Bernanke Forecasts Stagflation, Massive Brazilian Oil Find, The Greenback Carry Trade, and More!

by Addison Wiggin & Ian Mathias

  • Bernanke predicts slower growth, increased inflation… Ron Paul delivers the stagflation smackdown
  • Nasdaq and China cap off a week for the record books
  • Brazil’s transformational oil find… our gurus weigh in on this 8 billion barrel bounty
  • Ready for the greenback carry trade? Yen and franc set milestones versus the dollar
  • Consumer confidence plummets, takes retail with it… Merry freaking Christmas


“Growth of economic activity [will] slow noticeably in the fourth quarter from its third-quarter rate,” suggested Ben Bernanke before Congress yesterday.

OK… slower growth. Got it.

“Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity…”

OK… increased inflation. Isn’t there a word for this… oh, right: stagflation.

We cherry-picked the most pessimistic of Bernanke’s comments. After all, we have a reputation to uphold. But Bernanke’s speech was pockmarked with a few moments of optimism. And a few moments of pure entertainment.

For what it’s worth, Wall Street’s interpretation of the Bernanke testimony wasn’t far from ours. The S&P 500 and the Dow fell up to 1.5% within an hour of Bernanke’s statement. Then in the 11th hour, traders screwed up their courage and started buying. The late rally brought both indexes back to near break-even.

The Nasdaq wasn’t so lucky. It got whipped like a Catholic schoolboy caught nipping from the Communion chalice. Traders kept their afternoon losses right up until the bell… the tech-heavy index closed with a 1.9% loss.

Coupled with Wednesday’s fall of 2.7%, yesterday’s loss marked the worst two-day stretch for the Nasdaq since September 2002.

Across the Pacific, the Shanghai Composite Index suffered a milestone loss of its own. By registering a small loss of 0.3% overnight, the SSE capped off its worst performing week since 1997. The index fell about 8%, to 5,315.

A massive offshore oil discovery could boost Brazil’s oil reserves by 40%. Petroleo Brasileiro SA (Petrobras) announced this morning that its new “ultra deep” Tupi field could contain 8 billion barrels of recoverable crude.

If this report is accurate, Brasil’s reserves could quickly catch up to OPEC players like Nigeria and Venezuela. Currently holding the 17th largest oil reserves in the world, Brazil’s discovery could catapult the country into the top 10.

“If this is confirmed,” said Dilma Rousseff, presidential chief of staff, “we will no longer be a ‘medium’ country, pursuing self-sufficiency and exporting a little. It will transform the nation to another level, with exporting properties like Venezuela, Arab nations and others.”

Petrobras shares in the U.S. jumped just a tiny bit over the past year… from $24 to $116. Curiously, in Brazil, Petrobras shares climbed only 14%. There’s lots of money in New York looking for even the slightest bit of good news to invest in.



They better be dancin’ 40% harder at Carnival this year… big oil’s on its way

“Not so fast,” interjects our oil man Byron King. “The Tupi field is 286 kilometers (177 miles) offshore in the South Atlantic Ocean. Tupi lies under 2,140 meters (7,060 feet) of water, more than 3,000 meters (almost 10,000 feet) of sand and rocks and then another 2,000-meter (6,600-foot)-thick layer of salt. Getting that oil out of the crust will be a formidable challenge and require many years of expensive investment. Most of Brazil’s oil-bearing potential lies off its Atlantic coast.

“A discovery of 8 billion barrels is in the same class as Prudhoe Bay. ARCO and BP have spent over 30 years drilling and extracting oil from Prudhoe Bay. So it is not as if all 8 billion barrels from Tupi will see the light of day anytime soon. Petrobras has a very long-term program in front of it.”

On the brighter side, “I’ve long admired Petrobras for its outstanding technical competence… they are a genuine global leader in ultra-deep offshore oil extraction.

“Plus,” added Byron, “by the time Brazil’s oil comes online in any significant way, many other oil provinces of the world will be producing less. So congratulations to Petrobras, but don’t use this news as an excuse to buy a new gas-guzzling Hummer.”

Byron’s new Energy & Scarcity Investor debuts this afternoon. Look for it.

“The oil discovery in Brazil only strengthens the case for that country’s ascension into the investment-grade club,” says Chris Hancock. “Recent trade surpluses have been primarily driven through commodity exports. With oil prices rising, this is a huge windfall for the world’s unknown BRIC.

“I still think Brazil sits on the brink. The country desperately needs public infrastructure and housing. Reaching the I-grade club should reduce the cost of capital leading to sustainable growth.

“Brazil’s growth-acceleration program, announced this year, includes $280 billion of public and private sector infrastructure investment between 2007-2010. That’s a respectable chunk of change.”

For more on Chris, including his way to trade the most secretive pool of investment wealth in the world… look here.

Crude oil prices continued to trade wildly overnight and this morning. Oil climbed back to as high as $97 yesterday, but then abruptly fell close to $94 on Bernanke’s suggestion that growth would slow in the coming quarters.

But this morning, oil is right back up to $96 on fear that a particularly burly storm in the North Sea will inhibit production and transport. Despite recent volatility, oil has yet to break through the $94 resistance established after the Fed’s Oct. 31 cut.

The dollar struck a new all-time low on the heels of Chairman Bernanke’s comments. For a brief instant this morning, the dollar index scored an all-time low of 74 — its first forary into the number. The index has since stabilized into previous lows in the 75 range.

The index’s plunge is largely attributed to yet another all-time low for the dollar versus the euro. The euro returned to the $1.47 mark overnight and managed to oust previous records by a tenth of a cent. The pound also wandered into long-forgotten territory, gracing the $2.11 mark this morning, before retreating back to $2.11.

Strength in the two major euro currencies came from nearly simultaneous decisions from the Bank of England and the European Central Bank to keep their respective rates the same.

The yen continued its strong rally overnight and this morning, trading for as low as 111. Not since Aug. 17 has the yen fared so well versus the greenback. The Swiss franc, its carry trade brother by another mother, also rallied to $1.11, the highest versus the dollar since 1995.

We told you about Morgan Stanley and AIG’s losses yesterday. Not wanting to be left out, Wachovia announced this morning it’s lost $1.1 billion in October and expects increased loan losses in the fourth quarter.

Rumors abound, too, that Barclays will soon announce a whopping $10 billion write-down. Barclays officials have denied the allegation, but traders seem to be selling the rumor, nonetheless. As we write, Barclays stock it down 7% on the day.

“Get Set for Wave of Debt Downgrades,” headlines the WSJ this morning. Rating downgrades from Moody’s, S&P and Fitch are expected to flood the market in the next few months.

The three agencies have already downgraded $70 billion in subprime CDOs. But further downgrades worth tens, if not hundreds, of billions of dollars are on the horizon. S&P, for example, has 709 CDO tranches on its “credit watch negative” list, the very last list before downgrading. Thus far, S&P has downgraded only 381 tranches.

Likewise, Fitch has 609 CDOs on negative watch, nearly double the amount it’s already downgraded. Moody’s did not disclose its hit list for the article… but didn’t deny it is in a similar situation.

Consumer confidence is at a two-year low, says this morning’s RBC CASH Index.

RBC’s measure of consumer confidence registered a score of 64 so far this month, down sharply from a score of 80 the same time last month. Not since Hurricane Katrina has the index scored so low.

The index measures expectations about the future, job security, economic conditions and feelings about investments. All four measurements fell from last month

Sales at retail stores rose 1.6% in October — the worst October performance in 12 years. Not since 1995 has the U.S. seen such an unsuccessful October, according to the International Council of Shopping Centers.

Wal-Mart, the U.S.’ biggest retailer; Gap, the U.S.’s biggest clothing retailer; and Macy’s, the largest department store chain, have all missed their latest round of earnings forecasts. “This does not bode well for the upcoming Christmas season retail sector hiring or store expansion plans,” writes Mish Shedlock. “Wal-Mart has already announced a second reduction in the number of U.S stores it will be building. I expect more cutback announcements from other stores.”

Dashed housing hopes, no doubt, play a role in sagging retail returns this year.

“There may be some truth to what the contributor says about the Chinese not trusting our motives,” writes a reader in reaction to yesterday’s discussion of “date rape” drug-laced toys in Australia and the U.S.

“However, there are more compelling reasons, and they are all economic. In an article today in the South China Morning Post, it was noted that the safe chemical component that was specified to be used in the ‘Aqua Dots’ toy costs three times as much as the toxic chemical used.

“By the same token, I was told that leaded paint dries faster, allowing for shortened production time. And in a world where the manufacturer will face hundreds of thousands of dollars in claims if it misses the shipping deadline, such things matter. Some American importers now consider their departments responsible for making those claims as profit centers.

“What we have come to is the proverbial ‘rock and a hard place.’ Just as the U. S. economy is slowing and the dollar’s purchasing power declines, China’s costs are going up also. Among those costs, U.S. companies add increasingly more and more rules, regulations and vendor compliance manuals that include inspection of factories for human rights violations to make sure the workers are happy with the dormitory and the mess hall menu. This, in theory, is all well and good, but there is still no free lunch in this world. Someone has to pick up the tab, and at the end of the day, it is the retail consumer.

“So take comfort, dear customer, in the knowledge that though you are paying more and getting less, your children are safer and the Chinese workers are happy, too.”

“A $9 trillion national debt represents about 65% of GDP,” comments another reader on our observance of that historical milestone yesterday. “This does not seem to be an outrageously high ratio. Many large corporations have a much higher ratio of debt to income. They use this debt to maximize their net worth by achieving a higher return on assets than their borrowing costs.

“It is also true that the national debt never needs to be ‘paid back’ any more than GE (for example) has to ‘pay back’ its corporate debt. What’s important is whether or not the debt can be financed out of income — just as it is for a corporation or, indeed, an individual with a mortgage, which can easily be 200% of income. Thinking of it in these terms, the national debt just doesn’t seem to be that big. In fact — dare I say it — it could even be a lot bigger and wouldn’t be a problem. Please explain why it’s different for a corporation than it is for the U.S. government.”

The 5 Responds:
You must like paying taxes. A corporation is a business. It finances operations with the intention of producing a product, which in turn should produce a profit. (Not so sure the example fits with GM. Heh.)

Government, on the other hand, produces nothing. By definition, it can only take from the production of others and redistribute what it takes. When it borrows to finance its activities… especially at such an excessive rate… it takes the choice out of the hands of the living, voting taxpayers and lays it on future generations who have no say in the matter. As Alice Rivlin put it in a discussion we had with her for our film on the subject: “It’s immoral.” You can apologize for government spending habits all you want, but we tend to agree. Regardless of what percentage of GDP it represents, $9 trillion is preposterous.

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Our friend Chuck Butler got some great news yesterday. After a battery of tests, his doctors say there’s no sign of new cancer. Good work, Chuck. You’ve got the little bastard on the run.

October Retail Round-Up
Oil Discovery Rocks Brazil
Get Set for a Wave of Downgrades


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