.”

Average hourly earnings rose 1.7 percent in July from a year earlier, the smallest increase since December 2010 and down from a peak of 3.8 percent in June 2007, the latest Labor Department data show. The Bloomberg Consumer Comfort Index was little changed at minus 47.3 in the week ended Aug. 26, from the prior reading of 47.4 that was the weakest since January.

Price Cuts
J.M. Smucker Co., which owns the Folgers coffee brand, lowered retail prices in May by about 6 percent as Arabica bean prices fell. Orrville, Ohio-based Smucker sees lower coffee costs for the remainder of the year, President and Chief Operating Officer Vincent Byrd said Aug. 17.

Procter & Gamble Co. (PG), the world’s largest consumer-products company, rolled back $400 million of the $3.5 billion in price increases it made last year, Chief Financial Officer Jon Moeller said Aug. 3 during a conference call. The move boosted Cincinnati-based P&G’s U.S. market share of laundry detergents, including category leader Tide, by 0.6 percent in July, he said.

Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) cut its price for Apple Inc.’s 16 gigabyte iPhone 4S to $148 from $188, which was already cheaper than the manufacturer’s suggested retail price of $199. Second-quarter sales at Wal-Mart’s U.S. stores open at least a year gained 2.2 percent, below the 2.6 percent in the previous quarter, the company said Aug. 16.

Wal-Mart Cuts
Wal-Mart cut prices on paper household products by 14.1 percent in August from a year earlier and health and beauty aids by 13.7 percent, according to Bloomberg Industries data. The cost of laundry goods has climbed 18 percent since September 2010 at the stores, while household paper items have increased 2.3 percent, the data show.

The company announced a program discounting gasoline by 15- cents-per-gallon on Aug. 29. The average U.S. price of a gallon of regular unleaded gasoline has risen 16 percent this year to $3.80, according to AAA.

“Our customers are under pressure from the economy,” Duncan MacNaughton, chief merchandising officer for the world’s biggest retailer, said that day on a conference call. “We have always had aggressive prices on gas. This takes it to the next level.”

A measure of prices tied to consumer spending was the same in July as in the previous month, according to an Aug. 30 Commerce Department report. The core personal consumption expenditure deflator, which excludes food and energy costs, rose 1.6 from a year earlier, down from 2.2 percent in March.

Price Index 
The consumer price index was unchanged for a second month in July after plunging 0.3 percent in May, the most since December 2008, according to the Labor department.

Food price inflation caused by the worsening U.S. drought, as well as higher gasoline prices, is being offset by employment and wages that have failed to recover sufficiently, Valeri said.

Corn has surged 57 percent since June 15, reaching a record $8.49 a bushel on Aug. 10, as the drought parched millions of acres across the U.S. Soybeans gained 33 percent since mid-June and reached a record $17.605 a bushel on Aug. 27. Oil touched a 15-week high of $98.29 on Aug. 23, and gained 20.9 percent on Aug. 31 to $96.47, as Tropical Storm Isaac strengthened, crimping output in the Gulf of Mexico.

“The real driver of inflation is labor costs, how much people are making,” LPL Financial’s Valeri said. “Salaries aren’t increasing much at all.” Valeri said he favors intermediate-maturity corporate bonds because “interest rates are going to stay low for a while.”

Some thoughts
To summarize, prices for grains and oil (and health insurance and college tuition) are way up but since wages are stagnant, higher prices for some things leave less disposable income for other things, which fall in price due to reduced demand. The increases and decreases tend to cancel out, resulting in low or no inflation, and maybe, if the process gathers momentum, deflation. That’s the story of the coming year.

Now the question is how governments will respond. If their goal is to inflate away their debts, then they will, very soon, open the monetary floodgates and give us the much-anticipated global coordinated quantitative easing. In which case by late 2013 we’ll be back in inflation mode, with soaring commodity prices, falling currencies and a general sense of things spinning out of control.

But what if near-term inflation is not their goal? As reader Bruce C noted in a comment on a previous DollarCollapse article:

I’m still unclear on what the Fed’s (and all of the big central banks’) real agenda is. I know the official and conventional belief is that the Fed works for the benefit of the US, and that all the other central banks are exclusively concerned about their own country of domicile, but that is not necessarily true. Another perspective is that the central banks form a global cartel that is primarily interested in a global consolidation of the banking and financial system, often described as “a one world government with a single currency.” I honestly don’t know if, or the extent to which, that conspiracy theory is true, but I think we are all going to find out pretty soon. I say this because the way things have evolved so far all over the developed world is a perfect opportunity to usher in global governance, if that is their intention. Basically, what I’m saying is IF the Fed or the ECB initiates a significant level of “monetary stimulation” relatively soon then I submit that the one-world conspiracy theory is wrong. Stated differently, by holding back on additional monetary aid the resulting economic chaos will foster the level of desperation required for Westerners to accept global “solutions”. Watch what is actually done going forward, not what they say.

Agreed. The global slowdown is forcing policy makers’ hand. Either they ease big-time (as yesterday’s announcement of ECB bond buying indicates that Europe may do), in which case growth and inflation are their near-term goals. Or they wait and let the recession turn into a depression – which it will if not fought with more credit – implying that we’re being softened up for something even more dramatic.

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

Click here to contact him

This little-known asset class allows you to invest in some of the world’s fastest-growing companies… before they go public.

It’s all over the headlines. You can’t turn on CNBC or open an issue of The Wall Street Journal without hearing about it.

I’m talking about Facebook (Nasdaq: FB). Yes, Facebook.

Over the last couple of months, Facebook has been trashed. The stock is down almost 50% since it first started trading in May.

If you’re a regular Dividend Opportunities reader, Facebook’s woes shouldn’t be a surprise. We warned you about the company’s impending troubles before the stock even went public.

So why bring it up then?

I’m telling you this because despite Facebook’s problems as of late, there are still tons of people that have made money off this stock. They’re cashing in their shares and making millions of dollars… even from what’s being called “the worst IPO of the last 10 years.”

For example, just this past week Peter Thiel — one of Facebook’s first investors — sold 20 million of his shares of the company for a $400 million profit… and that was after he had already made another $640 million selling shares in the initial public offering.

And then there’s the story of David Choe… an artist who painted murals on the walls of Facebook’s office. Rather than take his fees in cash, Choe took it in Facebook stock. Choe’s stake was recently valued at close to $200 million.

For these early investors, Facebook has been a goldmine. These guys are literally millionaires because of the stock.

The big difference? They acquired shares of Facebook BEFORE the company went public…

Thiel gave the company $500,000 in 2004, back when it was still known as “The Facebook.” And Choe? He got his shares in 2005, long before the world was obsessed with newsfeeds or relationship statuses.

Back then, shares of Facebook weren’t listed on any exchange. As you can imagine, for people like you and me to buy a stake would have been almost impossible. Normally, these kinds of investment opportunities are reserved for “elite” investors and company insiders.

But the good news is my colleague, Andy Obermueller, has found a way for investors like you and me to get in on the action. Simply put, he’s found a unique set of securities that let investors like us buy into some of the world’s fastest-growing companies (including Facebook beforeit went public) while they’re still in their most lucrative growth stages.

The secret?

It’s a little-known asset class called business development companies, or BDCs.

Business development companies loan money to small private businesses in order to fund their growth. In exchange for the loans, BDCs normally receive interest payments, or an equity stake in the company they’re loaning to.

In other words, when you buy shares of a BDC, you’re investing in a portfolio of the world’s fastest-growing businesses… while they’re still private.

For example, Facebook just went public about three months ago. But Hercules Technology Growth Capital (NYSE: HTGC), a publicly traded BDC, bought over 300,000 shares of the company when it was still private — giving investors a stake in the shares long before its IPO.

To be fair, given the recent drop HTGC is down on its original Facebook investment. But there is no denying the power of investing in BDCs. In a world where small private companies — only available to some of the richest and well-connected investors — are at a big advantage, business development companies help level the playing field.

And while you won’t become a millionaire overnight, the best part is BDCs are required by law to distribute 90% of their earnings to shareholders. That means if a company in its portfolio is acquired or goes public, the BDC has no choice but to distribute the profits to its shareholders.

That means BDCs usually carry rich dividend yields. For example, right now HTGC is yielding 8.5%. And MGC Capital (Nasdaq: MCGC) yields more than 12%.

Of course with investing, nothing is 100% risk-free. And the same goes for investing in business development companies. But what might surprise you is that investing in a basket of small, private companies isn’t nearly as risky as it may seem.

For one, due to government requirements, BDCs look to build a diversified portfolio where no single investment accounts for more than 25% of its total holdings. Typically, a company will hold more than 50 different loans spread out over 20 or more different industries.

They are also required to maintain a low amount of leverage. The government prohibits BDCs from acquiring more debt than equity. By law, the highest debt-to-equity ratio allowed is 1:1. For comparison, investment banks are often levered as high as 30:1.

I want to make something clear. I’m not saying you should run out and invest every dime you have into business development companies. There is plenty more to learn about them before investing than I can include in a couple pages here.

But there is no denying that with BDCs, you can share the same advantages as insiders that own shares of the world’s fastest-growing private companies… long before the rest of the crowd even gets a chance.

[Note: Business development companies aren’t the only way that retail investors can access the previously untouchable private market. In fact, another investment gives you a backdoor into the market where Mitt Romney made his millions. For years, this arena has been off-limits to investors like you and me. But thanks to StreetAuthority’s latest research, we’ve found a way you can access this underground market. You can learn more about BDCs — and this “second” way to access the private markets — by clicking here now.]

Regards,

Bob Bogda
Managing Editor, StreetAuthority.com

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Disclosure: StreetAuthority owns shares of HTGC and MAIN as part of the company’s various real-money portfolios. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.