Arto Bendiken

by Addison Wiggin & Ian Mathias

• The bubble expands: China reports booming exports, oil imports and real estate prices
• One chart offers a sobering perspective… what the “recovery” looks like ex-China
• Alan Knuckman & Jim Nelson offer two investment trends gaining momentum
• Plus, David Walker offers simple solutions for fixing Medicare

 

  Here in the States, they’d call it a bubble. On the other side of the world, it’s “robust growth,” as The New York Times wrote this morning. Check this out:

1) Chinese exports increased 46% over the last year, China’s government reported overnight. 46%! That’s the best rate of annual growth since 2007, before the global crisis began in earnest.

2) China also released annual crude oil imports ending in February -- up 58% year over year, to a near record 4.8 million bpd.

3) Residential and commercial real estate prices in 70 Chinese cities rose 10.7% in February, year over year. In the Hainan province, new home prices suffered a nearly 50% annual rise. (It’s a lovely tropical island, but still… 50%?)

  What happens when the music stops? Bubble or boom, China is the strongest staple of the loosely bound “global recovery.” 

 

  “The Chinese are laying highways like nobody’s business,” notes Chris Mayer, picking up a piece of the construction boom illustrated above. “By the end of 2008, China had an estimated 60,000 km of highway. The U.S. has 75,000 km. Over the next few years, China plans to have 85,000 km of roads.

“This is having some amazing effects. For instance, China recently built a highway from Lhasa, Tibet, that runs all the way to the Nepali border. Along this road is the city of Shigatse, a formerly sleepy town where tourists may stop to gaze at ancient monasteries on their way to Mount Everest. But today, it is also a place where people get rich running freight services along the 515-mile highway…

“This allows an easy mixing of peoples and the freedom to pursue their own ends leads people to trade. Business expands. The quality of life rises. The roads are doing their work. The cars and trucks are coming. Where are the opportunities?

“I’m more interested in investment ideas that are a step removed from actually building the roads and cars that use them. All those cars will eat up a lot of metals of all kinds, for example. They will also burn a lot of fuel.

“Dig deeper and you’ll find China loves methanol as an alternative fuel to blend with gasoline to lower emissions. China blends more than a billion gallons of methanol in gasoline annually. And its appetite for methanol is growing more than 16% a year. Methanol, made from coal or natural gas, is China’s ethanol.”

  As China dependant as it might be, the great global bear market rally remains intact. Stocks did little yesterday, thus the S&P is still up 2% year to date, and 66% from its crisis low.

“The market momentum looks to carry stock prices to new post-recession highs,” speculates one of our traders, Alan Knuckman. “The S&P has blown through the 1,120 Nov/Dec triple-top resistance. Prices currently sit around 1,140 with the January highs at 1,148 soon to be tested.

”The market is littered with those who have questioned the legitimacy of this run-up, both economically and politically. Price momentum and trends are very powerful forces that are oft best to work with, not against. Eventually, stock prices will top out and fade, but the urge to be the first to pick that turn needs to be repressed for now…
 
“Stocks, gold and oil have assumed leadership positions at different times, but all have tended to move in the same directions. Until those relationships change, we plan to keep doing what we have been doing successfully.”

Alan’s Resource Trader Alert readers have found some remarkable success, indeed. With his trading advice, readers brought in 22 winning trades in 2009, with an average gain – including the losers – of 56%. That’s terrific. If you want to be on board for the rest of 2010, look here.

  Since stocks are little changed from yesterday, gold and oil are right about where we left them. Gold is a bit higher, at $1,125. Ditto with oil, at $81.

  For income investors, the real opportunities are abroad, says Jim Nelson. “One glance at your Lifetime Income Report portfolio will tell you how we feel about international investing. We think you’d be a fool to forget about the rest of the world when it comes to income. Just take a look at this…

“In the 1970s, the U.S. controlled a 70% share of the world’s financial markets. And according to Reuters, that number “could shrink to 30% by 2030.” Yet U.S. investors hold only about 5-10% of their investment wealth in foreign stocks and bonds. That’s a ridiculously low number, considering that soon, seven out of every 10 dollars will be made abroad.

“That’s not even the most enticing stat to switch to a broader international exposure… As income investors, it’s impossible to ignore the massive dividend yields foreign markets offer. The major indexes of many foreign markets are posting yields that are two, and even three, times larger than the S&P 500.

“That’s why we have spent the last year ramping up the Lifetime Income Report portfolio with solid foreign income plays. For tickers, look here.”

  Back in the U.S., the Treasury is expected to release another record-busting budget deficit today. Though not out until 2 p.m. EST, the Street expects around $220 billion in shortfall for February. That would bring the fiscal year total to over $650 billion -- up 10% compared with the same period last year and on course to top last year’s record $1.4 trillion budget gap. Oy.

  “We need to recognize that what threatens this ship of state is the ice that's below the water in the iceberg,” David Walker, the protagonist in our documentary I.O.U.S.A. , told NPR yesterday. “It's not today's $12.4 trillion in debt. It's the $50 trillion in unfunded obligations for Medicare, Social Security, other commitments and contingencies that we don't know how we're going to keep…”

For example, “in Medicare, I think we have to recognize… that there are actually three Medicare programs. There's Medicare Part A, which is hospital insurance, which is funded with a payroll tax, and there are B and D, which are physician and out-payment and prescription drugs, which are voluntary programs funded with a combination of premiums and general revenues and state contributions.

“The first thing we have to do is recognize that under Medicare Part B and Medicare Part D, billionaires receive subsidies for voluntarily signing up for those programs. That makes no sense… we should have more means-tested premiums than we do right now.

“We need to also be able to have more competitive bidding with regard to Medicare. We need to move away from the fee-for-service payment system. We need to move more towards evidence-based medicine. We need to do something with regard to malpractice. We need to move to electronic records, more integrated-care systems, a number of things that not only apply to Medicare, but also have to apply to our overall health care system.

“And last, but certainly not least, we need to learn the lessons of every major industrialized nation. We need a budget for how much taxpayer resources we'll allocate for health care. We're the only major industrialized nation that doesn't do that. Every other country has recognized that it'll bankrupt you if you don't.“

If you like what David has to say, you should join us in Vancouver this year. He was one of the most popular guests at the 2008 event, and we suspect he’ll be a crowd favorite again. We’ve asked him to fill us in on what’s been happening since we finished filming I.O.U.S.A., the effort to get the deficit commission established and -- of course -- some dirt on all those closed-door bailout meetings to which he was privy. There’s only one way to hear what he has to say -- be there. 

  “Yesterday, I received a letter in the mail from the Census Bureau,” a reader writes, “telling me that in a week the census form will be mailed to me. How much did we spend on mailing out the pre-Census letter. What a waste!”

  “I read with interest the note from your reader whose friend landed a modern-day WPA job with the Census Bureau,” another writes. “Perhaps providing temporary jobs is the only viable reason for doing the census. Of course, it does give politicians something to squabble over when it comes time to dole out the federal pork.

“But surely, with all the data and tools at hand in today's federal government, it is no issue to estimate population size and location in this country... if that's even important to do. If there were a good reason for doing the census, it likely would have been spelled out in a recent letter the bureau sent to all citizens. Instead, the letter essentially appealed to us to mail in our forms, or our local communities would not receive all the benefits (pork) to which they are entitled. Sounds like the feds already suspect us folks care squat about counting noses and need a little threat to solicit action. What a sad state of affairs.”

  “Before you get too smarmy about Census activities, you need to consider a few things,” our last reader writes. “I spent some time working with the Census Bureau as a consultant, helping them prepare for the 2000 Census. If you want a crappy, thankless job go run the Census Bureau. It's a political and logistical nightmare.

“While my numbers may be a bit stale (the numbers would actually be larger now), it is interesting to note that the human resources ramp up for enumerators (home visitors) and others is second only in effort to ramping up for war. In 2000, approximately 250,000 people were needed. The success rate on interviewing was about 1 in 4. The people hired had to be people that could survive somewhat of a background check; were presentable; could speak intelligently with people to extract Census data out of them; and would not be afraid to go to rotten parts of town, where most of the follow-up had to occur. And oh yeah, would only want this job for three or four months, starting in April (leaves out most college students).
 
“You may find an undependable deadbeat to work for a nickel an hour. But given the "security" requirements of the job... finding a quarter million workers for a few months, who happen to be situated in the right location, is not an easy (or cheap) task.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. You have just one day left to take us up on a $1 Mayer’s Special Situations trial. Seriously -- just one buck for full access to the MSS portfolio and one month of Chris’ high-end advice. We can’t make a deal much sweeter than that… take advantage here, before the offer expires tomorrow.
 

by Addison Wiggin & Ian Mathias

• Many “signs of the times” in one story: China & Big Oil team up to buy out Aussie LNG
• Frank Holmes explores an emerging economy hidden from mainstream highlight reels
• Fed reportedly preparing surprise rate hike… as soon as next week!
• Chris Mayer on a U.S. boomtown -- maybe boomtowns -- in the most unlikely of places
• Plus, readers chime in on Census Bureau employment and pannin’ for gold

   Big news: Arrow Energy, a modest foreign producer, received a $3 billion takeover bid yesterday. Why is this bench warmer story the leadoff hitter in today’s 5 Min. Forecast? Ahh, the drama’s in the details…some big trends in the making here:

First, Arrow is in the Australian natural gas business. Chris Mayer specifically gave you a heads-up on Aussie LNG just a few weeks ago. It’s the real deal.

Second, the bidders: Royal Dutch Shell and state-owned PetroChina have teamed up for the buyout. Royal, one of the biggest companies in the world, wants the bottomless bank account and political swagger of the world’s most powerful government -- that’s China.

And the Chinese, as evidenced by their failed deals with Rio Tinto and Woodside Petroleum, want access to Aussie resources -- badly. Those two failed ventures -- both with a fair share of controversy -- explain the collaboration with Shell. Lord knows China doesn’t need the money.

Heh, and last: America can still export something. Citigroup was the main financial adviser.

  “Asia’s rapid growth hogs the emerging-markets spotlight,” writes Frank Holmes, a mainstay at our annual Investment Symposium, “but Russia and the other countries of Emerging Europe (EE) also deserve some attention.

“For starters, EE economies have tight fiscal policies and are carrying far less debt than many developed economies, both positives for sustained economic growth.

“In the chart above, the best place to be is in the southeast quadrant, and that’s where EE nations are clumped. Russia’s debt position is minimal and there is ample strength in the consumer sector going forward. In January 2010, wages were up 11% from a year ago, to 19,000 rubles per month. This has kept domestic consumption levels around 65% -- on par with Brazil and above both China (30%) and India (57%).

“In addition, Russia’s oil production -- the country’s main profit center -- came through the crisis more robust than many expected, even surpassing Saudi Arabia in terms of production.

“But Russia is looking beyond oil and gas. In February, Time magazine reported that President Dmitry Medvedev has ambitious plans to create a high-tech haven where geniuses can think up world-changing inventions.

“The intellectual capital is there. Despite years of exodus of scientists and engineers from the Soviet bloc during the 1990s, the combined number of researchers in Russia and its former satellite states in Emerging Europe is not far behind the United States and China and is many times ahead of Brazil and India.”

  Back in the States, “The Federal Reserve is set to raise its key overnight interbank rate by a surprise 25bps next Tuesday,” our friend Peter Cooper wrote for araibianmoney.net, citing an “impeccable source from a top global bank.” This modern world is a trip, isn’t it? We’ve got news of a Sino/Aussie resource grab, details on Eastern European debt from our fund manager friend in Texas, Addison’s in Tampa shooting a documentary and now Peter -- a brit expat living in Dubai -- is scooping us on a U.S. interest rate rumor.

“By raising interest rates at this point in the cycle, the Fed will be both proving its confidence in the tentative economy recovery that chairman Ben Bernanke has proclaimed and underlining its commitment to preserving the value of the U.S. dollar at a time of mounting deficits and bond issuance programs…

“There will also be an inevitable revaluation of financial markets to reflect the higher cost of money. Again there is a risk that if confidence is not as strong as generally held, then financial markets will crash, rather than undergo a healthy correction…

“Reflationists will throw their arms up in horror at this action as imperiling a very fragile recovery. But it is a very fine judgment call, and a lot will depend on how much credibility the markets give the accompanying statements from the Fed about the likely speed of additional rate rises.

“However, the Fed has to keep its street cred and being a part of the gradual global tightening of interest rates -- after a long period of loose monetary policy -- should actually be better for the long-run health of the economy.”

We’ll keep an eye on the FOMC when they meet next Tuesday. Stay tuned…
 

  A sudden rate hike could cause quite a stir in American stocks, which are celebrating the one-year anniversary of the crisis bottom today. No signs of stress yet… markets opened flat this morning.

  Four more banks failed over the weekend, bringing the annual tally to 26. That’s already more than all the 2008 failures, and just a little off the pace of 2009, which saw 140 banks bite the dust. The FDIC currently has 702 lenders on its infamous “problem list.”

For the weekend’s failures, chalk up another $300 million in IOUs for the FDIC’s bankrupt deposit insurance fund.

  The dollar rally continues today, thanks largely to this: “Greece's debt problems could soon spread to the rest of Europe and mean a weaker euro,” said Greece’s PM George Papandreou overnight. Heh, this guy must be SO popular in Germany. The dollar index is up half a point from yesterday, to 80.7.

  More drama still in the euro-space: A stunning 93% of voting Icelanders elected to not pay back Dutch and British creditors that lost their shirts during Iceland’s monetary collapse in 2008. “They do not want to give their own money to rich investors who took the risk of depositing their funds in Iceland for higher interest rates,” The Epoch Times reports.

Did we miss this vote here in I.O.U.S.A.?

  Today’s dollar strength is bad news for gold. The spot price is $20 off yesterday’s high, at $1,115 as we write. Oil is down too, about a buck, to just under $81 a barrel.

  “This is a boomtown, or boomtowns,” Chris Mayer reports from an “exotic” location of his own. We’ll keep you in suspense here… see if you can guess which region has caught Mr. Mayer’s attention.

“You know the labor market is tight when the local McDonald's starts handing out $300 signing bonuses. Workers are coming in from all over, making it tough to find housing. They might sleep in their trucks or pitch tents, but it can get 50 degrees below zero, which makes such a move dangerous.

“There is also a chronic shortage of hotel rooms. I browsed the Web to see if I could find a room. I checked the Super 8 motel -- no rooms available. I checked a few others -- no rooms there either. I used Priceline to search, and there were no rooms available. What's going on here?

“Local ranchers are becoming millionaires overnight. The 4 Bears Casino reported a 60% increase in sales last year. This is a boomtown. Or boomtowns. Even the state government is in surplus.

“The above is a composite of what's going in North Dakota, around the Bakken Shale formation. As The Wall Street Journal put it: ‘A massive oil reserve buried two miles underground has put North Dakota at the center of a revolution in the U.S. oil industry, a shift that has radically altered the fortunes of this remote area.’

“The Bakken Shale could hold more than 4 billion barrels of oil and stretches under North Dakota and Montana (and Canada, but I'm only talking about the U.S. piece here). If that number is correct -- it comes from the U.S. Geological Survey -- then it would be the biggest oil field discovered in the contiguous U.S. in more than 40 years…
 
“In February 2008, we picked up shares of Kodiak Oil & Gas, a small Bakken player, for $1.94 per share. By June, they traded for over $4 per share. So you can make good money speculating on the Bakken.”

There’s a solid Bakken stock nestled inside Chris’ Special Situations portfolio -- which you can still take a peak at for just $1. Come Thursday, this trial offer will be off the table, so don’t wait. Details here.

  “My friend just started her job with the Census Bureau,” a reader writes. “She will have two days of training for her job, which will consist of opening envelopes and removing the documents, straightening the papers as needed to be scanned (not part of her job). Someone else will check the envelopes to make sure they are empty. Can't wait to see what she will learn on day two. And for this, she gets paid $17/hr, only no benefits.

“Gotta love those govt. jobs. Why make productive jobs when you can give someone $17 an hour to check an empty envelope? Yikes.”

  “To your reader who thinks that, as the price of gold rises, people will start panning for gold again,” another reader writes, “check out how crowded the tourist sites in ‘defunct’ gold producing areas are. Many of the ‘panners’ are doing this while trying to find another job or to find a nest egg… you are a little late!”

  “Back in the mid-’90s," the last writes, "while taking a rest from graduate school in upstate South Carolina, I used to spend three days a week panning mountain streams in North Carolina. After expenses and bank fees (my bank handled the shipping of my gold and black sand), I netted about $350 per three-day week. The gold price having risen considerably since then, I'm confident I could easily exceed a UAW weekly salary, the difference being that I'd actually have to get my hands a bit dirty to get paid.”

The 5: Heh, no shortage of sass in the inbox today. Good stuff…

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. Addison sends his best from Tampa, Fla. As he mentioned yesterday, he’s down there for most of the week, capturing the plight of Odyssey Marine on video. Stay tuned for more…

P.P.S. We’ve already put into circulation over 40,000 copies of our new mini-book, The Curse of the Incas. It’s an interesting read -- and a great lesson to be learned about owning gold and protecting your wealth. Check out the online copy, here.
 

by Addison Wiggin & Ian Mathias

• Buried by the government, noticed by The 5: Another $9.7 trillion in deficits
• A “cascade” of private debt default: Rob Parenteau on “the next act” in the Greek tragedy
• China hints about dropping dollar peg… Why the timing may be no accident
• Chris Mayer on “one of the best investments we can make right now”
• Readers write: Package delivery, gold as a “Ponzi scheme”

  One interesting feature of the Internet age, we observed while sitting high atop a cliff overlooking the Pacific frontier in Nicaragua last month, are the many different locales one finds oneself working.

Today, we’re in transit at the Tampa airport on our way to the final shoot of the Odyssey Marine segment of our new documentary film.

Luckily, the Tampa Airport just installed free Wi-Fi throughout. And luckier still, the bones of today’s episode were becoming evident almost as soon as we hit the “send” button on Friday’s “delusional” one. So today, we bring you an all-new “Debts and the Dollar” episode of The 5.

  The latest deficit projection from the Congressional Budget Office was conveniently revealed just prior to the close of business on Friday.

“Why so?” You ask suspiciously.

“Because,” we respond in a hushed tone.

The CBO’s latest numbers reveal that President Obama’s proposed fiscal 2011 budget would add $9.7 trillion to the national debt over the next 10 years. The White House projection is only slightly less staggering -- $8.5 trillion.

Further, the CBO projects the national debt will be 90% of GDP by the end of this decade -- higher than the 83.4% recorded at the end of fiscal 2009 last fall. We’re 100% certain this comment will elicit the customary response: “Look at Japan, its debt is 170% of GDP… and it’s been running massive deficits for years!”

To which we can only sigh and respond: “Exactly.” Then get back to our film in which we hope to illustrate the long-term deleterious effects caused by the “crowding out” effect, when governments spend their citizens’ future wealth… way ahead of schedule.

  “We told you two months ago,” our economist-in-residence Rob Parenteau also revealed late on Friday, “we thought Greece would not default, it would begin to implement government spending cuts and tax hikes and there would be a backup fiscal assistance facility put in place for the region in the event bond auctions began to fail. So far, this is precisely how the scenario has played out.”

So far, so good.

But “the next act gets tougher to predict,” he cautions. “Greece and other countries now face falling private-sector incomes — that is, after all, the direct and immediate result of higher taxes on businesses and households and lower government expenditures. Unless the trade deficits of these nations can swing sharply into surpluses (as lower domestic incomes lead to less import demand and lower costs of production lead to higher exports), private debt defaults will now start to multiply and cascade through the system.

“Last week, Moody’s placed four Greek banks on downgrade watch. This is just the start -- the fiscal retrenchment has only just begun to take effect. By taking these steps to avoid a public debt default, we would suggest these economies are now poised for more private debt defaults.

“We believe private investors do not yet get this connection, but it will be made very clear in the months ahead. Latvia, with a GDP collapse of nearly 25%, will become the next poster child of the region in this regard.”

  “It amazes me how complacent the market remains about the situation in Europe,” Dan Amoss chimed in, likely en route to our annual Agora Financial Inaugural Banquet, which we also hosted late on Friday. “It’s become quite obvious that there are no easy, painless solutions to the crisis in Greece. Economic growth in Europe will disappoint, because governments and banks taxed and borrowed from the productive private sector about as much as they can.

“It’ll be very difficult for Europe to avoid painful reforms to its gold-plated welfare state programs. Government spending will fall. Tax rates will go up, but may, in fact, lead to lower tax revenues. Yet the market is acting as though this huge problem will just be swept under a rug.

“The youth throughout Europe are suffering from chronic levels of high unemployment. This not only includes countries like Greece and Spain, but also includes Germany and France. The powerful influence of unions has limited the opportunities of new entrants into the labor force. And a high youth unemployment rate is not good for social stability.

“The disease that will afflict financial markets in the coming years is unaffordable debt at all levels of society. Greece is just one symptom. More will pop up in 2010.”

Ominous news for the world at large, but for those in the know, the crises yield the very opportunities that can help you protect your own pile from rot. Membership to Strategic Short Report is still available at an extremely reasonable rate.

  As if to underscore Dan’s point about complacency, we see that European leaders hope to fix their problems by establishing a eurozone version of the International Monetary Fund. In theory, it would set up tougher standards of fiscal responsibility to prevent another Greece.

The German and French ministers hatching this scheme say they’ll present concrete proposals “within a few months.” Heh. With luck, the other PIIGS will still be feasting at their trough by then. Or not.

  “Surely, the main mistake Europe made,” writes a reader commenting on the world’s obsession with Greek debt, “was in assuming Wall Street knew what the hell they were doing. When every financial ‘expert’ in the world was exhorting Wim Duisenberg to lower interest rates after the dot-com bubble burst, he valiantly resisted, because he worried more about inflation. Greenspan opened the taps and created a housing bubble.

“Well, it's a funny thing, but Spain also had a housing bubble, but the banks survived OK, because they had managed that risk. It was US junk debt packaged as triple-A investments combined with the bonus culture that screwed the world up -- particularly the U.K., whose only economic policy since Thatcher has been to copy the U.S.

“For my part, I noticed a while ago that the financial markets were being controlled by 25-year-old cocaine addicts with no moral compass.”

  China is floating a trial balloon about possibly letting its currency float against the dollar again. The head of China’s central bank has described the current peg -- in place since July 2008 -- as a “special” policy stemming from the credit crisis. “Sooner or later, we will exit the policies,” he said.

Not what you’d call a firm commitment, but it’s an interesting good-cop counterpoint to the bad-cop act Premier Wen Jiabao delivered three months ago: “We will not yield to any pressure of any form forcing us to appreciate.”

Don’t overlook the timing here. During an extended musing about China a few days ago, we pointed out next month is when the official window opens for the U.S. Treasury to label China a “currency manipulator.” We’re in the process of assembling a specific strategy for you should this trial balloon actually float this time... you can receive it free when you accept this “beta offer” -- three months of my new Apogee Advisory, free… invitation and details here.

  In the meantime, “one of the best investments we can make right now,” says Capital & Crisis legend Chris Mayer, “is to pick up relatively secure, low-cost uranium -- the feedstock for nuclear reactors.

“The demand for uranium is building in intensity like a heap of hot coals. There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below.

“The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs -- which make up 90% of the market -- produced only about 110 million pounds of uranium.”

If you haven’t yet taken advantage of the chance to try out Chris’ premium service, Mayer’s Special Situations, for just $1, time is running out. The deadline for the offer is this Thursday at 5 p.m. EST -- when his new issue and latest recommendation comes out. Here’s where to go to give this service a trial run.

  U.S. stocks opened flat this morning. The dollar index is down a bit, around 80.19. But gold is likewise down a bit, breaking below $1,130.

  Oil prices touched $82 a barrel today. Traders are overlooking the subtleties to the jobs numbers that came out Friday and concluding the U.S. economy -- and, hence, oil consumption -- is on the rebound.

  We’d be remiss to ignore the fact gold reached record highs last week against the euro, the pound and the Swiss franc.

  “Your retired UPS reader is wrong,” writes a reader determined to continue our debate about package and mail delivery. “Things have changed. I'm a rural mail carrier, and UPS drops off packages at post offices for delivery every day, usually by the pallet. There are even new return labels that allow the customer to send merchandise back via either shipper.”
 
The 5: You’re right. A colleague tells us he had some shoes delivered over the weekend and the tracking info from FedEx was very clear -- the final leg of the journey was via the USPS.

Heh. Of all the crises, fraud and political shenanigans going on in the world today, why are we still talking about this?

  “We take exception to the comments about the USPS,” writes an octogenarian with a similar sentiment. “We are pushing 80, and so have mailed countless letters and packages without a problem. Yes, a few pieces were delayed some, and the first-class mail doesn't always get in the box right at noon, but our local post office is manned by knowledgeable, hardworking and courteous staff. There are plenty of other things to be angry about, especially the trillion dollars spent on an unnecessary war.”

 “Gold, the ultimate Ponzi scheme?!?” writes a reader outraged by CNBC’s strange encounter with Marc Faber. “Gold has always been the anti-Ponzi scheme. The way fractional reserve banking works, the last people to receive money in the pyramid have the least purchasing power.

“People view gold as expensive right now, but what's to stop the little guy from buying mining shares, or, hell, maybe even try their hand at gold panning. Sure, right now, maybe a day’s worth of panning will buy you a sandwich, but this is my guess as to why we are not at the top of this bull market in gold. I think at the top of the gold boom, people actually will set out and start panning for flakes again.”

The 5:

Argh!

Regards,
Addison Wiggin
The 5 Min. Forecast

P.S.: Reserve Members: Time is short, but we had one Canadian couple cancel their reservations for the Rancho Santana Reserve “Chill” Weekend. If you’re footloose and want to join us, we’d be glad to meet you there. Details here.

P.P.S.: Our attorney has warned us that the judge and magistrate have ruled correctly in denying Odyssey’s claim to $500 million in silver and gold off the coast of Gibraltar “IF” -- and this is a big “IF” -- you believe the state has the right to invoke ‘sovereign immunity’ over their vessels hundreds of years after they’ve gone down in the sea. The law was originally meant to cover U.S. military secrets during World War II wartime operations… now it’s being applied to treasure, as well.

We’re willing to admit that at this point in the story we’re not sure what to think. That’s why we’re in Tampa this morning. But more than one of the subjects we talked to in London last week suggested Spain has been known to allow their ships to be salvaged in the past… but never has a sum this great been on the line.

Spain is also a signatory to a UNESCO treaty that claims all ships that have been at the bottom of the ocean for more than 100 years are “World Heritage Sites.” The U.N. needed 20 countries to sign on the treaty to make it international law. They got ’em. Ironically, Spain is the only one of the 20 that has a coastline. Hmmmn…

by Addison Wiggin & Ian Mathias

• The 12-million barrel delusion: What’s up in Iraq
• Citi chief goes to Capitol Hill, blames short sellers, hilarity ensues
• Faber on whether gold is a “Ponzi scheme,” Casey on the future of the euro
• Unpacking the Census’ impact on February job numbers
• Enron memories, yours for a mere $11,900,000

  Iraq will pump up oil production from 2.4 million barrels a day now to 12 million barrels by 2017. That’s the promise of Prime Minister Nouri al-Maliki, who’d like to hold onto his job after elections on Sunday.

Welcome to the Delusional Friday edition of The 5.

  It’s not 2004 anymore. And it’s no longer in Washington’s interest to play up purple fingers in Iraqi elections. So let’s bring you up to speed on what’s been happening there since the “surge” was deemed a success:

• A bevy of suicide bombings this week went underreported in the U.S. press. Three explosions just today killed 12 people. Chances are it’s the work of the Sunni minority, who’ve stayed quiet the last couple years because U.S. troops paid them off to lie low -- a key reason “the surge” has kept the fighting to a dull roar
• The Sunnis are restless because the Shiite majority maneuvered recently to keep hundreds of Sunni candidates for parliament and local offices off the ballot. Of course, we were told the whole idea of “the surge” was to give Iraq’s factions breathing room to settle their differences. So much for that.

 
We still have 100,000 American troops in Babylon trying to make sure that non-American oil companies like BP and China National Petroleum Corp. have reasonably secure access to the giant Rumaila oil field. (ExxonMobil got a small consolation prize in the bidding.) We marvel at the spectacle.

  The delusion that “short selling” is what nearly took down Citigroup in 2008 was being peddled on Capitol Hill yesterday. Citi chief Vikram Pandit blames that foul, unpatriotic trading strategy…. but paid no mind to the reams of foolish loans made by his employees.

Even in Congress, the idea didn’t fly. Elizabeth Warren, chairwoman of the Congressional Oversight Panel bird-dogging the TARP program, wondered why Citi was the only bank that needed a second bailout after the first. “I just want to understand why Citi is special,” she quipped.

“His bank has got the highest [credit] loss rate of any of the big four,” Christopher Whalen from Institutional Risk Analytics added. “The shorts were just responding -- the emperor had no clothes.”

Our own stock market vigilante would do the same. For more on Dan Amoss’ Strategic Short Report and a 62% discount, read here.

  Another delusion gaining traction this morning: Gold is “the ultimate Ponzi scheme.” Honestly, the folks at CNBC are starting to become unhinged.

Gold is “an inanimate object that sits in a dark, damp cellar somewhere,” host Simon Hobbs posited to Gloom Boom & Doom Report’s Marc Faber, “that may or may not be in short supply, may or may not glitter in the correct light, but really has no productive power. Isn't gold the ultimate Ponzi scheme?"

Faber was entirely too polite in smacking this down: "No, I don't think it's a Ponzi scheme, and it's not a liability of someone else... its quantity cannot be increased at the same rate as you can print money... I’m not saying that the dollar will go straight away down, because other currencies, apparently, like the euro, are even worse at the present time. But eventually, if you print money, the purchasing power of money will lose."

If you can stand it, watch the whole thing here.

  Faber and our friend Doug Casey agree on the outlook for that delusion in currency collectivism known as the euro. Greece will get an indirect bailout from the European Central Bank, says Faber. And it won’t work. And the rest of the PIIGS countries will follow. Lather, rinse, repeat.

“I think it was inevitable,” says Casey, “that the euro would burst apart at the seams, sooner or later. This isn't the first straw in the wind, by any means, but it's a major, unmistakable sign that the EU currency union is going to break up and the euro itself is on its way out. And the EU itself will meet its inevitable doom not too long after that.

“When you stop to think about it, the EU was really a stupid idea to begin with. It started out as a coal and steel free-trade zone, which made a lot of sense. But as time went on, as people in general often seem to do, and Europeans in particular seem to love to do, they bureaucratized the thing and made it into a pseudo-government.

“They wrote a constitution hundreds of times longer than the one that served the U.S. so well until it was abandoned. They took on micromanaging everything, down to producing huge, phone book-sized regulations on the composition of French cheeses, and so on. There's a burgeoning bureaucracy in Belgium trying to consolidate the 27 member states into one giant country, and it's absolutely not going to work.”

Both Doug and Marc Faber will join your editors and a host of Agora Financial regulars in Vancouver this July at the Agora Financial Investment Symposium in Vancouver. David Walker, Bill Bonner and Petrobras veteran Marcio Mello will be there, too. Our symposium chief Bruce Robertson has outdone himself this year. Register here. Early bird discounts still apply.

  And of course, this morning, it’s time for that ritual exercise in delusion that comes on the first Friday of the month, otherwise known as the Labor Department’s monthly employment report. Let’s go to the tape…

· Payrolls fell about 36,000 -- less than mainstream analysts expected
· The worthless U3 unemployment rate held steady at 9.7%
· The U6 figure that includes discouraged workers and part-timers who want full-time jobs grew from 16.5% to 16.8%.

Amazing how 15,000 temporary Census jobs can take the edge off an otherwise-lousy report, huh? And those temporary government jobs are just starting to ramp up.

  Still, from the stock market’s standpoint, these are Goldilocks jobs numbers -- stronger than expected, but not so strong that anyone expects the Fed to go and do something crazy, like, you know, raise the fed funds rate.

The major U.S. indexes opened up 0.5% in the first few minutes of trading. And the airwaves were filled with fund managers heralding the good news.

  Gold is holding up nicely at $1,133. Oil has perked up a buck, to over $81.

  So much for the delusion that extending the homebuyer tax credit would keep pumping up the housing market. Pending home sales fell 7.6% in January, according to the National Association of Realtors -- which is already trying to lower expectations for the February number by pointing out that people tend not to look at homes when they’re buried under three feet of snow.

  From the “times are tough all around” department comes word that the widow of Enron chief Ken Lay is having trouble shopping her Houston penthouse among private buyers (showings by invitation only) for $12.8 million.

So it’s been publicly listed for $11.9 million.

“Italian Renaissance-inspired,” the listing says. Reminds us of that gag about the Holy Roman Empire: It’s not Italian, it’s not Renaissance and it’s definitely not inspired.

The 12,827-square-foot spread features six elevators, five half-baths, four balconies, three fireplaces and two toilets in the master suite. No partridge in a pear tree, alas.

A spokeswoman for Linda Lay says only she’s looking for a smaller home. It’s also possible she’s trying to come up with some scratch to generate a couple of pennies on the dollar for Enron’s creditors. But if she’s made any sort of deal with the Justice Department, we won’t find out about it -- the court records are sealed.

  “Once again, your unchecked facts are designed to match your preconceptions, instead of reality,” scolds a reader. “In fact, the inauguration date was changed for Roosevelt's second term, in 1936, not his first in 1932. His first term was actually shortened by about six weeks due to this. Here are the particulars from WikiAnswers:

“The date of Jan. 20 for the presidential inauguration was established by the 1933 ratification of the 20th Amendment, which changed the start date of the new presidential term from March 4.

“The reason given was that due to the modern conveniences of better communications, the election results could be confirmed faster than in olden times. They did not want to make our Congress and president wait until almost the end of the first quarter of the year to begin their service.”

The 5: We stand corrected on the dates. Of course, we were merely being flippant. If you choose to believe the unchecked facts are designed to propagate our own delusions, that’s your prerogative. That particular factoid is a matter of pride, actually. March 4 is this Wiggin’s birthday. Thanks for setting us straight on the details.

 

  “I have to take exception to the comments by the reader about UPS giving the package to the post office,” writes another, “I worked for UPS for 30 years. UPS delivers to every address, while the postal carrier will leave the mail at the mailbox, UPS will take it to the door.

“As a driver in rural Arizona, I delivered to ranches that were 10 or more miles from the mailbox. The postal carrier would leave the package or mail at the mailbox and I would drive to the ranch, leaving the package at the door.”

  “The Postal Service cannot be fixed,” writes another reader, who gets the last word. “It is hopeless. I know, I worked at USPS headquarters in Washington, D.C. They do not even understand how horribly inefficient they are. I could fill an entire Web page and not scratch the surface, but you wouldn’t believe it. Needless to say, I was blown away over at the incompetence.

“By the way, why should we all subsidize mail delivery to people who choose to live in the boonies? They pay more for just about everything else in life (fuel delivery, groceries, etc.), but expect the same mail service, for the same price, we get in densely populated areas.”

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. “It's emerging markets that are driving the bull market in this [commodities] cycle,” comments our managing editor Chris Mayer in a MarketWatch piece out this morning. More of his thoughts here.
 

by Addison Wiggin & Ian Mathias

• Accounting tricks now infect even the “honest” reckoning of U.S. deficit
• Things we can no longer take for granted: 2009’s no-brainer play, market angst over Greece
• Byron King with two good reasons to add to your gold and mining stock positions
• Coming to a strip mall near you? England’s own Potemkin village
• Readers debate Canada’s hot streak, envision the future of mail delivery

 

  Happy inauguration day! Today we begin with this little known factoid: For the first 143 years of the American Republic, presidents were inaugurated on March 4, the only day of the year that is also a command.

The date was moved up to Jan. 20 in 1932 when the activist president Franklin Delano Roosevelt couldn’t wait to wring his hands around the neck of the U.S. economy. Roosevelt set in motion 78 years of what the economist Friedrich von Hayek called the “fatal conceit” -- the arrogant belief that anyone could know enough at any one time to plan an economy.

  Today, we’re paying the price. A little-noticed Treasury report that’s supposed to provide an honest accounting of the government’s finances is now being manipulated just like everything else.

The Financial Report of the United States Government applies generally accepted accounting principles to arrive at a realistic appraisal of the annual deficit. In a typical year, that’s up to twice the official number. But in fiscal 2009, the “real” number is actually lower than the official record-shattering $1.4 trillion.

  Statistical watchdog John Williams laments this year’s report reflects “accounting that might be considered questionable if it were used in the private sector. The relatively ‘positive’ 2009 results reflected capitalization of much of the government’s bailout efforts, a late ‘profit’ from TARP, questionable handling of some post-fiscal year liabilities and changes in actuarial assumptions.

So hinky are the numbers, the Government Accountability Office refuses to sign off on the report. In a statement, the acting comptroller general invokes “material” questions of how Treasury is valuing bailout-related liabilities and assets. In other words, Treasury under Tim Geithner is employing mark-to-make-believe just like the banks he used to oversee when he ran the New York Fed.

  Curiously, the most reliable trade of 2009 is breaking down as we enter the third month of 2010.

Four weeks ago, we noticed stocks are no longer moving in inverse proportion to the dollar. Even the “gold up-dollar down” play is no longer a lead-pipe cinch.

At the time, this break from trend had been going on for just two days. So we weren’t about to call a turning point. Heck, we’re still not. But look at what’s happened since…

So what’s going on? Hard to say. But we’re noticing some other things we can no longer take for granted. Like how markets hang onto every development in the Greek debt drama from Athens to Berlin to Brussels…

  On the surface, today’s news from Greece should be roiling the markets. “Prime Minister George Papandreou is flying to Berlin to speak with German Chancellor Angela Merkel tomorrow,” explains our forex specialist Bill Jenkins. “It is widely assumed that she holds the golden ticket for any EU assistance.”

But now it appears that ticket won’t get punched. Merkel says the meeting won’t be “about aid commitments.” Her finance minister elaborated by saying a third round of Greek “austerity measures” -- tax increases and cuts to government-worker wages -- should do the trick.

Buyers of Greek debt seem to think so. An auction for 10-year bonds went just dandy today -- heavily oversubscribed. You wouldn’t think protesters were again taking to the streets and seizing the finance ministry in Athens… but they were.

  The rest of the world is reacting with an equal degree of calm. U.S. stocks are up a bit this morning. And the currency markets are sitting tight.

“The market has not been very committed,” continues Bill Jenkins. “The euro free fall has ended, finding support at the 1.3450 area. We are on our 12th day of congestion in a 2-cent range… 1.3450-1.3650. Is this a bottom? It acts like it wants to be, but there’s not very much bounce here… at least not yet. Not many traders willing to take on the risk yet.”

  While the euro and dollar go nowhere, gold is holding onto most of yesterday’s big gain. It sits at $1,135.

  “All of the precious metal miners have pulled back in the past couple months,” reports Byron King. “It's a buying opportunity that's reflective of last year's run-up in the price of gold (and silver). Gold hit $1,230 per ounce in November. Then the gold price started to retreat. This pulled down the share prices for the miners.

“So looking ahead, what's the general direction for precious metal prices?

“You guessed it… upward. Hence, add to your positions in the mining patch.

“When it comes to future trends for gold and silver, it seems clear to me. It's obvious that overall world gold output is falling. I've discussed falling gold output in other updates.

“On the monetary side of things, the political classes across the planet can't control their respective government spending. This is bad for the dollar, and every other currency. It's as if the legislatures of every nation are in an Olympic race to determine who can ruin their currency the fastest. Except there's no gold medal for winning this race. Just the opposite, in fact. It leads to national penury.”

But it’s a lesson that’s been lost on national leaders for at least 476 years… as Byron relates in his latest special report. For the full story, plus the best ways to protect what you have during this race to the bottom, check it out.

  After a day of drifting nowhere, U.S. stock indexes opened up 0.3% this morning on a couple of positive data points…

First-time jobless claims fell by 29,000 last week. And continuing claims now stand at their lowest level in a year. This will be the final data point on jobs before the February employment report from the Labor Department, due tomorrow

Business productivity jumped 6.9% in the fourth quarter of last year. Digging into the numbers, this appears largely a function of companies continuing to cut jobs and the remaining employees working harder out of sheer terror that they’re next… but the market sees this as a positive.

  For the record, the Federal Reserve’s latest Beige Book -- or the Lily White book, as we’d prefer it be called -- delivers no news and no surprises. It found economic activity improved slightly last month in nine of its 12 regions, and it might have been better had it not been for the two big snowstorms. Yawn… stretch.

   We have stayed away from the Toyota witch hunt being conducted by Obama’s emboldened Transportation secretary because it seemed like such a waste of time. But daft we think Toyoda, the unfortunately named CEO, has gone. 

To drum up sales, Toyota just began offering 0% financing for up to five years on its most popular models. And in response, General Motors is doing the same. As if 0% financing circa 2002 made no contribution to GM’s bankruptcy circa 2009.

If they couldn’t “make it up on volume” then, what makes them think they can do it now? Oh, that’s right. They now have a red phone connected directly to Tim Geithner’s office at the U.S. Treasury.

  Next time you hear politicians complain that “the banks aren’t lending,” consider this: Their latest scheme to “protect the consumer” will likely dry up $6.3 billion in short-term consumer credit.

That’s the conclusion of the bank consulting firm Bretton Woods, which figures bank revenue from fees for overdrafts and nonsufficient funds totaled $38 billion in 2009 -- a 10% increase from the year before and a 27% increase from 2005.

Much of that increase results from schemes like “overdraft protection.” If you don’t usually run your bank account near zero, it works like this: You can ring up a $4 latte on a debit card, and if it takes your balance below zero, your card will still be accepted… but you’ll also rack up a fee of something like $34. (And another $34 for every transaction you conduct that day.)

Consumers have always had the choice of opting out of these schemes, but under new regulations that kick in July 1, they’ll instead have to opt in if they want it. Thus, a huge revenue stream for the banks dries up, and Bretton Woods figures that means $6.3 billion less that consumers can borrow this year. Gotta love the law of unintended consequences.

  Behold, Suburbistan:

Before…

 

… and after. Ideal for decaying downtowns
or moribund malls! Mix and match!

The town council in North Tyneside, England, is conducting an experiment with phony storefronts.

Just tape these snazzy graphics inside the windows or screw them to the fascia and you too can create the illusion of a bustling commercial district. They’re reusable!

True, there’s advertising encouraging people to set up a real business there, but we wonder about other applications of this concept. Maybe Detroit or Toledo could throw up some cutouts of ranch homes to encourage urban homesteaders?

  Reacting to the Canadian dollar’s hot streak, a reader writes, “The strong economic recovery in Canada, an amazing 5% in Q4 09, shows the country’s economy has significantly decoupled from the U.S.

“This large measure of independence in economic activities (albeit less so in business ownership -- the U.S. still owns a large chunk of big Canadian businesses) means the Bank of Canada can now afford to pursue a strong policy without worrying too much about the U.S. Fed. If it hikes interest rates and further encourage the already high savings, there will be a huge amount of real money available for investments for the future. Canada will take off from the U.S. orbit.”

  “No,” another reader counters, “we’re just enjoying a good commodities run, and lagging the USA on the credit bubble. Consumer debt ratios in Canada are now approaching levels seen in the USA in 2006.”

  In light of the Postal Service’s looming cutbacks, a reader speculates, “The future will be for mail to be handled by companies such as FedEx and UPS and their subsidiaries and by a hundred other wannabees. These companies are already deeply involved in the process of transporting the mails.”

“When the mail is handled by corporations to the maximum extent possible, the mail within the low-operating cost and high-volume areas will be by private companies. All the mail going places where costs are even questionably higher will still be left to USPS. The objective will be to get all the money for the job and do no work. Mail delivery will not be door-to-door, but to the mailbox unit at the nearest major intersection, etc.

“Mail now delivered to the ranch or main farmhouse will be available at the turnoff from the nearest interstate; never mind that it is 120 miles away (in a lot of places in the Midwest or maybe Nevada). More-local delivery might also be available by even more private means: the high school kid who would have been a paperboy once upon a time will now be a mail delivery person.
 
“If all that sounds too outlandish, consider that if you today in the East Coast Megalopolis send a parcel or FedEx message to Aunt Molly in her house out there in that little valley several mountains north of Boise, FedEx proudly takes it to Seattle, turns it over to UPS, which takes it to Boise and gives it to the USPS to cart down those gravel roads to Aunt Molly's place.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “Congratulations to Options Hotline readers,” reads an e-mail we received this morning “they’re up 86% in just nine days playing calls on a major automaker.” Steve Sarnoff’s next recommendation is due Sunday, and right now, because of a promotional offer we’re running, you can snag six months of service free.

P.P.S. If you missed the informal announcement earlier this week, we’ve locked in our friend, money manager, author, U.S. Senate candidate and YouTube sensation Peter Schiff for the 2010 Agora Financial Investment Symposium in Vancouver.

Along with a return appearance by Marc Faber and perennial favorites like Doug Casey, this year’s event is shaping up to be one of our best ever. Here’s where to secure your early-registration discount.
 

by Addison Wiggin & Ian Mathias

• First crisis, now crackdown… U.S. gov contacting “counterproductive” traders
• China grabs another world’s No. 1
• 20,000 more private sector jobs lost… one public industry primed for even larger cuts
• How U.S. debt is a thorn in NASA’s side… and a boon for investors
• Plus, Byron King visits the new epicenter for American nuclear power: Texas

 

  Every crisis comes with political baggage. This morning, the U.S. Justice Department is said to be “requesting” certain hedge funds reveal their bets against the euro.

Under pressure from their EU counterparts, say rumors making their way around the Internet, the Department of Justice is tracking down fund managers who attended a particular dinner in February hosted by Monness, Crespi, Hardt & Co., a NYC brokerage firm. The managers there supposedly discussed taking short positions in the euro and in U.S. banks while going long the Canadian dollar… all fantastic trading ideas, if you ask us.

But such “counterproductive” trading, as Ben Bernanke put it Monday, is irritating the masters of the universe. The Justice Department wants to investigate whether sharing such information amounts to collusion, and wants to cross-check the trading histories of each firm.

(Hmmmn… we’re having a dinner tonight with several of our Agora Financial colleagues and analysts. We’ll no doubt be discussing gold, the euro, Wall Street banks and the Canadian dollar. Should we too be worried?)

On the blacklist: Greenlight Capital, SAC Capital Advisors, Soros Fund Management and Paulson & Co., all of which have announced large gold positions in the past year.

Last October, we saw Greenlight’s founder David Einhorn give a speech at the Value Investing Congress in NYC. He railed against the Fed and outlined his philosophical position in buying gold as an insurance against financial calamity. It wasn’t notable for what was said, we remember writing at the time, but who was saying it and where.

We also thought Mr. Einhorn was begging for an audit… or worse. Heh. We’ll let you know if these blogosphere horror stories have any merit.

  Last year, China overtook the U.S. as the planet’s most sought-after destination for real estate investments, says a report today from property consultants Cushman & Wakefield. In 2009, property investment in China doubled -- exceeding $152 billion -- while the same measure in the U.S. plunged 64%, to $38 billion.

According to the report, eight of the 20 best performing real estate investment markets last year were in the Asia-Pacific region. They expect the ASEAN region to grow another 20% this year… particularly Japan, half of our Trade of the Decade, citing some “compelling” bargains. 

The group forecasts a strong rebound for the U.S., too. But notes, even if real estate investment doubled in the US in 2010, it would barely equal half of China’s net investments.

  Banks exposed to U.S. commercial real estate are not out of the woods yet. In fact, they may be venturing further in.

“It’s the same old story,” our commercial loan refugee Chris Mayer notes. “Banks made aggressive loans on commercial real estate. The recession came along and vacancies started to appear and rents started to fall. Commercial real estate prices also fell. That quashed the little equity that was in many of these deals and left banks holding properties that were worth less than the loans. Worse, many of them can no longer pay the mortgages.

“So banks are modifying loans, often extending them on an interest-only basis. Most of the troubled properties earn enough to at least pay the interest in this low-interest rate environment. The modification of the loan keeps it from being reported as ‘nonperforming.’ Technically, it hasn’t defaulted under the new modified terms. It’s a bit of financial magic, the kind they teach MBAs at universities. (I know. I’m a holder of the degree.)

“The problem is that modifying a loan is just kicking the problem down the road. Historically, about half of the modified loans wind up defaulting anyway. So though banks may report fewer ‘nonperforming loans,’ because they’ve kept them from defaulting, we see modified loans spiking upward -- a portent of bad things to come.”

Good times.

  Both the service and manufacturing sectors in the U.S. expanded in February, the ISM reports. Their gauge of manufacturing activity fell from 58 to 56, the group reported yesterday, but a score above 50 indicates growth.

Today, they say the service sector index rose from 50 to 53, its fastest rate of growth since late 2007.

  The employment firm ADP took another wild guess this morning and reported the private sector shed another 20,000 jobs in February. That’s “better” than the drop of 50,000 the Street was wagering on, so it was received as good news.

What’s more, the figure is ADP’s best reading since the glory days of 2008, before the Panic. All good. But you have to wonder… ADP also revised January’s number down from the original 22,000 lost jobs to 60,000. If you’re off by a factor of three, why bother counting? 

  You can expect a few thousand mailmen to join the ranks of the newly unemployed: The USPS announced yesterday plans to close more branches and ultimately end Saturday delivery service.

The 5 has bounced this idea around before, but this time it looks like the real deal… mail volume dropped 13% last year, the USPS lost $3.8 billion, it is already $10 billion in debt and expects to hit its $15 billion debt limit in 2011.

At this current pace, the government mail service -- beloved by Ben Franklin and Lance Armstrong fans alike -- is currently projected to lose up to $238 billion over the next 10 years.

The USPS has already reduced its head count 25% over the last 10 years. Time for a more radical approach? Yeah… looks like it.

  Maybe the USPS can borrow some cash from Ron Paul. The Texas congressman returned over $100,000 of his allotted office budget to the Treasury this week. “I have managed my office in a frugal manner,” Paul said, “instructing staff to provide the greatest possible service to the people of the 14th District at the least possible cost to taxpayers.”

God only knows what the Treasury will do with that 100 grand. Frankly, we’d rather see Dr. Paul spend it.

  “Due in part to the ballooning U.S. deficit,” notes our technology analyst Patrick Cox, “America’s replacement for the shuttle program, Constellation, is being canceled.

“Once the last shuttle mission is completed, Americans will be riding on Russian rockets to get to the International Space Station. America will, however, return to space exploration. The reason is simply that space, as my old friend Robert Heinlein pointed out, is the high ground militarily. Americans may be willing to share the high ground. They won’t cede it.

“Using conventional technology, the costs involved in extending space exploration to the moon and Mars are prohibitive. Alternatives to conventional rocket launch must be found if costs are to be significantly reduced to allow real exploration and commercialization.

“For this reason, the cancellation of the Constellation program may be a blessing in disguise. NASA-developed technology has not only served as a vehicle for getting astronauts into space, it has also been an excellent vehicle for delivering pork to congressional districts. In place of rockets designed and built by bureaucratic committee, much of the Constellation funding will now go instead to commercial space companies that will serve up a ‘space taxi’ role.

“This is great news for commercial space enterprises and their investors. We’ve already seen the potential of space-based businesses as wealthy tourists buy multimillion-dollar tickets on Russian ships. We’ve also seen the beginnings of private space access from Burt Rutan’s Scaled Composites’ collaboration with Sir Richard Branson’s Virgin Group company, Virgin Galactic.

“I first interviewed Rutan, by the way, in 1986: before his Voyager craft made history by flying nonstop around the world without in-flight refueling. Today, he is more than able to put passengers safely into orbit.”

  Stocks have been lazing around for the last 24 hours. There’s certainly plenty going on in the world, but the trade is “wait and see what happens” with Greece, the Friday jobs report and so on. Stocks went nowhere yesterday and opened up just a little higher today.
 

  The dollar, however, took a good beating yesterday. Confidence is building in a Greek bailout, and the euro snapped its losing steak, popping up almost 2 full cents, to $1.36. Thus, the dollar index lost nearly a point. It’s at 80.3 as we write.

  Today’s dollar weakness is a boon for gold. The spot price is up about 20 bucks from yesterday, to $1,140 an ounce. The dollar demise is good for oil traders, too. The black goo is back at $80 a barrel.

  Texas could be the epicenter of the nuclear revival, notes the intrepid Byron King, just back from a trip to the Lone Star State.

“Geologically, Texas has immense volumes of uranium in a massive ‘roll front’ trend over 300 miles long. It's more or less parallel to the reddish band in the structural map below.

“Industrially, the companies of old accomplished a lot of work in Texas, so there's old infrastructure. For personnel, a good many old hands still hang their Stetson hats down in Texas, and they know how to mine uranium. And politically, Texas is friendly to energy development.

“Back in the late 1970s and early 1980s, the U.S. produced over 40 million pounds of uranium oxide – ‘yellowcake’ -- per year. A lot of that yellowcake came from the great state of Texas, where there's a world-class uranium trend.

“Compare that old 40 million pound number with the current annual U.S. output of about 3 million pounds or so. Do the math. In the U.S., we've had a long-term decline of about 93% of domestic production. Today, the U.S. is more dependent on imported yellowcake than we are on imported oil.

“But one company in particular is putting the south Texas uranium play back together. After paying a site visit, deep in the heart of Texas, I'm convinced that this company will give us some great returns over the coming months and years.”

The ticker? You’ll have to subscribe to Energy & Scarcity Investor to find out. Details here.

  “I believe we are witnessing the beginning of the elimination of obesity in America and much of the developed world,” a reader writes. This odd discussion started with Patrick Cox, who is urging his Breakthrough Technology Alert investors to buy a company that could produce a paradigm-shifting weight loss drug.

“It's called a depression,” the reader continues. “While I enjoyed the low prices on beef last year, I have noticed that it is getting much more expensive, as is my produce and just about everything else I eat. Within five years, most people will not make enough money to be fat.”

  “I grew up in Israel and think I understand why many Americans are obese,” another writes. “They become addicted to fatty food at school. The big corporations are subsidizing 45% fat cheeses and meats to be served in school meals. The intended consequence is that kids are getting addicted to such foods and continue to consume it all their life.

“When we moved to the U.S., my kids could not eat the school lunch and we prepared for them the food they were used to in sandwiches -- for example, turkey or chicken breast with 1-3% fat. Their taste developed to like such foods. They are now lean and not mean.”

The 5: Ah that old chestnut ‘you are what you eat,’ eh? That concept was just another in a long line of brilliant ideas championed by the FDA that have proved to be a disaster for teaching children about eating well. It’s almost as fallacious as this one:

  Eat like this, and your body will begin resembling the pyramid. 

 
What’s worse, look at any packaged food and you’ll find high-fructose corn syrup among the top ingredients. People like to say Americans have contributed very little to the bounty of world cuisines. Au contraire! We invented high-fructose corn syrup. And it’s everywhere. And kiddies love the stuff.

Listen kiddies, if you sit around all day drinking coke and eating Nutter Butters while glued to your Nintendos… your ass is going to explode. It’s a fact. Eat a carrot. Go kick a ball around.

Heh, ok… enough.

No matter what might be the “right” cure, we’re willing to wager Americans will stuff themselves full of expensive drugs first. Some may even work. Patrick is big on a company that got past one more layer of bureaucracy with the FDA this week… meaning their obesity drug is that much closer to commercial availability. You don’t HAVE to invest along, but if you want to consider getting in on the ground floor of a potentially breakthrough drug, here’s a shot.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “Seven tons of gold, he gave them. And 13 tons of silver. But it came too late. He was about to die. And of course, his mistake would cost more than his life. It would also cost him his entire empire…”
 
So begins an interesting tale we’ve entitled The Curse of the Incas: Gold’s Untold Story. We recommend the read. It’s entertaining.

by Addison Wiggin & Ian Mathias

• O Canada… Olympics, GDP and Aussies send Canadian dollar soaring
• Rob Parenteau with a powerful economic indicator… brace for better-than-expected U.S. GDP
• Stocks rise, but on strange news… Dan Amoss on the perils of buying stocks now
• Plus, Chris Mayer and Alan Knuckman with two commodities worth buying

  Here we go again. The Canadian dollar is rapidly approaching parity with the U.S. variety.

 
In the last five trading days, Canadians have collectively grown almost 4% richer compared with their slovenly southern neighbors. Over the last 12 months, the loonie is up 22% versus the greenback. At this rate, we won’t be able to tell people when we head off for Vancouver: “Canada, it’s just like the U.S… only less.”

Add in the hockey game on Sunday… then the following nugget… Canucks have earned some bragging rights this week. But they won’t. From our experience, they’re always so… friendly.

  The Canadian economy expanded at its fastest pace since 2000 last quarter, its government reported yesterday. As measured by the funny little statistic known as GDP, the economy expanded at an annualized rate of 5%, beating the Bank of Canada’s projections by nearly two full percentage points.

Unlike in the U.S., growth in the great white north was relatively broad. And now with several quarters of expansion under their belt, there’s extra pressure on the Bank of Canada to start (gasp!) raising rates. Can you imagine? Banks willing to pay interest on savings again? What a world.

“Maybe the BOC will even raise rates earlier than it said it would,” notes Chuck Butler in The Daily Pfennig. “Raise them now, or next week or next month? I don't think so. But before the summer sun is hot and the tall colorful cold drinks with umbrellas are prevalent around pools... I do think so!”

  The Reserve Bank of Australia raised its lending rate again this morning. Now at 4%, the rapidly rising Aussie rate is one of several reasons the Aussie dollar is up 42% versus the dollar over the last 12 months -- the best performing major currency in the world.

Given the Aussie has a whole lot in common with the Canadian dollar -- the “comm dolls” if you insist on trading lingo -- this will put even more pressure on Canadian central bankers to hike rates.

  But not right away. As if on queue, this morning the Bank of Canada tossed this bucket of cold water on the trade: “The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity.”

The BoC said its lending rates would remain the same. But as Chuck forecast, it won’t be long. “The target overnight rate [0.25%] can be expected to remain at its current level until the end of the second quarter of 2010,” the statement reads.

  You can expect the U.S. economy to grow faster than forecast over the next few quarters, our resident economist Rob Parenteau wrote in a note this morning.

“If history is any guide,” writes Rob, “the Chicago Fed series is not one you want to miss if you are trying to get a bead on real GDP momentum. Real GDP growth of 3-4% now looks within reach for 2010 on this indicator, while most economists are still predicting barely above 3%.

“Given the lackluster reception of investors to positive Q4 2009 earnings surprises,” Mr. Parenteau concludes, “stock investors appear to doubt what the Chicago Fed series is pointing to, as well.”

  American stocks did rise yesterday, however, thanks mostly to a swarm of international news. Canada did its part. Rumors abound of a Greek bailout. And there were three big merger announcements: Japanese drug maker Astellas Pharma picked up OSI Pharma; German Merck bought Millipore, a biotool maker; and AIG sold its most profitable segment -- Asian life insurance -- to a British bank so it could repay government loans.

Heh… so… umn… this all, umn, makes America a “buy.” Yeah.

  “One of the most important lessons from stock market history is to not buy stocks trading at peak multiples of peak earnings,” Dan Amoss urges, “especially earnings that are driven by cost cutting, rather than revenue growth. Investors should pay high P/E multiples only for stocks that they’re highly confident can grow free cash flow at an impressive rate over the next few decades.

[Sounds like good advice for confidence in governments, too.]

“Yet in case after case, in the fourth-quarter earnings reports I’ve reviewed, investors persist in awarding lofty multiples to earnings driven largely by cost cutting and temporary inventory rebuilding on the part of their customers. This is typical of market tops. Investors are focusing on what happened in 2009 -- which offered an unsustainably good environment for corporate profits -- and not worrying enough what earnings might look like three or five years down the road.”

[Oh, cost cutting. That would never happen in government, never mind.]

  Sign of the times: CNBC’s newest attention getter is “Call the Close” -- a promo in which viewers, with the help of talking faces in various boxes, try to “guess the close for the Dow Jones industrial average.”

What if the Dow starts going down, instead of up? Think they’ll keep this one running? 

  Commodities are rising alongside stocks today. Gold is up about ten bucks, to $1,125. Oil is a breath from regaining $80 a barrel.

“The grain market is trying to mark a bottom,” says our resource trader, Alan Knuckman. “Bearish USDA numbers pushed prices down in January, but we’re already seeing movement back up: Soybeans continue to make new highs weekly as they build strength to attack $10 a bushel. Corn has made a 30 cent move that some are attributing to high snows that may impact spring planting.

“Nearly everyone saw record snowfall this winter, and the late beginning to the 2009 season is still fresh in traders’ minds. The 52 inches of snowfall (here in Chicago) versus the 30-inch average is one bullish fundamental variable that traders cannot ignore. While good crops in South America typically pressure prices around this time of year, the weather has gotten everyone’s attention -- even when you take off your trading cap.

  “The recession took a big bite out of molybdenum pricing,” Chris Mayer reports with another commodity opportunity, “but it is also the rebound.

“There are good reasons to see moly prices rise. First, there is the long-term demand curve:

“That’s roughly a 75% increase in a decade. And that assumes historical demand is the best guide. But there are good reasons why moly demand might rise more. This demand is mainly from energy uses and infrastructure investment. Nuclear reactors need moly. Deep-water wells need moly. Tar sands and heavy oils use moly in their pipelines.

“So these are strong new sources of demand that did not impact demand as much in the past. And then you look at where the moly will come from. The financial crisis halted or delayed the development of new mines. China is a potential source for new supply, but its mines are on the higher-cost side of the scale. They will need higher moly prices to encourage investment and bring the new supply online.

“In the meantime, a cash-strong moly producer has a window to make a lot of money.” Just like the one in Chris’ Special Situations portfolio. Get the ticker here for just $1.

  “I agree with your comments,” a reader writes of our China debate, apparently siding with those who’ve asserted China is more capital friendly than the U.S., “and have been saying the same things to friends and family in the U.S. for the last 14 years that I've been here in Beijing.

“However, you must also mention the enormous risks and variables here in China, such as no rule of law; in-your-face and never-ending corruption; signed contracts that are meaningless to a large extent and are where the negotiations really begin; a totally unethical culture that believes, as one local Beijing partner told me years ago, ‘I screw you before you screw me’; stealing from foreigners being seen as patriotic; two sets of rules, i.e., one for the Chinese and one for everyone else; and on and on...

“Keep in mind, too, that the communists pounded the citizenry so far down that there was only one way to go, and that was up. China is no economic miracle. Neither was Japan, South Korea, Taiwan, Singapore, India, Ireland, et al.

“Miracles are, by definition, very rare. Yet in almost every case, the U.S. included, when government gets out of the way and people are basically left alone, they prosper. That, and a very healthy ongoing dose of foreign direct investment doesn’t hurt.”

  “The cause of obesity IS investment,” another writes, this one referring to Patrick Cox’s bullishness on new obesity-fighting drugs. “We have spent the last 100 years replacing labor with the profitability of technology and business and sitting around staring at glowing screens.

“Meanwhile, food has been relegated to machines, pesticides and the profiteers having the cheapest inputs (corn syrup and flour) at the highest prices (Twinkies and supersized meals), all subsidized by government loans, grants, and tax breaks. To invest in 'curing' obesity, one should be buying garden tools and land. Cheap food doesn't help anyone.”

  “Americans, especially kids,” writes another on The 5 blog site, “don’t need more drugs in order to lose weight and deal with diabetes. People just need to cut way back on sugar and carbs, and also focus on portion control when eating.

“I’m usually not against any type of investment idea. However, making money off getting kids hooked on prescription drugs -- because Americans in general refuse to have a good discussion about the processed crap that’s in a lot of our food -- just seems wrong to me.

“Also, the drugs are not going to make people any smarter or more individually responsible. It will only disable people further. I.O.U.S.A. will never work out its problems if it continues to be a fat, lazy and dependent culture that continues to think that problems can be simply solved with magic pills.”

The 5: Hmmmn… well, what to say? We’re not fans of the cozy relationship between banks in New York and functionaries in Washington, either, but we don’t mind seeking profits from their mistakes.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Futures magazine just released their forecast for U.S. stocks in 2010. They've graciously included my bullish remarks within. Check it out.

by Addison Wiggin & Ian Mathias

• Greece situation looks hostile… but markets say the worst might be over
• Chile suffers, copper soars… commodity repercussions of yet another major earthquake
• Holmes, Guenthner on investing in water -- the world’s most precious resource
• Patrick Cox presents a compelling investment opportunity: Curing American obesity
• Plus, the China boom/bust reader debate rages on… and what about investing in India?

 

  The Spartans grow restless:

Hector vs. Achilles? More like State vs. Ouzo

On Feb. 12, while reviewing our forecasts for 2010 in a Richebacher Society Round Table, Rob Parenteau suggested social unrest was on tap for the year in Europe. No sooner has March arrived and we’re treated to a “physical expression” of the crisis developing there.

Major trade unions are all on strike. Most public transit -- including flights in and out -- is shut down. The Athenian stock market index is down 21% in the last three months. Petty crime, riots and all other kinds of innocuous items for a tourist-based economy abound.

All of which make the country’s debt problems worse.

  Alas, while it still makes for good TV, markets are tiring of the PIIGS. In fact, there is some light emerging at the end of the debt default tunnel. The price of insurance against Greek default (credit default swaps) fell to the lowest level since late January this morning.

The German government leaked a possible $35 billion EU bailout for Athens. That rumor alone helped lift U.S. markets early this morning.

  Using credit default swaps “in a way that intentionally destabilizes a company or country is counterproductive,” Ben Bernanke asserted late last week, too little, too late -- as usual. Coupled with today’s NYT headline “It’s Time for Swaps to Lose Their Swagger,” it’s safe to say it’s open season on derivatives -- and their purveyors.

  Stocks are also rising today, thanks to latest consumer spending data -- up 0.5% in January. That’s a notable increase from December’s 0.1% crawl, and it beat Wall Street expectations. Buy, buy, buy!

But, oh those darn footnotes! Personal income increased only 0.1% in January, meaning Americans simply spent more money they didn’t have. The savings rate fell to 3.3%, its lowest since October 2008, reconfirming the consumption trend at play before the Panic of ’08. And suggesting another crisis will be required for those habits to die hard.

We recall suggesting the lessons of credit crunch had not yet been learned as far back as November on CBS radio’s Big Money Show. The forecast holds. A “recovery” that gets us back on the wrong track is no recovery at all.

  Copper will be the commodity to watch this week. Chilean infrastructure has prevented human carnage far less severe than in Haiti last month. But from a global economic standpoint, yesterday’s 8.8 doozy of an earthquake could wreak more.

Chile produces more than a third of the world’s copper. Roughly 20% of its capacity has been shut down by the quake. Traders plugged that into their calculators early this morning and got this:

Rising up to $3.48, copper was briefly over a one-month high. We’ll keep an eye on it this week…

  Oil is riding copper’s coattails. It’s back up to $80 a barrel today. Gold is holding its ground at $1,115.

  “The world may be running low on its most precious commodity -- water.” Frank Holmes picks up on a theme that, thanks to our Chris Mayer, is quite familiar to Agora Financial readers.

“This map shows water scarcity projections for the world in 2025. Large chunks of Australia, Asia, Africa and North America are expected to have severe water issues. Credit Suisse estimates that by 2020, 37% of the global population will face severe water stress.

“The problem is unrelenting demand for a finite resource. Since the 1940s, the global population has tripled to more than 6 billion people worldwide. Over the same period, global water use has quadrupled.”

  “Water is quickly becoming one of the most important -- if not overlooked -- commodities on the planet,” our small-cap man Greg Guenthner chimes in. It’s becoming abundantly clear that the developing world is struggling to find sources of clean drinking water for its growing urban populations (China and India come to mind right away). But clean water is required for more than just drinking.

“While water scarcity in the U.S. and abroad has been thoroughly documented in the media recently, the importance of water in industrial applications has gone largely unnoticed. That’s the sector we’re looking into for the Bulletin Board Elite portfolio.

“The company that’s caught my eye develops water recycling services for industrial uses, specifically the natural gas industry. And if you know just how much water is used to drill for natural gas, you’ll realize how big of a deal this type of technology can be.

“When extracting natural gas from shale formations, drillers use a pressurized water-and-sand mixture to fracture the shale and free the gas deposits. It takes literally millions of gallons of water to complete this process, and much of this water returns to the surface. That means it has to be properly disposed of or placed in a holding pond for disposal. This is such an extensive process that it takes up approximately 5% of the energy company’s total revenue.”

[Note: For the ticker – and the rest of Greg’s small cap superstars – check out Bulletin Board Elite.]

  The dollar is rising today along with stocks and commodities. Stress in Europe seems to be overwhelming dollar gravity. Thus, the dollar index is up to 81-even, nearly a full point from Friday’s low.

   Speaking of those little green pieces of paper, Fannie Mae lost 72 billion of them in 2009, the pathetic government-sponsored enterprise (GSE) announced late Friday. That’s about $136,000 a minute.

Here’s Ian’s proposal for a new business plan for Fannie Mae: “Fire everyone except one janitor. Pay him to shovel stacks of $100 bills into the furnace all day, every day, all year. They’d save billions.”

Ian’s plan, of course, will fall on deaf ears. Fannie, in turn, will ask the Treasury for another $15.3 billion this week. Its total bailout tab will thus exceed $76 billion. For the same price, the Treasury could own outright a tiny little energy company like Conoco Phillips.

Fannie’s debt-addict loser of a brother Freddie Mac posted a smaller $21.6 billion loss last week too, if that makes you feel any better. He must be in recovery, too.

”Weight loss is an area we've been looking at for a long time now,” Patrick Cox updates readers Breakthrough Technologies, covering another diseased segment of the American psyche.

We watched the documentary Food, Inc. over the weekend. Among thousands of startling factoids in the film, this one stood out: One in three children born after the year 2000 will develop early-onset diabetes.

“Obesity is a major risk factor in various diseases,” says Patrick, “from arthritis and cancer to diabetes, hypertension and heart disease. Any drug that can help people lose weight safely is, therefore, going to offer true value. Moreover, obesity increases with age. As the baby boom, the wealthiest generation in history, rolls into its senior years, the demand and the need for an obesity treatment is growing dramatically.

“Until now, we haven't chosen a company in this sector, for several reasons. One is simply that the field is crowded. There were a lot of companies and technologies to vet. Many people are working on fat drugs. Normally, this might have kept me out of the sector, but there's room in this market for more than one winner. Buyers of these products often use them in combination.

“Another reason we were particularly careful is that we're going to see brand-new strategies for weight control in coming years. These new approaches, which I expect from several new sciences, including RNA interference, will probably leapfrog anything that comes out in the next year or so.

“Nevertheless, the demand is so great and the FDA is so resistant to new technologies, I expect some serious profits from innovators over the next five years. More importantly, this company has the potential and platform to evolve into a major biotech success story with many other targeted therapies.”

Like it or not, there will be a lot of money to be made treating obesity in the U.S…. for a long, long time. Get Patrick’s answer to this crisis, here.

  “My son lives in China,” a parent writes, continuing our spurious debate: Is China more capitalist than the U.S.? “He has for the past two or three years. For the past year, he worked as an account manger for a firm that makes games for cell phones. He quit that job and just landed a job as art director for a Beijing theater company. He also acts in films, TV shows and commercials.

“The way he explains it, it's like America was in the early 20th century, when opportunity abounded and everything was not sewn up. He's speaking of acting and opportunities in motion pictures in particular, but I think it might be pretty much across the board. I know he'd never be able to do what he does in Hollywood.

“For him, Beijing is very exciting. He's fluent in Chinese, and that makes him somewhat unique. He also mentioned that they hardly took any income tax out of his salary. Anyway, nothing like here in America.

“I visited him twice since he's been in Beijing, and I can tell you the people there really have the entrepreneurial spirit. Everyone has a business, even if it's a piece of cloth spread out on the pavement selling trinkets. Lack of a place of business does not stop them. And no one else does, either.

“On my last visit, I got sick and had to go to a Chinese hospital for blood test, X-rays and antibiotics. I was there for two days getting tests, but did not stay overnight. Total bill: $150.”
 

  “I lived and worked in Shanghai for a few months back in 2001-2002,” writes another. “My conclusions from that time, and my advice to folks considering starting or running a business there:
 

• As long as what you are doing there is seen as a benefit to the Chinese, things are good
• The rules change constantly, and “to the benefit of the Chinese” one day may not be the next
• Do not rely on rule of law. Contracts are almost worthless
• Allowing foreigners to live and work there is NOT so that the foreigners can make money and get ahead. It’s so that China can get ahead. You are a tool of production and will be used as such
• Any intellectual property that you take to China will remain in China to benefit the Chinese. You may make your one sale, but any thoughts of continuing royalties are just silly.

“If you can make personal peace with that situation, you will enjoy your adventure in China.”
 

  “Hey, 5! Did anybody vote for India?” a third reader asks. “My money is riding on them. The U.S. is like England after World War I. It peaked and was heading down and has never really recovered. As to China, it has a severe shortage of young people, due to its one-child policy. Who is going to take care of the elderly -- and at what cost? India has a plethora of young people. Vote for the underdog. China is too obvious a choice.”
 
The 5: We’re entirely agnostic on the debate. We like both India and China and want to have businesses in both. We also suspect that the development prospects in each country will yield greater investment opportunities over the next decade or more than in most developed sectors in the West, energy and technology most notably aside.

(Having said that, we don’t believe the one-child policy has had quite the reach or impact that you’re suggesting. Nor is a plethora of young in any developing country necessarily a good thing. We tackle these very demographic themes in the first “beta” issue of our new investment advisory. If you’d like to receive and comment on the first set of beta issues, we’re offering those issues free. Details here. Serious investors only, please.)

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “The trends we see in archeology are not surprising,” Greg Stemm, CEO of Odyssey Marine, told us before he began his presentation to an audience at the British Museum on Saturday. “They are symptoms of the overall move toward socialism and government intervention in markets that is sweeping the globe right now.”
   
We were in London over the weekend to capture some of Greg’s adventure on film for our new documentary. Greg has been spending an inordinate amount of time debating academic archeologists and defending the commercial model he has proposed to the governments of Spain, the U.K. and the United States, for excavating shipwrecks and salvaging tradable goods like coins that are currently resting in the deep waters of the Atlantic.

Specifically, we’re interested in the legal debate surrounding the “Black Swan” discovery off the coast of Gibraltar. The coins have been assessed at some half a billion dollars. But up to this point, Spain has successfully thwarted Odyssey’s claim to the wreck by invoking an arcane law meant to protect U.S. naval secrets during the Cold War. What happens next is anyone’s guess… Spain lacks the funding or the technology to recover the coins themselves. Stay tuned.

P.P.S. It won’t be long before our latest deal on Options Hotline will be swept off the table. We’re flat out guaranteeing your satisfaction AND the opportunity for big returns… details here.

by Addison Wiggin & Ian Mathias

• Why Eric Fry isn’t surprised economists are calling the recession’s end
• Congress fails to extend unemployment benefits… 1.1 million could be cut loose in March
• Bill Jenkins eyes this currency as the next winning FX buy
• Plus, a sign of times: World’s biggest diamond sold… to Hong Kong

 

  The U.S. economy grew even faster in the fourth quarter of 2009 than previously calculated, the Commerce Department claims today. The revised figure show a 5.9% increase in GDP, rather than the wimpy 5.7% we all believed in last week.

Take that! The recession is even deader!

  “The economists in Washington have absolutely no reason to doubt that the recession has ended,” Eric Fry reports in yesterday’s Daily Reckoning, “because the recession never arrived in Washington in the first place!

“Government employment in the Greater Washington, D.C., region has jumped more than 10% during the last eight years, while retail employment has gone nowhere. And this divergence has accelerated as the recession has deepened!

”Unfortunately, the employment trends depicted in the nearby chart are not the trends that typically produce national prosperity. If government employment were to continue rising while private sector employment fell, the economy would become less productive... at least that would be our guess. (Picture the post office operating every McDonald's in the land).

“Of course, the economists on Wall Street believe the recession has ended, too. Why wouldn't they? Former Treasury Secretary Hank Paulson shipped enough taxpayer money to Lower Manhattan in 2008 to employ every Wall Street economist for life... along with every Wall Street CEO, proprietary trader, managing director, vice president, secretary, security guard, lunch-runner, limo driver and yoga instructor.”

  In a similar vein, the U.K. announced this morning it too emerged from recession at a faster pace than previously reported. Heh, what a coincidence.

  U.S. existing home sales fell a staggering 7.2% in January -- a continuation of the lousy housing data we’ve been getting lately. Like new home sales on Wednesday, today’s number was way, way below Wall Street expectations, and the second biggest monthly slide since 1999 -- after December, which was the largest.

"It's not good news," said Lawrence Yun, the chief economist for the National Association of Realtors, who -- as we often note -- has a history of being far too rosy on U.S. housing. "There is rising concern about the strength of the housing recovery."

Really.

  The House and Senate attempted to pass a $10 billion bill last night that would have extended unemployment benefits for 1.1 million people. They ran into this:

Tough love from the senator from Kentucky

Jim Bunning (R-Ky.), who says he’s not seeking reelection, and who admittedly gets his news only from Fox News, single-handedly blocked the legislation late Thursday. He vowed to again today -- unless its authors tweak the bill to make it deficit neutral. Until then, “tough s—t,” he muttered.

While we suspect Congress will find a way to borrow and pay out those benefits anyway, the man’s approach was entertaining.

  Every other resident in Washington was camped out at Blair House across the lawn from the White House attending president Obama’s health care summit. Those invited met for seven hours.

Yawn, stretch… nothing happened.

  Neither did investors pay the presidential puffery any mind. Traders wrung their hands instead over the fate of Greece’s sovereign credit rating, pushing the market down 0.2%. The S&P 500 opened flat this morning.

And given the snow -- and that it’s Friday -- we’re not expecting much today either.

  It looks like the end of a long run for Bowne & Co. -- the second oldest company listed on the New York Stock Exchange. What started as a small stationary shop in 1775 evolved into a huge global communications company… and then got bought out in the credit crisis aftermath.

Sotheby’s -- the “Cal Ripken” of the exchange -- was founded in 1744 and now claims the oldest firm status by many years. The Bank of New York remains the oldest listing. The bank was first offered to the public in 1792, roughly about the time the French king Louis XVI’s head was rolling off the guillotine.

Our managing editor, Chris Mayer, sold his stake in Bowne yesterday. Readers following along in Mayer’s Special Situations booked a 74% gain in less than three months. “Just goes to show you there are ALWAYS opportunities out there in the stock market,” Chris noted. For Chris’ latest list of spinoffs, takeover targets and other Special Situations, look here. Access it today for just $1.

  Most commodities are in a relative holding pattern today, too. Gold and oil are drifting up, at $1,110 an ounce and $78 a barrel. The dollar index is slowly falling, down almost half a point from yesterday’s high, at 80.7 as we write.

  “I like the Canadian dollar more and more,” our currency man Bill Jenkins wrote yesterday. “It has some fundamentals that are definitely improving, and some other aspects that are definitely worth considering. Here’s why.

“Traditionally, the loony has been linked with the Australian and New Zealand dollars. Now in the current market, currencies are often linked together by at least one of three elements: They either produce a high yield, they are commodity-based or they are funding currencies for a carry trade.

“However, even though Canada is linked with the commodity currencies because of its rich natural resources, it is not a high yielder, nor is it a funding currency. Thus, up to this point, it has not been a real capital attracter.

“But its strengthening fundamentals are already reflected. We saw a strong Canadian employment figure at the beginning of February, and last week, inflation nearly hit the official target. We may be looking for a rate increase out of the Bank of Canada

“If retail sales continue to rise and we see decent numbers out of its GDP report coming up at the beginning of March, we may be onto a good trade.” If and when Bill fires off a Canadian dollar trade, only his Master FX Options traders will know… Join their ranks here.

  The most expensive rough-cut diamond in history was sold overnight. Petra Diamonds of London sold this 507-carat beast for over $35 million. The buyer, par for the course in the 21st century, was from Hong Kong. Chow Tai Fook Enterprises had the winning bid. They’re a luxury Chinese conglomerate with big stakes in hotels, casinos, jewelry, telecom and transport all over the Far East.

There’s going to be a very happy lady somewhere… in Asia

Some fun layers to this story: Petra named the stone Cullinan Heritage, after the Cullinan mine in South Africa, which also produced the original Cullinan stone -- the world’s largest rough-cut diamond, roughly six times the size of the one pictured above. That giant was sold to the British government in 1905 and was carved into “The Star of Africa,” the prize of the Crown Jewels… and given the sale of its modern cousin, a pretty accurate assessment of the shift in economics over the last century.

What’s more, Petra announced an earnings rebound last week. They made a $37 million profit over the last six months, compared with an $88 million loss in the same period the year before. The company cited a rebound in rough diamond prices and… strong demand from China. By their count, China has eclipsed Japan and the U.S. as the world’s biggest gem market.

  “I always have to laugh when everyone sings the praises of the Chinese economy,” our first reader writes. “Their economy is truly a wonder, we are told. All the same free market dolts that point to the power of the Chinese economy forget that it's a managed economy (managed by whom? The GOVERNMENT) and a dictatorship.

“Hooray for China making the big bucks. But let's get real. Any of the Republicans or free market capitalists that are hollering that Obama is a socialist would poop their pants if they had to live under the Chinese regime. The Chinese market may be something, but Capitalism it ain't.”

  “I think you guys have finally fallen off the edge: admiration for the murdering pilot tax cheat and the Chinese fascists.

“Next, you'll start arguing for a strong leader to take control of America; no need for democracy when a leader really reflects the will of the people. And who needs the rule of law when there are lower tax rates to be gained? Guys, you run money for a living. I bet the Chinese can run money too, and they'll work for a lot less than you do.”

The 5: Hey, how dare you suggest we run money!

  “It would be impossible to answer your question is China more capitalist than the U.S. in less than a dissertation, so I won't try. All I would say is GO. Go there and judge for yourself. I lived and worked in China for a number of years, and from my perspective, China is a far freer and more open society than the U.S., a country whose leadership respects its people and tries to do the very best for the largest number of people, and not just the very, very few that the U.S. leadership tries to placate.

“I often cringe when I read things that ignorant Americans say about China. America is really a barbaric, violent, corrupt country compared with China. I am reminded every day of George Orwell's astute comment in his history of the world that the Chinese had had a high culture and an advanced civilization for thousands of years when Europeans were still living in caves and eating each other.”

  “I am a VP of a biotech company here in the U.S. and married to a Chinese woman. We travel frequently to China. In many ways, it is more capitalist than the U.S. Or at least it is more friendly to capitalists than the U.S. How does a capitalist in America compete with the following: free land for your factory, free building for the factory, labor wages of a few dollars a day, well-educated middle managers for less than US$20,000 per year, tax holiday, no environmental problems...

“On one trip, I talked to an American businessman who has set up a factory with all of the above incentives who told me: ‘I tried to set up a factory in the Midwest, but gave up when I tried to deal with the costs. Then I saw what can be done here... who can compete with me? How could I possibly do this in the States?’ He makes auto parts. He also confessed that there was a moderate amount of corruption in the form of stock to local officials. If you are willing to set up shop in an area of unemployment and commit to hiring a fair amount of people, you can do well. Oh, and the government will build low-cost housing across the street from the factory for the workers.

“By way of contrast, it took us nearly a year just to get a building permit for a building expansion here in Capitalist America. My opinion... they will eat our lunch unless there are some major changes in tax incentives for business expansion or establishment.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. We’re writing from the Marlborough Hotel on Bloomsbury Street in London today. We just arrived, so don’t have anything material to report as yet. Tomorrow, we cross the street to the British Museum with a camera crew. Gregg Stemm, the founder of Odyssey Marine, is going to be debating the merits of “commercial underwater archeology.” We’ll let you know how that goes when we write again from Baltimore on Monday. (Yep, quick trip.)
 
In the meantime, allow me to introduce you to another great offer we’ve assembled:

P.P.S. There is no better time than now to give Options Hotline a try. We’re discounting the yearly subscription by $445, guaranteeing your satisfaction for the first 30 days, plus this -- an unheard-of incentive in our industry: If Options Hotline doesn’t present you with the opportunity to make at least 1,000% gains within one year, you pay nothing. Seriously. Details here.
 

by Addison Wiggin & Ian Mathias

• Beijing on the brain: A revealing poll, gold-buying rumors, fevered activity at Treasury and the Pentagon
• But is China really more capitalist than the U.S.?
• An income investor’s dream… Where to turn for high yield when the usual suspects don’t deliver
• Americans give priority to credit cards over mortgages… FICO chief wigs out in response
• “A shot across the bow” -- Doug Casey on the Texas IRS attack

 

  The markets are atwitter this morning over Greece. But chances are you already know that. It’s China we have on the brain.

And so does Joe Six-pack. ABC News and The Washington Post just polled 1,000 Americans and found…

· 41% say the 21st century will be the “Chinese Century”
· 40% say it will still be an “American Century”
· A slim majority says the U.S will play a smaller role in the world economy this century
· But a majority also says that will be either a good thing or, at worst, neutral.

We’re trying to be optimistic and take that last point as a sign that the protectionist monster among the masses is at bay.

In the meantime, there are other concerns…

  China has just postponed several military “exchanges” between Beijing and Washington -- visits by high-level officials and such. It’s the first real, tangible retaliation for the U.S. sale of $6.4 billion of military gear to Taiwan.

  Rumor has it China will buy all 191.3 tons of gold the International Monetary Fund said last week it would put on the open market. So far, only Russian news agencies are reporting this; it’s yet to be confirmed by Western sources.

  We take note of these developments with a couple of looming deadlines in mind…

· Next month, the Pentagon issues its annual assessment of China’s military. It usually has alarmist language, and Beijing usually issues angry replies, but most of the time, it’s just theater. This time? We’ll see…
· April opens the official window in which the Treasury Department could label China a “currency manipulator.” We’re hearing buzz from Washington that the Obama administration is keen to boost jobs by boosting exports -- which means a weaker dollar in general, and a weaker dollar versus the yuan in particular. We’ll watch this one closely.

  All of this weighs on our mind as we evaluate something we encountered on a private message board we belong to from someone who’s lived in China for 12 years. “What people fail to grasp,” this individual writes, “is this place is much more capitalist than the States now:

· No capital gains tax
· No property tax
· No local or state taxes
· A reasonable 35% tax rate for the highest earners
· Corporate tax rates of zero percent for 3 years and 15% per year after that.

“Also, most importantly, it’s not a casino economy like the States. China will sell 30% more vehicles this year than in the U.S. 93% of those vehicles will be purchased cash upfront.

“For a home loan, you need 30% down. As a private business, to get a loan you have to put up the assets of the company, i.e., plant and equipment. There are no leverage games here.

“It's a one-party state, but at least it is focused on its own people. We have a two-party system that has sold us down the river. All the Asian Tiger economies needed a strong central government to launch themselves out of poverty. Not a good system for our culture, but it works for them.

“High-speed train systems going on line, 50 new airports in that last five years -- you must see this place to believe it.”

We’ll be traveling to China in May. We hope to establish a business in Beijing. But what say you? Is China, for all its flaws, more capitalist than the United States now? Shoot us your thoughts here: 5minforecast@agorafinancial.com

  “In the 1970s, the U.S. controlled a 70% share of the world’s financial markets,” writes our dividend hound Jim Nelson, who also sees wealth and power shifting away from the U.S. “According to Reuters, that number ‘could shrink to 30% by 2030.’

“Yet U.S. investors hold only about 5-10% of their investment wealth in foreign stocks and bonds. That’s a ridiculously low number, considering that soon, seven out of every 10 dollars will be made abroad.

“That’s not even the most enticing stat to switch to a broader international exposure…

“As income investors, it’s impossible to ignore the massive dividend yields foreign markets offer. The major indexes of many foreign markets are posting yields that are two, and even three, times larger than the S&P 500.

“Dividend payers in New Zealand’s NZW 50 are posting an average yield of 5.3%. Australia’s ASX 20 averages 4.8%. And even the FTSE 100 in the U.K. is sitting on a 4.5% dividend yield. You can compare those numbers with the S&P 500’s measly 2% dividend yield.”

And those are just the indexes. Jim has unearthed some terrific picks within those overseas markets that you can buy easily on major American exchanges. Including dividends, they’ve registered eye-popping gains in the last year, like 40% and 66%.

For access to all of Jim’s picks, check out Lifetime Income Report. 

  The Spartans are still gumming up the mainstream financial press today. Moody’s threatened to downgrade Greek sovereign debt this morning, on the heels of a similar warning from S&P yesterday. Yawn, stretch.

Markets reacted predictably. The Dow plunged 165 points in the first 20 minutes of trading. Gold is clinging to $1,090. The dollar index is back up to 81.

It didn’t help that the weekly report on first-time jobless claims showed another “unexpected” increase. Nor did this…

  Durable goods orders rose 3% last month, but that was almost entirely on the strength of orders for commercial aircraft.

Back out orders for transportation goods and the number actually fell 0.6%. Orders for business equipment -- especially computers and electronics -- looks lousy. If businesses aren’t investing in capital goods, how likely is it they’re going to hire people? Just asking.

  Nearly one in four homeowners with a mortgage is underwater, according to figures from First American CoreLogic. That’s an even more dismal assessment than the one from Zillow earlier this month that reckoned only one in five.

In California, the number is one in three. In Nevada, two in three. At that pace, much of the Silver State is destined to return to the desert from whence it came.

Reviewing this report, a Reuters columnist points out something we wish had occurred to us earlier -- the Census Bureau’s “homeownership rate” has become a mockery. Officially, the number is still 67%. But if you exclude everyone who owes more on his home than the home is worth, the number is actually 43%. So much for the “ownership society,” huh?

  Speaking of home ownership, FICO, the outfit that computes your vaunted “credit score,” has just noticed that consumers with high scores are more likely to default on their mortgages than their credit cards.

Last year, the firm says, folks with FICO scores of 760 or higher defaulted on real estate loans at three times the pace they defaulted on plastic.

This shouldn’t be any surprise to FICO. We noticed a few days ago that the number of consumers current on their cards but delinquent on their mortgages exploded by 50% in the year after Lehman went belly up. FICO has access to this data in real time.

But it appears flabbergasted by this development, marveling in the first paragraph of a press release that “most credit cards are unsecured credit and mortgages are secured by real estate.”

Earth to FICO: If you’re in an underwater home, why wouldn’t you commit strategic default and use the difference between a mortgage payment and rent on a similar home to pay down those cards? You might not even have to move if your mortgage lender doesn’t want to follow through on foreclosure and book the loss!

Still, FICO’s CEO told Bloomberg TV he’s stunned the phenomenon isn’t limited to subprime: “Now we’re starting to see at the high end of the marketplace people with good FICO scores having serious delinquency problems.”

There’s a hint of panic in the man’s words, as if he senses his entire business model is going down the toilet. Good riddance. Millions of mortgages were issued in the last decade on the basis of nothing more than the “score” issued by this company, which reveals exactly nothing about a borrower’s income, or how his debt load compares to his income. FICO wasn’t the cause of the housing bubble, just a trifling enabler.

“I think we’re on the ragged edge, and this Austin thing is a clear warning shot across the bow,” says Doug Casey, reflecting on last week’s aerial suicide attack on a federal building in Texas housing IRS offices.

“When individuals start taking actions like this, it can change things. An army of one can sting, but what happens when you have 100,000 armies of one? Or a couple million? Just think of what would have happened back before World War II in Germany if each one of the millions of Jews and Gypsies and others the Nazis rounded up had fought back. The death camps were made possible by people who, although they had the capacity to act like wolves, acted like sheep.

“I’m not saying things will go that way in the U.S. But I do think there’s increasing resentment on the part of the average citizen against those who work for ‘The Man.’”

Doug never fails to provoke when he appears each year at the Agora Financial Investment Symposium. We can’t guarantee he’ll flout the B.C. authorities by lighting a cigarette -- indoors, on stage -- as he did in 2008, but we’re sure he’ll give you plenty to think about -- and act on. Besides, if you’ve watched the Olympics and thought that skyline in Vancouver looks pretty nice, you should experience it in person this July. For the 8 millionth time, here’s where to register. Do it.

  “The reader asserting, ‘Without an initial increase in borrowing/money supply, there can be no fiscal growth’ apparently has forgotten that it is possible to begin with savings, rather than debt. And even those who need to borrow can do so from others who have saved, rather than from an increase in the fiat money supply.”

  “Why do you, and most every other analyst, talk about the government needing to raise taxes when what is really needed is to raise revenue? It makes absolutely no sense considering that lowering the tax rates causes revenues to rise! There must be a break-even point in this formula, but so far, we have not lowered taxes to where we have reached it.

“Or contrarily, it needs to cut spending the way I do when my income is lowered by unemployment. I know, expecting Congress to cut spending is like expecting politicians to tell the truth. But you should not be encouraging raising taxes when that is not the answer to the problem.”

The 5: Oy. You must be new to the class. We’ve written extensively on the Laffer Curve, which is, as you describe, the optimum level of taxation for maximizing revenue to the government.

Even Arthur Laffer himself believes the level of taxation to maximize revenue is higher than where we are currently… because the nitwits in Washington can’t figure out how to control spending. We published a complete interview with Laffer, including his thoughts on deficit spending during the Bush years, in our book I.O.U.S.A.. Further, as we described in the “Foreword” to Gold: The Once and Future Money by Nathan Lewis, we don’t believe the Laffer Curve can work under a fiat currency regime. It requires the fiscal restraint of a balanced budget and the gold standard. Fat chance at that…

The whole idea is daft and conjured up by politicians who think the sun won’t rise without their approval. Why would you want to maximize revenue to the government anyway? It’s not like it knows how to spend it well. At this current juncture, we don’t advocate sending any money to Washington.

(Not that it really matters what we think. Members of Congress believe they have the right and infinite capacity to borrow whatever they want from our kids’ and grandkids’ future. In fact, they routinely pass the idea into law.)

Side note: We need your help. Seven years ago, we acquired a boutique research firm on Wall Street, because we thought we needed eyes and ears on the scene in New York. Heh. Stupid idea that was, eh? We closed that office in New York, but we haven’t given up on the idea of providing investment research for individual investors that will not only cover the nexus between money and politics, between Wall Street and Washington, but would crush even the finest research published by the Wall Street houses, such as they are.

We’re starting that service with three “beta” issues. We’d like to test the idea and get your feedback, so we’re offering the initial issues free of charge. If you’re interested in providing feedback, please get the details here.

Regards,

Addison Wiggin
The 5 Min. Forecast
 
P.S. We’re also giving away six months of our most exclusive and expensive service.

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We’ve got a few spaces available, so we’re offering a short-term discount on Greg’s premium microcap service. As we said, it’s the most exclusive and expensive service we offer. And easily one of the most popular. Today and tomorrow, you can get six months of recommendations and watch lists free -- but only until midnight tomorrow. The spots will undoubtedly be filled by then.

by Addison Wiggin & Ian Mathias

• Home sales, consumer confidence, jobs… gloom abounds
• Yet stocks, and Knuckman, are resilient… discover the “crude correlation”
• Faber’s forecast: Trillion-dollar deficits indefinitely, and a “dirty war”
• FDIC’s shortfall grows, as does its “problem bank” list
• Wonkish readers question our stats, especially as applied to Luxembourg… really

 

  “How dare you insult the fat guy with the mom tattoo.” We begin this morning with a reader outraged by our comment on the SEC’s weak settlement with Bank of America.

“His petty crime,” the reader continues, “does not compare with these large-scale, large-number thefts. I am sure he didn’t do whatever he did with as much scheming and planning and help from the government.”

Can’t argue with that. Nostra culpa.

  Following yesterday’s episode, we did some back-of-the-envelope math. The $150 million ruling in favor of BofA shareholders shakes out to roughly 1.7 cents per share. John Thain’s nose hairs would fetch more than that on eBay.

And… we learn this morning Bank of America is being allowed to dilute shares even further by cutting loose another stock offering. “The bank needs capital to pay back outstanding government loans,” comments the intrepid Ian Mathias. “The new executive board says they don’t know how else to raise the money.”

Boggles the mind. You can read the muck Ian raked yesterday, here. But we must warn you, it isn’t pretty.

  New home sales plunged in January to their lowest level since the Commerce Department started keeping records in 1963.

That’s an 11.2% month-to-month drop. All the gains made last year? Poof. Gone. The “bottom” of the market that mainstream analysts thought occurred a year ago is instead either happening now or still hasn’t happened yet.

Add that to the dismal Case-Shiller numbers we brought you yesterday and we have to ask members of Congress: How’s that extension of the homebuyer tax credit working out for you?

  More cheery news: The Conference Board’s consumer confidence index has dropped to its lowest level since last April. In January, the number was 56.5. This month, 46, way below even the most pessimistic mainstream predictions. Which is not really a surprise, given the challenge on the jobs front.

  For the first time since August, “mass layoffs” rose in January. That’s what the Labor Department defines as job cuts of at least 50 people by a single employer. 182,000 workers were affected, nearly half in manufacturing.

  How’s this for irony? One of the mass layoffs that’ll show up in next month’s report is Monster.com -- the job search site. It’s cutting 200 jobs in a “restructuring.”

  The Gallup polling firm has stumbled upon its own BS detector for unemployment figures from the Labor Department. 19.9% of people surveyed last month say they were unemployed or underemployed. That would be equivalent to an official unemployment rate of 16.5%.

The American people themselves say the government’s broadest measure of unemployment undercounts by a factor of about 20%.

Gallup’s figure comes within a respectable distance of the real-world estimate compiled by John Williams of 21.2%.

  Where is all this headed? Marc Faber has gone a step further with his forecast that “all governments will eventually default, including the U.S.” He laid out the prospect of a “dirty war” this week in Tokyo, during a speech delivered to 700 managers of hedge funds and pension funds.

"What are you going to do when your mobile phone gets shut down or the Internet stops working or the city water supplies get poisoned?”

“When I tell people to prepare themselves for a dirty war, they ask me: ‘America against whom?’ I tell them that for sure they will find someone.”

Faber has long seen war as the ultimate distraction from debts that can’t be repaid… and he said specifically the U.S. budget deficit will remain above $1 trillion a year. (The Obama administration says it’ll get back below that figure by fiscal 2012.)

You don’t have to manage a multibillion-dollar fund to hear Faber speak in person. He’s returning this year to the Agora Financial Investment Symposium, where he was a showstopper last year.

We just crunched the numbers on the investment recommendations delivered by nine experts during the conference, and the average gain since then is 59%… including a couple of standouts up 278% and 803%. If you want in on this year’s recommendations, early bird registration discounts still apply, but not for much longer.

  Ho, hum. As we write, Fed Chairman Ben Bernanke has begun flapping his yap in front of Congress during his twice-yearly august testimony.

No surprises here. Economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” And the Fed will get around to tightening “at some point.” We could recite this in our sleep by now.

The increase in the discount rate last week? As we thought it would be… just a head fake. Psych!

Traders are still lifting their drowsy eyelids after receiving this nonnews from the ether. Gold perked up slightly to $1,100, the dollar index has fallen a bit to 80.65 and the major U.S. stock indexes have recovered nearly all of yesterday’s losses. Remarkable, given all the delicious gloom above, don’t you think?

  “The bullish action last week in almost ALL asset classes confirmed temporary price stabilization, at minimum,” Alan Knuckman explains from his post in Chicago, “and possibly a march back to recent multimonth highs.

“Good signs across the board include crude oil rising up to over $80 a barrel and almost 15% off of the three-month lows seen just two weeks ago. This rally signals continued strength in the global recovery via demand support that is poised to test January highs at $85.

“Take a look at crude oil and the broad market S&P over the last month:

“Every major asset sell-off attempt to break the uptrend established from the March 2009 extreme market lows has rebounded with new relative highs.”

Readers of Alan’s Resource Trader Alert bagged crude oil gains of 29%, 59% and 106% last year. Here’s where you can get in on his next resource play.

  The FDIC is even more broke than it was three months ago. The fund the FDIC uses to “insure” your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter.

Incredibly, the FDIC is still trying to reassure us that all is well because it’s collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion -- barely twice the amount of the current deficit. Yeah, we feel better.

On top of that, the FDIC’s list of “problem banks” grew during the fourth quarter from 552 to 702. That’s the highest number since 1993 (when, we presume, more independently owned banks were around, so it’s worse than it sounds).

Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012.

  Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942.

Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence. The report confirms data released by the St. Louis Fed earlier this week that show commercial and industrial lending have fallen off a cliff.

As long as banks can continue to borrow from the Fed at 0.25% and park it in 10-year Treasuries for nearly 3.7% (and leverage it up, of course), we don’t see this changing much.

  “I cannot see the value in comparing external debt to GDP,” a reader writes, reacting to our list of countries threatened by economic contraction. “Most of the countries in your list are doing just fine.”

“Let us look at one's personal finances for a practical example. Including my house and car, my external debt is close to $500,000. Why should I compare my annual income with that? What should be compared is my ability to repay over the next 20 years. What is my ability to repay? My bank does not want me to be spending more than 30-35% of income on debt repayment. Perhaps that could be a good number to shoot for.”

“It is prudent borrowing and lending that finances the economy. Without an initial increase in borrowing/money supply, there can be no fiscal growth. I do not know what percentage of national income is used to repay debt, but if isn't in the 30% bracket, America needs to raise taxes!”

The 5: As far as we can tell, no portion of the “national income” is going to pay of the debt. The share the government needs to pay in interest alone is skyrocketing. But for a more objective answer, we dive into the paper prepared by professors Ken Rogoff and Carmen Reinhart…

· When external debt-to-GDP reaches 60%, annual growth declines by about 2%
· When external debt-to-GDP reaches 90%, annual growth is cut roughly in half.

“In light of this,” they write, “it is more understandable that over one half of all defaults on external debt in emerging markets since 1970 occurred at levels of debt that would have met the Maastricht criteria [for entry into the European Union] of 60% or less.”

They caution this is no guarantee that more advanced countries will go down the same road to default… but the figures are “indeed disconcerting.” Just this week, Rogoff said it’s typical for “a bunch of sovereign defaults” to follow on the heels of a banking crisis within “a few years.”

“I don’t believe your debt to GNP numbers of Luxembourg. Please explain them and give clear reference.”

The 5: We’re not entirely sure about them ourselves. But this reader offers some help:

  “Luxembourg is a small country closely integrated with neighboring countries. By population, it has just 500,000 people, less than 5% the population of Greece. People there speak Luxembourgish (basically a German dialect) as well as German and French.

”If you view it as an isolated country, it has a lot of external debt, but it probably contributes little to the external debt of the EU. Luxembourg specializes in banking, particularly private banking. It would make more sense to compare Luxembourg with the Cayman Islands or Hong Kong than with the PIIGS, but even these would not capture Luxembourg's distinct economic situation.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Congratulations to readers of Bill Jenkins who closed out their Swiss franc play yesterday for 83% gains in just over a month. That’s the way you play a financial crisis, eh? Bill is watching his charts for his next high-potential forex recommendation. To make sure you get the alert as soon as it goes out, here’s where to go.

P.P.S. Good news. We’ve had a cancellation for our “chill weekend” at Rancho Santana in Nicaragua March 24-28. So that means a spot has unexpectedly opened up. Reserve members interested in joining like-minded folks for a romp in the surf -- which I have to tell you is sounding like a better and better idea as another Nor’easter bears down on our beleaguered HQ -- drop a line to Marc Brown for more information.
 

by Addison Wiggin & Ian Mathias

• Another SEC screw-up… BofA steals billions, pays shareholders pennies
• Conspiracy confirmed: The twisted circle of Goldman, AIG, CDOs, CDSs and your tax dollars
• Greeks storm Athenian stock exchange… Byron King with some brutal truth for the region
• Chris Mayer takes notes on one of the biggest oil service mergers in history
• Plus, home prices could plunge again… the father of the CS home price index weighs in

  “This is half-baked justice at best,” U.S. District Judge Jed Rakoff wrote in an opinion yesterday afternoon. The SEC sued Bank of America for lying to their shareholders over the company having been forced to buy Merrill Lynch.

In a move that smacks of some backroom deal you and I will never be privy to, the SEC sued for only $150 million. That’s 2.4% of the $3.6 billion in 11th-hour bonuses Merrill execs awarded themselves days before they merged with BofA. It’s an even smaller fraction of the $4.4 billion bonus pool Bank of America henchmen enjoyed last year.

Half-baked justice? Yeah. On a pure cost-benefit model, it’s more like incentive for execs from BoA and Merrill and the Treasury and whoever else to go out rape, pillage, lie and steal all over again. Contrary to our Unofficial Unauthorized Darwin Awards, these companies and execs climb the food chain when they concoct corrupt insider schemes.

Good luck restoring confidence in the financial system while they’re still lounging in the corner office… rather than in a cell next to some fat guy with Mom tattooed on his arm. Oy.

  Even more for the “Wall Street Ire” file this morning: It has now been confirmed that Goldman Sachs bet against the very subprime assets it sold to AIG, which ultimately caused the insurers collapse. Here’s the breakdown, per a Bloomberg report and documents recently released from the House Committee on Oversight and Government Reform:

· Goldman Sachs underwrote $17.2 billion of CDOs for AIG, more than any other firm
· Knowing precisely the garbage it had underwritten (our assertion), Goldman bought billions in credit default swaps that would rise in value as AIG stumbled (fact)
· AIG ultimately paid Goldman -- with taxpayer dollars confiscated by many former Goldmanites in the Treasury -- the full value of their default contracts: $14 billion.

Of course, all this has been suspected for so long that it was assumed to be true… but now it’s in stone. How this isn’t securities fraud, we don’t know… it’s like selling a teenager napalm (that you made in your backyard) and buying fire insurance on his dad’s house.

  Perhaps “we the people” should man up and march on Manhattan… like the Greeks!

Rough translation, right idea

That’s the scene in front of the Athens stock exchange this morning. The Greeks have accurately assessed that the expenses of government and the resident plutocracy will likely be paid by the Average Alexandros, and are thus barricading the country’s stock exchange and vowing to strike all day Wednesday.

Heh, but lest we think too highly of the Greek movement today… this march against pseudo-socialism is being sponsored largely by the Greek Communist Party. What’s a self-respecting believer in free markets to do these days?

  “German Business Confidence Unexpectedly Declines,” Bloomberg headlines this morning. Heh, unexpected to whom? The blissfully unaware?

The Ifo Institute’s business climate index fell in January for the first time in 11 months, from 95.8 to 95.2. In light of all the insanity coming from the PIIGS and the stress over the euro, we’re only surprised it didn’t fall by more… like (gasp!) an entire point.

“Can you fault the Germans?” our Byron King asks. “Germany is a nation of high industrial productivity and strong monetary discipline. It can’t abide, and will not subsidize, the free-spending habits of the fiscal libertines down in Greece (not to mention Italy, Spain and Portugal). The usually polite German magazine Der Spiegel pulls no punches last week, entitling one article ‘Lies, Damned Lies and Greek Statistics.’

“In Greece, they’re faced with the hard fact that they have too much government and not enough productive economy. Even with their backs to the wall, the Greek politicians won’t make painful budget cuts. Greece needs a miracle -- if not a bailout -- just to keep the lights burning and the civil servants paid.

“Does this seem similar to what’s going on in California, or New York, or Michigan, or maybe even the whole United States of America? As that ancient Greek philosopher Plato once noted, ‘If the sandal fits, wear it.’

“What’s happening in Greece is a dress rehearsal for the tragic drama that’ll play out in the U.S. over the next generation or so. Too much government, too many obligations and not enough money to pay for it. To use a Greek concept, it’s destined. Something has to give, and my bet is that sooner or later, the U.S. dollar will go Greek on us.”

Of course, that’ll be to the benefit of Byron’s Energy & Scarcity investors, whose holdings in energy stocks will likely rise. But they won’t have to wait for dollar collapse… on Friday, ESI readers cashed out of their position in Tullow Oil for a 98% winner in just 14 months. Make sure you’re on board for his next pick, right here.

  For now, the euro is the world’s whipping boy. It fell about a full cent early this morning, to $1.35.

“With rumblings of dollar tightening and the Greece situation,” writes our currency man Bill Jenkins, “the upcoming week provides very little in the way of news. At the very least, it has more risks to the downside than the other way around.” Yesterday, Bill picked up $1.36 puts on the euro… they’re well in the money today. For help trading currency moves, see Master FX Options Trader, here.

  The dollar index bumped up about half a point on the above news, to 80.6 as we write.

  Gold’s holding its own, considering the dollar rally. The spot price is down about $5-10 from yesterday, to $1,110. And as we noted yesterday, oil’s had quite a run lately. But the party is over today… a barrel is worth a buck less, at $79.

  Schlumberger just pulled off a super-sized acquisition of Smith Intl. In an all-stock, $11 billion transaction, SLB is now by far the world’s biggest oil service company. Should revenues stay the same, Schlumberger will be double the size of Halliburton, its closest competitor.

“The deal says two things to me,” Chris Mayer adds. “First, it’s tailor-made to help the oil and gas business exploit tough-to-get-at resources, such as shale gas and deep-water fields. The two companies can share technology. And the financial clout of the combination will make for one heck of an R&D budget.

“It also tells me that things are looking up in the oil and gas business -- and that stock prices of service stocks are still cheap. As Schlumberger’s chairman, Andrew Gould, said, ‘It probably would not have been possible at the top of the cycle, because valuations would have been out of alignment.’

“I think the window is closing to make good acquisitions, though. As it is, Schlumberger paid a 37.5% premium to Smith’s price on Feb. 18 -- before the rumor mill put a charge into the stock price.

“I think Schlumberger probably overpaid. The market didn’t like it either, taking off $2.5 billion from Schlumberger’s market cap. These giant acquisitions rarely work out well for the acquiring company. When the oilmen get excited about the synergies of a combination, price considerations tend to get lost…

“In any event, the oil market looks good and lively to me. In early 2009, it looked like it was near death, but the recovery in oil prices, China’s increasing imports and an active M&A market are all portents of good things for investors in oil.”

  Home prices are falling again, says the latest rendition of the Case-Shiller home price index. National home prices fell 2.5% year over year in the fourth quarter of 2009, the group claims. Both the 10-city and 20-city indexes dropped 0.2% from the previous month.

That puts the average home price down 29% from its 2006 peak, back to prices typical of summer 2003. Ouch. Here’s a fresh way of observing this train wreck:

“This isn’t a forecast, but it’s a worry,” Robert Shiller, founder of the index, told unwilling ears on CNBC, “that home prices might drop substantially from here foreword, once this [government] support is taken away… Mortgage rates will go up, the economy might double dip, the expectations for housing -- which helped drive the markets -- might change suddenly when people see the support being withdrawn. Some people were buying because of the homebuyer tax credit. When that’s withdrawn, a lot of people will be absent the market. There is substantial downward risk right now.

“But on the other side,” he added, unable to control laughter sprung from true insanity of it all, “we’ve seen a bubbly nature in the market recently. So I think just uncertainty is at a maximum right now.”

Indeed. And “maximum uncertainty” is nirvana for options traders, which is one reason we’re offering a handsome discount on Options Hotline today. It’s one of our longest running services, and now’s a great time to check it out. Details here.

  “I note that in your listing of countries that have external debts greater than 100% of their GDP,” a reader writes, “of the top (worst) 15 that include four of the five PIIGS, 14 of them are worse than Zimbabwe, which you single out, including France and Germany. But the very worst was Luxembourg, with 4,287% of GDP, yet there is little press given to this country in the EU, while the world frets over Greece's debt situation.

“Seems like Luxembourg is getting very special treatment… strange, indeed! Could it be that one of the EU officials makes his home there? The political stench can be smelled all the way to Florida!”

  “Spain's claim to ownership of the Black Swan treasure would be not unlike Germany wanting to recover the art looted by the Nazis,” a reader writes, responding to our announcement yesterday. “If anyone has a claim other than Odyssey, it would have to be the Amerindians, from whom the Spanish stole and extracted it using slave labor. Next in line would be England, which has an arguable claim as a prize of war.

“If Spain has any claim to this treasure, it must also have claim to all of the Spanish treasure recovered in Florida as well. I hope your documentary addresses these absurdities.”

The 5: We’re already learning more about the politics of undersea archeology than we ever expected to in our lives. We began shooting at a conference in New Orleans last week that almost barred entry to our camera crew because “only serious discussions” were being allowed at the conference. Somehow, we fooled them into believing we’re serious. This week, we’re headed to London for a similar exhibition at the British Museum. We’ll be broadcasting outtakes and such as we make the film… so stay tuned.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “We’re sold out,” reads a brief message our publisher Joe Schriefer sent us this morning. If you took advantage of our partnership with First Federal and got yourself a Chinese Silver Panda coin, congratulations… you’re in rare company. We’ll keep our eyes peeled for more exclusive offers. They’re fun.

In fact, if you’d like to be alerted first to any future finds, visit this site and request that your name be put on our “exclusive coin offer” list. You won’t have to buy anything you don’t want to. We’ll just let you know when the deals materialize.

We’re already hearing rumors of the same coin.... in gold. Details here.

by Addison Wiggin & Ian Mathias

• NABE predicts “recovery firmly on track”… Rob Parenteau on what might derail mainstream expectations
• Marc Faber identifies one nation/sector as “the perfect contrarian play”
• Chris Mayer on when sovereign debt goes too far… and the many nations flashing warning signals
• Since it worked so well last time… SEC mulling more rules/bans on short selling

 

  Most economists now “expect the recovery to remain firmly on track.”

That’s the word today from the National Association of Business Economics (NABE), the group officially tasked with deciding if the economy is growing or receding. The NABE forecast 3.1% GDP growth this year, largely in line with their last broadcast back in November.

That “firm recovery” will also move the unemployment rate down one tenth of a point this year, the group forecast, from 9.7% now to 9.6% in December.

That’s good, right? C’mon, this is The 5… we never trust good news!

  “Our concern remains,” Agora Financial’s resident economist, Rob Parenteau, says “as investors gain more confidence in private sector growth,” many questions about their recent behavior arise:

For example, investors “may notice that ‘core’ inflation remained above zero all the way through the deepest and longest recession since the Great Depression. If core inflation is driven by slack in the labor market and slack in the use of productive capital, why did deflation fail to show up in one of the sloppiest business cycle recessions in decades?

“If many of the investors that sold mortgage-backed security debt to the Fed under the Fed’s quantitative easing (QE) program,” Parenteau continues, “then turned around and reinvested the proceeds in Treasuries, then the cessation of QE will result in more of a backup in Treasury bond yields than many investors currently expect.

“If at the same time, institutional investors are growing more confident in a self-sustaining economic recovery (and this is certainly where they have been placing their money over the past two weeks), the investment rationale to buy and hold Treasuries at historically low yields is likely to be further undermined.”

One conclusion: If the recovery is here for real, Treasuries are about to get smacked. Even by the Fed’s own logic. Right on schedule, if you’re following the Trade of the Decade.

(Side note: Marc Faber came out in support of the buy side of our Trade of the Decade last night. “There is an investment opportunity in Japan,” he told the audience in Tokyo. “Valuations are not terribly expensive,” he added, saying Japan was “the perfect contrarian play.” For the bold, he had one word for investing in Japan: “Banks!” ¡Ay, caramba!)

These next two nuggets don’t bode well for Treasuries, either:

  “China may have created trusts in the U.K. and Hong Kong,” observes our friend Chuck Butler. “They’ve switched their buying [and selling] of Treasuries to these two trusts, so that the transactions can't be tracked.

“Really, we don't know for sure, but that's the rumor going around right now. I have to think that this ‘story’ about ‘trusts’ has been made up, to keep people from thinking that China is really reducing its holdings of Treasuries. That's my story, and I'm sticking to it!”

  “Right now, the market thinks that Germany is a better credit risk than the U.S.” Chris Mayer reports. Indeed, if you own U.S. debt today and want to buy insurance against default, you will find that such insurance costs more than it does to insure German debt.

“I think that’s probably an anomaly,” Chris continues, “as I would bet that Germany is a poorer credit risk than the U.S. In any event, there is not much difference between the two. It’s a bit like choosing whether you’d rather flush your money down the toilet or burn it.

“Both countries are in danger territory, at least according to the work of economist Kenneth Rogoff. He looked at debt levels going back hundreds of years. Rogoff found that as a general rule, a country gets into trouble when external debt to GDP exceeds 60%. That means that the debt held by folks outside the country is about 60% or more of the size of the economy. The economy often contracts, and things can get ugly.

“If you look at the countries flashing warning signs right now, you find a meaty list of potential crises. Here is the latest:

“So let’s see… any resemblances strike you? These are almost all Western countries. All the biggies are here: the U.S., Canada, Germany, France, the U.K. and Australia. Plus, four of the five so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the usual suspects like Zimbabwe.

“I’ll tell you this: I can’t think of any lists you want to find yourself on with Zimbabwe.”

  The latest dollar rally took a break over the weekend. The dollar index fell almost a full point from Friday’s high, now at 80.6. The market got all huffy late last week over the Fed’s surprise hike of the discount rate.

Alas, as we wrote Friday, the Fed is “all for show, not for go," and the market has since retracted its concern.

  Nevertheless, gold took a little hit. It’s down about 15 bucks from the weekend high, to $1,115 an ounce.

  Another four banks bit the dust late Friday. Having taken off Presidents Day weekend, the FDIC had some catching up to do. The banks hailed from mortgage meltdown hot spot states from Florida to California, bringing the 2010 body count to 20.

La Jolla Bank of California was a notable casualty. Its $3.6 billion in assets makes it the biggest bank failure so far this year. All told, the weekend cost the FDIC another billion dollars it too does not have.

  Since it worked so well last time, the SEC is mulling new rules for short selling, again. SEC regulators will vote Wednesday on the reinstatement of the uptick rule -- a provision that requires a stock to be bid up before a short seller can establish a position.
 
“Any sort of ‘uptick rule’ imposed by the SEC would stifle stock market liquidity,” notes our in-house short seller, Dan Amoss, “which would increase transaction costs for all traders and investors. Also, the evidence from studies by academics and regulators has shown that limits on short selling impede price discovery in cases of rampant accounting fraud, like Enron.

“The real driver of stock market crashes are long-only investors all looking to sell at the same time, with nobody willing to buy. If short sellers drive the price of a single stock down to ridiculously undervalued levels, then the free market will ultimately respond -- the low price will draw value-seeking investors to step in and buy.

“But in many cases -- especially with highly leveraged companies -- there is no equity value. The reason Lehman never reached a bottom was because buyers suspected it had no value and eventually were proven right, since management was overstating the value of its toxic assets by tens of billions of dollars.”

Dan, if you recall, was way ahead of the crowd with his valuation of Lehman Bros. back in 2008. And his Strategic Short Report readers reaped the benefits -- to the tune of 450% profits on their LEH puts. That’s his gig. He’s our resident stock market vigilante. And he’s good at it. Since its inception, SSR has managed an average gain -- including losers -- of 49%. Well done, Dan. If you’d like to try your hand, we’re giving away two free months of his advice, right here.

  A tip of the chapeau to crude oil, this morning, too. While the world has been fussing over Dubai and PIIGS, the black goo has shot up $8 this month, to $80 a barrel this morning. Work it.

  “In response to the fake Chinese Silver Panda coins,” a reader writes, furthering our discussion from Friday. “I was really interested in buying some of these coins, but have no experience in rare coins. I trust Agora and believe you guys do your due diligence. My wife did some research so that we could be better educated and found a first-strike PCGS MS-70 Silver Panda on eBay:

“So are you saying that this is a fake, as First Federal are the only people who have access to these coins? If this is a fake, then the vendor should be reported. If not, then I still don't understand the difference between a PCGS first-strike from First Federal and the PCGS first-strike from this vendor.”

The 5: If it’s truly PCGS certified, it’s the real deal. But that doesn’t mean they are up to snuff with the coins First Federal is offering exclusively to you.

Here’s the key distinction: Not only are First Federal’s Pandas graded first-strike, but each coin also includes a letter from the Chinese Mint’s exclusive distributor declaring that the coin was truly among the first struck. It would be possible for other companies to have first-strike-graded coins simply because they submitted them to PSGS within the first 30 days of the mint release. But only First Federal has that documentation.

  “How do I know that these coins, coming from China, are really MS70-grade coins?” another reader writes. “China has not been on the up and up with the U.S. for some time now, and I am reluctant to buy anything from China without seeing it first. Please reply.”

The 5: Apart from the documentation, First Federal has a 30-day return policy. If you need to “see it to believe it,” the sale is guaranteed. Your investment is protected. And all the graders and merchants involved are international companies with sterling reputations and certifications.

We’ve darn near sold out the exclusive stash the Chinese mint has made available to First Federal, and in turn, Agora Financial readers. Having introduced the coins to you four days ago, First Federal’s inventory is down 80%! At this rate, the well will run dry within the next few days… hours, even.

Just sayin’… if you would like to have your own first-strike Panda, don’t wait.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Here’s a fun announcement: We just inked a deal with Odyssey Marine to make a new documentary film about its battle with Spain over the “Black Swan” treasure find off the coast of Gibraltar. Our press release to the trade in Hollywood goes out later today, but thought you’d like to know first.

ZEUS on location in Lebanon a few weeks ago, plumbing the depths of the Mediterranean for a downed aircraft's 'black box.'

by Addison Wiggin & Ian Mathias

• Fed sets cat among the pigeons by resetting discount rate… Impact everywhere
• Dollar-euro parity? Bill Jenkins on the prospect of a Greek bailout
• An object lesson in debt… Olympic mountain on verge of foreclosure
• How to steer clear of counterfeit collector coins from China
• After we respond to a reader’s “cry for help,” he writes back… 

 All for show, not for go. The Federal Reserve has raised the discount rate -- the rate it charges banks for short-term loans -- by 25 points, to 0.75%. 

“It used to be a sin,” our friend Chuck Butler commented this morning in the Daily Pfennig, “to have to go to the ‘discount window’ and borrow from the Fed. But these days, it's like a walk in the park… nobody watches, and nobody cares!”

The Fed’s move was expected. The timing was not. Rather than wait till its regular meeting next month, the Fed pulled the trigger after the market close yesterday… and before options expiration today. 

It’s the first increase in the discount rate since the Fed entered Bear Stearns panic mode by cutting the rate on Aug. 16, 2007 -- also outside a regular Fed meeting, also on a Thursday before options expiration.

Anyone with call options on the indexes is hurting this morning.

 Still, “this move is more cosmetic than anything,” cautions Dan Amoss. “It’s a drop in the bucket compared with the flood of new money the Fed created for quantitative easing programs. Yesterday’s announcement seems designed to silence the critics who say the Fed will never tighten again, and is engaged in backdoor monetization of the national debt. 

“The Fed and Treasury Department are involved in a poorly disclosed, conniving plan to recapitalize Fannie Mae and Freddie Mac without going to Congress for funding authorization. They are doing this through the quantitative easing program and Treasury’s Dec. 24 announcement of unlimited capital support for Fannie and Freddie. 

“Quantitative easing is the more important policy tool being employed by the Fed right now. The Fed will maintain focus on quantitative easing until the bond market revolts by selling off Treasuries. The more important development later in 2010 might be the bond market forcing the Fed to follow it into raising the cost of borrowing for both the government and the private sector.”

That would create a whole new realm of opportunities for readers of Dan’s Strategic Short Report. We’re offering access at more than 60% off the regular price. Check it out here.

 “The Fed statement was pretty adamant,” says Dave “Dollar Bear” Gonigam who perused the document on your behalf this morning, “about the discount rate not being an indicator of anything else to come, for what it’s worth.”

 Meaningless as it is long term, markets everywhere are reacting. The major U.S. stock indexes opened down 0.3%, traders fearing an end to the easy-money gravy train. The dollar index has blasted through 81… territory it hasn’t seen since last June. 

But the rising dollar hasn’t done its customary number on the gold price -- which stands firm around $1,115. Like yesterday, when the IMF decided to sell another 191 tons of gold on the open market, gold is demonstrating resilience in the face of news that traders would ordinarily see as bearish. 

"I'm very encouraged by the way that the gold market and crude market has reacted” to the Fed, Resource Trader Alert’s Alan Knuckman told CNBC after an early wake-up call. “They haven't pulled the plug yet, and they aren't as dollar dependent as some people thought." You can watch Alan’s interview here.

Oil is holding firm above $79 a barrel.

 The stock market is holding up better than you’d expect given the Fed’s announcement, and here’s why: The consumer price index just clocked in lower than expected, rising 0.2% in January. Most of that can be blamed on rising fuel costs. 

“Core” CPI -- the number used for people who don’t eat or drive -- actually fell 0.1%. Curiously, that’s the first month-to-month drop since December 1982.

 Americans polled by Gallup say they cut back their spending in January to the same levels as January 2009. Hmmm… We seem to recall people still feared the world was coming to an end back then. The response was uniform across all income levels and all regions of the country. 

Couple this with Wal-Mart’s same store sales and we’re still not seeing the celebrated American consumer getting back on his feet.

 “If the European Union allows fiscal support for Greece,” ponders our FX specialist Bill Jenkins, “does that mean carte blanche permission for others to run to the EU money window and collect assistance for their carefree spending days?

“It certainly seems to me, dear trader, that if the European Union makes this decision, it will lose all credibility. And that may be the only thing that stands between it and ruination of the union. It may end up collapsing on itself, even if no members ever leave, and its downfall will be the loss of confidence in the currency.

“So then, how much further could the euro fall? Could it go all the way to parity with the dollar? Most certainly. But before that point, we will likely see many waxing and wanes of each side of the currency pair.”

Bill’s call for euro-dollar parity is not new; he made it during one of our editorial meetings last summer. Since that time, the euro has melted down from $1.50 to $1.35. A move to $1.30 will position his Master FX Options Trader subscribers for some handsome gains very soon.

If you want to profit from the “waxing and waning” of the euro and the dollar, Master FX Options Trader is just the thing. Here’s where you can join. 

 The mountain where U.S. Olympic skier Lindsey Vonn won gold on Wednesday may well go into foreclosure next week. The Whistler Blackcomb resort is owned by Intrawest, a firm bought by the private equity outfit Fortress Investments in 2006. 

Intrawest’s lenders have set a deadline of a week from today to cough up a $500 million interest payment due two months ago. (The original deadline was today, but yesterday the lenders agreed to an extension.)

“Debt can make good investments bad investments,” observes Chris Mayer. “Save for the debt issues, Intrawest could probably just ride out this cycle and wait for better days. Not now.

“The lesson is also that investments make sense only in the context of a full cycle. The private equity deal for Intrawest only worked if Intrawest could sell condos at then market rates. As we all know now -- and some of us knew then -- it was a frothy real estate market. No deal should’ve depended on that continuing.

“I remember Intrawest fondly… It was one of those situations where in Capital & Crisis we had a clearly undervalued asset. Fortress agreed and bought us out. We made 71% in 490 days, from April 2005-August 2006.”

This morning, Chris issued his Capital & Crisis readers a four-part action plan for how to invest in a world that looks a whole lot different than it did back then. For access, go here. 

 “Anecdotal reports seem to show the Chinese Panda as one of the most counterfeited modern coins,” a reader writes in response to our exclusive offer on government-certified first-strike 2010 Silver Pandas.

“While beautiful, perhaps striking, even the 'good' Pandas will come under suspicion by any buyer. That's why I have avoided buying them, though I find the designs very nice. I just don't want to buy something that might be hard to get rid of when the time comes, because of all the fakes around.

“Given the aspersions on the coin, and the widespread availability of the fakes, I think it's irresponsible to promote them.

“Since you are undoubtedly getting a piece of the action for promoting them, perhaps you won't want to run this letter. I just hope you aren't enticing your readers into making a mistake. A delightfully attractive mistake, given the design of the Pandas, but from an investment perspective, a mistake, nonetheless.”

The 5: We brought up this issue with First Federal before we agreed to offer these coins. And after looking into it ourselves, we’re convinced this is old news.  

The counterfeit scandal dates back to 2006, and the whole coin landscape has changed since then. For instance, demand for collector-grade coins in China has become so intense, the major coin-grading agencies have opened Chinese offices. That’s a huge check and balance on the counterfeit problem right there.

Further, we’re not talking about the garden-variety issue here.  We’re talking only 2 ½ percent of the entire mintage that’s government-certified as first strike. The Chinese government has never -- repeat never -- done that before.

Our friends at First Federal obtained the worldwide exclusive rights to these government-certified first strikes and submitted them to PCGS, one of the two major grading firms. (Want to avoid counterfeits?  Make sure the coins are graded by one of them.) The coins that came back flawless - MS 70 - are the ones we’re talking about here.  

So that’s a number of layers of protection you have. PCGS stands behind the coins.  And First Federal's been in business for 25 years. It’s not some fly-by-night “Power Seller” on eBay. We only want to do business with the best, and we looked long and hard for a reliable partner to present you with offers like these.

Again, First Federal has set aside these government-certified first strike Silver Pandas exclusively for Agora Financial readers through next Wednesday, February 24. We expect them to go fast. So it pays to move fast. 

Late-Breaking Update: Last we checked, 40% of the entire inventory has already been sold. We had to double-check those figures - after all, it’s just 24 hours since we sent out our first invitation to readers. But the numbers all check out. So we expect the rest to sell out long before the offer expires next week. To make sure you get yours, here’s where to go. 

 “Thank you for taking notice of my cry for help in my ‘I don’t get it...’ post,” writes a reader following up from yesterday. “I agree with your reply. I must confess that I do get a bit overwhelmed by all the opinions, and in all the noise, I do miss some of the details.

“But I must correct you about my not being a Agora customer. I am an EXTREMELY HAPPY Resource Trader Alert customer, auto trading the RTA alerts via one of your preferred brokers. Riding the RTA train has been bit like riding the Polar Express with the wild swing of the commodity markets. But with Alan Knuckman driving the train, all is well!

“Alan’s trades have saved one of my accounts from utter peril under the guidance of others to amazing profits in just a few months that are worth bragging about to anyone that will listen. 

“I’m also a new Lifetime Income Report and Penny Stock Fortunes subscriber and am in the process of moving funds around to take advantage of some of the tempting opportunities that fit my long-term investment needs. 

“Lastly, I’m taking advantage of the 30-day trials of Strategic Short Report and Mayer’s Special Situations.

“Bottom line: I’m blown away... I’ve never had access to such timely, detailed and insightful research. THANK YOU! 

“In the end, my cry for help comes from the contrast between the detailed, motivating weekly news letters, alerts and reports and the paralyzing, game-changing, daily news coming from The Daily Reckoning, The 5 Min. Forecast and Whiskey & Gunpowder.”

The 5: Thank you for the compliments. Although we’re going to leave it to a longtime reader for the final word:

 “Read the ‘depressing’ comment by a reader, who didn’t know what to do or why to invest since the world is falling apart.

“LOL. As you guys have described me earlier in an e-mail about a year ago, I'm a ‘fatalistic optimist’; yes, the world is falling apart, yes I'm going to die, yes countries will crumble, yes markets will crash... but that doesn’t stop me from living my life, making more money and creating more wealth... rather, knowing that its all going to end gives me a real boost to have a blast!

“Why Agora Financial? One, they are funny. Two, they are nutty. Three, they are dotty. Overall speaking, they are honestly funny (honest and funny people).

“And I forgot, Bill Bonner is probably the best in giving the global governments ‘poetic, artistic and intellectual frosty-nosers.’ So Agora offers a different perspective of economics, relative truth, art and more than a bit of fun... what's not to like?

“But if you take Agora's investment advice at face value and expect things to work out, then you've probably been making the same mistake for the past decade... take responsibility for your investments!”

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. To help you do that, for a brief time, you can snag six months of free access to our most expensive service. Its picks are already up 18% on the year. Here’s where you can check it out

by Addison Wiggin & Ian Mathias

• Scary budget numbers… Placing vain hope in Obama’s “debt commission”
• China dumping U.S. Treasuries? Why there’s more than meets the eye
• Stocks, gold holding up in the face of bearish news
• The trillion-dollar hole… Crisis in state pension plans
• “Waiting for collapse” -- reader experiences cognitive dissonance; we reply

• Cutting the deficit to 3% of GDP by 2015 (it’s currently running over 10%)


• Fixing the problems with the Big 3 entitlement programs of Social Security, Medicare and Medicaid. 

• The study runs only through the end of fiscal 2008 -- which in most states was June 30. In other words, most of this is pre-Lehman


• Typically, public pensions don’t use mark-to-market accounting; they try to average things out across a period of years using a technique called “smoothing.”

• The world is coming to an end 


• All governments are run by idiots 


• The only good guy is Ron Paul 


• Gold is the only ‘safe’ investment 


• Most of Agora’s portfolios currently report more losers then winners 


• Interest rates are so low that we’re now looking at a bond bubble once rates go up 


• My house is a bad investment 


• Stock are falling out of bed as of the first of the year 


• Taxes are going to go through the roof due to all the debt 


• Even IRAs aren’t safe from the reach of the government 


• The government will run and own everything by the time Obama leaves office 


• Pending hyperinflation will destroy any wealth we do have and crush the economy 


• And, to cap it all off, in the end (when it does come), all my hard earned money will be worthless anyway 

by Addison Wiggin & Ian Mathias

• Don’t look now, but U.S. companies are back... Chris Mayer on “one of the best earnings seasons on record”
• George Soros doubles down his stake in gold… and picks up Citi?
• Patrick Cox on two encouraging byproducts of the U.S. recession
• China loses a “world’s No. 1” status… Japan now the biggest holder of American debt

  “We are in the midst of one of the best quarterly earnings seasons on record,” our managing editor, Chris Mayer, alerts us to a startling fact today.

John Deere, for example, beat Wall Street estimates nearly threefold this morning. Traders were ready for 19 cents a share in its fiscal first quarter. Deere gave ’em 57 cents. And that’s mostly without one-offs and special sales.

“More than four out of five companies are topping consensus estimates on profits,” Chris continues. “The S&P 500, that big index of America’s largest companies, is set to break a run of nine consecutive quarterly declines in profits.

  Heh. Not so fast.

“This doesn’t mean stocks are a buy,” Mr. Mayer cautions. “The big rally stocks enjoyed in 2009 baked in much of that recovery. However, unlike prior quarters, it’s not just cost cutting that’s driving those profits. Sales are starting to tick up again. Nearly two out of three companies are beating sales forecasts.

“What happened? The good recession happened (at least where government bailout money did not get there first). The bitter winter of recession thinned the herd. It’s an ongoing process. For instance, a recent Wall Street Journal headline reads ‘Radical Shifts Take Hold in U.S. Manufacturing.’ It pointed out that Dow Chemical would shed $2 billion worth of basic chemical factories to shift into more profitable specialty chemicals. Whirlpool is cutting 1/10th of its capacity. Yet Intel is investing billions in its U.S. plants to meet new demand.

“In a big-picture sense, what we are seeing is a squeezing of the economic sponge. The market process forces people to liquidate the bad businesses and purge mistakes. The excess capital is then free to go elsewhere and find better returns. And the capital that remains in a business earns a better return for its owners. Or put another way, capital flows out of the Whirlpools and toward the Intels. Thus, we plant the seeds of recovery.”

Discover a few of those seeds, here, for just a $1.

  Earnings surprises help explain the S&P 500’s 1.7% rally yesterday. Traders got a confidence boost from the EU over the Greece situation and were then treated to tasty earnings from Kraft, Abercrombie & Fitch and Merck.

  The Empire State Manufacturing index is even getting folks all lathered up. It blew expectations out of the water yesterday. The gauge of manufacturing in New York soared from 15 to 24 this month… not a definitive gauge for the rest of the U.S., but a leading indicator worth noting before the ISM’s nationwide manufacturing report later this month.

  What… you don’t count yourself among the lathered?

“The Great Recession is still in full force,” our Patrick Cox agrees. “Unemployment and the debt overhang are bad. The important thing to remember, however, is that this situation is neither accidental nor mysterious. It was caused by quite specific mistakes....

“Government-entwined credit institutions, especially Fannie and Freddie, were used to subsidize and encourage home ownership. People who should have rented bought. Housing prices rose. Speculators and mortgage lenders saw an opportunity and doubled down. Increasingly desperate measures to sustain an unsustainable bubble eventually failed, and the rest is history…

  “But even with public sentiments depressed,” Patrick continues with trepidation, “I'm seeing indicators that are positively uplifting. There has been, for example, a major shift in the public attitude about the debt. A few years ago, it was limited to people like Addison Wiggin and Bill Bonner. Today, there are widespread public demonstrations protesting deficit spending. This is a remarkable turn of events -- a sea change with real implications.

“Another extremely positive trend is the ongoing and spectacularly rapid collapse of the global warming edifice. Until a few days ago, it was still possible to claim the overall theory was sound, despite revelations of serious errors in official climate claims. Now that is no longer the case. The high priest of climate change himself, ex-head of the CRU, Phil Jones, has admitted there has been no statistically significant warming in 15 years…

“In short, we are seeing a return to sanity in both public opinion and the realm of the scientific peer-review process. The leaked CRU e-mails and data have not only changed the politics of climate change, they have shaken scientists in many different fields.”

  Japan, Germany, China, France and South Korea all had increasing applications for international patents in 2009. The U.S. had fewer, but still dwarves the field. The innovation that often leads the way out of tough economic cycles appears alive and well:

One such leading company, Patrick is convinced, will “revolutionize the treatment of communicable disease… When sufficient third-party validation is available for this amazing technology, we're going to see the company skyrocket.” Find out how you could be a ground-floor investor, right here.

  As tepid faith returns to the stock market, the dollar continues to trickle down. The dollar index fell as low as 79.6 early this morning and rests at 79.9 as we write.

  Gold rose as high as $1,120 yesterday, and has stayed put there since.

  George Soros more than doubled his investment in the SPDR Gold Trust ETF in the fourth quarter, says an SEC filing this morning. The billionaire bought over $421 million of GLD shares… with a net stake of $663 million.

On the other hand, Soros bought a ton of Citigroup in the fourth quarter, too. He took his first position in the bank with a hefty $313 million buy-in.

  JP Morgan has agreed to buy a big chunk of Sempra Energy for $1.7 billion. That makes the U.S. bank a notable player in global oil and metals plus European power and gas.

It bought the business units from Royal Bank of Scotland. The U.K. government had ordered RBS to jettison the company… one of many conditions of its large government bailout.

Question posed to us by Ian Mathias this morning, as he graciously mined the news for trends and forecasts: “Why is JP Morgan getting taxpayer-funded loans to go speculate in foreign energy? Shouldn’t the discount window be closed to it before it does this kind of thing?”

Hmmmn… good question.

  The FDIC gave flailing banks a pass over the holiday weekend. Not a single bank was taken over last Friday -- a first since Christmas 2009. The tally of bank scalps so far this year sits at 16.

  2.4 million borrowers in the U.S. could lose their homes in 2010, says the latest forecast from Moody’s Economy.com. That would be a rise of 300,000 foreclosures and short sales from 2009. There are currently 4 million homeowners that are at least 90 days delinquent.

  Japan has quietly taken over China as the world’s biggest holder of U.S. debt.

Foreign holdings of U.S. Treasury securities fell by $53 billion in December, says yesterday’s TIC data release from the Fed. China did the lion’s share of the damage, reducing its holdings by $34.2 billion. Thus, by the government’s latest count, Japan now owns $768 billion in U.S. Treasuries, compared with China’s $755 billion.

“The endgame is beginning in the Chinese-American relationship of vendor financing,” opines Dan Denning. “China buys U.S. bonds to help keep U.S. rates low so Americans can buy what China makes.

“What China doesn't buy, you can bet the Fed will have to monetize -- unless the Congress and the president suddenly cut American spending. The long-term trade on this is to get the heck out of U.S. assets. Whether ‘risk assets’ like commodity currencies or commodities are the ultimate refuge is yet to be seen. But oil, gold and resource stocks are certainly getting a boost today on greenback weakness.”

  “I note that China did, in fact, sell a bunch [$34 billion] of Treasuries yesterday,” a reader writes. “I suspect that was meant to intimidate D.C., like sending Luca Brasi to stand outside your house for a few nights. We'll see if it works.

“Obama can push the Chinese pretty damned far because, really, what can they do about it? Sell off their Treasury holdings? Refuse to export? Start a war? Really, what can they do about it?

“The Chinese have the proverbial ‘tiger by the tail,’ and the U.S. is the tiger. Their business model is based on manufacturing for foreign markets, the U.S. and the EU in particular. If they quickly sell off their Treasury holdings, they can inflict pain on us, to be sure. But that would likely truly crash the global economy. As badly as that would hurt the ‘foreign devils,’ it would devastate China, leading to potentially cataclysmic social upheaval.

“Same with a refusal to export to us. And as to a war, there's no chance of that so long as we don't do our pushing with the patented Bush/Cheney ‘I win by humiliating you’ approach, which, as ‘face’ would be at stake, might trigger something violent and very unpleasant.”

  “I think the Latin phrase ‘Auribus teneo lupum’ may best describe the U.S./China gesturing,” another writes. Translation: "I hold a wolf by the ears."

“This version from Terence indicates that one is in a dangerous situation where both holding on and letting go could be deadly.”

  “Here's my prediction of events to soon unfold between the United States and China,” our last reader writes. “The Chinese want their errant province back (Taiwan). Since they have the power to destroy the U.S. dollar along with our economy, they'll dump just enough U.S. bonds to really get our attention and to demonstrate their power. Then they'll take Taiwan.

“We'll make a bunch of noise, but in the end, there won't be anything we can do about it... all because the US Congress has had their collective heads up their collective asses for a generation or more.”
 
The 5: The Dalai Lama is going to be in Washington to meet with the president on Thursday. As we noted to the French presse yesterday, Obama’s political posturing harkens to an era when the U.S. possessed a much larger global market share. The economics have moved on -- politics will follow.

From the penultimate chapter in I.O.U.S.A.:

David Yepsen: “We finance these deficits and debt by borrowing from other countries, China for example. What implications does this have for our foreign policy if we’re in hock to other governments? Does that give American presidents flexibility to make foreign policy decisions, or do we have to worry about what our bankers think?”

Bob Bixby: “We have to worry about what our bankers think.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. How ironic is this, given the tone of today’s 5: For the first time in history, the China Mint has certified a batch of Panda coins “First Strike” for both the Silver and Gold Pandas.

As the middle class develops, “the demand for collectible coins in China is skyrocketing,” Nick Bruyer told us in the rare coins and collectibles Web broadcast we hosted last month. Tomorrow, we’re going to get a primer on what “First Strike” indicates for the value of these coins. And why you can expect to get a worldwide exclusive first crack at them, guaranteed by the exclusive distributor of the China Mint… watch this space.

In the meantime, if you want to brush up on your knowledge of these coins, you can still watch the our Web broadcast featuring Nick Bruyer, here. It’s free.
 

by Addison Wiggin & Ian Mathias

• EU gives Greece deadline to straighten up shop… Dan Amoss on why it will hardly matter
• Bill Bonner on why a sovereign debt bailout is bad for your portfolio
• The U.S. has a quiet (but significant) bond blunder of its own… Chuck Butler offers explanation
• Chris Mayer on “where to invest now, and what to avoid”

 

  Bonds can be a boring business… right up until they’re not. Scanning the globe today, the theme is debt, and companies and nations desperate to deal with it.

  Let’s recap. The easy target: Greece.

“If risks to Greece's deficit targets materialize, then Greece will announce additional steps by mid-March," said European Monetary Affairs Commissioner Olli Rehn yesterday.

Translation: The EU is giving the Spartans 30 days to get their act together. If the appropriate steps aren’t in place by mid-March, the EU will step in and do it for them.

  The lack of a specific plan is putting Greek bonds in the hurt locker. The yield on Greek 10-year notes has risen 21 points since yesterday, to 6.45%, their highest yield in three weeks.

  Greece is putting the kibosh on corporate debt plans, too: Global companies canceled the most debt sales over the last month since the credit crisis began in 2007. According to Bloomberg data, 16 major corporate bond sales were canceled.

  “The Greek government will default soon,” our bond vigilante Dan Amoss forecasts, putting the whole mess into perspective “unless we see a combination of sharp cuts in spending and a bailout from wealthier neighbors.

“But who wants to bail out a very distant neighbor from the consequences of his foolish behavior? European politicians are debating how to sell the idea of a bailout to their taxpaying, voting populations. This is an attempt to contain the damage from the last decade’s overspending of the Greek government.

“The stronger economies of Europe -- the ones not driven by government spending and tourism -- are in a pickle. If they let Greece default on its debt, the consequences for financial markets could be sharp and very painful. If they extend a lifeline to the Greek government, every other irresponsible government will line up for a bailout. At that point, everything may appear to be under control, but a few years down the road after a round of bailouts, the problem will emerge once again. They will remain in place until the size of welfare states and banking systems fall in line with the productive capacities of the economies that support them.”

  Stock traders welcomed the EU’s lukewarm support with open arms. One less crisis on the horizon, they’re saying. The S&P 500 opened up 0.75% this morning, largely on the news above.

  “But doth a single bailout a real boom make?” asks Bill Bonner. “Let us rephrase that. Will bailing out the spendthrift Greeks really make American businesses more profitable?

“You know the answer. It won't. In fact, it will make them less profitable. What it does is allow the Greeks to continue spending in the style to which they've become accustomed. And if the Greeks are going to do that, you can bet that the Irish aren't going to want to cut back. Or the Portuguese. To say nothing of the Italians. And what about the English?

“Bailing out the Greeks is a big mistake. But it's a mistake everyone seems to want to make. There's probably a Latin dictum for this sort of thing. But since we don't know what it is, we'll have to coin the phrase ourselves: Imbecility begets imbecility; especially when the bankers come out ahead.”

  Amid the sturm and drang, the spot price for gold climbed to a two-week high this morning. It’s sitting at $1,115 an ounce as we write.

  Gold up… dollar down. The U.S. dollar is down across the board today as traders’ appetite for risk creeps back into global markets. The dollar index is at 80.1, about half a point below Friday’s high.

  As we noted, there was some suspicious activity in the U.S. bond market last week too. You’ll recall the U.S. government struggled to sell $16 billion worth of 30-year paper on Thursday. Investors demanded a yield of 4.72%, a bit higher than expected.

"‘Indirect buyers’ are the foreign central banks,” EverBank’s Chuck Butler explains, “and they normally take down 40% of a Treasury issue. Well, last week, they took down only 28% of the issue... Uh-oh! But then, there were the ‘direct buyers’ upping their participation in the auction to a record level of 24%!

“Now, most of the market participants don't have a clue what these numbers are telling us. The ‘direct buyers’ are ‘unknown.’ Yes, there is no way to tell who makes up the ‘direct buyers.’ For all we know, the Fed took down the entire amount! Why, you may ask, is this a problem? Well... if not for the ‘unknown buyers,’ the auction would have failed!

“To speak of a U.S. Treasury auction and say that it failed would almost be akin to the day the earth stood still. We would see yields soar, and the dollar get deep-sixed. So until that day happens... every auction should become quite interesting, as long as the U.S. continues to drive up deficit spending and keep rates at ultra-low levels.”

Simon Property Group bid $10 billion this morning for the bankrupt carcass of commercial real estate giant General Growth Properties. If the deal goes through, Simon will end up owning around 550 American shopping malls, making it the biggest mall owner in the U.S… better them than us.

We still recommend being on the other side of this trade. For actionable advice, Dan Amoss’ Strategic Short Report portfolio has some worthy short commercial real estate plays. Details here.

  “Here’s where to invest now, and what to avoid,” Chris Mayer wrote late Friday. “As I see it, there are a few buckets that I like:

1) I still like resources where there are obvious potential bottlenecks and supply issues against a rising long-term demand curve. These would include potash, oil, iron ore, uranium and the agricultural commodities -- and, of course, the most important of them all -- water.
 
2) I like companies that put together the infrastructure where there are large investment dollars committed to these projects. This would include those long-term energy projects -- things like LNG -- and other projects that support water and wastewater and basic things like roads.
 
3) I like companies that operate in global markets and that have exposure to growing emerging markets, particularly those along the New Silk Road -- from the Middle East to Asia.
“These are broad buckets. Of course, there is always room for one-off opportunities that don’t fit some grand theme but make a lot of sense on their own merits. As always, our CODE metrics -- cheap, owner-operators, disclosures and excellent financial condition -- guide us in all things.

“As for what I don’t like: I’m still not enthusiastic about owning banks, financials and insurers. The credit crisis has not yet finished its work and there is more trouble to come here. I’m not enthusiastic about retailers, either. Now is not a time to hang your hat on the sale of nonessentials such as housewares, rubber toys and chic sweaters. Think essentials. Real estate of all kinds is still pricey in most places. I also don’t like science projects (like biotech companies) -- mostly because I don’t understand them -- nor do I like companies that are in the cross hairs of ugly regulations, like health care companies.

“So that’s a broad and quick overview of what I’m thinking right now. For five stocks that fit well with the themes I’ve listed, check out the latest issue of Capital & Crisis.”

  Last today, a sad sign of the times:

The world’s worst bank robber?

That’s James Bruce, a 73-year-old from Florida. Bruce was caught last week after robbing three Tampa banks. In each instance, he strolled in unarmed and handed the teller a note saying he was robbing the bank and to give him six $100 bills. When the police caught him (maybe try a mask next time, buddy), Bruce claimed he was only taking what he needed to pay his mortgage, and that he intended to pay it back.

 “I find it utterly comical,” a reader writes, “that after 30 years of Republican deficit spending, they are now concerned about the national debt. When Reagan took office, the U.S. national debt was less than $1 trillion. When Obama took office, the national debt was $12 trillion -- an $11 trillion increase in just 28 years. That figure doesn't even address unfunded liabilities.

“Now that it is time to sober up from our 28-year drunken excess, (which, by the way, led to an economic collapse, not the promised economic nirvana), everyone wants an instantaneous miracle cure. The last time the idiots on Wall Street took the country for a ride like this, it took us a decade and a world war to climb out of the hole we had dug. Well, I just laugh. The next time some snake oil salesman comes around peddling some have-your-cake-and-eat-it-too Ponzi scheme like supply-side economics, maybe the country will have grown a brain and will realize that there is no free lunch.

“Enjoy your depression, America. You voted for it.”

The 5: For tips on enjoying the depression, we remind you this is a major theme of The Daily Reckoning. Here’s a bit on economic velociraptors pouncing on Greece and each other. 

Cheers,

Addison Wiggin
The 5. Min. Forecast

P.S. We lived in Paris from 2000-2004. We learned a great deal of our conversational Gaul by watching French news on a puny little Panasonic television. So it was with great pleasure that we accepted an interview request from France24 last week.

The camera crew will be in our offices at 808 St. Paul Street this afternoon. The question: “How far can Obama go in upsetting the Chinese when, in fact, the U.S. owes so much debt to China? Are those tensions for real or mere gesticulations, knowing that the last thing the U.S. can afford is a tightening of credit?”

What say you, dear reader? Send your thoughts to 5minforecast@agorafinancial.com 

P.P.S. All the voices you’ve heard in today’s 5 will be featured at this year’s Investment Symposium in Vancouver. This is the event to get their latest and greatest investment ideas, not to mention the best time to be visiting one of the most beautiful places on Earth. The smart money is committing to the Symposium now… early registration discounts still apply.
 

by Addison Wiggin & Ian Mathias

• Retail sales delight… The 5 suggests a reason that should give Pollyannas pause
• China and Greece send U.S. stocks tumbling… Why the Greek bailout is looking shaky
• Forget “the next Greece”… Faber forecast sends CNBC talking heads into frothing frenzy
• A real-world economic stat that actually looks healthy
• Readers write: Are the Olympics a boondoggle? Are taxes really going up? Sit back and watch the show…

  Bummer. The federal government is back on the job today -- just in time to juice up Wall Street with these retail figures: Retail sales for January rose 0.5% from December -- more than the mainstream consensus expected.

Even better, the numbers weren’t particularly skewed by rising gasoline prices. Take away gasoline and auto sales and retail sales rose 0.6%.

Looking over these numbers, we recall a little news that flew under the radar last week. A report from TransUnion revealed the percentage of consumers current on their credit cards but delinquent on their mortgages grew to 6.6% in the third quarter of 2009 -- up substantially from 4.3% a year earlier.

That’s a lot of people who can maintain -- or even increase -- their standard of living by staying in their homes for free. Their lenders are only too willing to go along because they don’t want to book the losses that would come with foreclosure.

Everyone is happy in this fantasy world.

  Alas, strong retail numbers aren’t enough to perk up traders this morning. The major U.S. indexes opened down 1.4% because…

  The China sneeze play is back in action. For the second time in a month, Beijing has jacked up banks’ reserve requirements. Big banks now have to keep 16.5% of their deposits on reserve, smaller ones 14%.

Evidently, the last tightening wasn’t enough to slow the growth in either loans or property prices. Once again, U.S. traders assume Chinese domestic demand will collapse, and so will the world economic recovery.

Nor is the news from euroland helping matters.

  The Greeks have put Wall Street in a headlock for more than 24 hours now. Let’s recap…

• Before market open yesterday: Greek debt deal announced, traders rejoice. Futures up
• After market open: Traders realize there are no specifics to the deal. Market down
• By midday: European Council president clarifies -- the EU stands ready to help Greece, but help isn’t actually needed right now. Best of all worlds. Market up
• After market close: German Chancellor Angela Merkel let it be known Athens would have to get its own act together and, in the words of the U.K. Guardian, she “brushed aside all questions of financial support.” Bummer.

Is Frau Merkel acting wisely? Behold…

  Fourth-quarter German GDP figures just came out… and they’re flat. Not good after two consecutive quarters of growth. Year over year, the German economy shrank 1.7%.

French fourth-quarter GDP came in better than expected, up 0.6%. The eurozone as a whole grew barely -- 0.1%.

This news sent the euro to a nine-month low against the dollar, at $1.3533. The dollar index in turn is up to 80.75, a seven-month high. For now, as long as the euro looks shaky, the dollar retains its sheen as a safe haven. For now….

  The U.S. Treasury auctioned $16 billion in 30-year bonds yesterday, and it didn’t go very well. Before the auction began, yields were 4.68%. Afterward, 4.72%. Clearly, buyers are getting more nervous about the notion of going “long America” for the next three decades. The bid-to-cover ratio looked lousy, at 2.36.

Maybe all this talk of who’s going to be “the next Greece” is rather beside the point when debt is weighing everyone down -- including the keeper of the world’s reserve currency.

  “All governments will eventually default, including the U.S.,” says Marc Faber -- except for a handful like Singapore that have their debts more or less under control.

This comment drew gasps, first of horror, then of outrage, from CNBC anchors Sue Herera and Dennis Kneale. You can watch for yourself here -- the moment of truth comes around 2:15.

Still, the guardians of the Temple of the Perpetual Bull gave Faber a chance to explain himself. “In the developed world, we have huge debt to GDP, in terms of government debt to GDP and unfunded liabilities that will come due, and these unfunded liabilities are so huge that eventually these governments will all have to print money before they default."

(An aside: if you type Dennis Kneale’s name into Google, the first auto-fill suggestion that pops up is “idiot.” Seriously. Heh.)

Dr. Faber was one of the most popular speakers at last year’s Agora Financial Investment Symposium in Vancouver, and we’ve just confirmed he’ll be back this year as well. There’s nothing like seeing and hearing him and his candid assessments in person. Early bird registration is still available. I urge you to book early… make a vacation out of it. Vancouver is very nice in July.

  “Like Pandora’s box,” says our forex maven Bill Jenkins, “what is let out is not so easily put back.”

“The widely heralded recovery that we heard about during the closing months of 2009… rising CPI, increases in retail sales, the uptick in home prices and sales, increases in manufacturing, elevations of consumer confidence… it’s all completely and fully because of the stimulus that has been delivered -- and it will absolutely require additional and ongoing stimulus in order to continue. However, even with additional doses of money, the outcome is still problematic.

“If the powers that be actually believe that removing stimulus will work, and they continue to attempt to do so, I will tell you now, what they will see is a decline in demand.

“Take my word for it. With the same confidence with which I predicted the massive debt troubles in Europe and the contagion it would become, this too is my prediction for the United States. Sadly, when it comes to adding stimulus, we’ll be danged if we do and danged if we don’t. If we don’t, the economy will tailspin. If we do, it only becomes more apparent that the debt we have racked up has become insurmountable.”

A review of the open positions in Bill’s Master FX Options Trader shows his readers are sitting on quick gains of 36% and 66%. For access to all of Bill’s recommendations, go here. 

  Meanwhile, dividend hounds are taking note of a proposed takeover in the utility space. Electricity provider FirstEnergy is offering $4.7 billion for Allegheny Energy -- forming a mid-Atlantic powerhouse in four states.

Assuming it gets past the usual regulatory hurdles, this is a big deal to our income investing specialist Jim Nelson. “It would create one of the largest electric utility companies in the country, with more than $17 billion in annual revenue. FirstEnergy also expects an additional $530 million in cost savings in the first two years.

“We are bullish on the utility industry in the long term. This proposed deal marks the beginning of what we expect to be a massive industry consolidation. We could easily see a few of our plays experience the effects of this merger-and-acquisition landscape.”

Jim has two companies in mind, already in the Lifetime Income Report portfolio. For access to his full range of star dividend payers, go here.

  For reasons we can’t quite figure out, the Internet is awash with jobs forecasts for the rest of 2010. Here are a few:

• A consensus of 62 economists polled by Bloomberg says unemployment already peaked last October, and will close the year at 9.5%, slightly below the present 9.7%
• A consensus of 56 economists surveyed by The Wall Street Journal believes unemployment will fall to 9.4% at year’s end
• The White House, choosing to be gloomier (perhaps on account of our relentless mockery), is figuring on average 10% unemployment throughout 2010.

The economy needs to add at least 100,000 jobs every month just to accommodate new entrants to the work force. And the White House expects average monthly job growth of only 95,000 for the rest of the year.

Not ones to miss a party, we’ll offer our own 2010 jobs forecast: On the first Friday of each month, much like we got this month, we’ll learn where the economy is losing jobs, but the unemployment rate will continue to go down… as “discouraged workers” no longer count. Good times.

   After a post-credit crisis lull, looks like thefts of scrap metal are back. Someone’s removing the brass hardware from plumbing fixtures all over the University of California-Berkeley campus. Total losses to date: $9,000.

For the record, copper is about $3 a pound right now, about 25% off its 2008 high. Zinc is just under $1, still 50% off its 2006 high.

  Now for a “real-world” statistic that would make Warren Buffett and James Howard Kunstler giddy.

As you’ll recall, the brand-new Pulse of Commerce Index measuring truckers’ purchases of diesel dropped like a stone in January. But rail shipments are looking sharp…

This looks especially encouraging compared with two weeks ago, but we caution this number is still skewed by a big increase in auto shipments -- 53% over this time a year ago. Lumber and coal traffic are actually down year over year.

  Still, lumber prices stand at a two-year high -- up 60% year over year.

How can that be when home building is in such sorry shape? Turns out production is down by around 30% over the last two years. Supply and demand.

Our short specialist Dan Amoss sees the price spike as a “likely temporary” phenomenon. He tells MarketWatch that "if not for [the] stimulus and housing tax credit, there would be practically zero housing starts in the U.S." You can read more of his comments here. For steps you can take to profit from the slump, you can still take advantage of Strategic Short Report for up to 60% off full price. Here’s how.

  “I am from Vancouver too,” a reader writes in objection to yesterday’s Olympic kvetching, “and most of us are proud to host the Olympics and welcome the visitors.

“I also remember 1986, and at the time, the situation was much the same. There was intense opposition to Expo 86 from those who believed the money should be spent on health care and housing for the poor, but after the fair got under way, most of them participated and we lived to see the great benefits to the city.  The same seems likely happen again.”

  “To correct any misunderstandings concerning Olympic costs for the complainers from Vancouver,” writes another, “I would like to point out to them that all residents of British Columbia are on the hook for the costs of this fiasco. Just like the Montreal Olympics, we'll be paying for this extravaganza for years to come, yet we in the outback will have to content ourselves with watching events on television (not necessarily a bad thing) with little likelihood of attending in person.

“Already our provincial government is covering some of the costs with reduction in services (already paid for with taxes) and additional fees, increased premiums for health care insurance and cancellations of other services also already paid for through taxation. The whole catastrophe is all about egos, politician's legacies; vanity, vanity, all is vanity. 'Twas ever thus.”

  “It's not a new tax in B.C.,” writes yet another reader, calling foul on someone who wrote in yesterday. “The current provincial sales tax (which has been around my entire life) is being HARMONIZED with the federal sales tax (GST).

“It's impossible to sell tax reform to the public, because they don't understand. When the GST replaced the MST, the GST was called a new tax on the public, but they never mentioned the ending of MST.

“I actually thought your readers were smarter.”

The 5: We thought they were smarter, too. Darn. After yesterday’s comments, we took a look under the hood: Last year, we brought speakers, investors and thinkers from 22 countries to Vancouver. And all seven continents, as one attendee had come from a “vacation” at the science outpost in Antarctica.

Heh. That’s part of what makes the Vancouver event so great. You never know who you’ll meet. Just one more reason to carve out space in your calendar and join us this year.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. "Chocolate has emerged as an inexpensive indulgence,” Alan Knuckman reports keeping an eye on another popular commodity, “along with coffee, that has remained popular during this current economic crisis," he comments in a recent MarketWatch article. Members of Alan’s Resource Trader Alert just laid on a cocoa play this week he figures has $3,500 profit potential.

Just three weeks ago, he recommended closing out a play that delivered a 67% gain. If you’d like in on his next recommendation, here’s where to go.
 

by Addison Wiggin & Ian Mathias

• Greek rescue plan? Like Oakland, there’s “no there there”
• How GDP fell more than one percentage point… yesterday
• New commercial real estate warning… and a way to play it this week
• Byron King with a chart that shows why gold has so much further to run
• Vancouverites who wish Olympic fever would chill already… a message of hope from underneath 50 inches of snow… and more!

  “When we look at the world economy today,” our friend Egon von Greyerz from Matterhorn Asset Management writes this morning, “wherever we turn, we see a wall of risk.

“And sadly, this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (U.S., U.K., Spain, Italy, Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phony valuations and unlimited money printing.

But governments will soon realize that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.”

  Nowhere is that more apparent than Brussels this morning. A summit there led by German Chancellor Angela Merkel, Greek Premier George Papandreou and European Central Bank President Jean-Claude Trichet has yielded the following…

· A demand that Greece get its fiscal house in order
· Vague reassurances of “determined and coordinated action.”

A rescue plan as discombobulated as this photo op

Not exactly the sort of specifics that would put Wall Street at ease. No wonder the market, which has been on tenterhooks for days over this Greece thing, slipped as much as 0.4% on today’s open. Even a sharp fall in first-time jobless claims last week couldn’t calm traders’ jitters.

  The uncertainty is also putting a hurt on the euro this morning, down against the dollar to around $1.37. The dollar index has pushed back above 80. And gold is joining the dollar as a safe haven, rising to the high $1,070s.

  So the details of Greece’s rescue haven’t been worked out yet. But for Bill Bonner, the details hardly matter -- because the final result is carved in stone. “The focus of this week’s discussion is the PIIGS -- Portugal, Ireland, Italy, Greece and Spain. Together, they’ve got about $2 trillion worth of debt. And lenders are making it more expensive for them to borrow more. If this continues, they’ll default. And then, say the financial authorities, terrible calamities will happen. The whole European financial system could come falling down. It would be the end of the world as we have known it.

“Does this sound familiar too? It should. It’s the same scare tactic used after Lehman was allowed to go under. AIG had to be saved. And Fannie and Freddie. And GM.

“The debts will be collectivized... just like those of Fannie and Freddie. Instead of being allowed to fail on their own merits, in other words, European nations are locking arms... they are all going to fail together!”

  There goes part of your fourth-quarter GDP. Statistical watchdog John Williams has pored over the trade deficit numbers we brought you yesterday. And he concludes it’ll whack off a good chunk of those fabulous GDP numbers we got late last month.

“The December deficit showed significant deterioration,” John says, “with the effect -- by itself -- of wiping out roughly 1.1% of the gimmicked 5.7% GDP growth, suggesting a downward revision to a still incredible (as in unbelievable) 4.6% annualized real growth rate.”

  And those are just the potential revisions to the fourth-quarter numbers. The first quarter of 2010 is looking positively ugly if one real-world measure is to be believed.

The PCI, or Pulse of Commerce Index, made its debut yesterday. Prepared by Ceridian and UCLA, it measures diesel purchases at some 7,000 truck stops nationwide. Its data set goes back to 1999, and it’s tracked GDP pretty reliably.

Like GDP, PCI grew at a healthy pace in the fourth quarter of 2009. But in January, PCI plunged an annualized 36.8%.

Ouch.

  The meltdown in commercial real estate has not been averted, merely delayed. That’s the takeaway from a report released this morning by the panel that oversees the TARP program. It cites the following cheery numbers…

· $1.4 trillion in commercial real estate loans will need refinancing in the next four years
· More than half of those loans are underwater
· Losses could reach $300 billion
· Those losses threaten the solvency of 2,988 banks -- all of which have more than three times their assets tied up in commercial real estate loans
· The vast majority of those banks are small fries with less than $1 billion in total assets.

The panel warns this could put a damper on economic recovery. Uh, yeah.

Meanwhile, news could break after today’s market close affecting one of the major REITs. Our short specialist Dan Amoss figures whatever is announced likely won’t be good for the stock. In fact, it could deliver the big payoff on months of research that Dan’s put into the shaky REIT sector. Want in on the action? Go here.

  China appears to be getting skittish about any sort of U.S. debt that’s not backed by the U.S. Treasury. According to Asia Times, China’s big commercial banks and the State Administration of Foreign Exchange are dumping asset-backed securities and corporate bonds. From now on, only Treasuries and Fannie/Freddie debt will suffice.

China’s motives, as usual, are hard to suss out here. But we note this comes on the heels of an interesting decision by the Securities and Exchange Commission. No longer will money market funds have to get SEC approval before suspending withdrawals in the event investors begin a run on the fund.

And what kind of paper is most likely to get a money market fund into trouble? Yup, short-term asset-backed securities and commercial paper.

We caution this doesn’t necessarily mean the SEC is making way for an imminent dislocation of the sort that caused the Reserve Primary Fund to “break the buck” the same week Lehman went under and AIG went to pot. But all the same, we don’t blame the Chinese for hedging their bets.

  Don’t be scared off by last week’s sell-off in gold, says Byron King. “What got sold? Do you really think that people parted with their Gold Eagles, Maple Leafs and Krugerrands?  Did YOU sell YOUR gold?  Do you think that the Chinese sold gold from their national vaults? 

“No, last week people sold paper, not real goods.  Sure, it felt like a sell-off to your portfolio, when gold miners declined.  But beware thinking that we're about to experience the Great Reversal in values for precious metals.
 
“For example, the world gold mining industry is galloping, just to maintain a slow overall annual decline in total output.  Here's a chart that goes back over 30 years.  It's clear that gold output from South Africa is steadily falling.

“I've discussed before how the South African mines are, overall, getting so deep, hot and dangerous that we're on the edge of a major rapid decline in gold output.

“And notice that in the past decade, gold output from the rest of the world has just not picked up the slack.  Sure, there have been some great investment, growth and production stories.  I cannot fault the miners that are out there, digging away.

“But looking at the overall picture, total world gold output has decreased by 1 million ounces annually since 2001.  Meanwhile, the U.S. dollar is declining in value.  Peak Gold, anyone?”

That’s a gold story no one’s talking about. What do we hear from the mainstream, instead?

  The mainstream says John Paulson, after making a killing shorting subprime in 2007-08, has blown it with his move into gold.

The Wall Street Journal could barely contain its glee (headline: “Midas Touch Lost?”) as it reported Paulson’s new gold-oriented hedge fund has raised only $90 million or so on top of the $250 million Paulson himself is kicking in. And… horror of horrors… the fund is down 10% since it opened on Jan. 1.

This is the sort of thing that confirms James Turk’s analysis from last November: Gold has just begun stage two of a three-stage bull market. In stage two, interest grows, but mainstream skepticism abounds.

Since you need a $10 million minimum investment to get into Paulson’s gold fund, we assume you’ll need to find an alternative way to get in early on stage two. Byron King can accommodate. See his latest gold ideas here.

  “I was confused,” a reader writes, “by the two data points with which you began yesterday's newsletter.  You noted that there were over a 1,000 homes repossessed this past December and then immediately went on to note that there were over 2.8 million US foreclosures last year -- obviously, about 233,333 per month on average. 

“Does this imply banks are foreclosing, but hardly ever repossessing or is there some potential data incongruity here (or just some obvious point I am missing)?”

The 5: There’s a whole lot of that going on. This is the “shadow inventory” phenomenon we documented last week courtesy of Dr. Housing Bubble, one of the few people attempting to quantify it. His work focuses on California, but there’s anecdotal evidence from all over that people are living in their homes for well over a year after getting a notice of default.

  “I live in Vancouver,” a reader writes in response to Bruce Robertson’s firsthand observations, “and like many wish that the Olympics would go away or be funded by the corporations that see so much financial gain from them. I don’t see the corporations lining up to pay for it.

“From my perspective, the Olympic project has some 6 billion tax-admitted dollars committed under its name. Do the math: $6 billion divided by the 2.5 million people living in the lower mainland. How much per person in new taxes does that work out to… now amortize that debt as future public debt… as far I as can see, it’s a public wealth extraction.”

  Another reader chimes in by way of explanation: “The corporate media types here are wondering aloud why public enthusiasm is rather muted, as opposed to back in 1986, when Vancouver hosted a World’s Fair. The answer is that back in '86, the notion of having people come from the world over was new and exciting.

“A quarter of a century later, cosmopolis is an everyday fact of life in Vancouver. It’s nothing new. Nothing special. It’s neither particularly good nor particularly bad -- and it’s certainly not very exciting.

“For world-weary Vancouverites, the Olympics just means higher taxes and heavier traffic. Sure enough, a new sales tax takes effect this summer. It’s called the ‘harmonized sales tax’ (a nice, almost Confucian sort of euphemism!), but it would be more aptly named the ‘Olympic sales tax.’

“Hooray!”

The 5: Yikes. Thanks for the heads-up as we prepare for this summer’s Agora Financial Investment Symposium. We too will bring attendees and speakers from many countries and six continents. We certainly hope we don’t engender the scorn of your fair city. We’ll try to pay our own way… and we won’t encourage new taxes to be raised on our behalf.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “Very quiet here this morning,” Dave Gonigam writes from the Agora Financial headquarters on Saint Paul Street in Baltimore. Dave’s one of the brave souls to actually dig out and make it into the office today. (On your behalf, I might add, since he’s been a critical player in producing The 5 this morning. Thanks, Dave.)

“My short walk from home was navigable,” Mr. Gonigam continues. “One door down from here, someone sprayed gang graffiti on a giant snowdrift that covers a parked car on St. Paul. It gives me faith in man's infinite ability to adapt to his circumstances.”

While martial law has been lifted for the time being, several members of our customer service team are still snowbound. Please understand if you get a recorded message when calling our toll-free number, even during business hours, we’ll be back up to speed by early next week. Provided, of course, Monday’s storm doesn’t pack the wallop of these last two.

P.P.S. The markets are ripe for the trades being conducted in one of our most-expensive services. Now, and for a limited time, you can try it out for a 60% discount. Details here.

by Addison Wiggin & Ian Mathias

• Housing recovery still out of sight… the latest list of brutal housing truths
• Markets shudder over Greece’s fate… Knuckman, Soros, Roubini identify the real issue at hand
• Rob Parenteau shares a “wild, unwritten story of the recession”
• How to invest in developmental drug companies without the fly-by-night risk
• Plus, Byron King with a must-know tech for 2010 uranium investors

  More than one in five homeowners were “underwater” in their mortgages in the final quarter of 2009. That’s the word from the data site Zillow.com this morning.

The year-end recap doesn’t indicate a recovery in housing any time soon:

• U.S. home prices dropped 5% in the fourth quarter, year over year. A record 12th straight quarter year-over-year fall… interesting too compared to the S&P/Case Shiller’s more optimistic home price index
• For all of 2009, about 29% of homes sold in the U.S. went for less than what the most recent occupants originally paid
• Over 1,000 homes were repossessed in December, a Zillow record
• Bank sales of foreclosed properties accounted for one-fifth of all U.S. sales in December.

There were a record 2.8 million U.S. foreclosures last year. Zillow goes on to forecast as many as 3 million this year.

Who could have seen this coming? We wonder. Hmmmn…

  Alas, the markets will worry about housing on another day… today, they’re still feverish with the swine flu. The smallest of the PIGS -- Greece -- is still a cause for concern… and hallucinations. The Dow and S&P shot up 1.5% yesterday, their best day in more than a month, on rumor that the EU was assembling a debt bailout for the Greeks.

“Greece is not a critical weight-bearing pillar of the euro house of cards,” counters our Alan Knuckman, advising resource traders on how to process concern over the PIGS. “It must be noted that Greek GDP is rather small -- when compared with individual U.S. states, it sizes up between No. 13 Massachusetts and No. 12 Michigan.

“As a native Michigander, that makes me think…” Knuckman ponders on. “I am inclined to separate local difficulties from concerns of potential global downfall. Michigan, home of Detroit and the longest freshwater shoreline in the county, is in the process of fighting through the impact of the Big 3 auto manufacturers' demise, and holding on mainly because we’re Built Ford Tough.  But a setback in Detroit shouldn’t be responsible for a downfall of the U.S. currency -- and likewise I don’t believe this much weight should be placed on Greece.

“Put another way, I cannot see the over 200 inches of annual snowfall in my hometown solving the water crisis in California any more than Greece taking down the EU.”

  “I’m actually confident Greece will do whatever is necessary to meet conditions to remain a member of the euro to qualify for financing by the ECB,” George Soros told the press yesterday. We hasten to add, despite all his political controversies, Soros made his mega-fortune trading currencies -- most notably, shorting the pound at its moment of weakness.

“I think the markets are generally concerned on sovereign debt and Greece is at the forefront of that issue.”

Amen.

  “If countries remain biased toward continuing with loose fiscal and monetary policies to support growth,” Nouriel Roubini adds, “rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered 'safe havens.'

“Most central banks will withdraw liquidity starting in 2010, but government financing needs will remain high thereafter. Monetization and increased debt issuances by governments in the developed world will raise inflation expectations. These governments will have to offer higher real yields or investors will move to more attractive emerging markets.”

  “This is one of the wild, unwritten stories of this recession,” The Richebacher Letter’s Rob Parenteau wrote us this morning. “The primary reason why the government fiscal deficit has widened out beyond 12% of GDP is because tax revenues collapsed as private sector profit and household income went into deflation (a fall in dollar level terms).

“As displayed below, total government expenditures (local, state and federal, including investment spending) as a share of GDP have risen less than two percentage points -- about what they did in G.W. Bush’s last recession when the New Economy bubble derailed.

“Remember, much of the spending in American Recovery and Reinvestment Act has a long tail to it (so there would be goodies for the midterm elections and beyond, no doubt). This is one of the jokers President Obama is holding up his sleeve (although he is probably wishing he had not held it for so long), along with the Census hiring, that will juice up the payroll employment results this year.”

  The U.S. trade deficit expanded by $40.2 billion in December, up 10% from the month before.

  “Here’s a way to earn consistent profits on drug development stocks without the massive risk,” Jim Nelson writes.

“Drug development is one of the largest gambles you can invest in. It takes more than eight years and up to $2 billion to develop a new drug candidate. Years of clinical trials and FDA studies are required before a single pill is sold to a patient.

“Of course, once all this is done and the drug is commercialized, it can bring an enormous windfall of profits. So imagine skipping all the trials and costly spending of development -- and still receiving all the benefits. Today, you can…

“You see, to pay for the massive upfront costs of drug development, many biotechs sell a portion of future sales of the drug candidate, which pay only if it is commercialized. They sell these rights at a fraction of the potential payout.

“It’s like selling options in the stock market. You are selling the right to reap the benefits of future assets for a fraction of what they’ll be worth.”

Just two days ago, Jim advised Lifetime Income Report readers to pick up shares of such a drug development investor. “Their rights are already bought and paid for,” Jim notes, “leaving the company with virtually zero continued costs, big royalty payments and a fat dividend.” If you haven’t already, you can add it to your portfolio too… subscribe here today.

  The dollar’s right about where we left it yesterday, up just one-tenth of a point, to 80.1. Roubini, by the way, also forecast an end to the dollar rally yesterday. He expects it to drop 20% from here. We’ll investigate further and get back to you.

  Gold’s tapping the brakes on its recent rebound. After rising as high as $1,080 an ounce yesterday, it’s back down to $1,065 as we write.

  “If you want to invest in uranium, you need to know about in-situ leach (ISL) recovery,” writes our resident rock hound Byron King. “2010 will be a year in which the nuclear power industry revives, and I’ve got a uranium 'miner' that gets its yellowcake by pumping mildly acidic water.

“With ISL (also called in-situ recovery, or ISR), you pump mildly acidic water through the rock to dissolve the minerals and reverse the mineralization process. Then you recover the acidic water with dissolved uranium minerals suspended in it.

“You run the liquid through a resin that separates out the uranium minerals. You wind up with wet, yellow goop that you dry out -- called yellowcake. This is what you sell.

“So once your project is up and running, the process is fast, low cost and environmentally low impact, and you get a saleable product out the back door with minimal hassle.”

This is exactly what two uranium miners in Byron’s Energy & Scarcity portfolio are up to. Get their tickers -- along with a slew of other future resource stars -- right here.

Note: Byron was also featured prominently in a MarketWatch.com piece by Peter Brimelow this morning. Have a look, here.

  Last today, an oddball investment bucking the current trends: Cattle.

Live cattle, despite all the market malaise, has rallied to a six-month high over the last week. With the help of Doug Casey, we’ve alluded to this before… cows may have found a bottom, so to speak.

  “My wife and I happened to be visiting Dubai when the Burj Khalifa opened,” a reader writes, responding to our note yesterday that the Burj has already been shut down, due to electrical problems. “By a quirk of luck and happenstance, we were among the first 25 of the general public to visit the 124th floor observation deck.

“My take on Dubai: kind of like Las Vegas, but lacks the warmth and charm. After observing the massive number of huge, empty skyscrapers, the hundreds of new ones still under construction and the incredible number of abandoned half-constructed ones, I can’t imagine how they can right this sinking ship, irrespective of the price of oil. It reminds me of Edward Bennett Williams’ comments about his then-coach of the Washington Redskins. ‘I gave him an unlimited budget and he exceeded it.’

The 5: Heh. We’re not sure where you’re finding warmth and charm in Vegas.

  “Silver Lake, Colo., still holds the world record for snowfall,” a reader writes, less than sympathetic to our situation here in Baltimore. “76 inches in 24 hours. Quit whining, and keep shoveling!”

  “Keep in mind that digging out of snow is a very popular way to die,” a reader writes with the opposite advice. “First, you work very hard at shoveling snow for a few hours; then you take a well-deserved break or rest. During the rest,  typically an hour or two after the work stops,  your heart stops. It is caused by not doing much physical work most of the time and having a heart problem that you may or may not know about. Middle-aged men are most susceptible, but it is not limited to a specific demographic.

“Some respond to the problems of deep snow in the way by using the religious system: God put it there, God will take it away. Sometimes, there is a great deal to be said for that approach.”

The 5: Hmmn… popular way to die? I didn’t realize snow shoveling ranked among the favored methods of hara-kiri. Either way, it has to be among the more painful… my back, ooh, my back. The City of Baltimore just initiated “Phase Three” of their snow removal strategy. That indicates “blizzard conditions”. No cars are being allowed on the streets except emergency vehicles for the next several hours.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. The same weather pattern that is causing snowstorms to converge on the mid-Atlantic is causing record rainfall in Vancouver... just days before the Winter Olympics are set to begin. We’re told event organizers have been loading helicopters with snow miles away and then flying the stuff to the Olympic ski slopes. We haven’t seen them come as far as Baltimore, but would welcome the sight should they choose to.

Our own advance team (symposium director Bruce Robertson) has been stranded in Denver since last week, unable to return to Baltimore from his trip to the Olympic city. Fun times.

Even so, “More people are becoming buyers of Olympic commemorative coins than ever before,” our friend Nick Bruyer tells us. “During the 2000 Sydney Olympic Games, for example, First Federal Coin was an official distributor for the Olympic coin program. We sold more than $10 million in Olympic coins. In 2008, we were an official distributor for the Beijing Olympic Games coin program, and our sales topped $24 million.

“Now we’re an official distributor for the 2010 Vancouver Olympic Winter Games coin program. I can tell you with all confidence that this is the largest coin program in the history of the Olympic Winter Games.”

Because of our unique relationship with Nick, he’s set aside one of the most coveted Vancouver Olympic coins for readers of The 5. “I have exactly 23,” Nick writes. “I repeat -- just 23 first-edition 2009 Silver Kilos.” And he’s prepared to offer them at substantial savings to you.

A kilo of silver? Nutty. Still, we bet these 23 will go fast. If you’re interested… look here. We expect silver -- like gold -- will be in a bull market for years to come.