Red-Hot Resources

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Friday, January 11, 2008

Ben Bernanke Wants to Make You Rich

Yesterday, Ben Bernanke said he was ready to make deeper cuts in interest rates. This is good for Red-Hot Canadian Small-Caps and Red-Hot Global Small-Caps in three ways.

  1. This is naturally inflationary, so that should boost prices of precious metals.
  2. It's also bad for the US dollar, so it will boost the value of US shares of foreign stocks.
  3. Finally, this should juice up the US economy, which is still the most powerful engine in the global economy. And that should increase global demand for natural resources.

Why is Mr. Bernanke doing this? Well, he can't ignore the signs of a slowing economy anymore.

First, the numbers are in, and holiday sales were terrible: An already weak holiday shopping season turned out to be even worse than expected for many of the nation's retailers, who reported Thursday they had disappointing sales results for December. The poor performance raised more concerns about consumer spending, and in turn, the health of the economy.

Adjusted for inflation, December retail sales dropped about 2% compared to last year.

Next up, credit card borrowing surged: The Federal Reserve reported Tuesday that consumer borrowing climbed at an annual rate of 7.4% in November, far higher than the 1% rise in October.

The category that includes credit card debt surged at an annual rate of 11.3%, a six-month high, an indication that shoppers were relying heavily on credit cards to finance purchases since home equity lines of credit became harder to get....The 11.3% rise in credit card debt was the seventh straight month of strong gains in this area and was the biggest jump since a 12.8% rise in May.

So consumers had to max out their credit cards even though they bought less than last year.

In a consumer-driven economy – which is what the US is – this is bad news.

More bad news: U.S. manufacturing contracted in December and sits near five-year lows, while hiring in December rose by 18,000, the least since August 2003. Also, profit growth for S&P 500 companies turned negative in the third quarter for the first time since 2002 and is projected to be negative again in the final three months of 2007.

And this bad news isn't confined to the US. European retail sales in November fell the most in at least a decade, and U.K. house prices declined 0.8 percent in the fourth quarter, the first drop since 2000.

Taking these things into consideration, you can see why Bernanke is eager to cut interest rates. The markets are starting to price in not just a 50-basis point cut in interest rates but ANOTHER 50-basis point interest rate cut after that.

The fact is, the Fed and the Treasury are just not going to sit on their hands and let the economy go into the tank in an election year. They are going to STIMULATE the heck out of the economy.

However, it's not like inflation is cooling down. Did you see the US trade deficit figures today? Not only were the headline numbers bad, but US import prices posted their largest calendar-year increase on record in 2007 as oil prices climbed over 50%!

What's more, China used to be a deflationary offset to higher domestic prices. But that's not happening anymore.

The real bad news: In 2007, import prices soared 10.9%, way, way up from the 2.5% gain registered in 2006. What's more, that's the highest calendar-year increase since the government began compiling the data in 1987!

Obviously, inflation is red-hot. And lower interest rates will only make it hotter. Obviously, this makes the value of the US dollar go down. And what goes up when the dollar goes down … what's on the end of the fabled "See-saw of pain" ….

That's right, amigos! Gold!

Naturally, silver will go up, too.

But wait – there's more!

Along with lower interest rates, Central Banks around the world have been throwing billions and billions of dollars (and euros) at the banking crisis. That crisis could cost banks $400 billion, and the government will likely pick up the tab. That means you and I pick up the tab, but on the upside, a government bailout will likely jumpstart bank lending again. On top of that, now the Bush administration is considering a "stimulus package" of undetermined size. $100 billion is a number being tossed around.

You think things will change if the Democrats win the election? Well, Hillary Clinton is already pushing a $70 billion stimulus package.

All this liquidity has to flow somewhere. I bet a big chunk of it flows into gold, and other parts of it keep flowing to emerging markets which produce the oil that America is addicted to like high-speed chicken feed and places like China and India which make the goods we buy on credit.

Let's not focus on who foots the bill right now. Let's just admit this is like crank for the global economy.

So, to sum up: Gold and silver going up. US dollar going down. US shares of foreign stocks going up. Demand for natural resources going up.

Now, the big stocks are down this morning. But most of the stocks in the Red-Hot Canadian Small-Caps portfolio are rising. The Red-Hot Global Small-Caps portfolio got clocked overnight, but don't worry, that was an over-reaction -- it should play catch-up tomorrow.

Why is your Canadian portfolio rising? Because those stocks are focused in the right sectors (natural resources) and the easy money policy being pushed by the government will make buyouts and takeovers top of the menu in 2008. The big fish will start circling these stocks soon -- you wait and see.

I'm getting more bullish on the right sectors.

2008 could be one heck of a year.

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