Arto Bendiken

According to the head of economic affairs at Brazil’s foreign ministry, Carlos Marcio Cozendey, the plan is “to distribute the retaliation broadly in order to maximise pressure.”

The “retaliation” he refers to includes trade sections on 100 US goods, ranging from cars to milk powder. The tariffs are in response to cotton producer subsidies the US has kept in place despite a 2008 WTO ruling that found the practice discriminatory.

From the BBC News:

“The World Trade Organization (WTO) approved the sanctions in a rare move.

“Brazil published a list of 100 US goods that would be subject to import tariffs in 30 days, unless the two governments reached a last-minute accord.

“It said it regretted the sanctions, but that eight years of litigation had failed to produce a result.

“It said it would raise tariffs on $591m (£393m) worth of US products – from cars, where the tariff will increase from 35% to 50%, to milk powder, which would see a 20% increase in the levy.

“Cotton and cotton products would be charged 100% import tariff, the highest on the list.”

As a rising economic force Brazil is taking a strong stance on the issue. It’s not insignificant to begin a trade confrontation the largest economy in the world. We’ll watch closely to see how this aggressiveness plays out.

Read more of the history behind the subsidies and about what the response means in the BBC’s coverage of Brazil’s US trade sanctions.

Best,

Rocky Vega,
The Daily Reckoning

Brazil Launches Salvo of Trade Sanctions Against US originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The pills that I thought were tranquilizers turned out to be vitamins, and although I am on the verge of some kind of mental breakdown because of the mix-up, I feel great!

Turning to the old tried and true, I soon learned that I had started too late, and I was not nearly drunk enough to have properly anesthetized my nerves when I chanced to read Agora Financial’s 5- Minute Forecast report that “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.”

My hands shook and my guts churned at the horrific prospect of adding $9.7 trillion to the money supply, which means (I gulp in horror at the prospect) inflation in pieces like you never saw! Yikes!

I mean, (my voice rising in pitch and volume) the entire GDP of the USA is about $14 trillion, and the government wants to increase, over ten years, government spending by 70% of everything that this country currently makes!

Apparently eager to change the subject since I seem to be getting worked up about this and could, possibly, probably, almost certainly, damned near guaranteed, erupt into some loud Mogambo Hysterical Tirade (MHT) and make a shambles of everything, The 5 says, “Further, the CBO projects the national debt will be 90% of GDP by the end of this decade”, which I guess they thought would calm me down or something, but it didn’t, which was bad enough to cause me to have chest pains accompanied by loud howls of pain and outrage in another tiresome Screaming Mogambo Fit (SMF), but then went on to make it all worse by saying that debt will equal 90% of GDP, which is “higher than the 83.4% recorded at the end of fiscal 2009 last fall.”

Suddenly, there was an uproar as I jumped to my feet and shouted “What kind of bizarre crap is that? The national debt is already $12.5 trillion in a $14 trillion economy, and somehow you add $9.7 trillion to $12.5 trillion to get 90% of the economy which means that …that…that…”

Well, I knew what I meant to say, but did not have a calculator handy, and the security guards had me by the arms and were hustling me out of the room pretty quick.

I later found out that what I meant to say, but did not have the figures handy, is that this means that the CBO thinks that, unbelievably, in ten short years, a staggering $22 trillion of national debt will be 90% of the economy, which means that the CBO thinks that the economy in ten years will be, I gulp to report, $24 trillion, which is a whopping 71% higher than today! I am stunned!

What can one say but, “We are freaking doomed!”

Perhaps hearing my plaintive voice with its unmistakable undertone of angry paranoia and wanting me to calm down, The 5 says, “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!’”

I think to myself, “Okay, they just take time to raise the blade of the guillotine higher and higher, but the end result will be the same, and if anyone thinks that Japan proves otherwise, then I laugh the Mogambo Laugh Of Scorn (MLOS) at them and turn around to wave my buttocks in their faces in a final fillip of disrespect!”

The 5, in what I imagine is said with a deliciously snotty tone, says, “To which we can only sigh and respond: ‘Exactly.’”

Well, I can do more than that, because I am, after all, The Loudmouth Mogambo (TLM)! And I say that if all prices doubled, today, GDP (which measures spending) would instantly double, too! Hahahaha! Everything costs twice as much, but the economy looks like it boomed! Hahahaha! Welcome to Inflationary Hell!

I often marvel that it’s a good thing that the poor are usually ignorant or stupid, because if they could, or would, comprehend how this huge explosion of money is going to make prices rise and make them enormously poorer and more miserable, worse and worse, and probably for the rest of their lives, they would go freaking berserk.

As for the middle class, they are supposed to be smart and educated enough to know this stuff, but they don’t, and so they don’t understand the sheer enormity of how much poorer and miserable they will be for decades to come, either, and they will suffer, too.

Then there are those of us who are buying gold, silver and oil to protect ourselves against the ruinous, crushing, cataclysmic inflation in prices that this inflation in the money supply, and debt, will cause, because then, for us, it all becomes idle dilettantism and pleasure, which is, once you boil it down, the whole point of investing, isn’t it?

And could anything be easier? Whee! This investing stuff is easy!

The Mogambo Guru
for The Daily Reckoning

CBO Budget Projections and the Horrors of Inflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The private sector ruined itself in the bubble of ’03-’07. Now, it’s the public sector’s turn. All over the developed world – with a few exceptions – the feds are adding debt at an alarming rate.

The US has already passed “the point of no return,” says a report from Casey Research. Ken Rogoff and Carmen Reinhart put that point where external debt passes 73% of GDP or 239% of exports. IMF data, says the Casey team, shows the US has already gone too far on both scores, with external debt at 96% of GDP and 748% of exports.

We’re in Mumbai, India, checking in with one of our ‘strategic partners.’

In our family office, where we keep the family money, we take big bets over long periods of time…working with strategic partners who are knowledgeable about key sectors. Last year, we missed the rally in US stocks. But we’re lucky in our choice of friends and business partners. Two of our strategic partners – one in the resource area…the other in India – more than doubled our money.

Over the last 12 months, Mumbai’s Sensex index has gone up more than 108%.

But our bet on India is for the very long term. In the recent financial crisis, that bet seemed to go bad. Foreign investors pulled their money out of India along with other emerging markets – even though India had very little exposure to the banking crisis itself.

What’s ahead? Seven percent GDP growth this year…nine percent next year. The first figure is news. The second is a forecast. But there are good reasons to be bullish on India for the long pull. Stay tuned…

Bill Bonner
for The Daily Reckoning

Investing in India: News and Forecasts for the Long Haul originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Hip hip, hooray! Hip hip, hooray!

Our little big bull market celebrated its one-year anniversary yesterday, albeit in tentative style. The Dow managed to eke out an 11-point gain, while the broader S&P 500 fared only slightly better. Investors, it appears, are awaiting the next catalyst to keep the momentum going. But are they running out of excuses to buy?

It is difficult to know precisely what is going on inside the collective brain of the marketplace, but one indicator gives us a hint. The VIX Index, also known as Wall Street’s “Fear Gauge,” measures the implied volatility over the coming thirty days. A high reading represents costlier options, commonly used to hedge against any sudden down trend. A low reading indicates a lower hedging cost, meaning that traders expect relatively calm waters ahead. At its extremes, the VIX Index is a rather useful tool for contrarians. When the VIX breaches its moving averages to the upside, it’s usually a pretty good sign that the market is oversold. Conversely, when the index dips below certain key points, it’s probably a good time to expect the unexpected, so to speak.

Right now, the VIX is bobbing around close to its 18-month lows. That means traders are not forecasting much of anything…a pretty good sign that we’ll see quite a bit of something. Last Friday, the measure fell to 17.5, a level not seen since January…when the S&P promptly fell from around 1,150 to 1,050. Before that, the VIX had not seen a reading of 18 since August of 2008…right before the market went skydiving without a parachute. By March of 2009, a few short and painful months later, indexes around the world had almost managed to saw themselves in half…and worse.

Just before the global financial collapse, your editor took advantage of the rampant overconfidence in the market to implement a little preemptive “austerity plan” of his own. And so, from the gaudy bubble-central of Dubai we took the long road east, making sure to pass through notably inexpensive destinations like India, Nepal and Southeast Asia. Without a country full of union workers to protest the move, this was relatively easy to do (sorry Greece…and France…and Britain…and, well, Europe). Here in the Far East, we can enjoy the same or better lifestyle for a fraction of the price. Rent is less than half what it was in Dubai. Food costs next to nothing. And, as an added bonus, your editor’s girlfriend is not obliged to dress like a ninja when we take weekend trips to neighboring countries…not even when we visit Japan.

One would need a degree in modern economic theory not to see the problems lurking below the surface of this market rally. That or a job in a government office…in which case you’re paid not to notice. But the fortunately untrained eye can’t help but notice the worsening unemployment situation, a deteriorating real estate market – especially in the commercial sector – and a public balance sheet that looks even worse than the private one that led us all into this mess in the first place.

While on our little pilgrimage of austerity – back at the end of ’08 – early ’09 – we ran into dozens of ex-bankers and newly redundant financial services workers. We found them lazing on the beaches of Viet Nam and sipping $2 daiquiris at the bars around Bangkok. A few of them had plans for the future, but mostly they were there to somehow, vaguely, “ride it out.”

Our little big bull market may be a year old but, if we had to bet, we’d say it’s a rally in overconfidence only, as presently exhibited by the VIX index. On the bright side, the bar staff at the resorts in Phuket can look forward to another influx of lost souls armed with loose severance packages.

Joel Bowman
for The Daily Reckoning

Deciphering the VIX Index and the Rally in Overconfidence originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Water – I’ve been urging my subscribers to invest in water stocks for several years…and Hyflux is one of my favorites. Hyflux (HYFXF: OTC Bulletin Board) operates in China, Southeast Asia, India, the Middle East and North Africa. It is involved in a variety of water projects, from desalination to recycling. It was among the first stocks ever recommended in my investment service, Mayer’s Special Situations, when I launched the “Blue Gold Portfolio” back in the summer of 2006. Since I recommended it, Hyflux is up 75%, while the S&P 500 is down 10%.

Recently, the company posted a fresh earnings report that showed record results. Hyflux announced net profits of $53 million – a record high and a 27% increase from the year prior. The order book also grew 20%. It generated solid cash flow and maintained a good balance sheet with $120 million in the bank.

Below is a chart I like from the latest earnings presentation. It shows you the growing order book broken down into two categories. EPC is the engineering business that builds plants. This is a more volatile business. The O&M is for operations and maintenance. This is the business the runs desalinization plants and the like. This is a steady cash flow business.

As you can see, the O&M part of the business is growing mightily. This lowers the risk of Hyflux’s business and gives it more of a stable platform of cash flow.

Hyflux is also gaining market share, especially in desalination. This next chart is also from the latest earnings presentation. It shows you Hyflux has emerged as a clear leader among its peers.

Hyflux operates the largest seawater desal plant in China, in Tianjin. The company is also building the largest seawater desal plant in the world in Algeria. There is a ton of room for growth when you consider the urgent and long-term need for water along the New Silk Road.

The stock trades for about 25 times earnings, which roughly matches its growth rate. Hyflux is no longer the great bargain it was; however, it remains one of the best ways to play Asia’s long-term water needs.

Gorman-Rupp (AMEX:GRC), another veteran of the Blue Gold Portfolio, reported good results last week. Gorman-Rupp makes water pumps of all kinds, as well as pumps used in other industries, such as oil and gas. It’s been a great performer since I recommended it in mid-2006. We took half off the position the table after doubling our money. The other half has delivered nearly 12% annually, soundly beating the market. The S&P 500 has fallen 15% over that timeframe.

Gorman-Rupp has a strong balance sheet with no net debt. Sales and earnings were lower in 2009 as a result of the recession, but the longer-term picture looks good. The company remains in good position to capture a share of the rising tide of spending on water and wastewater infrastructure over time. The construction of its new 460,000-square-foot facility is complete and the company moved in during the fourth quarter.

The stock is not likely to light the world on fire, but it’s a good long-term investment in the water sector. Patient investors should give it a look while it trades at depressed earnings levels.

I also like Badger Meter (NYSE:BMI), which makes metering devices, and A.O. Smith (NYSE:AOS), which makes water heaters and has a booming business in China. Valmont (NYSE:VMI), which makes irrigation equipment, is another to watch.

But in all cases, the price paid is important. I like to wait for opportunities to buy stocks on the cheap, like we did with Flowserve (NYSE:FLS), which makes pumps, valve and seals. The stock has doubled since I recommended it, with the promise of more to come. But if the stocks I like aren’t attractively priced, I’ll just sit tight and keep a watchful eye.

Energy Services – T3 Energy Services (NASDAQ:TTES) reported good results last week. T3 is a cash flow machine. It generated $33 million in free cash flow and remains debt free. The market values the stock at $309 million. So you are paying only 9 times a depressed free cash flow number to own this stock. And things look to get stronger as the year goes on and the drilling rebound continues.

One of the interesting notes from the quarter: About 60% of T3’s backlog is for overseas work, confirming again a trend we’ve seen at work in Key Energy Services (NYSE:KEG). T3 sees a lot of demand from the Middle East. It also won a key certification in Saudi Arabia – which had been pending for over a year – for one of its products, which should greatly help sales there.

The company also has a new product that is generating some buzz. It is a new frac system, used to coax more oil or gas out of a well. Without getting too technical, T3’s system allows a driller to service multiple wells from a single location. T3 shipped one for $9 million, or about 17% of revenues for the quarter. After 45 days in the field, the system exceeded customer expectations. No other competitor currently offers this, and T3 will show it off at the upcoming Offshore Technology Conference. This could be an exciting new product for T3.

The company is just above my buy-up-to price of $25, but I would urge buying the stock on any weakness. Business is clearly turning up, and there is lots of room for upside as we get strong results later in the year. Remember, two years ago, the stock hit $80 per share.

Chris Mayer
for The Daily Reckoning

Water Stocks: A Few of My Favorite Things, Part I originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Dr. Ron Paul (R-TX) isn’t one to let his opinion go unheard… especially as Congress continues approving massive amounts of debt-financed spending.

From his recent Texas Straight Talk:

“Last week, the House approved another increase in the national debt ceiling. This means the government can borrow $1.9 trillion more to stay afloat and avoid default. It has been little more than a year since the last debt limit increase, and graphs showing the debt limit over time show a steep, almost vertical trend. 

“It is not likely to be very long before this new ceiling is met and the government is back on the brink between default and borrowing us further into oblivion.

“Congressional leaders and the administration acknowledge that the debt limit will need to be increased again next year. They are crossing their fingers that the forecasts are correct and they will not need another increase sooner, even before the 2010 midterm elections.”

You have to wonder if anyone else in Congress is considering the consequences of these actions. This excerpt came to our attention via The Daily Bail’s post on how more spending is always the answer. You can view the clip below:

Ron Paul: Not Long Before the Gov’t is “Borrowing us Further Into Oblivion” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Yesterday marked the one-year anniversary of the rally. The Dow rose a piddly 11 points. Gold sold off $1.

This rally has gone on for so long most people think it is not a rally at all, but a new bull market. Worldwide, it has taken equities up some 73%…making it one of the greatest rallies ever.

What are we to think? Are we alone in thinking it’s still a trap? What happened to the problems that led to the crisis of ’07-’09?

If you don’t think about it too much you might think everything is fine. Stocks are up. Business profits are up. GDP is up. Housing and unemployment seem to be stabilized. What’s not to like?

The recovery is a done deal as far as most people see it. The rescue efforts, initiated by the feds, were a big success…or so they believe. It has been 12 months since the bottom…and the world still has not ended. Everything is back to normal…isn’t it?

The problem in ’07-’09 was that too many people owed too much money.

And what has happened to change that? The net level of indebtedness in the US has actually gone up since ’07!

Huh? How’s that? We’re in a de-leveraging phase, aren’t we?

Well…yes…but only in the private sector. The feds are still adding debt.

Let’s look at the private sector first. There, we find unemployment still around 10%. Adult males in their prime working years, however, have fewer jobs than ever before. One figure we saw shows that only 4 out of 5 of them are working.

That is just the beginning of the problem for these fellows. They’re getting fewer college degrees, compared to women, than ever before. They’re earning less money too – again, compared to women. Fewer are the chief breadwinners in their households. And fewer are even in a household at all – more are alone.

Let’s not get distracted by the suffering of the masculine part of the population…

…we’re looking at what is going on in the broader economy. Is it healthy and growing? Or is the stock market just a honey trap…a bear market trap for the unwary investor?

The private sector is de-leveraging. Not only is the unemployment rate high, the typical family also lost a lot of money when its house went down in price. And since the typical householder is also in his 40s or 50s, he has to consider his retirement and how he’s going to fund it.

Stocks? While they’ve bounced back nicely, the stock market is still well below its highs…and still in a losing position over the last ten years. A 73% gain sounds nice, but it would take a 100% gain to recover the losses of the ’07-’09 bear market.

Houses? One out of four mortgaged houses is still underwater. In some new developments, the figure is as high as one out of two. And there is little likelihood that the owners will be high and dry anytime soon. People no longer expect to retire on the gains from their houses.

This leaves the middle-aged householder without much choice. He has to save money. Remember, the boom of the 2003-2007 period was caused by dis-saving. Now, a higher savings rate will mean less spending for many, many years. This is a fundamental and important change of direction for the economy. It will restrict business growth and restrain profit growth too.

So, is it possible to slough off the crisis and return to business as usual? Nope. Not possible. You can pretend that things are back to normal. You can act as if they are back to normal. You can invest as though they are back to normal. But you can also lose your money.

But they’re not normal at all. They’re different. The 1982 to 2007 period was…mostly…a boom time, caused by rapid increases in debt, asset prices, and consumer spending. The next period is…mostly…a bust time – when asset prices, private debt, and consumer spending go down.

Sooner or later, but probably sooner, the stock market will realize it. Our Crash Alert flag – tattered and faded – is still flying.

Bill Bonner
for The Daily Reckoning

Private Sector De-leveraging: A Rally in a Bull Costume originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Day after day, China’s heavyweight status becomes more pronounced. We’ve discussed it before, due to its economy, which is in the process of overtaking Japan’s second place in size and its growing influence in Latin America. Today, we take a look at its strengthening influence in Asia… and Japan in particular.

According to the Financial Times:

“Last year, the Japanese economy shrank by more than 5 per cent. And the high hopes that surrounded the reformist government of Yukio Hatoyama, the prime minister who was elected last summer, have quickly dissipated. Mr Hatoyama’s approval ratings are sinking and the Japanese business and civil service establishment seem eager to dismiss him as an ineffectual clown.

“How Japan reacts to this new sense of weakness – exaggerated though it may be – will matter to the whole world. The country’s size and strategic importance make it critical to America’s Pacific strategy and to China’s geopolitical calculations.

“As it adapts to Japan’s new circumstances the Hatoyama government has, almost unwittingly, initiated a debate about the value of Japan’s alliance with the US. Some western observers in Tokyo muse that perhaps Japan is once again following its historic policy of adapting to shifts in global politics by aligning itself with great powers. Before the first world war the country had a special relationship with Britain. In the inter-war period Japan allied itself with Germany. Since 1945, it has stuck closely to America. Perhaps the ground is being prepared for a new ’special relationship’ with China?”

The signs of Japan’s shifting allegiances are showing up in a variety of ways. A statement from Japan’s foreign minister revealed his perspective that, “this will be the age of Asia.” Similarly, Japan’s prime minister has criticized America’s “unrestrained market fundamentalism.”

Tellingly, the verbal distancing has crossed over into the military realm as well. The Democratic Party of Japan has expressed a desire to see the US move its Okinawa military base. Given the US-Japanese security treaty, and the roughly 50,000 Americans in place there, it’s no small matter to mention offhand.

You can read more about the relationship dynamics between the three nations in Financial Times coverage of Japan edging from America and towards China.

Best,

Rocky Vega,
The Daily Reckoning

Japan’s Growing Attachment to China Over the US originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Yesterday’s price action in the currencies versus the dollar was a drag, man… We did, however, see the higher yielding currencies begin to move away from the pack of currencies led by the euro (EUR). That move higher by the likes of Australia (AUD), Brazil (BRL), South Africa (ZAR), and others, carried over through the overnight sessions, so, as we start today, they are stronger versus the dollar… In fact, the Aussie dollar is near a 7-week high this morning.

Another thing helping to boost the Aussie this morning was the news overnight that China reported that exports had increased the most in three years, last month… For those of you keeping score at home… That’s a 46% increase in exports during February for China! Now… I can hear some of the new readers saying, what in the world do China’s exports have to do with the Aussie dollar rising? Ahhh grasshopper, come sit…

You see, Australia is a raw materials (commodities) rich country, which supplies China with all the raw materials they need to build their infrastructure. When China slowed down, it caused a chain reaction to Australia… But… As we’ve seen in the past nine months, China was the first to come out of the economic slowdown, and this report confirms that they are hitting on all 8 cylinders right now… So, as the old saying goes… What’s good for the goose is good for the gander… And what’s good for China is good for Australia!

That can be carried over to the commodities, too… What’s good for China is good for commodities… And looky here, copper, for instance rose $24 on the Chinese news!

The Reserve Bank of New Zealand (RBNZ) meets this afternoon to discuss rates… I would be very surprised to hear that the RBNZ hiked rates this afternoon… Like I said the other day, I think that they will wait another month… But, does this present us with a buying opportunity before the hike? You bet your sweet bippie it does!

The news from Germany this morning wasn’t helping the beleaguered euro any… German exports fell in January according to a report printed this morning. You may recall about a month or so ago, I told you how China had replaced Germany as the #1 exporter… Well, that difference between the two must be widening, given Germany’s slumping exports, and China’s 46% increase last month!

Hey! The rate hike campers here in the US had to lower their flags yesterday, after Chicago Fed President, Evans, said that he “expects the central bank to hold its target rate (Fed Funds) at a record low for the next ‘three or four meetings’”… OK… The Fed Reserve meets every six weeks… So… Given this news, it means the Fed is at least 4-5 months away from moving rates higher.

Now… I know that the markets are always looking forward… But, these are uncharted waters, folks… There’s no guarantee that the Fed will look to raise rates even in 4-5 months! So… The looking forward thing is treading water carefully, watching for those sharks that live on the land!

The Canadian dollar/loonie (CAD), has backed off the lofty level of 0.9770 it reached yesterday… Things are looking good for the loonie… I mean, Canada doesn’t have the subprime mess to deal with… Their housing boom was never even close to that in the US or the UK… And the list goes on… But let’s not leave out rising oil prices, and commodities remaining in their bull market… It’s all good for the loonie these days.

Speaking of the commodity bull market… I’ve not gone on here for some time, and believe that, since I mentioned it, we could discuss it today… OK… Well… Long time friend, Jim Rogers (yes that famous Jim Rogers) wrote in his book on commodities, that for the past 400 years, commodity bull markets run between 17-22 years in length of time… Well… Lets see… This commodity bull market began about nine years ago, right? So, that means we’re only about half way through the “normal” or “historical” bull commodity market.

Now… This is where it would be good to discuss trends… Trends begin for a fundamental reason, and normally do not end until that fundamental reason has been corrected… However, a trend is not a ONE-WAY street. There can be volatility within a trend that will fool or trick people into believing the trend has reversed… Only to find later that they were wrong…

This current weak dollar trend is a good example… You see, we’re experiencing dollar strength right now… But does that mean the weak dollar trend is over? Not in my book! For the fundamental reason, that deficits being too high, has not only not corrected, it’s gotten worse! So, mark this down, and the same can be said for the commodities, as one of those periods of volatility within a trend…

Then there was this… Did you see the news that the FDIC is encouraging public pension funds to invest/inject capital into failing banks? If you just screamed really loud “WHAT?” then you joined me, because that’s exactly what I did when I read that headline in a NY Times article that was sent to me… Why in the world would public pension funds want to inject capital into these failing banks? And even more important than that question, why is the FDIC “encouraging” these public pension funds to do so?

Well… I can come up with a number of reasons for the FDIC to be “encouraging” that this be done… But, what I’m sitting here banging on the typewriter keys about this morning is the fact that this uses “real dollars”… Not ones that were printed out of thin air, like the Treasury gives to the Fed to use… They aren’t future guarantees either… They are “real dollars” that are about to be thrown at failing banks that have already had money thrown at them and they still can’t make it!

I shake my head in disgust at this attempt to get these bad loans off the government’s books and onto the public balance sheet…

None of the bailouts should have ever been done, and we wouldn’t be still messing with all of this! It’s like telling a lie… Once you tell it, you have to keep adding on to the lie, until it gets so big that it explodes in your face… We started this bailout mess, and it just keeps growing and getting bigger and bigger all the time.

To recap… The currencies traded in a tight range versus the dollar for most of yesterday. The higher yielding currencies did gain ground versus the dollar, and that carried over throughout the night as China posted a 46% rise in exports! German exports slumped in January, and the Canadian dollar backed off its lofty level from yesterday, which means it’s cheaper today… Wink, wink…

As I begin to head to the Big Finish, the currencies are mounting a mini-rally versus the dollar, with the euro trading higher to 1.36, which has seemed to be the real hurdle for the single unit… Every time the euro begins to trade above 1.36, it gets smacked right back down again… Makes you wonder if there’s something going on here, eh?

Chuck Butler
for The Daily Reckoning

Strong Chinese Exports Cause Aussie Dollar to Soar originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

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 US 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 US piece, here). If that number is correct – it comes from the US Geological Survey – then it would be the biggest oil field discovered in the contiguous US in more than 40 years…

In February 2008, we picked up shares of Kodiak Oil & Gas (AMEX:KOG), 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.

Chris Mayer
for The Daily Reckoning

Is Bakken Shale the New American Gold Rush? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

As we’ve pointed out before, there are two parts to a political system. One part is shrewd, calculating and corrupt. The other is stupid, senseless, and earnest. The first is surprisingly predictable. The second is predictably surprising.

Like the two sides of the brain, people use politics both ways. On the right side, they use it to do something that is completely preposterous…and often completely at odds with their own interests.

Start a war, for example. National pride. Sentiment. Anger. Humiliation. There’s no telling exactly what emotion will stir up the mob. And there’s no telling what mischief it will get up to when it’s been properly stirred and shaken. India was the site of the biggest political demonstration of all time. What was it about? Killing cattle. The Hindu population was against it…

Meanwhile, from Nigeria comes news that the Christians and Muslims are killing each other. And in Europe, just a century ago, people tried to kill each other for 4 long years…

But the right side of politics is beyond our scope for today. We’re concerned with the left side…the rational…goal seeking…angle playing side…where people use politics like a burglar uses a crowbar – to get something that isn’t theirs.

For example, a report in USA Today tells us that government employees have used politics to get more money. The paper said that 8 out of 10 professions are better paid by the government than by the private sector.

Lobbyists use the government to get money for their employers. If we read the item in The Wall Street Journal correctly, there were 10,000 “earmarks” in the latest budget bill.

What’s an ‘earmark?’ It’s a special little provision that gives a contract – or other favor – to a specific company, industry, or locality. A congressman might insert a little provision awarding a $100,000 contract, for example, to one of his constituent companies. Directly or indirectly, the company may have contributed $50,000 to the congressman’s re-election campaign…or may be ready to hire him if he is booted out of office…or may have hired his son or daughter. The amount is so small that the rest of the Congress is not going to pay much attention to it. Besides, other members of Congress are doing the same thing. Ten thousand earmarks…that’s more than 20 apiece.

Giving out money to friends and supporters is not exactly what Congress was set up to do. A Congressional Ethics panel was organized to investigate. Its report just came in this week. What did it find? That there was no impropriety; it was just business as usual!

Even the Ethics Committee has been corrupted by the left side of politics – the rational side. Everybody is looking out for Number One. Even the Ethics Committee.

Very predictable. And no harm in that. Everyone does it.

But as the political system matures, it supports more and more people who are looking out for Numero Uno and don’t much care what happens to Numero Duo. And as the host weakens, the parasites become bolder.

Even the right side of politics is corrupted. Instead of going to war for purely absurd reasons, lobbyists for pentagon contractors urge the nation to war for practical ones…specifically, to add to their own profits…and generally to boost employment.

Eventually, between the left side and the right side, the nation runs out of juice. Or worse. When the politicians have squeezed all they can out of existing taxpayers they go to work on those who aren’t even born yet. The debt rises and rises…until it is too heavy to carry. Then, all Hell breaks loose.

A few days ago, the Congressional Budget Office reported that the Obama administration’s deficit forecasts were a little on the low side – $1.2 trillion short over the next 10 years.

How reliable are those CBO forecasts? Not very… The deficits are likely to be a lot higher than either the administration or the CBO now imagine.

Stay tuned…

Bill Bonner
for The Daily Reckoning

The Duality of Politics originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

People think that Addison Wiggin is just another talented, intelligent, pretty face who secretly thrills to hear people say things like, “You’re a lot better looking than The Mogambo! And younger and smarter, too!” but he is much, much more than that.

His story starts off that “The FDIC is even more broke than it was three months ago” to which most people rudely say, “Welcome to the club! Waddya think, we got some kind of picnic at the beach going on out here in the real world while you pretty-face hotshots talk about who is smarter and about some idiot named Mogambo who must be an idiot because otherwise he would not have such a stupid name!”

Mr. Wiggin goes on undaunted, perhaps buoyed by the knowledge that no matter what happens, he’ll still be better looking than The Mogambo. And smarter, too. And younger.

Maybe that’s why he did not seem to be registering horror at the news of the bankruptcy of the FDIC, and, as if to underscore my suspicions, you can almost hear the confidence in his voice as he explains, “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.”

Naturally, if these were the old days when the money supply was more-or-less constant, this would cause panic: “Our bank deposits are uninsured! Yikes! The Mogambo said we’d be wiped out and here it is, and he said to buy gold, silver and oil, and we didn’t, and now look at us! Oh, woe!”

But nowadays? Relax! We have a fiat currency that the Federal Reserve can, literally, create at will, at a stroke, all the money necessary to make sure that every Last Freaking Dollar (LFD) dollar in your account is fully protected against actual nominal loss; you had an electronic or paper buck, you will still have and electronic or paper buck!

Unfortunately (and you can tell there is a “catch” by the way the soundtrack suddenly turns gloomy and there seems to be the sound of somebody, in the distance, throwing up into a toilet) this huge, sustained increase in the money supply guarantees – guarantees! – that you will lose buying power in every one of your precious dollars, so you are kind of screwed, either way, when you stop and think about it, by Federal Reserve policies.

My Sensitive Mogambo Nose (SMN) detects (sniff, sniff, sniff!) detects panic. So, desperate for money, I look to prey on the superstitious, and suggest that maybe you should just send all of your “tainted” money to me so that my hoodlum friends and I can have a big ol’ party, where we will raise our glasses in a long series of toasts to you, to your health, and to your good luck because – hey! – attracting the attention of deities, paranormal powers, transcendental influences and cosmic forces could, conceivably, work!

Mr. Wiggin is not enthusiastic about my latest rip-off scam, which I suggest only because I am out of ideas and I am desperate for money. He suggests a perfectly legal and good way to get some money, which is, “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”!

He’s right, of course, but before you rush out to start a bank and get your piece of this Federal Reserve stupidity, perhaps you should consider something along the lines of buying gold, silver and oil in some kind of wild, paranoid, knee-jerk reflex as a small, small part of a whole constellation of symptoms known collectively as Screaming Fear Of Outrage (SFOO) of the inflation that will be caused by such massive increases in the money supply, now additionally caused by the needs of the FDIC, but he goes on that it will get worse than that, as, “On top of that, the FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702” he says! Yikes!

A long, haunting howl of dismay escapes my lips, perhaps not unlike the sound of ravenous, starving wolves howling, “oooOOOOOOooooooooh!” as they close in on your bloody trail as you crawl along, dressed in rags, wounded, bleeding, in the snow, at night, in the mountains, in a snow storm, with freezing sleet, and you realize that you can’t buy them off with your paper fiat money, but with a flash of True Mogambo Enlightenment (TME) that has come tragically too late, you realize that with the heft of a kilogram of gold in your hand, you can beat the living hell out of anything that comes near you that is metaphorically wolf-like in economic nature, or, with literal wolves, something spewing out .45 caliber bullets in a semi-auto fashion, putting us one more leg-up (as if we needed it!) on wolves of the literal kind, with politicians being of the metaphorical kind of ravenous wolves, thus mixing up literal with figurative, back and forth, up and down until you are in a panic, all confused and bewildered, wondering what’s real and what’s not, and your first instinct is to just start blasting, blasting, blasting until your trigger finger is bloody and cramped, and you manage to clear out a “Mogambo Dead Zone Of Safety (MDZOS)” all around you.

And you probably would have, too, if you had not remembered that you bought a lot of gold, silver and oil just to take care of situations like this! And it’s working perfectly! Ahhh!

But this thing about the “FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702” is, as I notice with alarm, not only a number that is a huge (almost) 50% higher in just one quarter, a statistic which sets my Sensitive Mogambo Senses (SMS) tingling, as with two data points, a desperate-yet-handsome man like myself can quickly, and easily, discern some kind of Trend Of The Ugly Kind (TOTUK), to which I am particularly alert ever since I noticed that the entire freaking course of human history in the world, a world you call Earth, is the sad, stupid story of one stupid country after another borrowing money and getting into debt that they can’t repay, which is always resolved with inflation in prices, a bankruptcy of assets, and a ruinous war with somebody as we attempt to shift the cost of victim-hood from ourselves to foreigners so that there is, indeed, a free lunch for us.

Mr. Wiggin is not impressed with my penetrating analysis, which is in line with what everyone else agrees is pretty stupid and not worth reading or even admitting that they had even read, even in part, but I notice that he immediately takes up on my idea of “trend” that just I mentioned, and – surprise! – he finds, “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.”

An involuntary “Yikes!” escapes my lips. That’s a trend!

I, as are most normal people who understand how this “economics thing” works, am horrified by all of this, and the only saving graces were that I had gold, I had silver, I had oil, and I had enough firepower – within reach! – to provide calming relief to an otherwise paranoid, screaming, hysterical man, such as myself, pumping adrenaline from every pore in his primal outrage at the sheer terror that is being created by the Federal Reserve.

For some reason, I can actually feel your scorn, as you deride what you think is just another paranoid gold-bug gun nut Loonie-Tunes weirdo since the Federal Reserve can just create all the money and credit that the FDIC needs, so why don’t I, as I asked my kids, just shut up?

With that, I thought it was all over, until he went on, “Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942”, which was the year after we entered World War II, which seems important, but was a long time ago, and we don’t get to watch watching terrific war footage with things blowing up and – blam blam blam blam! – guns are firing! Things are on fire! It’s all exciting as hell!

Instead, we will note, much more soberly, that this is today we are talking about, not some ancient yesterday, and Americans are not the “good guys” bravely freeing Europe by destroying it all so that our industrial advantages are completely spared, but are, instead, the biggest bunch of feel-good, hyper-leftist morons that the world has ever seen where, despite a national emphasis on education, ample historical evidence, and the Constitution of the United States requiring that money be only of gold and silver, the citizens have allowed a pure fiat money and every kind of slimy flimflammery that such unbridled money supply would allow, which was, as you would guess, anything you could imagine.

The bad news is actually beyond that of mere bank lending being down, since nobody (except governments) wants to borrow money, since nobody has the money to buy anything anybody makes, so why invest money to make something that nobody will buy. The worse news is that bank lending is how money is created.

Money is, by definition, being destroyed, so that there is less money around with which to pay debts.

You know, without me telling you, that all this ain’t good! And these are the times when you are glad that you are safely invested in gold, silver and oil, and the only thing you have to worry about is, for instance, the usual stuff of keeping an eye out for party-killing suspicious strangers who may know your wife or boss, checking for suspicious pods growing near where you sleep, and protecting yourself against vampires, werewolves, and other blood-suckers, which leads us back to politicians deficit-spending, which leads us back to the Federal Reserve creating more money, which leads us back to buying gold, silver and oil in fearful response, which leads me back to, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Using Gold to Fend of the FDIC and Its “Problem Banks” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Senator Dodd has suggested that the Consumer Financial Protection Agency be housed with the Federal Reserve Board… yet, despite having all the power needed to stop the mortgage debacle, it was never able stop that train wreck. Why trust it to do more in the future?

The muttering over regulation sounds like putting the cart before the horse.

This cartoon came to our attention via The Mess That Greenspan Made in its post on financial market regulation getting even more difficult.

Making a lot of Noise but Getting Nowhere originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Big news: Arrow Energy (ASX:AOE), a modest energy producer, received a $3 billion takeover bid yesterday. Why was this benchwarmer 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 in his essay “Liquid Natural Gas: The Next Resource Boom”. 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.

Addison Wiggin
for The Daily Reckoning

Arrow Energy (ASX:AOE): Rising Demand in Aussie LNG originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

It looks like US banks are losing the opportunity to earn fees on the roughly $500 billion in planned European debt offerings this year. It probably shouldn’t come as a big surprise, given the less than savory details that emerged regarding Goldman’s relationship with Greece, and the series of black eyes the euro currency has been enduring as a result of sovereign debt-related instability.

According to the Guardian:

“For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

“Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.

“‘Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit,’ said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. ‘It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments.’

“European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making.”

Another important relatively “nationalistic” and pride-driven effort underway in the euro zone is the potential development of its own European Monetary Fund, based on the International Monetary Fund (IMF), but to be headquartered in Europe rather than in Washington, DC. It’s almost as if Europe wants to be in charge of its own destiny… go figure.

You can read more about both developments in the Guardian’s coverage of how Europe seems to have barred Wall Street banks from government bond sales.

Best,

Rocky Vega,
The Daily Reckoning

Wall Street Snubbed in European Sovereign Bond Sales originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The lowly cockroach has a tough chin. It’s survived all kinds of shocks over the years. Jungles gave way to deserts. Flatlands succumbed to urban habitats. Predators came and went over many millennia. Yet there the cockroach stood, undaunted upon its six spindly legs.

Investors could learn a few things from the cockroach.

For one, the cockroach teaches a great lesson in survival. As author Richard Bookstaber points out: “Its defense mechanism is limited to moving away from slight puffs of air, puffs that might signal an approaching predator.”

So simple and so crude – yet so very effective. The cockroach is hard to kill and fit for any environment. In markets, we also have cockroaches. One of the types would be the holding company with lots of cash, little debt and a few different businesses in its charge. These things are hard to kill. They have also often done quite well for investors over their long histories, as Berkshire Hathaway (NYSE:BRK.A), ITT (NYSE:ITT), Loews Corp (NYSE:L), Seaboard (AMEX:SEB) and others have shown.

One up-and-comer that has caught my attention is Griffon Corp (NYSE:GFF). The company operates in three different business lines: radars, plastics and garage doors. Let’s look at each of these businesses. Then we’ll see how we can pick up shares today for a deep discount to the value of the sum of its parts.

“Telephonics” is Griffon’s radar and communications business. It makes, for example, weather radar and search radar for military and civilian applications. It also makes air traffic control systems. It has its talons deep in the market, and you can find Griffon systems on all manner of military aircraft – everything from the C-130 Hercules to the AH-64A Apache helicopter. Its biggest customer is the US military. But it also counts Boeing, Lockheed Martin and the like as customers.

It’s a good business with a bright future. The trend toward more surveillance of borders, for example, increases demand for Griffon products. Ditto the trend toward more unmanned aircraft. The technology is also adaptable to civilian applications. Griffon has built, for example, 20 air traffic control systems in China over the last 20 years. And there are more requests for proposals out there, including a big one in Hong Kong.

This is the best of the three businesses, in my view, and one that ought to be able to grow in low double digits even in a challenging economic environment. The second business is called Clopay Plastics. This operation makes films and plastics used in diapers and a variety of medical and industrial uses. Procter & Gamble is a big customer, along with Kimberly-Clark, 3M and Johnson & Johnson. Clopay Plastics is a good business – profitable, steady and entrenched.

The last business is Clopay Building Products, which essentially makes garage doors. As you know what’s happened to the housing market, I probably don’t need to tell you what happened here. This business has been losing money. However, management has done a good job turning this business around. It closed plants. It got rid of the installation business. As a result, it actually eked out an operating profit last quarter.

This brings up why I think this stock is a buy now. Griffon is in the midst of a big turnaround, one that is already taking shape. New management came in last year when Ron Kramer became CEO. He was the president of Wynn Resorts and before that a managing director at investment banking firm Dresdner Kleinwort Wasserstein. He’s brought in a new CFO, the former CFO of International Flavor and Fragrances. He also brought in a new accounting guy from Dover Corp. and new tax guy from Citi. The team is loaded with acquisition-related and strategic experience. One of their top priorities is to put Griffon’s balance sheet to work.

And they’ve got a lot to play with here. Griffon has lots of cash to do a deal – $320 million in cash against only $180 million in debt. On the most recent conference call, Kramer says they’ve passed on a lot of deals. But this is one way this team could create value, by picking up an asset on the cheap in this market.

Until then, the turnaround continues apace. As Kramer pointed out on a recent conference call: “We are confident that each business is now positioned to operate well even if conditions remain challenging. In the year ahead, we believe that each business will generate significant growth and operating profits and continue to generate cash.” I believe him, but the stock market doesn’t.

On the conference call, Kramer remarked, “It is clear that at least for the moment investors seem to think that Griffon is worth something decidedly less than what we believe the businesses to be worth.” The market is still looking backward on Griffon, on the trends of the past four years, as earnings per share fell from $1.65 per share to 39 cents in the fiscal year just ended, Sept. 30, 2009.

At $13.15 a share, Griffon trades for slightly more than its book value of $11.50 per share. For fiscal year 2009, it generated $50 million in free cash flow in what was clearly a transitional year. Nonetheless, the stock goes for only 15 times that depressed free cash flow number. I would estimate a private buyer would pay around $18 per share on a sum-of-the-parts basis, as is. Better results as the turnaround continues will up that number significantly.

Finally, officers and directors, a group of 16 people, own 28% of the stock. They have every incentive to unlock the value that they clearly see. In this highly fragile economy, I’ll take the cockroaches of the investment world.

Griffon is a very rugged cockroach.

Chris Mayer
for The Daily Reckoning

Griffon Corp (NYSE:GFF): Buy Cockroaches, Get Rich originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Our little bull market is one year old today. Yep, that’s right, just one year ago our little cherub came into the world… And my how it has grown!

Since touching a 12-year low on March 9, 2009, the Dow has bounced more than 61%. Over the same timeframe, the S&P 500 has soared 72% and the NASDAQ has jumped 84%. These eye-popping numbers could lead one to believe that all is right with the world…or at least that all is much better than it was one year ago.

But your editors are skeptical of this assessment. It’s true that the widespread panic of early 2009 is gone and the crisis mentality has vanished. But here in early 2010, the seeds of the next crisis are germinating nicely.

Even without any new problems, the economy is still struggling with serious difficulties like sky-high unemployment and stubbornly high mortgage defaults. But new problems are already on their way. In the private sector, for example, commercial real estate defaults are rising exponentially. That’s bad. Over in the public sector, government indebtedness is rising exponentially. That’s really bad.

“The CBO’s latest numbers reveal that America’s national indebtedness will increase by $9.7 trillion over the next 10 years,” our colleagues at The 5-Minute Forecast report. “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.”

Unfortunately, America’s finances are not unique; they are emblematic. Sovereign borrowers are out of control.

“It amazes me how complacent the market remains about the situation in Europe,” says Dan Amoss, the mind behind the Strategic Short Report. “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,” Dan continues. “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,” says Dan. “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.”

Ironically, as government finances around the world deteriorate, many corporate bonds will begin to provide a more compelling destination for investment capital than government bonds. In other words, the uglier that government finances become, the prettier corporate finances appear…

Eric Fry
for The Daily Reckoning

Are Sovereign Borrowers the Next Crisis Catalyst? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

If you don’t read the newspapers you run the risk of missing something. Of course, if you do read them, you run the risk of catching something.

Not much in the financial news worthy of comment this morning…

The Dow gained $13. Gold lost $13. Nothing much to say about it…

So we will comment on something beneath comment…something so low we have to dig down to find it…something so unworthy we hardly imagine we are mentioning it…something in the newspapers…

We’re talking, of course, about politics…

The love-fest with politics is heating up. The drugs have been passed around. Now, the clothes are coming off…

“France keeps steady course in economic upheaval,” says a headline at the International Herald Tribune. Steady course? You bet. It kept subsidizing, bailing out, protecting, coddling and otherwise meddling in its economy – just like it did before the crisis began. Had it not done so, the story continues, France might not have been the first major economy out of the worldwide recession.

On the other hand, the French never went deeply into debt… So maybe they just didn’t have so much exposure to the worldwide debt crisis in the first place.

Never mind. The papers don’t know what the problem is, but they’re convinced that government interference is the solution.

Over at The Financial Times, Clive Crook is breathing hard, too. He reckons that the “downturn called for a big stimulus,” and that the US stimulus effort headed off a worse recession. He then explains that the feds’ stimulus really didn’t stimulate at all, it merely offset a decline in spending at the state level. State tax revenues fell; states spent less. State tax revenues declined $87 billion in the last 12 months, the biggest drop on record. The feds made up for it by spending big.

Meanwhile, The New York Times tells us that the whole downturn is now behind us. The economy is “surprisingly normal,” it says.

The US economy is some 11 million jobs short of full employment. Nothing very normal about that. But February saw an unexpected upturn in consumer credit, reports the Times. And unemployment seems to have bottomed out, adds The Wall Street Journal.

Surprisingly normal?

Well, there’s a big difference from something that looks surprisingly, reassuringly normal…and something that is actually working normally.

Which is it?

The New York Times is right; it is an economy that looks surprisingly normal…

Zombies can look surprisingly normal too. If you clean them up.

Bill Bonner
for The Daily Reckoning

Championing Stimulus and the Economics of “Surprisingly Normal” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

If you’re worried about retirement you’re not alone. A new survey out today shows that Americans are increasingly ill-prepared for retirement. US Workers are delaying their planned career end dates to instead focus on building just a basic nest egg. 

According to CNNMoney.com:

“The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

“Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.

“Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey…

“…The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009.”

The fact that only 16 percent of respondents believe they are saving enough for a comfortable retirement, a 20-year low, is an especially bad sign. It’s worse still if you consider that many of these workers may also believe they have some underlying financial support from two of the US government’s most egregious unfunded liabilities: Social Security and Medicare. These days, the nation’s retirement safety net is looking more threadbare than ever.

For more details visit CNNMoney.com’s coverage of how 43 percent of surveyed US workers and retirees have less than $10k for retirement.

Best,

Rocky Vega,
The Daily Reckoning

Survey: 43% of US Workers, Retirees Have Under $10k Saved for Retirement originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

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.”

Addison Wiggin
for The Daily Reckoning

CBO Debt Projections: Make Room for “Crowding Out” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."