Mutual Loss Is ETF Gain
The latest stats for mutual funds were released onThursday and to put it mildly, the numbers were shocking. For only the sixth timesince 1988, August witnessed outflows and they were substantial. About $12.3 billionexited funds and $14 billion was removed from funds that invest primarily in theU.S. This was the greatest outflow since September 2002 but somehow, pricesrose. The last five times there were outflows in August, the Dow was lower eachtime, averaging a 7.24% loss. Truth be told, the ameliorating factor is thecontinuing expansion in ETF assets, with a net issuance of $15.6 billion in August. Thus, there were actually modest net inflows to account for August 1.1% rise in theDow. A complete report will appear in the next issue, along with a look atseasonality.
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Crude Computations
Somehow, the government’s tally of the Consumer Price Index(CPI) shows an annual gain of just 1.97% through August, despite a $20 climb in the priceof crude oil. We don’t get it. Something does not compute. Asdefault and foreclosure rates attest to, interest rate costs for homeowners increaseddramatically in 2007. The price of gas is higher. Rents have risen. Thesenior year of university tuition for your Editor’s son costs 7% more than his junioryear. What doesn’t cost a lot more? Is it reasonable to conclude thatconsumer inflation rose less than 2% because computers are a bit cheaper this year thanlast or because a 4-gigabyte flash drive is down from $169 to $69?
Clearly, oil should be a huge factor in cost increases but does notappear to be included in the computation. How strange. On an inflationadjusted basis, crude has made a new all-time high, yet in 1981, when crude was thentrading at a record high, inflation ranged through the year from 11.8% in January to 8.9%in December. We’re not sure how much longer the Bureau of Labor Statistics cankeep up the illusion of low inflation, but when gas finally hits $4 per gallon, we believereality will overtake the notion that all is well.
Will gas hit $4 per gallon? Will crude hit $100 perbarrel? In our view, both are certain. Our Year Ahead issue published onJanuary 8th (see http://www.cross-currents.net/c010807c.pdf)gave all the reasons you needed to know. The booming Chinese economy virtuallyassures an enormous increase in demand for every good, commodity, and service, for decadesto come. As of the end of last year, China’s oil consumption was already 32% ofthe U.S. At current rates of growth, Chinas’ needs will likely increase by 10million barrels per day in the next decade, and this increase is more than the totalamount now consumed by Japan, Russia and Germany, the next three largest consumers ofcrude. Is China really that huge? Yes. Think of it this way. Chinahas nearly 4.4 potential consumers for every consumer here in the U.S. and 4.4 times asmany geniuses to catalyze advances in technology. And soon, China will even havemore English speaking people than the U.S.
Some readers could simply not understand our YearAhead stance in January but it is all very clear now. Our two investment picks havesoared. The PowerShares Golden Dragon China Portfolio (PGJ) is now up 60%. CNOOC Ltd. (CEO) is up 77%. Oil is on its way to $100 per barrel. Perhaps nottomorrow, but eventually. Inflation? We vote higher. Andoil? Clearly, world crude oil production is on the decline (see charts at EnergyInformation Administration (http://www.eia.doe.gov/). Lower supply coupled with the expected huge increases in demand in the years ahead meansonly one thing. Crude is going much higher.
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Gold Way Ahead Of The Dow
Gold’s run in September should not come as ashock to anyone who has read our thoughts on the matter. We turned bullish on goldwhen the calamity of 911 occurred, in the belief that uncertainty had overnight, become amajor part of the equation. While it is true (thankfully!) that no major terroristattacks have taken place in recent months, the threats remain real and palpable. Combine the idea of a successful terrorist plot to disrupt the financial markets with ourhuge exposure to derivatives and you see the potential for an event that would likely havea far more reaching impact than another episode directed towards the murder of innocentcivilians. We live in very dangerous times and will continue to pay a premium foruncertainty. We see the expansion of this premium below. As our wealth grows,we expect this premium to continue to expand. And as wealth grows worldwide, weexpect inflation to rise. The factors that drive the price of gold are all ingear. This has all the makings of a super bull market.
PowerfulCommentary. Unique Perspectives.
ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the firstissue was published in May of 1990. Mr. Newman is also a member of the Market Technician'sAssociation and has been widely quoted for years by the financialpress, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuseson economic and stock market commentary, often covering controversial subjects. Severalproprietary technical indicators are usually featured in every issue accompanied bycurrent interpretation. Broad samples of our work can be viewed at
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