Today, we light a candle and try to interpret the shadows on the wall…

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September… to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey… let’s guess… uh… housing sales will fall, right?

And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.

“Jiang, chairman of Indus trial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest U.S. banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.

“The United States is home to four of the nine largest banks in the world — JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.

“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks — Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China — are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds… and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy goes without taxpayers’ money in the gas tank. Let’s see… it comes to a complete stop?

But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘second great depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead… perhaps with a little bump from time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary base exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.

But amid all the confusion, uncertainty and noise… your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year… or what the actual GDP will be. But when we look at the shadows… we have a strong hunch that we are entering a depression… and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression à la 21 st century. A depression with Iphones and Twitter. This is NOT your grandfather’s depression.

It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:

“FRUGALITY THEME IS SECULAR, NOT JUST CYCLICAL

We came across two articles that truly resonated on this score — about how U.S. households are changing their entire approach to the family budget and this transformation cuts a wide swath on a socio-demographic basis. See Census: Recession Had Sweeping Impact on U.S. Life on Bloomberg news (by Hope Yen) as well as Consumer Spending Cuts Reach Across Incomes in the Associated Press business news section (by Eileen Connelly).”

With so much noise… and so many distortions… it’s hard to tell what is really going on… and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon… so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices… and tax revenues.

New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit a new record. And the Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.

All of those things are about what you’d expect.

Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:

“Sept. 23 (Bloomberg) — U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

“The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued that persistent current account deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,” Duncan said in an interview in Hong Kong yesterday.

“Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.”

*** Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. “Empire of Debt,” we called it. It was such a hit that the publisher asked us for a new edition… which was released this summer.

[Editor’s note: You can get Bill’s book here.]

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

“The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

“ U.S. workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said.

“That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the U.S. debt burden becomes too large and the government can no longer sell debt to the public, the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he said.

Source: Awaiting the Depression

Source: Investment News Briefs Thursday, August 13, 2009

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!

Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.

But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

By the way, another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.

Source:  China Booms… Too Good to be True?

Could the market actually be bottoming or near bottoming? Could the economy be showing signs of recovery?

Sorry. It’s going to take a lot more than consumer confidence edging up in March. I want to see…

• Manufacturing increasing. It went down by 18 percent last quarter. I guarantee you that it’ll keep going down next quarter.
• Non-defense capital orders increasing. They went down 5.7% in January.
• Productivity increasing. It went down in the fourth quarter. Too many workers standing around doing nothing as plants ratchet down production.
• Auto sales increasing. GM, Ford and Chrysler suffered through another month of sales falling 41 percent compared to this time last year.
• Retail sales increasing. They dropped “only” 0.1 percent in February – hailed as a sign of better things to come by several pundits in the mainstream financial media.

Give me a break…

Could it be that the financial media is reacting to complaints that it’s “talking the market down” by reporting on all these downward trends?

The popular media is not doing anyone any favors by reporting bad news as good news. So, what the heck is going on with the Wall Street Journal? Why is it getting into the “bad news as good news” act?

Listen to this dribble from Saturday’s edition (talking about last week’s market bounce)…

The rise in the stock market, even if it isn’t always a reliable predictor of the direction of the economy, could offer a sorely needed boost to confidence. ‘What you’re trying to do is reverse psychology,” said Robert Barbera, an economist at ITG, a research and trading firm. “‘You’re trying to get people to think of the glass as a third full instead of 97% empty. Once you do that, the enthusiasm about things improving can do a lot of the heavy lifting.”

Listen, I have nothing against Robert Barbera. I’ve never even heard of the guy. BUT WHAT HE’S SAYING DOESN’T MAKE ANY SENSE…

A “sucker’s rally” isn’t – and more to the point SHOULDN’T –make people feel confident.

Not when the economy is losing over 650,000 jobs a month…

Not when one out of every eight households is behind on their mortgage payments or in foreclosure. By the way, foreclosures surged in February…

Not when companies are cutting dividends and taking $41 billion away from shareholders last year and another $33 billion so far this year…

Not when people are seeing $11 trillion of net worth disappear over the course of a single year (in 2008).

And I haven’t even mentioned the 800-pound gorilla in the room yet…

NOT WHEN THE GIANT $27 TRILLION MORTGAGE DERIVATIVE MARKET HASN’T FINISHED UNWINDING.

Even if just $5-10 trillion of this giant market has to be paid off by the banks providing the insurance on these derivatives, that’s a big sum that the banks have no idea how to “handle”.

So, forgive me if a couple of banks cooing about revenues going up in the first two months of the year doesn’t get me excited.

And if you want to jump up and down in sheer joy from Ben Bernanke’s qualified statement that the recession could end by the end of the year “if the financial markets stabilize,” go right ahead.

But if that was the most bullish statement Ben could come up with, I’m thinking his heart just wasn’t in it.

Anyway, you know how I stand on this: There’s no way that the financial markets will stabilize.

Seeing the glass as a “third full” is dangerous if it leads you back to the stock market too quickly. As far as I’m concerned, even the “97% empty” take is too optimistic.

How about “99 percent empty”…

The market is taking a little break right now. Before long, it’ll be heading down – all the way down to near 5,000.

And this little interlude we’re having right now will be completely forgotten.

But there will still be some who blame the media … and others who blame a lack of confidence.

Give me a break.

Source: The Most Dangerous Con: Selling Hope

There’s always a bull market somewhere, the cliche goes. Today — and so far in 2009 — Shanghai’s been a surprisingly good spot to place your bets.

The Shanghai Composite climbed another 6% yesterday. Rumor has it the Chinese government is considering doubling its own economic “stimulus” package, from around $580 billion to $1 trillion… maybe more.

There are a couple data points being published lately that have traders excited. The Chinese purchasing managers’ index, for example, rose to 49 in February, just a hair short of the contraction/growth score of 50 and an improvement from November’s record-low score of 38.

The Chinese sovereign wealth fund has been pumping money into its biggest banks, too. And with the fall of financial giants here in the U.S., those Chinese banks are becoming, umn, relevant. Middle-class demand for goods and housing, while slowed, is still growing.

A record 20% of all U.S. residential mortgages were “underwater” in December. That means more than 8.3 million mortgages carried more debt than the value of the home they were borrowed against. The “sand states” — California, Nevada, Arizona and Florida — have it worst. For example, 50% of all Nevada mortgages were underwater in the last month of the year.

“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, which published the survey. No word on what happens if they don’t.

Private American companies shed 697,000 jobs in February, ADP claims today. The payroll management company’s gauge of monthly employment registered 83,000 more schlubs kicked to the curb than the Street expected… and marks the 14th straight month of decline.

The Bureau of Labor Statistics (BLS) is expected to announce 650,000 job losses in February. If ADP’s report is any indicator (and that’s a big “if”), Friday’s BLS report will be worse than expected as well.

Regardless of the accuracy of either report, you can get a pretty fair look at the employment scene by charting both. Look very closely and you might spot a trend.

Even we’re getting bummed out by these numbers.

Doing its part, the U.S. auto industry had its worst month in 27 years during February. Sales crashed 41% year over year, to an annual pace of “just” 9.1 million. That’s the slowest pace since 1981… amazing, especially considering there were around 75 million fewer Americans back then.

A year ago, yearly sales exceeded 15 million cars and trucks.

Tired of driving their own hybrids to Washington, GM execs are now pleading with European governments for bailout bucks over the phone. The degenerates’ case: Without a multibillion-dollar boost, up to 300,000 Europeans will lose their jobs when GM’s EU plants run out of money. Hmmn… that sounds familiar, doesn’t it?

GM is asking Germany for $4 billion in exchange for partial ownership of European operations. The FT says the automaker is also in talks with the U.K., Spain and Poland. Just what the global economy needs, eh? A global shakedown.

The stock markets opened decidedly higher this morning. After stumbling to a small loss yesterday, the Dow popped up 100 points at the opening bell today… for… umm… no real reason at all. Other than this curious sound bite:

“What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal,” newly elected president turned financial adviser Barack Obama said yesterday, “if you’ve got a long-term perspective on it.”

Here’s a question: How many of the retiring baby boomers with gutted portfolios and bitch-slapped pension plans have a long-term perspective “on it”? Solid, like Barack.

“We are quite confident,” added Fed head Ben Bernanke yesterday before Congress, “that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences.”

The chairman marched to Capitol Hill yesterday to defend his multitrillion-dollar campaign to save us from ourselves. He insisted that he “had no choice” but to bailout AIG, and soothed lawmakers with assurances like this: “If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.”

Grr…

And as the Fed chairman massaged Congress with one hand, the other quietly orchestrated the first day of the Term Asset-Backed Securities Loan Facility (TALF). (That sounds dirty, doesn’t it?)

Between his printed dollars and taxpayer dough lent from the Treasury, the program to rekindle student, auto, credit card and eventually mortgage loans will have a war chest exceeding $1 trillion.

“The question facing every investor today,” writes Eric Fry, “and the one that could wield a very large influence over one’s investment fortunes — is whether deflation or inflation will hold sway during the next couple of years.

“To preview our conclusions: We’re betting on inflation.

“No one knows, least of all Ben Bernanke or Timothy Geithner, if the Fed will conjure up one dollar too many. And no one knows if the Fed could ever coax its magical deflation-fighting dollars back into the cauldron, once their services were no longer needed.

“At least, in theory, no one knows…

“In reality, everyone knows: The excess dollars will never return to the cauldron. They will escape into the economy at large, where they will run rampant, and cause the price of eggs to increase to $10 a dozen…or $20…or maybe even $100…

“And what if inflation arrives much sooner than expected? What if the widely anticipated deflation never materializes? The holders of long-dated Treasuries would fare very, very poorly. And the nonbuyers of gold would be very chagrined, at best. So consider this two-part question:

“1) Is the 2.89% yield of a 10-year Treasury so thoroughly compelling that it justifies risking an enormous capital loss (if inflation appears sooner than expected)?

“2) Are commodity plays at their current depressed quotes so thoroughly risky investors should continue to shun them, no matter the price?”

Oil has snapped back $3, to $44 a barrel. Most of the buying support today comes from the Far East, as the latest momentum from China gives traders hope that the world’s second biggest user of the gooey black stuff is still guzzling away.

But gold isn’t getting any love today. The spot price fell another couple bucks overnight, now at $910 an ounce.

“The monetary and banking problems driving gold higher for months have not disappeared,” James Turk assures us. “They will remain for the foreseeable future because the imprudent lending by banks will take years to unravel, highlighting the essential need for a safe haven for one’s money.

“Gold is the safest of safe havens because it does not have counterparty risk. Gold also preserves purchasing power, which is an attribute that will become increasingly important in the months ahead as all the new money being printed by central banks around the world takes its inflationary toll.

“Gold has not yet made a new record high in U.S. dollars, but I expect one soon.”

After hitting a fresh three-year high yesterday, the dollar index is still holding strong today. It scores just under 89.

“I get asked all the time,” notes EverBank’s Chuck Butler, “how long will this dollar strength last. I said some time ago that I believed that by late summer/early spring, the credit markets might be showing signs of unlocking, and that could bring the risk takers back out from under their respective rocks, and that a return to the fundamentals would bring about an end to the dollar strength. The end of July marks one year of dollar strength, when the you-know-what hit the fan with subprime loans and this whole lockdown of credit and liquidity caused a huge deleveraging in the markets.

“While I still believe this thought has merit, I also have to figure in the fact that the previous stimulus plans didn’t work, the money was wasted on Wall Street buddies and cronies… And now we need another one, but only this new one is centered on the wrong things. So I’ll be watching for signs. If none appears, then I’ll have to go back to the drawing board.

“So in an environment when ‘bad news’ rewards the dollar… and the bad news just keeps coming along, that’s not a good sign for a reversal of dollar strength right now. When what used to be called 100-year events now happen almost weekly.”

“The reader commenting that the best thing for China, et al., to do,” writes our first reader today, “would be to cut Americans off from funding and provide tough love may be missing a big implication. If an unreformed alcoholic is TOLD to stop drinking and his bottle is forcibly removed, do they graciously thank you or come up swinging?

“I believe that if America had its funding removed, we would be fighting World War III within weeks. Ever better to maintain the facade BUT take advantage of opportunities within the charade.”

“If I have time to read only one of the many, many e-letters that I get daily,” writes another reader, ”The 5 is that one. Keep up the great work!”

“Many thanks for continuing the best daily read around anywhere,” says a third.

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China Bucks the Trend, GM Goes to Europe, Inflation Prediction, Jobs and More!

• Toyota Motor Corp. (ADR:TM) yesterday (Tuesday) named Akio Toyoda, the grandson of the company’s founder, as the new company president. The announcement car the same day Toyota announced 2008 sales figures, down 5% in Japan and down 4% worldwide.

• Constellation Energy Group Inc. (CEG) said it agreed to sell the majority of its London commodities unit to Goldman Sachs Group Inc. (GS), a move to boost the power company’s liquidity, Reuters reported. A dollar amount of the deal was not released. Constellation is also trying to sell its Houston-based gas trading operation.

• For the first time in 6 years, China’s urban unemployment rate rose, climbing from 4% to 4.2% in the three months ended Dec. 31. “Growth has fallen off a cliff in China in recent months. It does already feel like a recession for a lot of people,” Paul Cavey, chief China economist at Macquarie Securities Ltd. in Hong Kong, told Bloomberg.

• Kingdom Holding Co., the investment company owned by Saudi Arabia’s Prince Alwaleed bin Talal, reported a massive $8.26 billion fourth-quarter loss. “The loss is phenomenal. This is the biggest corporate story for Saudi Arabia in many years,” John Sfakianakis, chief economist at Saudi British Bank, told Bloomberg.

• Warner Bros. Entertainment Inc. said yesterday (Tuesday) that it plans to cut 800 jobs, or 10%, of its global workforce, as the company struggles with the current recession. “We are very sad to announce that based on the global economic situation and current business forecasts, the studio will have to make staff reductions in the coming weeks in order to control costs,” Barry Meyer, chairman and chief executive, and Alan Horn, president of the studio said in a statement.

• Johnson & Johnson (JNJ) yesterday (Tuesday) reported a 14% increase in fourth-quarter profit. The company earned $2.71 billion, or 97 cents per share, up from $2.37 billion, or 82 cents per share, in the year-ago quarter. However, revenue fell 4.9% to $15.18 billion from $15.96 billion — the first drop since 2004. Excluding charges and gains, J&J earned 94 cents a share.

• Rohm and Haas Co. (ROH) yesterday (Tuesday) said it would cut 900 jobs, or 5.5% of its workforce. The company plans to adjust production schedules in certain manufacturing facilities, reducing sales and marketing positions and freezing discretionary spending and employee salaries, Reuters reported.

• Google Inc. (GOOG) said yesterday (Tuesday) that it would end its Print Ads program on February 28, Reuters reported. The program was intended to create a new revenue stream for newspapers, but was not having the desired impact and fell by the wayside as Google retrenched amid the current global downturn.

Source: Global Investment News Briefs Wednesday, January 21st, 2009

“The definition of stupidity is doing the same thing over and over again and expecting different results,” said Albert Einstein.

The best thing that could happen to the auto industry is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible.

So, why in the world is management siding with the unions in their appeal to Congress?

Because under bankruptcy protection, management becomes accountable to the court, many of their perks and benefits would be curtailed, and they could, heaven forbid, even lose their jobs.

The auto industry, its unions and allies are therefore quick to point out that they, too, are “too big to fail” (have we heard that before?), that the American economy would not recover from the job losses and the economic impact of failures that would have far-reaching implications.

The Center for Automotive Research (CAR) has just released a comprehensive study on the impact of a 100% failure of the Big Three in the U.S.:

• In the first year, the U.S. economy would lose 3 million jobs (about nine additional jobs for each auto worker that is laid off). It would lose another 2.5 million in year two and 1.8 million in year three.
• U.S. personal income would decline by over $150 billion in the first year and another $250 billion in the next two years.
• Our government would also lose $60 billion in 2009 and almost another $100 billion in the next two years.
• We would lose a piece of Americana (those of you who are nostalgic for the good ol’ days might enjoy the following video clip: http://www.youtube.com/watch?v=KGZvQoPxhNs)

I agree – it poses a very grim scenario.

In fact, Senate Bill Sec. 402 seeks to “(C) preserve and promote the jobs of 355,000 workers in the United States directly employed by the auto industry and an additional 4,500,000 workers in the United States employed in related industries; and (D) safeguards the ability of the domestic automobile industry to provide retirement health care benefits for 1,000,000 retirees and their spouses and dependents.”

Obviously, the $25 billion approved by Congress on September 24, 2008 is already falling short. It is clearly not enough to deal with a problem of that scale and, the car makers lament, needs to be doubled immediately. But in case you wonder, the industry and its unions do reserve the right to come back for more…

So let’s review some of CAR’s assertions in light of what we know:

Auto sales are forecast to decline from 16.1 million in 2007 to 14.9 million in 2008. 2009 can be expected to be much worse. Spending on capital goods such as cars and trucks will be affected long-term as a result of excessive consumer debt, tighter credit terms, higher unemployment, and a serious recession (or depression).

If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly. This is basic economics so far.

Now comes our choice: On the one hand, we have some highly productive global manufacturers that produce fuel-efficient vehicles the U.S. consumer wants and can afford to buy. On the other hand, we have three inefficient companies that produce unattractive gas guzzlers and are plagued with high legacy costs and liabilities (Big Three workers make $73/hr, Toyota’s $48, the average manufacturing worker makes $32). Why should U.S. taxpayers subsidize these losers? Is it so that they can continue to compete unsuccessfully with productive manufacturers and avoid any dramatic (and much-needed) changes in their way of doing business?

In light of the fact that throwing good money after bad almost never works out, I think the U.S. taxpayers should not bail out GM, Ford, and Chrysler. A common-sense alternative would be to save our tax dollars and allow the most efficient manufacturers to gain market share and hire more workers. Ultimately the U.S. market will post sales of 12 to 15 million cars annually. If it takes one, two, or three million fewer workers to produce the cars U.S. consumers can afford to buy, so be it.

A farmer with one modern wheat combine can do the job of a thousand 18th century farm hands. That is a lot of unemployed farm workers, yet nobody demands to return to those good old days. Productivity and efficiency do result in job losses and dislocation, but eventually progress creates new jobs and additional wealth.

Whether a Honda, GM, Toyota, Ford, Hyundai, or VW, currently each and every car still requires one engine and four wheels. Each manufacturer uses basically the same domestic and overseas suppliers, and each has dealers selling its cars (most dealers represent a broad spectrum of brands and will sell whatever car the market wants). The argument that GM closing its doors would result in the loss of 2 million jobs or more is ludicrous as the competitors that pick up the slack will hire workers and buy more from their suppliers. While that may not be good for Detroit, it may be good for the Carolinas or Tennessee.

Simply, business shifting from certain players in the industry to others is called competition. Capitalism and competition are the forces that have made the U.S. the most successful economy for many decades. Granted, it is a harsh reality, but it works, and so far no other system has come even close to creating as much wealth for most of its agents.

Anyone who follows our flagship newsletter, The Casey Report, knows our stance: we hope, most likely in vain, that the new administration will finally come to the realization that no entity is too big to fail. Besides, bankruptcy reorganizations have a much greater chance of success with larger corporations, as they usually have lots of assets to dispose of — assets that can be sold cheaply to new enterprises, which are then able to build businesses on a much sounder basis. In the process, there is innovation and progress.

The choice is clear: Either the Obama administration can continue on the path of nationalizing entire segments of our economy (so far banking, insurance, auto – next, health, airlines…) and run them into the ground. Or it can let poorly managed companies fail, thereby making it easy for successful businesses and new entrepreneurs to buy the assets of these organizations. Step back and let the markets work their magic instead of blaming the market for ills that were created by special interests and poorly designed regulations.

Source: Should the Big Three Be Allowed to Fail?

Mike Shedlock of globaleconomicanalysis.blogspot.com writes that I – and people like me, who are expecting inflation – are a bunch of idiots, which is unfortunately true about me, and I am grateful that my Natural Mogambo Stupidity (NMS) is his only complaint about me. I only wish that others were equally restrained in their criticism, as there is apparently no end to either my personal shortcomings or their delight in pointing them out.

He writes, thankfully not mentioning me by name, “You would think that inflationistas would have caught on. But they haven’t. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either, including an implosion in China.”

I have to admit that he is right, as my wife and kids will happily tell you that I never change, except to get worse. On the other hand, I steadfastly say that neither the Federal Reserve, nor the federal government, are going to sit still when people are whining about “shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things” when they have a fiat currency that they can instantly create, with unlimited abandon, which they promised to do, will do, and are already doing.

Thus, with a staggering, unbelievable amount of money being created, these and many more deflationary problems will soon be just a quaint memory as voluntary fiscal and monetary restraints around the world are being thrown wholesale into the dumpster even as we speak, and humongous “economic stimulus plans” financed by massive increases in fiat money are being trotted out across the globe, all meaning that inflation will rise and rise.

As if to prove me right, the article went on to note that Professor Steve Hanke, formerly with Credit Suisse (NYSE:CS) and now a senior fellow at the Cato Institute in the United States, said that this month, “Zimbabwe’s annual inflation had soared to 2.79 quintillion percent”, which is the inevitable result of the moron government of Zimbabwe spending decades literally printing all the paper money that makes such inflation possible!

In case you were wondering, “a quintillion is a figure with 18 zeroes and is a rung above a quadrillion”, which I will helpfully write out as 2,790,000,000,000,000,000%!!!!!

If you are a Junior Mogambo Ranger (JMR), then you need no explanation as to why I included five exclamation points at the end of that sentence, which indicates some extreme significance.

But even if you are NOT a JMR, then you should still need no explanation as to the significance of inflation that is measured in quintillions of percent, or even inflation measured in quadrillions of percent, or inflation measured in trillions of percent, or inflation measured in billions of percent, or inflation measured in millions of percent, or inflation measured in thousands of percent, or inflation measured in hundreds of percent, or inflation measured in tens of percent, or Any Freaking Inflation At All (AFIAA) that is more than zero, because what it means is that Bad, Bad Times (BBT) are a-coming as all of this money starts chasing a static supply of goods and services and people get Very, Very Upset (VVU).

And besides the fact that inflation in the USA is already running between about 5% and 10% (depending on your source), it is going to get worse and worse, and thus a BBT and a VVU are a-coming, which is why you need gold, silver and oil.

And the fact that they have been sold off to (as is theorized) raise cash and thus drive their prices to Laughably Low Levels (LLL), should have you in a buying frenzy, gobbling up as much of each as you can, and then going around to your stupid neighbors and ringing, ringing, ringing their doorbells and knocking on their doors, and then kicking their damned doors over and over because you can hear them in there whispering to each other, “Shut up or he’ll hear you!” and so you yell out, “Buy gold, silver and oil as fast as you can, you morons, or die a horrible death by inflation like the people of Zimbabwe!”

But as usual, they don’t buy gold, silver and oil, and they don’t even answer the door. Don’t you make that mistake!

Source: When Inflation Comes a-Knockin’