|
 “The U.S. government is on a ‘burning platform’ of unsustainable policies,” the Financial Times reports this morning, “and practices with fiscal deficits, chronic health care underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.”
Uh oh… someone at the FT must have been talking to our friend David Walker at the Government Accountability Office.
Yep… sure enough. “David Walker, comptroller general of the U.S.,” the FT goes on, “issued the unusually downbeat assessment of his country’s future in a report that lays out what he called ‘chilling long-term simulations.’ These include ‘dramatic’ tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of U.S. debt.”
Does anyone listen to this guy?
 Inflation, at least the way bean counters at the Labor Department calculate it, continued to rise in July. Wholesale costs inflated at 0.6% last month. That’s an annual rate of over 7.2%, three times the level forecast by Wall Street. And the biggest surprise of this morning’s CPI report.
But most of the gain was driven by energy costs. “Core inflation facing producers grew only slightly,” reports CNN Money.
Phew! What a relief.
Since energy prices are really of no concern to wholesale manufacturers, the fact that they accounted for the majority of inflation isn’t a big deal. We feel better…
 Umm... not so fast. Even without those pesky food and energy costs, core producer prices were up 2.3% year over year, the biggest jump since September 2005.
 Chinese retail sales leapt forward last month at their fastest pace since 2004. The Chinese spent 16% more in July than in the same time in 2006. Chinese consumer confidence in the second half is likely to pass four-year highs, says a recently released MasterCard survey.
 The Shanghai Composite Index gained over 1% overnight, setting yet another record high. The index is up nearly 65% this year. But that’s not the real story. Look at this chart:
While the subprime/credit crisis hit U.S. markets the hardest, the Shanghai index rallied over 20%.
 Major U.S. indexes were up nearly 1% within the first few hours of trading after the Fed announced it would add another $2 billion in a one-day repurchase yesterday. A quick jolt of liquidity kept markets afloat, but not prosperous. The Dow and S&P 500 steadily gave back their morning gains all day… both gained less than 0.1% by the bell.
 The Fed is clearly spooked. But where does this subprime crisis stack up in the scheme of things? LTCM in 1998? The S&L crisis of the early ’90s? Stock market bust in 2000… or even 1987?
Worse than all of the above.
The global ramifications of this bust may soon be rearing in the political realm, instead of just wounding the pride of overpaid fund managers in New York and London.
“There currently are three possibilities,” suggest the geopolitical watchdogs at Stratfor.com in their latest briefing on the subprime disaster. “One is that the subprime crisis is an overblown event that will not even represent the culmination of a business cycle. The second is that we are about to enter a normal cyclical recession. The third, and the one that interests us, is that this crisis could result in a fundamental shift in how the U.S. or the international system works.”
George Friedman, the founder of Stratfor.com, doesn’t see a “fundamental shift” yet, but he’s on high alert. This crisis bears the hallmarks of more than just your garden-variety market correction.
 “The credit crunch has finally hit the Aussie housing market,” reports former Strategic Investment editor turned Australian investing guru Dan Denning. “Local low-doc lender Bluestone raised its lending rates by 17 to 55 basis points yesterday. This means potential new homebuyers with sketchy credit histories will pay an interest rate anywhere from 7.8-12% -- if they can get a loan.”
 The dollar continues to prosper as global markets suffer. This morning, the pound briefly slipped below the $2 level for the first time in nearly two months, and the euro barely held its $1.36 mark overnight -- if you’re the type to count fractions of a cent, it’s actually at a one-month low.
“With the subprime meltdown going global, it's no longer just a problem for the U.S. and the dollar,” comments Chuck Butler. “And after this huge run-up this summer in the currencies, I see a consolidation on the horizon... The currencies are consolidating at this time, and we should look for them to back off versus the dollar for a short time, before heading back up again later this year.”
 Goldman Sachs, the U.S.’s most profitable securities firm, is the latest victim of the credit crunch. The firm announced this morning it would pump $2 billion (plus $1 billion from individual investors) into its Global Equities Opportunity Fund -- which lost 30% last week. It was “worth” over $5 billion on Monday, but by Friday, it had fallen to nearly $3.5 billion.
“This is not a rescue,” CFO David Viniar said about the cash infusion. “This is a good investment opportunity for us.” Hmmm… we’ll see about that. An “investment opportunity” this large would be enough to force most businesses to file for bankruptcy protection.
 Since June 22, over $60 billion in corporate loan or bond deals (46 in total) have been pulled off the table. In the past two weeks alone, 13 debunked deals have accounted for $43 billion in postponed loans.
 Gold looked like it was going to crest $671 in the opening hour in New York this morning, but by noon, it had fallen back to $668 and change.
 “The underlying buying pressure may be too strong for central banks to keep a lid on gold at these prices much longer,” says James Turk of GoldMoney.com. According to Turk, central banks will soon have to stop selling gold in an effort to conceal the true problems within the credit markets, thus releasing gold’s desire to rise with great energy.
“Note the sloping red line that has contained gold since its May 2006 high,” explains James. “It is similar to the one that contained gold from mid-2004 until August 2005. Once that previous red line was hurdled, gold soared. I expect the same result this time too.”
 The U.S. has made its first move in the race to lay claim to the North Pole. The Coast Guard announced yesterday that it has sent the cutter Healy to the pole on a “mapping mission” to determine what, if any, part of the Arctic could be considered U.S. land.
They’re mapping the seafloor on the northern Chukchi Cap, an underwater plateau that extends from Alaska's North Slope some 500 miles northward. The crew of the Healy maintains this mission is not a response to Russia’s recent expeditions… it’s just an incredible coincidence that they’ve chosen to map the same area.
After Russia’s controversial underwater flag planting earlier this month, Canada, Norway, Denmark and now the U.S. have all -- in one way or another -- acknowledged their interest in keeping the Arctic Circle out of Russian hands. No one ever seemed to care about the Arctic and its underwater shelf until Russian scientists claimed there could be more oil up there than there ever was in Saudi Arabia.
The area is currently managed under a U.N. resolution… which means what exactly we don’t know. The global oil grab is getting interesting…
 “Tell me, am I the only one who sees how brilliantly devious the central banks (who are really a group of private bankers with a license to print money) are about this supposed injection of liquidity into the market?” asks a reader.
“Contrary to common belief, they did not give this money to the other bankers, they lent it to them, at 4%, and they expect it back, with interest. So let's see, central bank private banker A lends X billion dollars to private bank B, which private banker A busily printed up that morning in their basement.
“Well, not really, but OK. He then lends that fake money to the other banker, in return for real interest, paid for by real money, based on real labor, paid for by real people and real sweat. Pretty soon, the group of A bankers owns the group of B bankers, and bought them with counterfeit funds. I give you fake money, you give me real interest. Deal?”
 “I second the comments made on ethanol production,” writes another reader. “And as another ‘old’ Kansas farm boy with continuing interest and ownership in a family wheat farm, I would point out two additional problems with increased corn production. While driving through northwest Kansas on I-70 last Fall, I was astounded to see that the thousands of acres previously planted to winter wheat was now in corn production.
“Wheat, arguably one of the most important human food crops worldwide, is suffering a double whammy: decreased production due to changing climate (droughts in Australia and the Ukraine, floods in Kansas -- we lost our entire wheat crop this year in south central Kansas due to excessive rain) -- and decreased production due to supplantation by corn.
“The second problem is water! Growing corn is a water-intensive process, and in western Kansas, it is necessary to employ massive pump irrigation to produce corn on farms that, in the past, have been able to produce wheat with dry land farming. Goodbye, aquifers!”
We wonder just how will historians read the Great Ethanol Swindle of 2007-2008. Think it will stack up against the Teapot Dome scandal involving the federal government in 1924? And how many times are crazy things like this going to happen before Johnny Q. and his six-pack-drinking football-watching buddies realize the government doesn’t necessarily have his interest in mind when they announce broad support for programs like “corn for fuel at any cost”?
C’mon people… we don’t publish this stuff just for its amusement value.
Yours with affection,
Addison Wiggin
The 5 Min. Forecast
P.S. “Drawing parallels with the end of the Roman empire,” the FT article we mentioned in today’s lead continues, “Mr. Walker warned there were ‘striking similarities’ between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an overconfident and overextended military in foreign lands and fiscal irresponsibility by the central government.”
“‘Sound familiar? Mr. Walker said. ‘In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.’”
We held a sneak preview of the documentary we’re making out of Empire of Debt, a book we wrote with Bill Bonner, at our Vancouver symposium. The preview was a huge success. Over 200 people showed up to challenge Patrick Creadon, the director, and me on our approach to making the film. We came away with some very intriguing ideas… and a little sheepish for not having treated the subject with as much gravity as some of the audience would have liked.
David Walker plays an exceedingly important role in the film as we move toward completion. He and his staff at the GAO have been first-rate and offered their support in a number of ways, including allowing us to interview Paul O’Neill in Walker’s office at the GAO building. Our first deadline is Sept. 28, when we will submit a rough cut to the judges at the Sundance Film Festival. With any luck, we’ll help Mr. Walker explain to the public what a dismal state the federal balance sheet is in.
If you’re interested in hearing investment strategies discussed in Vancouver, our audio CD set is nearly complete >>
|
Thursday, August 16th: 6:20am.
Recent guerilla attacks in western Mexico have authorities on both sides of the Mexican border scrambling to protect billions worth natural gas pipelines. Companies such as Hershey’s, Honda, and Kellogg’s are losing up to $7 million a day as local rebels bomb energy sites left and right. Meanwhile, several little known organizations are well positioned to profit from a sudden energy grab... or… worse yet, a full blown U.S. / Mexico Border War. 
