Rhodium has been moving up off of its recent lows by over $300 per ounce. This seems to us to be the beginning of the next upward cycle for this Platinum Group Metal (PGM). A couple of years of economic recovery around the world should restimulate a healthy demand for this rare precious metal.
Since 1972, the S&P index has progressed along an average rate of increase of 6.55% per year. When the current rate pushes that number over 7%, it is an indication that the market is overheated, and beginning to "bubble". Right now, the nominal value should be a bit over 1700. However, the 7% level is near 2060. Our interpretation of this is that the markets are operating optimistically, but not overly so. By the end of 2014, the nominal value would be 1760, and the 7% level would be 2160. At the current point of 1920, there is 200 points (+10%) of headroom for the market to move within, and a floor 160 points downward (-8%). As long as general business and political conditions remain stable, we would expect the S&P to end the year above where it is at this beginning of June. At the end of the third quarter, we'll review this situation once again.
We'd like to speculate about something here. The vast majority of people do not understand the concept of, or the need for, central banking functions such as those provided for by the US Federal Reserve system. When there is a huge object such as this in front of people, and which they do not understand why it is there, the usual responses range from "I don't care about it one way or the other" all the way up to "It is an unholy soulless and undemocratic institution implemented by government bent on the economic enslavement of the citizen. It must be abolished!" This latter is characteristic of many economic Libertarians and Tea Party devotees.
Here are the basic reasons to have a large central bank for the US, and in fact, any modern economy functioning within a democratic environment:
Profit-motivated interests of the Banking Industry are subjugated to the directions of the Federal Reserve, which through its policies and regulations, protect the depositors and creditors of individual banks.
Interbank transactions are underpinned by the Federal Reserve, as it acts as the "Lender of Last Resort".
The Congress has established three main goals for the Federal Reserve: Maximum Employment, Stable Prices, and moderate long-term interest rates. The latter two are achieved first, and with the establishment of that environment, then a good employment picture substantially follows.
How does the Fed achieve stable prices and moderate long-term interest rates? This is done basically through two mechanisms which essentially "defend the currency" of the US. By exercising direct control over short term interest rates, and the overall money supply, the value of the dollar (usually) changes only very slightly from year to year, in terms of its purchasing power for US-made goods and services.
Additionally, the Fed defends the dollar through management of our own faith and confidence in our banks, with which most economically active people have a great deal of activity via mortgages, savings and checking accounts, consumer loans, etc. etc. Federal Reserve regulations establish guidelines and parameters within which banks must operate, and they monitor the adherence to these regulations to varying degrees. In such instances when the Fed has not been closely watching or enforcing adherence, many banks engage in more risky loan and investment practices, and the result is always some sort of general financial crisis or collapse, just as we recently experienced.
In its most vigilant state, the Fed literally has its hand on the throttle of USA's "economic train". If the throttle is set too low, the whole train grinds to a halt, or may start sliding backwards down the hill. If the throttle is allowed to run too fast, derailment is predictable certain. And, in times such as we find ourselves in now, the throttle is wide open, and they are shoveling fuel into the boiler as fast as they dare, by way of increasing the money supply monthly, as QE3 repurchases distressed bonds at a rate of $85B per month. This is all in an effort to maintain and gradually increase the forward momentum of the economy, and get us moving back uphill and forward again.
Without the Fed, none of this would be happening, and individual random market forces would be thrashing about, without overall direction, and only with self-interested or self-protective purposes. The result would be economic disaster beyond comprehension, with destroyed banking, markets and investment systems, unemployment at levels equal to or above that of the Great Depression, and no confidence in or hope for an economic recovery.
One of our indicators looks at activities amongst the precious metals used in industry. One group of the these metals is called "the platinum group", and includes platinum, palladium, and rhodium. These platinum group metals are all used as elements called catalysts, and are found in nearly every automobile, as well as in refineries, chemical plants and pharmaceutical factories. As the economies of the world dig out of their recessionary doldrums, demand for these materials will rise, and their prices, if history repeats itself, will all go up as well. One of these metals is particularly inflexible in terms of supply and demand - that is rhodium. Rhodium is currently trading for $1200-$1300 per ounce. Prior to the Great Recession, it was trading at just about $10,000 per ounce! As a medium to long term investment, we have purchased a small amount of rhodium, with the expectation that it will again trade at levels much higher than now, but perhaps taking 3-8 years to achieve that goal. But for now, this is one of our uses for the information contained in the AdvancedProjections Recession Indicators.
This is going to be very brief, but an idea for you to think about. Every recession seems to be preceded by the creation of many items of "value" which, during and after the recession, become more or less worthless.
The classic case, cited in thousands of places, is the financial crash in Europe several centuries ago, that was preceded by "Tulip Mania". In that case, the instrument of their destruction was tulip bulbs. People invested in something they thought would only go up and up and up in value, many sinking (and then losing) entire fortunes in items which had only a few cents worth of intrinsic value.
I will mention here the items that preceded the last three significant US recessions, where the population of financial instruments of a particular nature grew so large, and consumed so much cash, that when their values began to collapse, they took the US economy into recession, sinking hundreds of billions or even trillions of dollars of "value" into a financial black hole.
Recession of 1990: Savings & Loan Crisis & Sub-prime Mortgages (SPM's)
Recession of 2001-2002: Dotcom stocks
Great Recession of 2007-2009: Sub-prime mortgages (SPM's)
Credit default swaps (CDS's) and Mortgage-Backed-Securities (MBS's)
Each of these recessions was also accompanied by rampant fraud at high levels within companies, where executives subverted accounting controls and practices, to commit massive frauds. (see William K. Black's book "The Best Way to Rob a Bank is to Own One"). Regulators very often do not see these frauds until
they become so massive that they topple under their own weight. The collapse of Enron, the collapse of Worldcom, and the collapse of the Madoff Ponzi-scheme, all came about AFTER huge frauds, abuses and excesses took place. Spotting these types of activities, and other forms of financial "wallpaper" creation, is critical to seeing the topping activity that occurs during the onset of a recession. The ensuing collapses, if large enough, only exaggerate the effects of the recession by consuming capital that could otherwise be put to good productive use.
This is a great short article to read on this topic. Note the frequent references to "paper". In normal times, paper simply means loans, bonds, contracts etc. But in times of financial stress, this real paper often turns rapidly into wallpaper...