The pressure on the Fed to hike interest rates next week is building.
This pressure is not coming from a hypothetical scenario or a future forecast. Its coming from forces that are active in the marketplace right here and now surging energy costs … an incipient spike in gold … a new decline in the dollar.
Nor is this pressure being weakened by Hurricane Katrina as Wall Street was hoping just a few days ago. Quite to the contrary, we are now staring down the barrel of …
A Post-Katrina
Inflationary SPIKE
The events and efforts in the wake of Hurricane Katrina are now raising serious new concerns about an acute, short-term surge in inflation over and beyond the inflation that was already building before the storm.
There are several reasons for this phenomenon:
First, even with last weeks temporary correction in crude oil, the price for a gallon of unleaded gasoline is sticking tenaciously close to the $3 level. The national average is just three to four cents below, compared to $2.44 cents per gallon just a month ago, and $1.84 this time last year.
Other fuel costs have risen even more sharply. And ALL fuel costs are now spreading throughout the economy, driving up prices on virtually every product and service imaginable.
Second, the government is embarking on a new, post-Katrina spending spree thats out of control.
Within the next 30 days or so, Congress is expecting still ANOTHER $50 billion hurricane aid request from the Bush Administration, on TOP of the two emergency spending bills already approved for $62.3 billion. Thats a total of $112.3 billion just in the first six weeks after the storm.
But it STILL wont be enough.
In fact, right now, members of Congress are estimating the total tab will be as much as $200 billion.
Thats one-third bigger than the New Deal to recover from the Great Depression … DOUBLE the size of the Marshall Plan to rebuild Western Europe after World War II … and easily the largest and most SUDDEN public works project in
U.S.
history.
Third, the President is not going to raise taxes to cover the extra costs. Instead, virtually the sole source of money is going to be through more DEBT.
Result, the federal budget deficit, which had been showing some signs of shrinking, is ballooning again to $400 billion, $500 billion or MORE another source of inflation and rising interest rates.
How will Mr. Greenspan react to this pressure cooker of forces ready to explode under interest rates?
Its highly unlikely he will just blow them away I doubt he will try to engineer a pause in his rate hikes as Wall Street is hoping.
If he does, it will be a disaster. Foreign central bankers will shake their heads in dismay. Foreign investors will start dumping their dollars. And the maneuver will backfire almost immediately.
Consider whats already happening in related markets right now …
ANOTHER Big Supply Crunch
Coming for Crude Oil
Anyone who thinks the supply crunch for crude oil is easing any time soon is dreaming.
Some 4.02 billion cubic feet of Gulf natural gas production is still offline.
Ditto for 60% of regional oil production.
Four refiners also are sitting idle. And Shell just said its massive Mars platform capable of pumping 220,000 barrels per day may not resume full operations until the fourth quarter at the earliest.
Meanwhile, the peak demand season for heating oil is dead ahead.
According to Venezuelan Oil Minister Rafael Ramirez, “This isn’t a temporary thing. These prices are here to stay. These high oil prices are out of OPEC’s hands.”
What about the release of the
strategic oil reserves? No matter how much oil is released, the fundamental fact remains that the
will have to REPLENISH those reserves, effectively pulling 30 million barrels off the commercial market in the near future.
Gold Stocks Surging
While most eyes are focused on energy, a prices explosion has been incubating in the gold market, another telltale sign of rising inflation.
Meanwhile, key gold stocks, also a good leading indicator of inflationary expectations, are ALREADY on the move.
Case in point: Royal Gold (RGLD). The last time the shares in this gold mine investment company blasted off, starting in late 2001, it surged from about $2.50 to over $27 per share!
Now RGLD is blasting off AGAIN!
The business model of the company is, in some ways, similar to that of Enerplus which I discussed yesterday: Royal Gold collects royalties based on the revenue generated from some of the worlds largest mines. So the company gives you a diversified interest in multiple gold mining operations.
Safe Money subscribers: I told you to buy Royal Gold in the same Flash Alert I sent out last month recommending new purchases in Enerplus. And in case you missed that flash, I repeated the instructions in the latest Safe Money issue. If you own the stock, great. Hold on.
If not, stand by for my next alert. As soon as we see another buy window, we will do our best to let you know. (If you do not yet subscribe to my Safe Money Report, click here to sign up and make sure you dont miss the flash.)
What’s driving this latest rise in gold? Larry tells us its a chronic imbalance between demand and supply:
Gold demand:
- Political and economic tensions boosted the appeal of gold as a safe-haven investment. Investment demand grew 36% in tonnage terms, driven by strong growth in
,
and
. - Jewelry demand hit a record annual rate of $38 billion in the past year 24% higher than last year. When you drill down, you see the numbers are even greater in some regions: Gold jewelry demand in
rose 42% in the second quarter, while
‘s gold jewelry boom pushed sales up by 27%. - Industrial and dental demand grew by 13% to 112 metric tons in the second quarter, with the Unites States and
driving those markets.
Gold supply:
Supply fell short by 152 tonnes last year, according to GFMS. Indeed, so far this year, the overall supply of gold is up about 8%, but demand is up even more 21% in the first half of the year.
Clearly, this is not an imbalance thats about to correct itself in the near future. So expect the rise in gold and gold shares to continue, or even accelerate.
The Consequence of
Another Fed Rate Hike:
More Trouble for Housing
Weiss Research Editorial Manager Michael Larson has been watching the housing market like a hawk, and for good reason: It holds the key to the future performance of the
economy … major
banks … trillions of dollars in mortgage bonds … and more.
Now, hes convinced that this past spring was the peak of the housing boom. His reasons:
- Inventories are exploding: Housing inventory is flooding the market. There were 460,000 new homes on the market in July. That was up 15% from the same month in 2004. Moreover, it’s the highest level ever. As for “used” homes, there were 2.75 million for sale the most in over 17 years.
- Prices are weakening: New home prices plunged 4.3% year-over-year in the most recent reported month (July). That was the largest single-month drop in more than 13 years. At $203,800, median prices are at the lowest since the end of 2003.
- Existing home prices will be the next to crack: A Mortgage Bankers Association index that measures purchase mortgage activity has dropped 6% from its peak in June, and it looks like it will head much lower in the months ahead.
- Regional evidence of a sharp turn is piling up: From the Sarasota Herald-Tribune in Southwest Florida, we learn that for-sale inventory is up 157% year-over-year in one formerly “hot” county and 35% in a neighboring one. In the Sacramento Bee in California, we see there were 9,141 homes for sale in the four-county area as of mid-August more than double year-earlier levels. And the Boston Globe reports there were 22,406 single family houses on the market recently up almost a third in a year.
- The Feds “Beige Book” confirms: It shows that sales are cooling around the country. For example …
The New York district: “New Jersey builders report that housing demand remains fairly brisk, but that buyers are increasingly hesitant and that lenders have grown more skeptical about appraised home values … There has been some noticeable weakening in some upstate New York regions.”
The Philadelphia district: “Real estate contacts noted that existing homes for sale seem to be on the market longer now than earlier in the year.
The Cleveland district: “Relative to this time a year ago, most residential builders reported that their sales had fallen. Most contacts also characterized their backlogs as average while some said that they were light. In general, homebuilders do not anticipate any significant improvement in the economic environment through the remainder of 2005.”
The Dallas district: “Contacts expressed concern about the large amount of condominium and town-home construction near downtown Dallas, questioning whether all the ‘contracted’ units would actually close. Many of the purchases are being made by investors, they say, and are actually just ‘reservations’ on properties currently under construction.”
In normal times, this weakness would eventually show up in the form of LOWER inflation. But not now. The inflationary forces unleashed by the massive Katrina recovery effort will easily overwhelm any restraining effect from the housing slowdown.
Bottom line: More inflation, higher interest rates AND a housing decline at the same time.
These events merely reinforce the wisdom of the steps you are already taking or should be taking to protect and grow your money:
Step 1. Move your keep-safe cash assets to SHORT-TERM instruments, like 3-month Treasury bills or money funds specialized in short-term Treasuries. Every time the Fed raises interest rates your yield promptly goes up in tandem.
Examples:
American Century Capital Preservation Fund (CPFXX; 800-345-2021)
Dreyfus 100% U.S. Treasury Fund (DUSXX; 800-645-6561)
Fidelity Spartan U.S. Treasury Fund (FDLXX; 800-544-8888)
Vanguard Treasury MMF (VMPXX; 800-662-7447)
Weiss Treasury Only Money Fund, (WEOXX; 800-430-9617)
Step 2. Move out of LONG-TERM bonds. Their yields are still not far from their record lows. Why lock them in at these levels? If you do, you either get stuck with these low yields for years to come … or you are forced to take an immediate loss when you sell before maturity. So get out now while you still can WITHOUT significant losses.
Step 3. Continue to ride the wave of rising energy. If youve been following us until now, you should already have substantial gains. If not, this weeks moderate correction in most energy stocks is opening up a short window to jump on board.
For long-term investing in energy and other natural resources, I recommend Larrys Real Wealth Report. For fast-paced, high-profit-potential options on energy stocks, I recommend his Energy Options Alert. (Note: This service is capped at 1,000 subscribers and will be closed to all new members soon).
Step 4. If you have stocks, real estate or a business that could be vulnerable to rising interest rates, take protective action immediately. One alternative is to simply sell. Another is to hedge against rising interest rates with investments that are designed to soar when rates rise. You get protection PLUS unlimited profit opportunities.
Step 5. Also allocate a portion of your portfolio to gold and gold shares. For bullion, I recommend gold bullion exchange-traded funds. And for the shares, you can start with Royal Gold, which I mentioned earlier. But wait for a dip before buying.
Step 6. Above all, invest prudently. Limit your speculative investments to money you can afford to risk. Avoid debt. And keep most of your net worth in investments that aim for yield and stability.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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