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January 1, 2012
Issue 180   -  Predictions
 
 
That was a fast year wasn't it?  It seems like I just did last year's predictons so without further adieu.... 
 
 
Economy
 
 
 
The economy is very difficult to predict with so much government intervention.  Not only are most of the numbers fudged and twisted, but the media is asleep at the wheel for the most part.  They never seem to notice the obvious contradictions in the economy versus the reported numbers.  This leads many of populace to be misled.  For me, I try to ignore the "official" numbers and use my eyes.  I watch the local stores and restaurants and employment pages.  Living in Washington DC does not give me a true measure of economy at large due to the large government employment.  It does let me know if there is a "turn" coming because if this area is slowing, that means trouble.  Currently I see a status quo type of environment.  Not a whole lot of deterioration or pick up.  I would take this as a slight negative because if things were picking up, this area would be more on the move.  Now there is a possible reason for this....no raises for government employees.  With the high percentage of government workers, no cost of living raise for two years in a row has to be having an effect..  This is mirroring the economy at large as raises are small there too.  Unless there is a large pickup in government spending, which I think is unlikely without a crisis, the economy will roll over.  I expect the economy to be soft for 2012.
 
Job Market
 
The job market has been downright dismal.  The main problem is that the cheap labor is being provided by other countries.  Unfortunately, this is feeding up to the higher paying jobs also.  Cheap high speed internet connections are making this transfer all the more quick.  This has also led to the government trying to make things look better.  The jobless claims number is CONTINUALLY "revised," almost always to the downside.  Exhibit A:
 
 
If you look at the red words you will read a truism.  If one were truly doing "revisions,"  over time they would cancel each other out and contribute zero to the unemployment numbers.  As you can see in the chart, this isn't the case.  In fact its a near straight up rise in revisions that show things to be worse.  Now what are the odds of that happening by chance?  Zero.  It proves what everybody who is coherently analyzing things realizes....the government lies.  There is no way the job market is going to get much better this year and I expect things to get worse as local and state governments continue their cut backs.
 
Interest Rates
 
Interest rates are nearly impossible to predict with interventions being daily.  Last year I predicted that interest rates would rise, and they did, for the first half of the year.  At that point the Greece problem erupted and investors flocked to treasury bonds as a safe haven.  As the European problem spread from country to country, this only intensified.  This drove interest rates back down...in the U.S, of course they spiked in Europe.  I expect that the trend of lower rates here is slowing.  Evidence?
 

Foreigners Dump Record Amount Of US Treasurys In Past Month

With year end fund flows making absolutely no sense for the most part, thank you global central planning, as the euro plunges and the market refuses to follow, with risk assets rising on speculation the ECB (and/or Fed) are about to restart printing yet gold collapsing (on one or two hedge funds liquidating, yet econ PhDs already rewriting their theses on why the "gold bubble has popped"), and finally with Treasurys soaring to near all time highs (10 Year under 1.9% yesterday even as stocks surged on data from the National Advertisers of Realtors, aka NAR, of all fraudulent and corrupt entities), here is the latest observation to make the confusion complete. As the Fed's critical H.4.1 weekly update shows (which is leaps and bounds more accurate than the Treasury's TIC international fund flow data), in the week ended December 28, foreign investors sold the second highest amount of US bonds in history, or $23 billion, bringing total UST custodial holdings to $2.67 trillion, a level first crossed to the upside back in April. This number peaked at $2.75 trillion in mid-August, and as the chart below shows the foreign holdings of US paper have been virtually flat in all of 2011, something which is in stark contrast with what the price of the 10 Year would indicate vis-a-vis investor demand. And going back further, the last week is merely the latest in a series of Custodial account outflows. In fact, in the last month (trailing 4 weeks), foreigners have sold a record $69 billion in US paper, a monthly outflow that was approached only once - in the aftermath of the US downgrade (when erroneously it is said that a surge in demand for US paper pushed rates lower - obviously as the chart shows nothing could be further from the truth).

 
Without these buyers, it is almost impossible for rates to stay down.  At some point interest rates will spike, but I don't think we are there yet.  I only rate the chance of a huge spike in rates this year (2+ % up ) at 10%.  I do expect rates to be up and this will not help the deficit or home market.  Speaking of which......
 
Housing
 
The housing market is in what I call a "perpetual funk."  This will continue.  Here is a chart showing the housing prices from the last 24 years:
 
 
As you can see we have plateaued in a zone.  I expect that we will continue in that zone unless interest rates rise too quickly.  If that happens, prices will continue down.  I do fully expect that before house prices rise substantially that we will break the 125 level in the chart above.  That won't be good for anything.  Be careful buying houses for rental income unless you know you can cash flow it.  I think you will be able to buy rentals at much lower prices in the future.  
 
Stock market 
 
 
 
The stock market is nothing more than a casino at this point and predicting where it will swerve is almost pointless.  High frequency trading has caused irreparable damage to the markets and Wall Street's control over congress is nearly total.  For now, and the foreseeable future, I'm out of the broad market. 
 
Dollar
 
It was a very strange year for the dollar.  I anticipated that the dollar would fall and it did for the first 6 months.  Then the Greek issue arose and we became "safer."  Of course no paper fiat currency is safe, but it's all a matter of degree.  Europe took a turn for the worse and then the dollar became even "safer."  For now, the dollar is better, but don't bet on that continuing.  I foresee the dollar resuming its downward trend sometime this year.
 
Government Intrusion
 
Our government is basically out of control.  The idea of a constitutionally constrained government is merely a memory.  Here's a video describing how bad it has gotten.  (thanks to Craig E.)
 
 
Isn't that amazing?  As if this wasn't bad enough, now we have laws that enable the president to detain ANYONE!

THE WHITE HOUSE

Office of the Press Secretary

FOR IMMEDIATE RELEASE

December 31, 2011

Statement by the President on H.R. 1540

Today I have signed into law H.R. 1540, the “National Defense Authorization Act for Fiscal Year 2012.” I have signed the Act chiefly because it authorizes funding for the defense of the United States and its interests abroad, crucial services for service members and their families, and vital national security programs that must be renewed. In hundreds of separate sections totaling over 500 pages, the Act also contains critical Administration initiatives to control the spiraling health care costs of the Department of Defense (DoD), to develop counterterrorism initiatives abroad, to build the security capacity of key partners, to modernize the force, and to boost the efficiency and effectiveness of military operations worldwide.

The fact that I support this bill as a whole does not mean I agree with everything in it. In particular, I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation, and prosecution of suspected terrorists. Over the last several years, my Administration has developed an effective, sustainable framework for the detention, interrogation and trial of suspected terrorists that allows us to maximize both our ability to collect intelligence and to incapacitate dangerous individuals in rapidly developing situations, and the results we have achieved are undeniable. Our success against al-Qa’ida and its affiliates and adherents has derived in significant measure from providing our counterterrorism professionals with the clarity and flexibility they need to adapt to changing circumstances and to utilize whichever authorities best protect the American people, and our accomplishments have respected the values that make our country an example for the world.

Obama Signs Martial Law Bill: NDAA Now Law

Against that record of success, some in Congress continue to insist upon restricting the options available to our counterterrorism professionals and interfering with the very operations that have kept us safe. My Administration has consistently opposed such measures. Ultimately, I decided to sign this bill not only because of the critically important services it provides for our forces and their families and the national security programs it authorizes, but also because the Congress revised provisions that otherwise would have jeopardized the safety, security, and liberty of the American people [Editor's Note: This phrase is nothing more than a legal-loophole clause referring to threats to veto prior versions, as the White House disputed not being given deference over detainment to the Office of the President]. Moving forward, my Administration will interpret and implement the provisions described below in a manner that best preserves the flexibility on which our safety depends and upholds the values on which this country was founded.

Section 1021 affirms the executive branch’s authority to detain persons covered by the 2001 Authorization for Use of Military Force (AUMF) (Public Law 107-40; 50 U.S.C. 1541 note). This section breaks no new ground and is unnecessary. The authority it describes was included in the 2001 AUMF, as recognized by the Supreme Court and confirmed through lower court decisions since then. Two critical limitations in section 1021 confirm that it solely codifies established authorities. First, under section 1021(d), the bill does not “limit or expand the authority of the President or the scope of the Authorization for Use of Military Force.” Second, under section 1021(e), the bill may not be construed to affect any “existing law or authorities relating to the detention of United States citizens, lawful resident aliens of the United States, or any other persons who are captured or arrested in the United States.” My Administration strongly supported the inclusion of these limitations in order to make clear beyond doubt that the legislation does nothing more than confirm authorities that the Federal courts have recognized as lawful under the 2001 AUMF. Moreover, I want to clarify that my Administration will not authorize the indefinite military detention without trial of American citizens. Indeed, I believe that doing so would break with our most important traditions and values as a Nation. My Administration will interpret section 1021 in a manner that ensures that any detention it authorizes complies with the Constitution, the laws of war, and all other applicable law.

This is absolutely outrageous.  The president thinks that a portion of the bill is basically unconstitutional and yet he is going to sign it.  What portion is unconstitutional?  The ability to detain people without probable cause.  Who gives that authority?  Him!  So now we are just to "trust him."  Hey Mr. President, how about vetoing it and sending it back while demanding it comply with the constitution?  Even if I trust you (I don't) then what about future presidents?  This is a continuing slide into a fascist state.  This trend continues.
 
 
Energy
 
I saw oil rising in 2011 and it did.  This year I am not as confident of the direction, but I do see gas prices rising.  Why?
 

End of Corn Ethanol?

By Barry Ritholtz - December 29th, 2011, 9:00AM

I listed these two articles in the morning reads, but I am so delighted over this that I had to make sure you did not miss this: Congress has apparently failed to extend the corn ethanol subsidy, a terrible energy idea that has subsidized the burning of food/corn for 30-years.

It is unclear whether this has simply lapsed, and has not been renewed yet or if the wasteful, engine damaging, negative-net-energy Corn Ethanol nightmare is finally over.

Here is the Detroit News:

The United States has ended a 30-year tax subsidy for corn-based ethanol that cost taxpayers $6 billion annually, and ended a tariff on imported Brazilian ethanol.

Congress adjourned for the year on Friday, failing to extend the tax break that’s drawn a wide variety of critics on Capitol Hill, including Sens. Tom Coburn, R-Okla., and Dianne Feinstein, D-Calif. Critics also have included environmentalists, frozen food producers, ranchers and others.

The policies have helped shift millions of tons of corn from feedlots, dinner tables and other products into gas tanks.

 
This VERY underreported happening is going to affect gas prices.  First realize that ethanol is a tremendously wasteful product.  It barely produces more energy than it takes to produce.  This is not efficient at all.  Without these subsidies, there would probably be no corn based ethanol.  Sugar and other crops are much more energy efficient than corn.  Brazil uses sugar which is over 3 times as energy effective.  The end of this subsidy will most definitely make ethanol, which is by law 10% of all gas in the U.S. go up in price.  Unless oil collapses, which it could in a world economy collapse, I don't see this happening.  I advise to upgrade any car purchased to a more fuel efficient model.  There is a non zero chance that oil could spike up with the metals but I don't see that happening yet.
 
Gold and Silver
 
Gold made it 11 positive years in a row and yet no one on the main stream media seems to like it.  That's unusual right?  Not when you realize that bankers run the media and gold is their arch enemy.  How's this for relative performance:
 
 
Gold is still the KEY investment that you need to own.  As far as silver, it was down for only the 2nd time in the past 11 years.  Silver is much easier to manipulate and the bad guys have taken advantage.  I see silver as being the potential home run this year.  Here are some great reasons why: (from GATA)
 

One man who provides the silvery details to the China story, Stephen Leeb Ph. D, economist, NY Times best-selling author, and promoter of his latest book, Red Alert, is back to remind silver bugs of the bright future for the silver price in his latest interview on GoldSeek Radio (GRS). (Previous BER articles about Leeb and silver, click here and here.)

“Silver is an utterly critical metal when it comes to renewable energies, solar panels; there’s no other game in town,” Leeb told GSR. “ . . . Silver-based solar is going to play a major part in our energy future . . . China used to export silver, now they’re importing, and they are very big importers. And they [China] went on to say that they’re not going export any silver what so ever.” Though China recently relaxed its strict export quota of rare earths, silver was not included in the increased export quota. And for good reason, according to Leeb.

Who is Stephen Leeb. He’s not the marquee name in Google’s search results. He is not as well-known as Jim Rogers; he’s not Marc Faber; and he’s not Peter Schiff.

Leeb is, however, a prolific author and researcher who’s looked at China’s multi-decade economic plans—plans that require a monstrous amount of critical industrial metals, including silver, to fulfill a national, strategic goal of reducing fossil fuels consumption within the People’s Republic. Leeb predicted the oil price would top $100 when it traded at $27. Now, he’s more alarmed at what he has discovered about China’s future consumption needs for the new energy commodity, silver. (See Robert Hirsch interview (audio) on the subject of Peak Oil on Financial Sense Newshour of Dec. 15.)

Leeb’s emphasis on detailed points about silver and its importance to renewable energy projects in China is ahead of the curve from most precious metals advocates—though, Rogers, in a broader sense, has already taken Leeb’s thesis regarding China voracious needs to include almost any commodity. And according to Leeb (echoed by Jim Rogers), the supply and demand characteristics for silver in the renewable energy sector must include a much, much higher price.

“I do believe [$200] is not an unreasonable target” for silver, Leeb told GoldSeek Radio host Chris Waltzek.

Leeb believes the silver’s industrial usage for renewable energy will greatly outweigh its usefulness as protection against central banker monetary profligacy. The need for silver will become a global security issue at some point, especially in the US, but the America must “wake up” to, first, address the issue of Peak Oil and publicly recognize the vital commodity for the next decade or two will be silver.

“But the problem is,” Leeb continued, “once it reaches one hundred [dollars], people start getting very, very nervous. It’s a very, big broad round number and they [bankers and/or government] start taking action; they might consider outlawing the ownership of silver as a monetary metal.”

The future must include breaking from fossil fuels as a source of energy; there’s just not enough cheap oil to go around, and China doesn’t want to take on the U.S. military to get the amount of oil it needs to increase its own GDP, according to Leeb in an earlier interview on Financial Sense Newshour of Nov. 10.

Wind and solar power are the future, and China “gets it,” he said.

“Along with rare earths, which are obviously so vital, so critical, you also have copper, which is on no one’s radar screen as a potentially scarce metal,” Leeb said in his most recent GSR interview. “And you have silver, which is on some people’s radar screen, but they don’t know if it’s like gold, a precious metal, or whether it’s an industrial metal. Well, it’s both.

“But I do believe that its primary purpose over the next five to 10 years is going to be as an industrial metal; it’s going to be critical to defining our energy future. And China really does get this. They’ve written about peak oil and they’ve written about peak coal. So they’re preparing.”

Shedding some light on the probably plans for China’s $3.2 trillion reserve, Leeb expects a lot of that money as well as future reserves will be spent on stockpiling strategic metals instead of using the cash to build a powerful war machine to match Russia to collectively compete directly against the U.S. and its allies during the remainder of the decade—speculatively speaking, a sort of a Sun Tzu tactic inspired by the book, The Art of War (English translation & Wiki synopsis), which has been reported by several sources as required reading for all Beijing senior officials.

“Their major expenditures . . . they have cited seven industries, of which, the most important, are energy based industries, which they plan to spend, I would guess, nearly $5 trillion to the end of the decade. That’s the equivalent to two world wars . . . and they’re going to spend that over the next eight or nine years.”

How much silver will be needed during this $5 trillion outlay in renewable energy projects in China? “Mind-boggling” amounts, according to Leeb. And as far as price, Leeb steps up his $200 per ounce easy layup prediction to venture into much bigger price levels as possibilities for the white metal.

“There’s no way of saying how high it [silver] will go; it’s dramatically high[er],” according to Leeb, when taking into account, too, central banks opting to inflate out of a debt bubble gone popped.

At $27 silver, the price is “ridiculous,” he said, and added, “I’m a believer of $10,000 gold. . . but I would not be surprised, if we avoid a Depression between now and the end of this decade, I would not be surprised if gold doesn’t touch $10,000.”

Given Leeb’s prediction of a gold/silver ratio touching at least 7.5, that calculates to a silver price north of $1,000 by the end of the decade, making a $200 prediction seem easily attainable, indeed, under a Leeb scenario.
 
The reasons for silver to rise are many and I am positioning myself accordingly.
 
GORO
 
GORO had a very productive year as far as gold and silver production goes.  However, the price of the stock was not nearly as strong.  The price could fall further from here early in the year as their 4th quarter will be weak due to lower silver and gold prices and two weeks off for Christmas break which will lower production.  This is normal and eventually I see this stock much higher. 
 
Mexus US Gold
 
Mexus has fallen a great deal and some of that in December was most certainly tax loss selling.  With that ended, I see the stock ticking back up, especially after the 30 day wash sale restriction ends.  In case you don't know, buying a stock which you took a loss on with your taxes is not allowed until 30 days have passed.  This will mean those who sold just to take the loss won't be able to buy until the end of January.  This is still a risky stock, but at 6 cents or so, it may be worth a lottery ticket.  This company could still be a big winner but the information available at this time is too sketchy.  I've still got my position in this stock and am expecting a higher price this year.
 
MBIA
 
This has been a winner so far and I see it going higher as they work off the last of their settlements.  The big one being with Bank of America.  IF this goes through the stock should rise nicely.  I've still got money here.
 
AXU
 
Not a great performance here this year but as silver makes it's turn back up, this one stands to benefit greatly.
 
I'll close the year with a funny.  Here's a woman who calls 911 for a ride to the liquor store.  Gotta love it.  Have a great year!