“The issue is a disputed border between the two. They fought a 32-day war over it in 1962. China emerged victorious, but the whole thing settled nothing. The border between the two remains hotly contested. It is nearly 2,500 miles long and winds its way across difficult mountainous terrain. There is a northeastern state in India called Arunachal Pradesh, which China calls “Southern Tibet” and claims as Chinese territory.

“India claims last year there were nearly 300 border violations by Chinese troops and over 2,000 instances of ‘aggressive border patrolling.’ In the Indian media, it’s become a kind of sport to guess when China will attack India. And a recent essay by a Chinese analyst added fuel to the fire when it claimed China could ‘dismember the so-called “Indian Union” with one little move.’

“What would the effects be? It’s hard to say. But if the world’s two largest and fastest- growing emerging markets go to war, the results can’t be good for the global economy. China is even India’s largest trading partner. It all depends on how it unfolds.”

Chris will be getting a frontlines view of this flash point over the next few weeks. He and our executive publisher Addison Wiggin will be scouting potential joint ventures in the UAE and India from this weekend until mid-October. For highlights, be sure to check your daily 5 Min. Forecast. But for the nitty-gritty — and actionable advice — keep your eyes open for our new BRIC report… it’ll be ready very soon.

Source: Think China vs. India

This morning’s Commerce Department release of +2.7% places August retail sales well ahead of the 1.9% “expert” consensus.

Great. Now that they’ve “pulled forward” car sales for the next 12 months…what’s next? How about… Appliances!?

Later this fall, Uncle Sam will being doling out up to $200 a pop (in borrowed money) to anyone who wants to replace an old appliance. Yeah, that’ll keep retail and GDP stats humming along.

Wholesales prices rose last month twice as much as forecast…thanks largely to rising gasoline prices. The 1.7% jump in August followed a 0.9% decline in July.

“Core” PPI excluding food and energy rose a more modest 0.2%. But that was also double analysts’ expectations. Turns out a good amount of that was driven by higher prices for cars and trucks, too. Whaddya know… “Cash for Clunkers” gave automakers an excuse to cut back on factory-to-dealer incentives.

Dealers don’t experience a squeeze without passing the costs along to customers. Which should make tomorrow’s release of the consumer price index (CPI), well, interesting too. The consensus says a 0.3% increase. We’ll see what tomorrow brings.

Source: Cash for Clunky Appliances?

Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the ‘assets’ they sat on…and finally it came time to pay the piper.

Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, “Think about how much better off Lehman Brothers would be if its management hadn’t put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.”

So the heavy-hitters of the finance sector have surely learned their lessons and proceeded to mark down their “assets” to realistic levels over the last year, right?

You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we’re in a worse pickle now. “In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz told Bloomberg over the weekend. “The problems are worse than they were in 2007 before the crisis. It’s an outrage.”

And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, ‘a bunch of whipped dogs.’ Rather, they’re supremely sanguine, compared to much of the rest of the world.

For all the honeymoon-is-over talk surrounding Obama, we’re struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy.

We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than-10% clip.

Source: Have the Titans of Finance Learned Their Lesson?

Walking the long, windy road toward the demise of the dollar, we spy another mile marker today: China is officially putting their money where their mouth is.

After clamoring for a reserve alternative all year, the Chinese government agreed to a $50 billion currency-diverse deal with the IMF today. Back in June, the deal seemed imminent. This morning, it finally came to fruition.

In their deal with the IMF — the first of its kind for any nation, ever — China buys $50 billion worth of bonds denominated in Special Drawing Rights, which will represent a basket of global monies. (That basket will be a split between the dollar, euro, pound and yen… not exactly the gems of the global currency batch.)

Still, it’s probably a win for China on several fronts: They get to ditch the dollar (sort of) without making a big geopolitical stink. In fact, since their funds will prop up the IMF’s rescue coffer, China gets to play the global good guy for once — while also purchasing some political influence over the IMF.

Russia and Brazil have each promised to buy $10 billion of these bonds, as well.
The U.S. dollar has already given back gains made earlier this week. The panic on Monday and Tuesday helped bump the dollar index up to just shy of 79. But the buzz has worn off, and the DX is right back to where it started the week, around 78.3.
Gold, on the other hand, has done nothing but rise this week. The spot price inched up, thanks to its “safe haven” status, and then accelerated skyward as the dollar fell. The spot price is up to $985 this morning, from $950 and change on Monday. That’s a three-month high.
“Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation,” Frank Holmes reminds us in his latest Daily Reckoning essay. “You can see this on the chart below — in a typical year, the price of gold in September rises 2.5% above its August price. The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

“What accounts for this predictable trend?

“September kicks off several of the planet’s most potent gold-demand drivers:

• The post-monsoon wedding season in India and Diwali, one of the country’s most important festivals
• Restocking by jewelry makers in advance of the Christmas shopping season in the United States
• The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift giving
• And in China, the week-long National Day celebration starting Oct. 1 and the run-up to the Chinese New Year in early 2010.

“Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.”
For stocks, traders took a breather after Tuesday’s sell-off and finished yesterday around break-even. This morning, the S&P 500 opened just a bit higher, thanks mostly to this:
Chinese banks lent more money in August than many had anticipated, the China Securities Journal reported this morning. At $24 billion, that’s right around July’s level.

If you recall, it was a rumor that Chinese lending had slowed even further in August that sent stocks around the world plummeting Monday. Thus, this “not so bad” report shot the Shanghai Composite up 4.8% today, and has helped other worldly indexes start off in the black. (Whether more easy money in China is a good thing… well… traders can save that for another day.)
“Market prices should reflect underlying demand and supply,” notes Chris Mayer. “As in a vegetable stand, the prices come from the buying and selling of people in the market.

“But with all the artificial stimulus money floating around, here and abroad, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse?

“CNN’s bailout tracker reports that U.S. government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (“cash for clunkers,” for example).

“That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

“Take a look at this next chart, which shows you how the stimulus spending reaches a peak sometime in early 2010 at $57 billion and then takes a dive.

“Of course, the government can always decide to spend more. But as it is now, this is a pattern of spending we can expect to distort the various sectors it flows to. You can see also on the chart where the money goes, including that big red layer that goes toward highways and transportation.

“We may yet see a surge in business activity as we get to 2010. But after that, we’ll see if this seeming recovery in the making is real or manufactured by funny money.”

If the latter scenario occurs, wouldn’t you want a portfolio full of companies in essential industries… like water, food and energy? That’s part of the reasoning behind Chris’ latest project: The Primeval Portfolio. Check it out here.
Whether real or artificial, hopes of recovery got a firm slap this morning, courtesy of the data patch. Here’s the quick and dirty:

• The U.S. service sector contracted for the 11th month in a row, the ISM said today. After Monday’s ISM manufacturing gauge, which showed surprise growth, traders had their fingers crossed for a score above 50 in today’s ISM service sector reader. Not so, said the group. Their index stood at 48. In other words, 70% of our economy was still shrinking in August
• Retail sales fell 2.9% in August, the 12th straight month of decline. Despite of the “back to school” rush, only low-cost brands showed signs of life last month… Costco, BJ’s, Gap, Aeropostale, Target and T.J. Maxx all outperformed
• Jobless claims from last week came in at 570,000, worse than the Street expected. Coupled with yesterday’s worse-than-expected ADP jobs report, the outlook is none too rosy for tomorrow’s government employment data
• Personal bankruptcies shot up 24% in August, year over year, putting the U.S. on track for over 1.4 million filings this year.

And here’s the one statistic that troubled us the most this morning: Student debt grew 25% in the 2008-2009 school year, says the latest from the Department of Education. So much for “the great deleveraging.”

Total student loans outstanding exceeded $75 billion during the period, up from roughly $60 billion the year before. An estimated 66% of U.S. college students borrow money for school, with the average individual debt load of $23,186 by graduation.

So let’s get this straight… the next generation is borrowing more than ever, at a faster rate then ever, during extremely worrisome credit conditions, heading into the worst employment environment in recent history, while on the verge of inheriting the biggest federal debt burden the world has ever known?
“Don’t let the recovery pundits fool you,” urges our currency adviser, Bill Jenkins. “As just about everyone knows, the stock market crashed in a big way in 1929. What most don’t realize is that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

“And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a ‘buy-and-hold’ investor, you MUST account for inflation. It is the single biggest ‘invisible’ tax in our wonderful Fed-managed economy.)

“But before people could get too happy with making money again, along came President Johnson and the ‘Great Society.’ I don’t know who it was so great for — the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to break-even for another 30 years.

“So 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines.

“We are now in just the second year of this disaster. We are witnessing an almost-perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

“At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 — and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

“So don’t let the recovery pundits fool you, even though they’re out in force.”
“I’ve recently moved to Florida from South Carolina,” a reader writes, “and we decided to rent the first year here, for several reasons. But now that we’re here, we’re thinking of staying renters for a while. My wife and I realized that by living in Florida and — here’s the key part – renting, we’re saving about $15,000 per year.

“After we read the news about Florida losing population for the first time in 50 years, it got us thinking — what are the prospects for Florida? I don’t think they’re as sunny as they used to be.

“Here’s how our savings add up:

• Don’t have to pay property tax, which is 2% of the purchase price where we are (Palm Beach County) — so that’s $10,000
• No homeowners insurance in Hurricane Alley, which saves us another $2-3,000
• No homeowners association fees, which are $3000 per year in the neighborhood we’re currently residing. Many neighborhoods are higher.

“Add it up and we’re saving $15,000-plus as renters. I don’t think we’re missing out on any home price appreciation, so tell me, why do I want to own a home in Florida?”

The 5: We’re not the right people to ask. This editor’s been renting a condo in one of Baltimore’s more swanky/artsy neighborhoods for over two years now. It’s close to the city — but quiet — with a great park in the backyard and the sexiest pool in Baltimore. It’s not without faults, but we really like it.

Despite it being one of the city’s finer locales, the condo’s owner — who got together with some friends and made an investment in the building during the bubble — hasn’t rented the apartment at a profit for years… if ever.

The idea of owning a home has its merits, but watching him sink underwater on this place has been tough (he’s a really nice guy) as well as educational. Of course, we don’t have “a place of our own,” and we’re not “building equity,” “establishing credit” and all the other mortgage broker sales pitches. But after watching all this go down, that seems like a risk worth taking.

Source:  China’s New Investment, Student Debt, The Faux Recovery and More!

Our forecast today: The government and mainstream media will soon be calling the end of the recession. Leading this feeble cause is the latest ISM manufacturing index, probably the most powerful argument for recovery we’ve seen yet:

This morning, the ISM said its gauge of manufacturing activity had risen to 52.9 in August – out of contraction for the first time since the recession began and the highest score since June 2007. Of course, things are a bit different now, but over the last 60 years, when the manufacturing sector returns to growth, the recession has already ended. That prospect is enhanced by the capacity utilization data we mentioned earlier this month — another recession-ending indicator now glowing green.
What’s more, pending home sales rose 3.2% in July, the National Association of Realtors also reported. With an index score of 97.6, that’s a 12% rise from this time last year, the highest level in two years and the sixth straight month of improving pending sales conditions.
Factor all that in with rising consumer sentiment, home price and stock indexes and we suspect now is around the time when the government will eventually declare the recession ended… which will make way for all kinds of shelved legislation and the political agendas that popularized the current administration in the first place. Then there’s that whole “double dip” dilemma… but we’ll save that for another five minutes.
Yesterday’s gloom from China helped push U.S. stocks down. The S&P 500 fell 0.8%. Today looks like it’ll be even worse. The market got a little bump from the manufacturing and housing data this morning, but as we write, traders are “selling the news” – big time. The S&P had fallen 2% by lunchtime.
“Cyclical equities, commodities and commodity currencies have already moved,” notes our macro adviser Rob Parenteau, “first to reflect the end of the Armageddon bet back in March, and then to reflect the end of the recession bet in July. We suspect investors will seize on the mounting evidence of an economic recovery to redouble their efforts to increase their positions in these asset classes.

“We will be surprised if 10-year Treasury yields do not break 4% by mid-October as this recognition spreads, and we suspect Chairman Bernanke, with the president’s nod for another term at the Fed, will be forced to start talking about normalizing the fed funds rate in Q4 (before actually doing something about it in Q1 2010) if he wishes to keep Treasury bond investors from heading for the hills. A Fed promising a near-zero fed funds rate from here to eternity will surely look far from appetizing to Treasury bond investors if a 4% real GDP growth environment unfolds.”

Wait, 4% GDP growth?

“If we were to naively use the experience of all the recessions of the post-World War II period as a guide, the nearly 4% peak-to-trough decline in real GDP to date in this recession would be the prelude to a first-year recovery growth rate close to 8.5%. This, of course, is unthinkable given the current mess. But if we got only half of that historically normal bounce — which we believe is the correct handicap, given the private sector deleveraging under way — the resulting 4%-plus real GDP growth over the next year would prove nearly twice the current 2-2.25% consensus expectation. Chairman Ben might just want to stick around for that.”

A better life through proven economic thought – that’s the Richebacher Society credo, which Rob has done a fine job carrying on. Find out how you can join their exclusive ranks here.
It’s worth noting, despite yesterday’s sell-off, the S&P ended the month up 3.4%. That spells a 51% shot since March, the best six-month run since 1938. Of course, the last thing you’d want to do now is take some profits… after the most notable winning streak in our lifetimes, the S&P will likely rise another 50%. It’ll probably go up forever.
China is celebrating a stronger manufacturing sector today, too. Its purchasing managers index (like our ISM) rose from 53.3 to 54 in August, signaling its sixth straight month of expansion and the best score in over a year. But is the China boom just a product of too much easy money? It’s starting to seem so… we’ll keep an eye on it.
Here’s another story fanning the economic recovery’s flames:The much-delayed Boeing 787 Dreamliner might finally take flight this year. Late last week, Boeing said that its long saga of delays and frustrations with the much-hyped jet are coming to an end. The first Dreamliner is now on track to leave terra firma by the end of the year, and the jet will actually be delivered to various international airways by the end of 2010.

Just how late is the Dreamliner? Japanese airliner All Nippon will get the first in 2010… since they were originally promised delivery by the start of the Beijing Olympics.

“My next buy recommendation is based on some of the historic changes happening in air transportation,” notes Chris Mayer, who chronicled the Dreamliner saga in the latest Capital & Crisis alert. “One of the key drivers of this change is what I call the Silk Roads of the sky. The aerospace industry has a $6 trillion backlog for new aircraft — which will double the global fleet over the next 20 years.

“In large measure, new and booming trade routes will link all kinds of cities and markets flung all over God’s green footstool. There are hundreds of new airports planned and thousands of new planes that will connect China to Africa to the Middle East and more.

“The thing about the new aircraft is that they are titanium intensive. Titanium is a silvery, lustrous metal that is corrosion resistant and has the highest strength-to-weight ratio of any metal. Aircraft manufacturers love titanium, especially now that the market has crushed the price of titanium, along with everything else.

“That creates some space for us to buy a quality operator now. Titanium prices are way down. Sentiment is terrible, with most analysts only lukewarm to the idea. Most of the near-term news is bad. That gives us a great price to get in on a promising long-term story. Of course, this is already in the process of changing, thanks to the Dreamliner announcement.”

So what’s the best play on this trend? Check out your latest Capital & Crisis alert.
The Canadian economy contracted more than anticipated in the second quarter, the Canadian government admitted today. GDP contracted 3.4% in the period, compared to the 3% Canadian traders anticipated. The first-quarter GDP decline was also revised downward to 6.1% — the worst annualized drop on records dating back to 1961.
“I told you so!” Byron King exclaimed to us in a one-line e-mail sent very early this morning. He’s really not the shouting/gloating type, so we quickly clicked the link he sent along and saw this, the headline of today’s New York Times business section:

“China Tightens Grip on Rare Minerals”

The Old Gray Lady is “breaking news” today on China’s rapidly increasing dominance of rare earth metals… those bottom of the periodic table elements crucial to producing just about every high-tech gadget. The NYT noted that the Chinese government is just shy of cornering the market of rare earths, and that its export quotas have been shrinking every year, with this year on track to be the smallest yet.

Readers of The 5 or Byron’s Energy & Scarcity Investor will likely yawn and turn the page… they have been reading about this since March 2008.

“There are more than a few stock pushers out there,” notes Byron, “explaining to people how to ‘profit from the squeeze in rare earths.’ But there’s really only ONE decent publicly traded company that will give you a long-term return in rare earths.”

That company is in the Energy & Scarcity Investor portfolio. Learn about it here.
Speaking of rare metals, gold’s been keeping an awfully low profile lately. Over the past 30 days, the spot price has kept to a $35 range, bouncing mostly between $940-955. The spot price is in the higher end of that paradigm today, at $952 an ounce.
The positive manufacturing numbers stopped the oil sell-off today. After a nearly $3 fall yesterday, light, sweet crude arrested its fall at $69 a barrel.
The dollar is just a bit higher. Up a few tenths of a point, to 78.2, the dollar index is still less than a point above its 2009 low.
“Inflation or deflation?” a reader asks, referring to Bill Bonner’s forecast that betting on inflation feels too easy. “I can tell you this…

“I live on a very strict budget, and I am not stretching on this statement. In the last 18-24 months, my bills have gone up considerably. I will give you some examples. Thirty-nine ounces of Maxwell House Coffee was about $5.50 a year ago, and today it comes in a smaller (34.5 oz.) package for about $8.00. WOW! A 5 lb. bag of sugar was around $1.99. Now it is $2.29. Dry cereal used to come in a larger package also, and went from $2.00 a box to a whopping $2.39. Soft drinks: A six-pack of 24 oz. bottles was $3.00 and NOW it is an unbelievable $4.29! Dog food from $8.99 to $10.99.

“My cable bill has gone up two or three times in the last two years (includes Internet and TV). My electric bill has gone up just a little.

“What went down? My homeowners insurance and natural gas bills

“The problem here is that the difference between what has increased in price and what has decreased still leaves me in the hole. In other words, after all the bills are paid, I am paying MORE this year!”

Uncle Sam responds: That’s simply not possible, madam. Consumer price inflation is down 2.1% over the last year, the largest decline since 1950. If people like you were right, it would undermine our whole methodology. There must be something wrong with your budget.
“Given the data from the Rasmussen poll you mentioned,” a reader writes of Rasmussen’s great “throw the bums out” poll, “I guess if there were an all-or-nothing choice when people voted we might finally make some progress in fixing Congress. I think the data are misleading, though, since polls have shown these types of numbers in the past, but of course, when it gets right down to it, people re-elect their local pork provider (over 90% of incumbents win in Congress).

“One poll I saw probably 10 years ago asked if Congress was corrupt, and 90% replied yes, but when asked about their own local rep, people said he was one of the few good politicians. This is the problem: All these guys are just horse-traders for their local projects, many of which we don’t need, especially with trillion-dollar deficits staring us in the face for the foreseeable future. Who knows, as the fallout from the never ending bailout programs recedes, perhaps people will start voting some of these idiots out of office — Rep. Rangel, with his forgotten income and taxes, might not be the best guy to run the Ways and Means Committee for starters. Keep up the great work.”

The 5: Thanks, it’s our pleasure.

Sourc: Manufacturing Rebound, A Contrarian Play, Rare Earths and More!

China has once again set the tone for our Monday market forecast. Roll the videotape:

Chinese traders dumped shares early this morning after a popular magazine rumored that the booming Chinese loan market is cooling off. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down.

Thus, as we charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August.

But still up around 50% for the year, is this the time to pile back into China — the great hope of the global market rebound? With the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings.

If you’re debating buying this dip, you should check this out: Earlier this year, Addison Wiggin penned a report that spelled out a “triple timebomb” that would derail the global rebound… one of which was a faux boom in Chinese stocks.
China’s sell-off has hit just about every asset class today, especially commodities. You know the drill by now: Commodity traders of the world have pinned hopes on China’s rise, and every time they falter, oil and copper hit the bid. Light, sweet crude is down over 3% as we write, to $69 a barrel. Copper shed about 3% as well.
Gold took a little hit this morning. Traders raced out of stocks and into the dollar. Thus, the spot price shed about $10 at the New York open, and now rests just below $950 an ounce.
China frazzled the U.S. market too. The S&P 500 opened down 1%.

“This rally is on borrowed time,” opines Dan Denning. “We don’t know when. We don’t know why. But we do know what. And the what is that stocks are going to price in much lower earnings and investors are going to pay less for those earnings. Expect a lot of fall volatility.

“Energy investors ought to take heed, as well. Lately, there’s been a nice correlation between the oil price and stocks. The better the economy, the better it is for oil and earnings. Both have gone up.

“We’re still bullish on energy for a lot of reasons. But if the party ends sometime in September/October/November, you can expect lower oil and energy prices. That means if you have gains in energy stocks, you’d want to think about trailing stops and profit taking. In fact look for profit taking on the share market as a precursor to a new move lower.”
Oil service giant Baker Hughes bought fellow oil field tech company BJ Services today. The transaction will cost BHI about $5.5 billion.

“I’ve said over and over that there are only a small number of world-class firms that have the technology to find, drill and extract the world’s hydrocarbons,” says Byron King, who holds Baker Hughes in theOutstanding Investments portfolio. “Now there is one less.”

“BHI’s goal in this deal is to expand its international presence, and to leverage on BJ’s pressure pumping expertise. Now BHI can compete for the growing market for large integrated projects, by incorporating pressure pumping into the firm lineup.

“I expect that this acquisition will be good for the long term prospects for BHI. And it illustrates that there are other opportunities out there, smaller firms that are candidates for a takeout.”
While the Chinese growth story is faltering today, India is forging ahead: The Indian government said this morning that its economy grew 6.1% in the second quarter, narrowly beating Wall Street estimates. That’s really pittance compared to its typical 9% or greater growth over the last three years… but hey, we’ll take 6% these days.

“However, in light of the poor monsoons, the possibility of the growth of this magnitude continuing for the rest of the year looks remote,” write our Indian partners at equitymaster.com. “There are some who argue that manufacturing and services are fully capable of filling in the void left by agriculture, and hence, growth may not be as badly impacted. With rural India accounting for half of India’s consumption, such an assumption for the time being looks a bold one, indeed. Furthermore, if the central bank starts tightening monetary policy in the wake of high inflation that food prices are likely to bring, it may hurt growth prospects further. All in all, things point to a growth in the region of 6% with a downward bias.”
It’s Monday… time to find out which banks kicked the bucket over the weekend: With failures in California, Minnesota and our home state of Maryland, the FDIC has bumped the yearly total of failed banks to 84. The three shuttered banks had about $1.9 billion in assets, which ended up putting a $446 million dent in the FDIC’s deposit insurance fund.
“More than one in four banks announced an unprofitable quarter,” notes Dan Amoss, referring to the FDIC’s latest quarterly report, which we mentioned Friday. “There is still a long road of pain ahead for bank shareholders… here’s the crux of the FDIC report:

“Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

“The FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in an Aug. 14 Strategic Short Report alert. The new figures — the moves from December 2008 to June 2009 — are highlighted in the dotted lines at the far right of this chart:

“You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.”
The FDIC has put the government (read: taxpayer) on the hook for another $80 billion in potential future losses,The Wall Street Journal reports today. That sum is the totality of the FDIC’s “loss share” agreements — in which the FDIC promises to take a huge amount of possible future losses if another bank agrees to take on a failed financial’s assets.

The FDIC currently predicts the $80 billion in backstops will end up costing the insurer “just” $14 billion… $4 billion over the present balance of its deposit insurance fund. We’ll keep an eye on this one.
The Fed has made $14 billion in paper profits from emergency loan programs, the bank quietly announced today. Since the start of their unusual programs about two years ago, itty bitty interest rates and fees on loans worth hundreds of billions of dollars have actually netted the private/public bank an embarrassment of riches.

So where’s the money? Which banks owed what? What about the other programs, like the AIG bailout? Who knows… no one can audit The Fed. They just wanted you to know this morning that they’ve made a freaking killing bailing out the risky bets of their Wall Street buddies.
While it’s a little off our beat, we’d be remiss not to mention this: If given the chance, 57% of Americans would vote to remove every single member of Congress. A Rasmussen poll released yesterday gave participants two rhetorical choices: Either let ’em all stay or throw the bums out. When the dust settled, 25% said they would maintain the status quo, 57% would want a clean slate and 18% weren’t sure… or perhaps afraid they would end up on some “dissident database.”
Last today, another sign of the times… looks like capitalism will remain an easy target for a while. Here are the two feature films at this year’s Venice Film Festival:

Capitalism: A Love Story — Michael Moore’s new flick. While we trust this guy as far as we can throw him, the trailer looks like he spends a bunch of the movie making Wall Street execs and Congress people squirm, which is usually fun.

The Informant! — Matt Damon plays Mark Whitacre, the Archer Daniels Midland exec who exposed the companies lyin’ and cheatin’ in the ’90s.
“I agree with Bill Bonner,” a reader writes, referring to our issue on Friday, when we suggested, with Bill’s help, that many depression hurdles are still ahead. “We will be going through a lot of suffering and adjustments. My expectation is that we’ll probably come out of this crisis around 2016. This is based on the 17-year economic cycle.

“With 84 bank failures and 416 banks on the list about to go kaput, and the TBTF zombie banks, we have a long way to go. BTW, check out theBankrate.com’s star ratings on banks. They have replicated the FDIC’s CAMELS rating very successfully. All the three banks that failed last Friday already had a 1-star rating (the lowest rating).

“As we all know, we will see more banks, retailers, restaurants and companies catering to conspicuous consumption fail. I have started comprupt.com, a site where you can predict which company is going to implode next and when. Heck, this may just be Monopoly 2.0… at least trying to have some fun with the destruction all around us.”

The 5: That’s the spirit.
“Robert Prechter’s analysis indicates that we are in for a major retracement similar to what your graph shows,”writes an Elliott Wave fan, responding to the same edition of The 5. “He is also predicting deflation, instead of inflation, which will affect the prices of oil, gold and silver to the downside. The other contrarian prediction is the dollar will strengthen through all of this mess.”

The 5: Not a bad forecast at all. Bill Bonner shared a similar sentiment during his presentation this year at our Investment Symposium. To paraphrase him: Betting on inflation is starting to feel too easy.

Source:  China Sets the Tone, FDIC Falters, Fed Makes a Profit, India’s Surprise and More!

Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a ” hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations. The “old old,” – those aged 80 and over – are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the US economy.” Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion – $ 1 trillion higher than last year’s estimate – into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties – indeed, because of the difficulties – it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating?

“The US government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, ” but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ‘ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Source: Social Security? Not Exactly

“Investing in this market is like trying to take cheese out of a set mousetrap,” Chris Mayer begins today. “It’s very tempting to make a grab, but you are also fairly certain about what will happen if you do. The market’s 50% rise from its March lows is stunning. It’s like the cheese in the trap. But we also know that no market moves up like that for long. The kill bar is never far from such rallies.”

Check out Asia early this morning… you can almost hear that bar whipping through the air:

Today’s global stock sell-off really started on Friday, when the U.S. suffered its worst bank failure of 2009.Alabama-based Colonial Bank gasped its last breath late Friday. With roughly $25 billion in assets, it was the biggest bank failure since Washington Mutual back in September.

Like WaMu, the FDIC brokered most of Colonial’s burden onto another bank’s balance sheet. BB&T picked up the lion’s share. And just like the WaMu/JP Morgan deal, the FDIC greased the gears by including some kind of backstop provision. In this case, BB&T and the FDIC (read: your tax revenues) will enter a loss sharing agreement on $15 billion in shaky Colonial assets.

Colonial’s failure took a $2.8 billion chunk out of the FDIC’s deposit insurance fund. With just $13 billion left — at best — the fund is at its lowest level since 1993. Along with four other banks that failed over the weekend as well, the FDIC has closed 77 banks this year. One more and we’ve tripled last year’s count.
“The FDIC has been tardy in resolving banks and cleaning them up,” says Dan Amoss, “which will result in higher costs to the FDIC in the long run. Plus, with these ‘loss sharing’ deals (Colonial/BB&T), the FDIC is putting off the recognition of losses over a period of years, and its estimates of ultimate losses will likely be low, whether they’re ultimately absorbed by the deposit insurance fund or acquiring banks like BB&T.

“A perfect example is Integrity Bank in Georgia, which should have been shut down long before it was allowed to attract new deposits with high CD rates.

“Also, note to 5 readers: If your CD rates seem too good to be true, your bank may not be healthy, and you may have to deal with the hassle of not accessing your money while the bank is resolved.”

Dan has quite a knack for spotting bad banks. His Strategic Short Report readers bagged gains of 162% betting against Allied Capital, 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. We just published his latest short-financial play… available to readers of The 5 for just $1.
Already anxious over Friday’s lousy U.S. consumer confidence number and Colonial’s failure, Chinese traders slammed the bid today on rumors that the Chinese government is going to tighten lending standards. No official word yet from Beijing, but rumor alone was enough to knock the Shanghai Composite down almost 6%. The Chinese benchmark is down 12% so far this month.
Thus, the foundation of the U.S. bear market rally is quickly eroding: The consumer is pulling back again, the banking crisis (as we noted Friday) is alive and well, and China — the world’s great hope for growth — is looking tired. Add all that up and the S&P 500 opened down almost 2% this morning.
“Investors might forget we’re in a bear market because investing this year has looked easy,” continues Chris Mayer. “Those who have missed out on the rally must be tearing their hair out. Their money burns a hole in their pockets.

“In fact, the evidence is that most investors have the attention span and patience of a field mouse. Here’s the average holding period for a stock on the New York Stock Exchange:

“What jumps out at you right away is that the average holding period is less than a year. That means that, on average, an ‘investor’ typically holds an NYSE stock for a matter of months. This is not investing, which is why I put the term in quotes. I don’t know what it is. Mindless gambling comes to mind.

“It’s no surprise that the last time we were down here was in the Roaring Twenties. We all know what that was the opening act for.

“This chart also speaks to a larger problem in the markets today — there are too few owners and too many renters. Just as in real estate, owners generally take better care of a property than renters. Why should it be different with companies?”

If you’re among the few long-haul investors left, you should team up with Chris. Check out his long-term “paycheck portfolio” here.
Commodities are under lots of pressure today, thanks mostly to Chinese investor anxiety. Oil’s down about $5 from Friday’s high, to $65 a barrel. Gold has fallen over $20 since Friday and goes for $932 an ounce as we write.
Thus, the dollar and U.S. Treasuries are today’s winners.The dollar index is up a full point, to 79.4. Bond demand has pushed the yield on a 10-year down 5 bps, to 3.5%.
Ben Bernanke is taking extra steps to save commercial real estate. The Fed announced this morning a three-six month extension of the Term Asset-Backed Securities Loan Facility (TALF).

The trillion-dollar program was set to expire at the end of the year. The Fed said today — conveniently, right before the market was about to open into a big sell-off — that it would bump the program back to June 31, 2010, for commercial mortgage-backed securities and to March 31, 2010, for other asset-backed paper. That should, in theory, encourage banks to securitize lots of new mortgage and consumer loans… the kinds they would avoid in a normally functioning free market. God bless the Fed!

The TALF has been in action since November 2008.
China’s sovereign wealth fund is preparing to buy up to $2 billion in U.S. mortgages. Having not felt quite enough pain from their Morgan Stanley and Blackstone investments, China Investment Corp. is rumored to be vying for a seat at the Public-Private Investment Plan — the yet-to-be-launched scheme the U.S. Treasury cooked up to get mortgage backed sectors off of U.S. bank balance sheets.
“We’re watching Far East telecoms,” Penny Stock Fortunes’ Greg Guenthner tells us. “Chinese Internet population is increasing at an astronomical rate, growing 42% last year alone, to nearly 300 million users, according to the China Internet Network Information Center. Now the government is setting its online ambitions toward the countryside, vowing to hook up every village with broadband lines by 2010.

“Still, the region’s penetration rate is only 17%, compared with 75% here in the U.S. The opportunities are boundless.

“Most of the time, backdoor plays offer the largest profits in growth industries like this one. Sometimes, however, a straightforward approach is your best chance at the quickest gains. This is one of those times.

“Take China Mobile, for instance. This telecom behemoth is the most obvious play in the region. In the last three years, the company doubled the number of subscribers and grew its bottom line 107%. That’s a rare feat for a $230 billion company.

“China Mobile’s growth is impressive, but it’s nothing compared with what a small-cap player can do in this field. There’s plenty of room to grow in the telecom industry of the Far East.

“That’s why we’ve been looking for under-the-radar Internet providers in Asia. And we just we found a beauty.”

Want the ticker? Subscribe to Penny Stock Fortunes here.
Japan has joined the ranks of recession-emerging nations. This morning, the Japanese government claimed the country’s GDP grew 3.7% in the second quarter. That puts an end to a five-quarter losing streak and the longest period of Japanese GDP contraction since World War II. As with Germany, France and Hong Kong last week, there’s little expectation for Japan to maintain this growth in the coming quarters.
Employees of the Chicago city government might be reading The 5 in their pajamas today. In a sign of the times, the city closed up shop to help close its budget gap. Running a skeleton crew will save ’em about $8 million a day
Last today, another strange reoccurring theme: Even the dead can’t escape the credit crisis.

An LA widow is auctioning her husband’s famous gravesite so she can afford the mortgage payments on their $1.6 million house.The deceased, Mr. Richard Poncher, is a relative unknown. But you might recognize the tenant immediately below his crypt:

At the end of the eBay auction — currently up to $4.5 million — Mrs. Poncher will rip her hubby out of his resting place and deed the crypt to the whoever the winner chooses. Before you fret for Mr. Poncher, we should add that he bought the place from Joe DiMaggio and insisted he be buried face down, in everlasting creepiness.

The new tenant will have to share Marilyn with Hugh Heffner, who has the crypt next to her reserved.
“Are you serious?” a reader asks. “How can this recession/depression possibly be over?” We enjoyed an overwhelming response to Friday’s issue, when we asked you to guess when the government/NBER would claim the recession is over.

“The causes of this man-made disaster have not been addressed and the same banksters-political class-financial oligarchy are still actively proceeding backward with their own hidden agendas. To quote Albert Einstein: “Never expect the people who caused a problem to solve it.” In other words, business as usual on the USS Titanic with its numerous enormous self-inflicted holes. Full speed ahead to the 1930s.”

The 5: We’re not suggesting it’s all sunshine from here on out. Here’s an example of someone who was closer to “pickin’ up what we were puttin’ down”:
“By my statistical analysis, the recession ended in May of this year; and that’s the good news,” he writes. “The bad news is that the DEPRESSION began in the following June. If anyone believes these smoke blowers at the gov’t and/or financial institutions (perhaps that’s redundant), they deserve what is upon us. It is not all sweetness and light. Bitterness and dark is the life we will lead until we restructure and begin the long pullback.”

The 5: Not a bad guess. Off the cuff, the average guess for when the government/NBER will officially declare an end to the recession is around November 2009. Most readers added that it won’t feel like it’s over for years to come. Lots of double-dip guesses too, which seems to make a lot of sense these days. And there were outliers, of course, which we’d be remiss not to share:
“2015,” a reader wrote. “No sooner — no way. Expect to defend yourself. It will get ugly.”
“It will officially end sometime in 2025-2028,” declared another.
“This depression should end technically around mid-2016 with the Dow under 1,000,” opined another. “So-called normalcy will not return until the mid-2020s. God only knows what this country will look like when it’s all over. Good luck to us all.”

Source: Global Sell-Off, Long Haul Investing, A Small Cap Opportunity, Commercial Real Estate and More!

It’s official: Our government ran a record $180.7 billion over budget in July, the Treasury Department said today. That’s just a bit over Wall Street expectations and just under the Congressional Budget Office estimate we reported Monday. Thus the government tab so far this fiscal year is a record $1.27 trillion, not the record $1.3 trillion the CBO guessed earlier this week. Phew… what a relief.

A few more scary details:

• The budget deficit is still on track to exceed $1.8 trillion by October, the end of the fiscal year. That would be four times last year’s record budget
• July spending rose to over $332.2 billion, an all-time high
• Government revenues fell 5.6% from last June, to $151 billion
• Those revenues have been lower than the same month the year before for 15 straight months.

And we doubt Uncle Sam will get much help from tax revenues anytime soon… even “cash for clunkers” couldn’t save American retail sales in July. The Commerce Department’s July retail sales number shocked the Street this morning, down 0.1%, despite expectations of a 0.8% rise.

The government’s cleverly acronymed Car Allowance Rebate System (CARS) program did help — without auto sales, the retail gauge would have fallen 0.6%. But the lowly consumer has made his point: Even with free money deals from Uncle Sam, retail is not ready to “get back on track,” as the Obama administration likes to say. In fact, even if the Street’s wish came true, we’d still be a long way from the old status quo.

In a similar vein, Wal-Mart’s latest sales numbers missed expectations this morning. While still profitable, the world’s biggest retailer saw same-store sales fall 1.2% in the second quarter — well below the Street’s forecast of a 1% rise.

Interestingly, Wal-Mart enjoyed 13 straight months of better same-store sales from April 2008-April 2009. Then they suddenly stopped reporting monthly sales and switched to quarterly. Now, in their first quarterly report, sales are down. Hmm… must be a coincidence.
We don’t blame Joe Consumer for resisting retail, even “everyday low prices.” After all, another 558,000 Americans filed for unemployment for the first time last week. Initial claims rose by 4,000, says the Labor Department today. 6.2 million people are now receiving unemployment benefits.
U.S. foreclosures rose to another record high in June,says RealtyTrac today. One in 355 households, or about 360,000 homes, were in some form of foreclosure during the month. As we mentioned yesterday, roughly one quarter of all mortgages are worth more than the present value of the homes they cover.

That’s not good for the average home price, down 15% last quarter to $174,100 (existing single-family home).

Well, at least troubled homeowners can count on the Fed to keeping pinning down refi rates… Uh-oh:
Mark your calendars… the Fed has promised to stop manipulating the bond market by October.

That’s the meat of the news from yesterday’s Federal Open Market Committee meeting. They will “gradually slow” the pace of its official Treasury purchases, but the $300 billion program will now run through October instead of ending in September, as the Fed had previously scheduled.

(Of course, as our friend Chuck Butler often points out, that’s just the official word. The Fed has other ways to skin this cat. For example, they’re rumored to be striking deals with primary dealers for post-auction purchases. Instead of making official bond purchases at the auction, the Fed will have a primary dealer buy the bonds and then sell them to the Fed… same debt monetization, but without that pesky “transparency” and media attention.)

Outside of the Treasury bond announcement, the FOMC statement was about what you’d expect: Interest rates were left at 0% and will remain “exceptionally low” for an “extended period.” While “economic activity is leveling out,” it will “likely remain weak for some time.” And, of course, “inflation will remain subdued for some time.”
“The Fed doesn’t exist to help you,” says our currency man Bill Jenkins.

“Central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to an end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

“For us, we will trade with all this in mind as each bank assesses its role in the global finance arena… knowing that they will begin raising rates as soon as possible, and sometimes even before. When they do, it will give us huge opportunities to profit. Rising rates almost always guarantee soaring currencies.

“Particularly I would look for the U.S. dollar, Europe, Aussie and United Kingdom. Australia will provide the real runaway as long as China can get some exports up and running. If this recovery gets some legs (which is still problematic in my mind), they already have the upper hand with an interest rate multiple times higher than the others.”

Will you profit from this trend? Have Bill help you reap the benefits by checking out Master FX options Trader.
The Fed’s announcement hit just about every market…bonds, stocks, currencies and commodities.
No surprise that the Fed’s announcement hurt bond prices. Not only did they forecast the end of their official purchases, but that “leveling out” talk also hints of higher interest rates, and thus lower bond prices. The yield on a 10-year jumped as much as 10 basis points, to 3.7%, on the news. But this morning it’s already given it back on the heels of the latest retail and jobless numbers.
Stocks rallied in advance of the FOMC meeting in expectation of some kind of good news. Up 1.3% before the announcement, the S&P 500 seemed content with the Fed’s lilywhite forecast and finished up 1.2%.
The dollar was perhaps yesterday’s biggest loser. That brief “good for the economy, good for the dollar” trade from last Friday is dead in the water. Traders took no comfort in the Fed’s soothing announcement and bid the dollar index down a full point, to 78.2 as we write.
Thus commodities are on the up and up. Gold’s up about $10, to $957 an ounce. Oil gained a buck and is now just below $71 a barrel.
“I had the unique opportunity,” writes Byron King, “to tour two different oil sands operations near Fort McMurray, in northern Alberta. I saw a massive open-pit oil sands mine, and the associated reclamation effort, operated by Syncrude Canada Ltd. I also visited an in situ oil sands recovery project called Surmont, operated by ConocoPhillips.

“When we think about the concept of ’Peak Oil’ today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the light, sweet, easy-flowing oil that is getting harder and harder to find, certainly in significant quantity.

“But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be ’heavy,’ with lots of carbon atoms and not so many hydrogen atoms.

“Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

“Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the ’other’ issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

“Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the United States wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.”

There are stocks to own no matter who wins the battle over Canada’s oil sands… find them here, in the Outstanding Investments portfolio.
One surprise batch of data today: France and Germany are technically out of recession. Both nations reported 0.3% GDP growth for the second quarter today. Given that the two are now Europe’s biggest economies, that’s surprisingly good news.

Should make for some fireworks from the PIIGS (Portugal, Ireland, Greece, Spain and an extra I for Italy) when the two start pestering the ECB to raise rates.
“You mention that the short interest on stocks fell 12% in two weeks,” a reader writes. “No surprise there. With the SEC issuing its rule prohibiting ’naked short selling,’ risking personal insolvency to predict falling prices is now illegal. And just as there is now no ’downtick rule’ or mark-to-market accounting (not to mention the federal government’s interdiction against accurate financial reporting — a.k.a. ‘stress testing’ — and its outright ownership of significant areas of the economy, subsidized by the taxpayers), there is now no investment whistle to blow to sound the alarm for the unsuspecting public.

“Of course, much of the unsuspecting public is now so caught up in the economic game of musical chairs known as the Obama administration that they are too busy (and broke) to pay attention. This does not bode well for the futures of our children or our children’s children … you know, the ones to whom we are passing the buck!”
“I served in the U.S. Navy for 8 years and did my share of ’spending like a drunken sailor,’” another reader writes. “I take offense at the notion that drunken sailors spend like power-mad politicians. Drunken sailors only spend what is in their pocket or what they won playing poker on the ship, but nonetheless once they’re broke, drunken sailors quit spending (and usually pass out).

“Please have your readers try to find a more appropriate analogy to wasteful spending by crooked politicians because those of us who were, and the ones who still are, drunken sailors spend within our means on things that are important to us (booze and babes). Thank you for your attention.”

The 5: Point taken… no sense in giving drunken sailors such a bad name.

Source: Budget Insanity, FOMC Down-Low, Oil Sands Investing and More!

“It is critically important that Congress act before the [debt] limit is reached,” Tim Geithner wrote over the weekend in a letter to lawmakers, “so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations.”

Sounds like our Treasury Secretary is finally putting his foot down, insisting that Congress pull back its lavish spending programs and start addressing our incredible $11.6 trillion national debt.

Wait… what’s that? Oh, Geithner’s actually asking for Congress to raise the debt ceiling. If Congress authorizes our government to dig deeper than $12.1 trillion in debt (our current glass ceiling) our partners here and abroad will somehow “remain confident.” How perverse is that?
The U.S. budget deficit rose $181 billion in July, to a record $1.3 trillion, the Congressional Budget Office reported over the weekend. You know the drill by now… tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%.

That’s a $530 billion increase in spending from fiscal 2008.

The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008’s record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers.
Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of their way to publicly embarrass Big Three execs for jet setting from Detroit to D.C.

Prepared for a public backlash, Congress has a several lame talking points at the ready… that the current fleet of private jets is outdated… that having new high-tech planes will be better for the environment and ultimately lower cost… and that these planes will be used mostly by the Pentagon and only about 15% of the time for lawmakers.

But here’s our favorite: Legislators are eager complete the transaction so that they can have a new fleet in time for the busiest congressional travel period of the year… August, when they are all on holiday!

Here’s the crucial difference between 2009 and 2007: While the government is still spending with reckless abandon, the consumer is rapidly deleveraging. Consumer credit fell for the fifth consecutive month in June, the Fed announced Friday. Credit outstanding fell by $10.3 billion in the month, to a total of $2.5 trillion. That’s more than double what the Street expected. Revolving credit, namely credit cards, fell by $5.2 billion — a record 10th month in a row of decline.

Now in a state of contraction since February, the average American is embarking on the longest credit pullback since 1991.
“We are clearly in an economy-wide deleveraging process that will last for years,” writes Strategic Short Report’s Dan Amoss. “We are not in a typical inventory-led recession. Sure, the next few years will not mirror the 1930s, because the government and central bank are debasing the currency to prevent a dreaded debt deflation spiral. We probably won’t have 1930s-style bank runs (although the FDIC is running dangerously close to needing to tap its line of credit with the Treasury to replenish its Deposit Insurance Fund).

“But make no mistake: We will pay for the inflationary bailouts at some point down the road with a currency crisis. Central banks cannot keep abusing savers and the bond market to this extent without eventually provoking a collapse in demand for paper money.

“A collapse in demand for paper money, not a decline in the ‘output gap,’ will eventually bring about inflation. We’ll see signs of it as real Treasury bond investors keep balking at these low rates at Treasury auctions, leaving the Fed to step in and monetize the debt. Eventually, there’s a risk that the Fed will lose the tiny bit of independence it has left and the printing press could come under the control of Congress, which would accelerate the endgame for the U.S. dollar. The market for gold-related assets will look ahead to this possibility.”

Dan’s Strategic Short Report readers own calls on GDX, and recently took on a short position in a very well-known bank. We’ll be telling you much more about this fishy financial soon… keep an eye out tomorrow.
The benchmark 10-year Treasury bond just suffered its worst week since 2003. Investors forced yields up 38 basis points last week, to as high as 3.88%.
But the stock market continues to climb. Friday’s better-than-expected jobs report (more on that in a minute) bumped the major indexes up about 1.3%, to their highest levels since October. The Dow and S&P 500 finished up over 2% for the week.

The market looks a bit timid today. After opening down, the Dow and S&P are near break-even as we write
“It’s been a rough year for dividends,” says our income analyst Jim Nelson, “but if you know where to look, your income will be just fine. Below is a breakdown of S&P 500 yields by sectors:

“As you can see, the biggest loser on the list is financials, which shouldn’t be a surprise. The segment’s dividend yield fell 300 basis points (right-hand column) from last year to now.

“The sector that pays the most is doing so under the radar: telecommunication services. This is a favorite of ours. That 14 basis point increase is primarily due to AT&T and Verizon — both paying out around 6%.

“These dividends aren’t nearly as safe as we’d like, though. Instead of gunning for the U.S. telecom industry, we like to play that game in emerging markets. We already have a Pacific Rim telecom in the Lifetime Income Report portfolio, and we’ll be adding another this week. Even after that, we’ll continue to keep our eyes peeled and noses to the ground in case something else pops up in that industry.

“Going back to that table, you can see the next two best-paying sectors are utilities and consumer staples. Our portfolio is already loaded with these, and we’ll continue looking in these directions as well.”

If you seek stable, dividend yielding stocks with serious upside potential, Jim’s Lifetime Income Report is where it’s at… details here.
It’s Monday… time to check in on the annual bank failure tally: Two in Florida and one in Oregon bit the dust over the weekend. That brings the 2009 running total to 72. The three took a $185 million chunk from the FDIC’s war chest. So far this year, the agency has lost over $15 billion from its bank insurance fund.
The dollar is holding onto its surprise Friday rally today.As we mentioned then, we were taken aback when the dollar index jumped from 78 to 79 after the better-than-expected jobs report.

“For months now,” explains Bill Jenkins, “every time there was good news for the economy (like Friday’s jobs report), it was bad news for the U.S. dollar. But not on Friday. The initial reaction to the good U.S. news was to sell the dollar. Then suddenly, the market reversed its course and began selling the other currencies with both hands, and buying the U.S. dollar, instead. In other words, the tide shifted, and good news for the U.S. economy also became good news for the U.S. dollar.

“So has the U.S. dollar put in a bottom here? Are we about to see a knee-jerk reaction favoring the greenback to other currencies? Only time will tell. But FX traders better be on alert. My readers saw a 42% profit in the Swiss franc on Friday’s move.”

42% in one day? Nice. There’s plenty more where that came from… just check out Bill’s Master FX Options Trader.
Since the dollar remains strong, gold is still under pressure. The spot price is down about $20 from Friday’s high, to $945 an ounce.
“Why is every analyst, yourselves included,” a reader asks, “so quick to believe the government’s unemployment and GDP figures, when the political interests of the White House are at stake in the numbers and the White House controls the executive departments that generate these figures? We know from past unhappy experiences (e.g., weapons of mass destruction in Iraq) that the White House is capable of lying when it suits political purposes. Not to mention that GE, Murdoch and the other oligopolists who control the news we get are politically and financially motivated to play along and hype the figures.”

The 5: We’ve talked about the dubious nature of the jobs report so many times (like here, here or here) that we thought we had gotten our point across. Guess not.

Uncle Sam — though the power of statistical ploys like the birth/death model, seasonal adjustments and margin of error — can put the jobs numbers just about wherever he wants. We follow ’em because they can greatly affect the prices of your investments, they influence policy and public opinion and there are very few viable alternatives. We quote folks like John Williams often so you get a worthy alternative point of view. We could only be more contrarian by ignoring government stats altogether, which would be a disservice to you, whom we promise to inform, enrich and entertain.

And speaking of Mr. Williams:

“Heavily distorted seasonal adjustments have artificially reduced the levels of new claims for unemployment insurance,” writes John in his latest Shadowstats alert. “They appear to have flowed through not only to July unemployment and payroll reporting, but also to the July purchasing managers manufacturing survey.

“July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed the pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries, as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported seasonally adjusted monthly gain in July, up by 28,000 jobs…

“The severity of the ongoing economic contraction has started to generate other distortions in data reporting:

• Year-to-year comparisons will begin to see a flattening in annual declines, as year-ago numbers used in comparisons were in severe contraction.
• Extreme economic disruptions have distorted patterns of regular activity and related seasonal-adjustment processes.
• The birth-death model overstates payroll levels during recessions.
• Short-term discouraged workers begin to disappear from the broader BLS unemployment measures as their “discouragement” extends beyond one year…

“While Wall Street likely will hype the July employment results as confirmation that the economy has turned the corner, such hype and resulting overly optimistic expectations should be slammed in the months ahead, when the positive reporting distortions reverse out in a normal catch-up process.”

Source:  The Debt Ceiling, Dividend Plays, A Currency Sea Change and More!