Tuesday, March 31, 2020
League of Power

The League of power


"Freedom by Friday"

A Funny Thing Happened

Kevin Raymond September 20, 2010 Freedom by Friday No Comments on A Funny Thing Happened

A Funny Thing Happened on the Way to the Poll Booth…

The much-maligned Tea-Party movement is threatening to send the two-party system into chaos. There is a strong possibility that the Republican Party will be torn apart by this new movement. While Republican by political designation, the Tea Partiers are a different crowd. They represent the ultra-conservative wing of the party and while Republicans have always prided themselves for their imagined fiscal conservatism, these guys are serious about it.

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Politicians have one thing in common. They all lie. Most of them steal too. Once in office they tend to become conformists all of a sudden. The party elite calls the shots and the rest fall into line. That is how big money wants it as well. Lobbyists know how the game is played and how the players need to be played. Its business as usual, on both sides of the fence…until now that is.

Whether you agree with or disagree with this “new” movement, it should be taken seriously. Leaning to one side or another in too strong a fashion could tip the boat in a direction that may sound good rhetorically, but have damaging short term consequences to the markets. The new movement is one that wants to balance the budget, lower taxes, and adopt a so-called “pro-business” mentality. They want to tighten the clamps on illegal immigration, repeal the health care bill and enact a host of new laws that are meant to pull the US out of its economic and social malaise.

The Fly in the Ointment

There is only one fly in this ointment. When asked how they planned on reducing the deficit and national debt, the leaders of the movement had few answers other than to reduce government spending. Governments are by habit creatures that must spend to survive. Talking about reducing debt is great until you have to do it. Greece is a great example of how too much austerity too soon can lead to social unrest. The US has become a society of entitlement once again and those who feel entitled are not going to idly sit by.

For the markets this could either be very beneficial or very damaging. History has shown that when governments are gridlocked the markets do well. No damaging laws are passed and the politicians spend time arguing instead of spending money. But, if the political agenda becomes too radical the markets could be in for a rough ride. If government spending is sharply curtailed during a period of slow growth, another deeper recession could ensue. If you recall, most of the growth in GDP in the past year has been the result of government spending or subsidies. Pulling the plug, while the right thing to do, could be the wrong medicine at this time.

Gold is Speaking Loud and Clear

The price of gold, you know the stuff we’ve been telling you to buy, has hit new all-time highs. The price is getting close to $1,300 per ounce. In the face of no growth, no inflation and a weak global environment for business, gold and silver prices are soaring. The signal from gold is that the new movement underway is real. But, that being said, gold prices should be falling. If fiscal and monetary conservatism are on the horizon, that is good news for the US Dollar…the anti-gold play. But, the dollar is going nowhere. That leads me to conclude that gold is rising because of fear and uncertainty, two things the market hates.

For the first time in weeks, gold stocks are also rallying with the price of the metal. If this trend continues, then you want to own gold stocks, not the bullion. The bullion has vastly outperformed the shares of senior mining companies. If this rally in gold is real, then gold mining shares are the biggest bargain going. Our choice is Goldcorp (GG-NYSE) one of the lowest cost major miners with unhedged exposure to gold prices.

Market Breakout

Two weeks ago the market was a few S&P points away from rolling over. The technical charts showed a confirmed head and shoulders pattern, a very, very bearish situation for the stock market. Yet today the tables are turned and the market looks like it wants to breakout and head higher. However, the recent 7% plus rally in stocks has been accompanied by low volume meaning that there is not a horde of buyers out there, but a lack of selling.

Over the past two weeks we have pointed out that the market looked like it would move higher based on the signals we were getting…low implied volatility, huge corporate share buy backs and stronger insider buying. If you listened, you would have made out quite nicely on this call and also on the gold call. Therein lies the problem.

It is rare to see markets and commodities rally simultaneously when the economic environment is pointing to slower, not faster growth ahead. We always want to think that this time it’s different. And, what’s different this time is that there is very strong economic growth in emerging markets. India raised interest rates last week, Australia is in a tightening mode, China strengthened its currency – these are growth areas we have pointed out before. Even places like Thailand and Chile, which both suffered major negative situations early this year (riots in Thailand, and the major earthquake in Chile) are rallying to new highs in markets or currencies.

My friend, emerging markets are becoming the place to make money. They are beginning to develop demand and growth independent of Europe or the United States. That is a very good thing for the global economic environment. It brings diversification in a sense to the world’s economies. Make no mistake, the US and Europe are still the key drivers and emerging markets will collapse if the developed markets tank. But, for the first time in a very long time, Asia and South America may actually bail us out.

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Best regards,

Kevin Raymond


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