As we all know, the U.S. reached the maximum debt level at which it can borrow (its debt ceiling) earlier this week. The U.S. has borrowed $14.3 trillion and cannot borrow more unless Congress increases the debt ceiling limit.
The government says that it has dipped into its federal pension funds to pay its bills. And what does the market do? It closes an eye and yawns. The yield on the 10-year U.S. Treasury actually fell yesterday to 3.1%. The bond market is experiencing a “little” rally despite the government having to dip into its pension funds to pay its bills.
Frankly, the bond and stock market doesn’t care at this point. It’s keeping that eye closed. It feels, like we all feel, Congress will eventually give in and raise the amount the U.S. government can borrow like it always has in the past.
But the market has the other eye wide open on this one…
By the middle of this May, the U.S. Mint had sold 85,000 ounces of American Eagle gold coins—on track to being their best sales month in about a year.
The last time sales of gold coins reached that level, the price of gold bullion rose 21% in the following year.
Gold, having hit a high of $1,541 per ounce earlier this month, is back down to $1,491 this morning, a drop of 3.2%. But the gold stocks were getting soft back in April and stayed soft for most of May…until yesterday.
I believe the share prices of the gold mining companies are starting to firm up again. In fact, over the last couple of days, the gold mining stocks have led bullion higher. The market has one eye wide open on this one. A strong price base has been established for the gold mining stocks…and the patient gold investors are about to get rewarded.
The market closes one eye on the debt problem, and opens the other to the developing commodities story.
Michael’s Personal Notes:
The same thing will happen here in North America…
Yesterday, the United Kingdom’s Office of National Statistics reported that inflation in the U.K. jumped to 4.5% in April. Core inflation, which excludes the volatile food and energy items, came in at the fastest pace in 14 years—3.7%.
Bets that the Bank of England will be raising interest rates sooner rather than later have increased substantially.
We will experience the same sequence of events here. The inflation rate in America will eventually pop. The Fed will react by raising short-term interest rates. We will hear the pundits say that the Fed kept rates too low for too long.
As I have been writing for weeks now, inflation is becoming a problem throughout the world for several reasons. The United States will not be immune to inflation woes.
In the U.K., two-year government bonds yield 1.02%. In the U.S., a two-year U.S. Treasury yields only about half of that—0.53%. Is the direction of U.S. short-term interest rates not staring us in the face?
Where the Market Stands; Where it’s Headed:
Very interesting to note…
The number of stock advisors bullish on the market has fallen sharply, while the number of stock advisors expecting a correction in the stock market has risen sharply (source: Investors Intelligence Advisors Sentiment, 5/18/11).
Traditionally, stock market advisors are wrong on their consensus opinion: if they expect the market to rise, the opposite happens. If they expect the market to fall, it usually rises. The more there are of them who expect a correction in stock prices, the less likely it is that it will happen.
I’ve been writing that I expect a little more pop from this bear market rally; say another 10% on the upside. Given the bearishness starting to prevail amongst stock advisors, the chances of the bear market rally continuing are now stronger.
The Dow Jones Industrial Average starts this morning up 7.8% for 2011.
What He Said:
“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.