Surprising Trade Deficit Details, Yesterday’s Volatile Market, Staggering Infrastructure Costs, Our “Strong” Dollar, and More!

U.S. markets rallied big in the morning yesterday. The cause for celebration? A dubious trade number.

The August trade deficit declined to $57.6 billion
— great news, on the surface. This 2.4% narrowing of July’s number means exports grew and imports shrank for the third month in a row. On the news, the Dow and S&P shot up over 1%. The Nasdaq jumped over 2%.

Unfortunately, when you dig into the numbers, they’re not exactly bullish. Quite the opposite, in fact.

“The trade number that got the market so giddy owes much of its strength to gold exports,”
Eric Fry tells us. “That is, gold leaving the U.S. and going elsewhere. If you look only at the export side of the ledger, you find that total net exports in August increased $600 million. Within that number, an export item called ‘nonmonetary gold’ increased $442 million.”

“It turns out that ‘nonmonetary gold’,” explains Eric, “is gold that is held by the New York Federal Reserve Bank on behalf of foreign governments. So these ‘exports’ aren’t really exports at all. They are just a delivery of goods that already belong to someone else. That fact that we are ‘exporting’ this gold simply means that a few foreign governments have decided they’d rather hold their gold in their own vaults.”

And yet… the jump in “nonmonetary gold” exports accounted for three-quarters of the ENTIRE improvement in exports!

“If we continue not exporting gold,” Eric slyly retorts, “while simultaneously not supporting a strong dollar, we’ll get that nasty trade deficit closed in no time!”

Heh. Heh.

We doubt traders noticed the gold in these numbers, but they started selling after lunch all the same.

Speculation on why the market reversed: Hedge funds took profits in Apple and Research in Motion, whacking each for about 10% in midday trading. JPMorgan reduced sales estimates for a Chinese search engine called Baidu.com. And the big retailers Target, Wal-Mart, JC Penney and Nordstrom all revealed disappointing sales.

By the end of the day, the Dow had shed all its gains and fell to a loss of 0.5%. The S&P itself dropped 0.5% . The Nasdaq fell 1.4%.

Yesterday marked the most volatile day on Wall Street since Aug. 7.

For what it’s worth, the major U.S. indexes continued to decline another 3% on Aug. 8-9.

Across the Pacific, China released its trade numbers yesterday, too. The Chinese trade surplus soared to $23 billion in September — its fourth highest month on record.
And a 56% increase over September last year.

Along with the trade numbers, Chinese officials apologized to the U.S., promising that they will do their part to stop being so thrifty and taking advantage of our consumerism. Beijing has allowed the yuan to rise 9% since 2005, when then Treasury Secretary John Snow begged it to stop manipulating its currency.

“A strong dollar is in our nation’s interest,”
current Treasury Secretary Hank Paulson said yesterday, humming a similar but moronic tune, “and the currency values should be set in a competitive marketplace based upon underlying economic fundamentals.”

The White House is apparently ramping up “strong dollar” rhetoric for the upcoming G7 meeting, at which currencies and a possible “trade war” with China are expected to be priority topics.

For his part, President Bush told the WSJ yesterday that he is also a big believer in a “strong dollar policy.” And added that Hank Paulson “reflects the view of this administration that the strong dollar policy is the correct policy”… and that the best way for a currency to become valued is through the market.

Unfortunately, strong talk does not a strong dollar make.

“A ‘strong dollar’ would come from ‘strong fundamentals,’” explains our currency counselor Chuck Butler. “But when you need to attract $3 billion in foreign investment a day to finance the current account deficit, your housing market is melting, and interest rates are falling… you really don’t have strong fundamentals to garner a strong currency.”

The last time he heard a nation’s leader blathering about a “strong” currency
was back in August, when Hugo Chavez renamed the bolivar the “strong bolivar”… right after he chopped three zeros off the back of it.

Despite all the talk… the dollar remained fairly sedate yesterday.
Despite an early morning run at $1.42, the euro ended the day even at $1.41. The pound stuck to $2.03, and the yen was still cheap at 117.

The Canadian dollar rested at $1.02… a “stronger” dollar than the U.S. variety.

Gold traded as high as $752 for immediate delivery in New York yesterday, but sold off in Asia overnight to about $747 this morning.

“Gold prices look poised to break higher,” writes Ed Bugos from Vancouver. “Following another record high in platinum, we’re seeing break outs in the Amex Gold Bugs Index (HUI) and the XAU led by new highs in precious metal stocks like Agnico-Eagle, Randgold, Kinross, Barrick, Freeport, Lihir and Aurizon. Juniors like Eldorado, Miramar (which is getting taken out by Newmont), Yamana and NovaGold are also registering solid gains.

“The immediate objective for gold is around $790-800,” says Ed, “but previous bullish foot prints suggest a $900 target price, finally blowing through the old 1980 record. In my opinion, this should happen regardless of what happens to the U.S. dollar — whether it rallies or not — or oil and other commodity prices.”

Crude oil leapt to just over $83 overnight,
90 cents short of September’s record high. The spike came on news from the U.S. Energy Department that domestic inventories fell by 1.7 million barrels during the week of Oct. 5 — 70% worse than expected.

The International Energy Agency didn’t help much. They concluded yesterday that oil inventories held by the world’s largest industrialized nations have fallen below a five-year average.

As we write, oil just hit $84… a new intraday high.

“The United States has fallen so far behind in maintaining its public infrastructure — roads, bridges, schools, dams,”
reports Christopher Hancock, “that it would take more than a trillion and a half dollars over five years just to bring it back up to standard.”

That’s $1.5 trillion… with a T.

“Let’s put that in perspective. The Iraq war has cost the United States $458 billion to date. The EPA estimates that U.S. sewer system maintenance over the next 20 years will run somewhere in the ballpark of $390 billion. Meaning domestic sewer system repairs alone will cost almost as much as a seven-year, full-fledged war.”

The fiscal burden of infrastructure work recommended by the American Society of Civil Engineers (ASCE) is startling. “Patching potholes and disposing of solid waste will cost roughly twice as much as the war running through 2008,” says Chris. “And when one accounts for the Congressional Budget Office estimates stretching this war into 2017, the total cost of a 17-year Iraqi invasion will run slightly more than the five-year domestic funding we need right here at home.”

By the way, if you’d like to hear more from Mr. Hancock, check out International Living’s “Ultimate Event” at the end of the month. It’s shaping up to be quite a show… click here to learn more.

“Why is it so hard to see that the housing cycle will bottom long after 2009?” asks a reader “Go back to late 1980s and 1990s. We experienced in the Bay Area of Northern California prices that hit the ‘top’ in mid-1989 and began to recover in 1995.

“So doing the ‘math’ — 2006 plus six years is 2012 — that’s when I believe the recovery will finally begin at the earliest. This simple arithmetic is based upon my personal experience, having bought late in 1988.

“I now live in the Phoenix area where I think the recovery may take even longer.”

The 5 responds:
You’d think it would be easy to see. But with organizations like the National Association of Realtors revising its forecasts downward eight times this year alone, folks who aren’t tuned in don’t really have a chance in Hades of understanding the market forces at play.

“The high uranium demand expected for future reactors is predicated on the assumption that the reactors will be light water reactors,” comments another. “These reactor designs were adapted from military designs used in the U.S. Navy. The military has never had much use for concepts such as efficiency or thrift, and this is reflected in its choice of hardware.

“Such designs are used in the U.S. and much of the world today. This type of reactor depends on ‘thermal’ or slow neutrons to fission U-235 nuclei. Such reactors are very wasteful of natural uranium. In fact they must have fuel enriched in the uranium-235 isotope, resulting in piles of ‘depleted’ uranium that is currently used to poison Iraq and parts of Hawaii. Perhaps worse, as they are now operated, the fuel cycle is once through. Only a tiny fraction of the available energy of the fuel can be used. Not to mention the generation of incredibly radioactive waste to be disposed of…

“The preferable choice is the ‘fast’ neutron reactor… Reactors of this type usually use liquid metals such as sodium or lead as the primary coolant. Some reactors of the fast neutron variety can even generate more fissile isotopes than they consume. For every uranium or plutonium nucleus they fission, they can ‘breed’ in excess of one fissionable nucleus of uranium (from thorium) or plutonium (from U-238). The wide adoption of this technology (it already exists in pilot plants and the Russian navy Alfa-class submarines) would have several desirable consequences. Both depleted uranium and used reactor fuel would be transformed from waste into valuable resources, eliminating the problem of disposal. Stocks of uranium, plutonium and ‘spent’ reactor fuel already mined would supply the world demand for reactor fuel for the foreseeable future…

“So you can operate one of these reactors, generate revenue from sales of hydrogen, and at the end of the day have more usable fuel than you started with. Sounds like a business model to me. Can you say hydrogen economy? How about fuel cell car? By the way, love my Reserve membership and The 5, of course!”

The 5 responds:
Hydrogen economy.

Thanks for your support,

Addison Wiggin
The 5 Min. Forecast

P.S. Our penny stock team has a fuel cell pick of its own… click here to learn more about the Penny Stock Fortunes portfolio.

ADDITIONAL RESOURCES:
Israel asks U.S. foreign aid be paid in euros
Trade Deficit Lowest in Seven Months
More from Chris Hancock in today’s Rude Awakening
The ECB’s president discusses the “strong dollar