May 14, 2007 by Addison Wiggin & Ian Mathias

• Has the fat man finally had his fill? In Rome, he’d purge and head back
  for more…
  
• Chrysler gets mauled by a three-headed dog
• “Peak Milk,” baby. Everything you want to buy is going up this summer
• China steel production up 20%: What are they building over there?
  
• Chavez, Bush, two peas in a pod? The battle for the “commanding heights” of the economy…

 “The fat man finally has had his fill. Now he’s backing away from the buffet line,” Capital & Crisis’ Chris Mayer told us in light of last week’s retail numbers. Major retailers reported a collective 2.3% decline in sales for the month. “That was the weakest showing since people began tracking the measure in 1970,” Chris told The 5.

“People will offer lots of explanations why the retail sales figures were so poor. They’ll say the cost of gasoline was high, or blame the weather. Here is the real reason: The U.S. consumer is tapped out.”

So what do you do? Mr. Mayer suggests buying businesses that produce things the almighty consumer “must” use, not to keep up with the Joneses, but to simply stay afloat. His Capital & Crisis portfolio is bulking up on energy, infrastructure, water and similar businesses.

Cerberus Capital is buying Chrysler back from the Germans for $7.4 billion. After spending $37 billion to buy the American carmaker, then billions more trying to keep it afloat, Daimler gets to keep all of Chrysler’s debts. (At least, they get to write them off against activities at Mercedes and other going business concerns.) The big she-daddy problem that is Chrysler’s billion-dollar pension nightmare will be spun off into a separate holding company, called Chrysler Holding.

And Cerberus — the three-headed dog who guards the gates of Hades — gets to keep the car company. Cerberus now owns the Chrysler, Dodge and Jeep makes, and Chrysler Financial. They just bought GMAC financing, the only part of GMC worth a spit. And they’re looking at the 2005 bankruptcy Oscar winner, Delphi.

Look for Cerberus to come out strong next year with a new and improved debt-free global automaker for sale… and a fistful of performance fees stuffed into its own pockets.

“Peak Milk,” anyone? Rabobank, the world’s largest agricultural lender, said dairy farmers can’t keep up with a 3% increase in milk consumption this year. Get ready for higher prices of anything involving dairy products: milk, cheese, sour cream… low-fat lattes.

Gas prices from last week in San Francisco courtesy of the AP. Summer driving season doesn't even start until Memorial Day weekend... ready for $5 gas?  When it comes to your neighborhood, give us a write.  We’ll be happy to say, “we told you so.”

Et tu, cotton? “Cotton prices are way oversold,” Kevin Kerr writes, keeping The 5 alive on all things commodity related. “If China comes in and grabs the remaining supplies from last year, cotton in the U.S. could disappear.”

The USDA reported a 13% smaller crop this year, a drop from 21 million to 18.8 million bales. At the same time, China announced it would increase cotton imports by 30%, from 13 million to 17 million bushels.

“Cotton is taking a pounding in the news,” says the Maniac Trader, “but we may be looking at the beginning of one of the greatest long-term bull market opportunities right now. I am looking as far out as December 2008 cotton.”

In the past year, cotton futures have dropped 2.8%, and corn has shot up 54%.

 Last year, Chinese steelmakers produced nearly 20% more steel than they did the year before. That’s the fastest growth rate among all Asian steel producers.

What are they building? Skyscrapers. Our Christopher Hancock has had his eyes and ears on the Chinese market for most of this decade now. According to Christopher, China plans to add another 1,000 skyscrapers to the Shanghai skyline by 2011...and to double its demand for steel by 2031.

For comparison, the Sears Tower contains 76,000 tons of steel. Imagine how much growth potential lies in the steel industry? Lots.

Christopher has been sharing his insights and stock recommendations with Agora Financial Reserve members for several months. But tomorrow, his Free Market Investor will become widely available. Look for it…

“Although I agree with you in your derision of Ben Bernanke,” a reader told The 5 after Helicopter Ben chose to leave rates alone yet again, “I disagree with your implication that he has any control over interest rates.

“If you plot the U.S. 3-month Treasury bill yields on top of the fed funds rate, you will find that in every occasion (since 2000) the Fed has followed the three-month T-bill rate. I am not sure what Mr. Bernanke does, but what he certainly doesn’t do is determine interest rates. I suspect that he is in the smoke-and-mirrors business, given that he doesn’t correct this widespread misconception.”

Last summer, we had the distinct honor of working with Dr. Kurt Richebächer on a book he was writing at the time. He believes he’s successfully refuted the “monetarist” view of the Great Depression, for which Bernanke is now the most famous mouthpiece. Monetary policy, Dr. Richebacher tries to show, can be useful up to a point, and then it will simply fail to have any effect whatsoever. He believes the Fed has lost control of interest rates… and history will not look kindly on Bernanke or his googly-eyed predecessor.

“The problems with the Federal Reserve noted today have been well documented by Congressman Ron Paul,” another reader reminds us. “I suggest that you refer the readers to his Texas Straight Talk columns for April 9, entitled ‘The Federal Reserve Monopoly Over Money’ and for March 19 entitled ‘Don't Blame Market for Housing Bubble.’ These can be found at www.house.gov/paul/index.shtml If he becomes the next president, the Federal Reserve will definitely be changed, and maybe eliminated.”

Thank you for the heads-up. We’re no strangers to Dr. Paul. In fact, he will be featured in our documentary on U.S. debt, along with Warren Buffett, Robert Rubin, Paul O’Neill and David Walker, to name just a few. We’ve also invited Dr. Paul to keynote one of the days at our Investment Symposium in Vancouver in July. We’re awaiting confirmation. You may want to join us. Details here.

“Chavez may be crazy,” writes a reader, “but he's not necessarily nuts. Playing financial chicken with the guys who own the planet is kinda crazy, but what he's doing makes perfect sense.
 
“Chavez understands that the U.S. has never played by the rules, and that's how come we are now the richest country this planet has ever seen. The U.S. grew by being protectionist... right up to the mid-20th century... and beyond (Reagan was big-time protectionist). By then, we'd perfected the art of state-controlled targeted investment, reliance on the state sector for R&D, production and procurement -- Pentagon/high-tech industry, anyone?
 
“So if you think Chavez is nuts for trying to keep control of some of his own resources and capital, you have to concur that successive leaders of this country have been absolute loons. After all, extermination of the indigenous population, slavery, capture of territory belonging to other countries, worldwide imperial violence and other more creative ways of extracting wealth from those who might not want to give it up are rather radical forms of market interference.
 
“I typically enjoy your commentary, but let's get real when it comes to judging how leaders of other countries conduct themselves. Maybe he's nuts, maybe he's not. Time will tell. But Chavez understands he's playing catch-up. Eventually, there will be another coup — and he might not survive the next one.”

The 5 Responds: Lenin, too, believed he could control what he called the “commanding heights” of the economy — the steel, coal, iron mills, the banks, the railroads and even oil. What did Lenin prove? Centralized planning of an industrialized nation is a bad idea. Why Chavez thinks he can best the track record set by the Soviet Union, Red China and socialist India in the 20th century… well, go figure. He’s nuts.

Two sources we recommend for reading: The Road To Serfdom, by Friedrich von Hayek; The Commanding Heights, by Daniel Yergin. (The latter was also made into a PBS documentary series, and was, in fact, the inspiration behind turning our own Empire of Debt into a documentary.)

We’ve had a slew of mail regarding our comment on George W. Bush’s economic track record. We’ll have to get to those tomorrow… but let us remind you: Free speech is a hallmark of our nation as much as free markets ought to be.

“I agree with Charlie Munger that the mass production of ethanol as a wholesale replacement for gasoline is a really dumb idea,” writes another reader. “Biofuels such as ethanol and biodiesel may have a very important role to play in the transition to a low/no-carbon future, but they should be targeted to use for rural residents and farmers, who have relatively long distances to travel and who do not have access to public or commodity transit options. Using corn-based ethanol as a replacement for gasoline use in urban centers is absolutely unsustainable, and therefore absolutely stupid (or worse -- self-destructive).

“As projections have already shown, even if all the agricultural land in America were used for the growing of corn, and all the corn converted to ethanol, it would still not be enough to replace all the gasoline currently consumed in America. And if this were tried, America would then become 100% dependent on foreign imports for all of its food. Is this dumb or what -- trading oil dependency for food dependency!”

Heh! Wouldn’t that be fun?

Warm regards,
Addison Wiggin,
The 5 Min. Forecast

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