Rate Cut Recap, The Growing China-U.S. Trade Imbalance, Restaurant Prices to Rise, and More!

by Addison Wiggin & Ian Mathias

  • Fed rushes to rescue the market… but sends stocks plummeting
  • What’s next for the FOMC? The 5 decodes the latest batch of “Fed-speak”
  • Restaurant prices to rise, industry growth set to slow
  • Could Russia be running out of oil and gas? Study reveals total supply loss in near future
  • U.S. trade deficit climbs, China’s trade surplus near record high

Boohoo. The “market” wanted a 50 point rate cut, but the Fed gave up only 25. Within 10 minutes, the Dow had shed over 200 points.

“This is not what the market needs,” whimpered one of the talking heads on CNBC yesterday, sounding like a street junkie in search of a fix, “the market needs more, and it needs it now.”


Your editors spent the majority of the afternoon watching the markets tank. It was rather entertaining. We were expecting a late afternoon rally, but it never came. This morning, however, the Dow is up over 200 points and climbing…

“Incoming information suggests that economic growth is slowing,” read the FOMC’s needlessly complicated release, “reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks…

“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”

Translation: Things are getting bad, and will probably get worse. Dollar be dammed, we’re cutting again, and soon.

Among the members of the FOMC, only one soul expressed dissent over the 25 point cut… Eric Rosengren wanted 50 points.

“I wish the Fed would concern themselves with fighting inflation,” writes Chuck Butler in defense of the loathsome dollar, “instead of appeasing the markets. I just don’t see a rate cut as something that helps us out right now…

“With the Fed’s next rate cut, they will no longer enjoy a positive rate differential to the euro… and then on down the line with Norway, Sweden, etc., I see this as a major hurdle for the dollar to overcome in 2008…

“But then, the biggest hurdle will be the dollar’s ability to attract about $3 billion per day in foreign investments to finance the current account deficit.”

The U.S. trade deficit leapt to $57.8 billion in October, reports the Commerce Department this morning. The deficit managed to grow from September’s hefty margin of $57.2 billion, despite all-time high U.S. export sales of $141 billion.

The wave of tainted toys, food and medicine arriving daily had zero impact on the U.S. desire for Chinese goods. The China-U.S trade gap was $25.9 billion in October, the most recent month the government can track, up nearly 2 billion bucks since the month before.

The dollar enjoyed an unusually stable afternoon, courtesy of the Fed. Following today’s twisted trader logic… a 25 point rate cut was seen as good news. The dollar index rose as high as 76.3 after the FOMC’s announcement.

Against its rivals, the dollar rallied mildly. The euro is trading at $1.46 this morning… the pound, $2.04.

The yen bested the buck yesterday too. It closed up 2, to 110. But don’t get your hopes too high, warns our currency counselor. “We’ve seen this kind of yen move all too often,” says Chuck. “Each time, it falls back. I would love to see the yen take off to the moon. But that just won’t happen, unless the rest of Asia, including China, sees their currencies go on a rampage versus the dollar… It has to happen all at the same time.”

Which, in turn, would really be a problem for the dollar.

Domestic gold traders threw the baby out with the bath water. They sold the yellow metal all the way down to $796, a loss of $15 in three hours. But their brethren in Asia and Europe saw that action as a buying opportunity… and drove the price back up to $810 overnight. Aren’t these markets fun?

The clever folks at Citigroup unveiled their new CEO yesterday at 2:15 EST, the exact moment of the Fed’s rate cut decision. Vikram Pandit is now the man atop one of the world’s biggest banks. Pandit, a former fund manager from India, is quite a statement of a choice: an obviously foreign man with exceptional capital markets expertise.

Our friend Robert Rubin will cease acting as Citi’s interim chief and return to his former cushy position at the helm of the executive committee.

“I honestly think it’s going to get tougher before it gets better,” Freddie Mac CEO Richard Syron let slip yesterday. He predicted a $5.5-7.5 billion loss over the next year or two. Freddie shares took a beating… down 6%. “We’ve reported really ugly numbers,” Syron admitted.

Growth within the restaurant industry is expected to slow next year, reports the National Restaurant Association this morning. The trade group expects diners to eat out less frequently in 2008 as a recession looms. The group also estimated higher menu prices in the new year, by an average of 3%.

For what it’s worth, the restaurant sector makes up 4% of the annual U.S. GDP.

Inflation in China accelerated in November at its fastest pace in 11 years. Consumer prices rose 6.9% over the past 12 months, Chinese economists said yesterday. Year-over-year food prices rose a staggering 18.2%. Rising fuel costs, which we highlighted in yesterday’s 5, took their toll as well, up 5.5% since this time last year.

At the same time, China announced another near-record trade surplus. The country exported $26.3 billion more than it imported, just barely missing the record set in October of $27 billion.

That’s 14% year-over-year export growth. Hmnmn…

As odd as it may seem, Russia is running low on oil reserves.

“At the current level of production,” writes our resident geologist and oil-o-phile Byron King, “Russia’s oil reserves will be used up in 22 years.” Citing research published by the German Institute for Economic Research, Byron says that if Russia — one of the world’s biggest suppliers of oil and gas — doesn’t ramp up exploration and production quickly, it’ll be curtains for the country’s energy supplies.

“Despite its immense hydrocarbon wealth,” Byron writes, “Russia suffers from a dearth of investment in both mature and frontier areas. The creeping nationalization of foreign projects in the past couple of years has not helped. Russia needs more companies, both foreign and Russian, pursuing more projects.

“Whether its leadership understands this or not, Russia does not need just a handful of politically connected Russian companies holding all the cards. But Russian nationalism and, to some degree, xenophobia prevail. That, and a legacy of state planning from the Soviet days. Many Russians actually think that state planning of large-scale endeavors like hydrocarbon exploration really works. But in the days of the Soviet Union and its state planning process, oil output peaked in 1986. The Soviet Union fell apart within a few years after the ‘Red Peak Oil.'”

Byron’s Energy & Scarcity Investor is way ahead of the curve with respect to the Peak Oil phenomenon and the global shift to alternative energies. If you’re inclined to seek winning investments in this vein, you’ll find no better source.

Early this morning, Libya unveiled its shiny new $255 billion sovereign wealth fund. Africa’s most prominent oil producer announced that $100 billion of the fund will be used to buy foreign assets. It has yet to name any specific targets.

“Gulf Cooperation Council member Bahrain has reportedly begun the process of aligning its dinar with a basket of currencies,” reports our Rude compatriot Joel Bowman from his perch in Dubai.

“Consider that GCC countries tend to move more or less in unison when it comes to monetary policy. Indeed, members of the Cooperation Council — which include the world’s largest oil producer, Saudi Arabia, and the nation boasting the world’s largest sovereign wealth fund, the United Arab Emirates — are preparing for a monetary union as early as 2010.

“Speculation is rife among nations in the oil-rich Middle East that a mass exodus from the dollar is imminent. Almost weekly, the papers here report this minister or that official as saying they are considering moving to a diversified currency basket to shore up the footing of their own currencies and combat the runaway inflation that is plaguing many of the residents in the region.”

“According to the people at Stratfor.com on the bailout plan,” a reader points out, “borrowers cannot hold more than 3% equity in their homes. This condition eliminates anyone who put a downpayment on their home, focusing the entirety of the bailout on those people who financed 100% of the home’s value.

“So if borrowers hold 3% or less of equity in their home, and many of them negative equity due to a loss in real estate value, then those are the very people that are most likely to walk away from their property and let the bank take the loss. Therefore, it’s no wonder that the banks are willing to extend ‘special terms’ to those people. Try to bleed them for as long as possible.

“This is a sucker play! But what exactly do you expect to come from a former CEO of Goldman Sachs?”

“I wrote my senator just this week,” another reader tells us, “and informed him that if he was inclined to vote for any stupid bailout for stupid and incompetent people, i.e., ARM contract holders, then I would be sorely disappointed.

“This is beyond belief that the government would bail out people because of their incompetency and stupidity. What I told my senator was that if this goes through, I just might go on the dole, just because I deserve it! I really don’t deserve it, but neither do idiots who signed ARM contracts. When governments do stupid things like this, there is little incentive for productive people in society to work anymore.”

Good luck with that…

Addison Wiggin

The 5 Min. Forecast

P.S. Back in August, Strategic Investment’s Dan Amoss suggested readers buy put options on the distressed banking firm TCF Financial. Since then, the financial services company has fallen to pieces, and those who headed Dan’s call are sitting on nearly 60% gains.

Dan’s passion for shorting inspired us to launch the Strategic Short Report in 2008. We’ll be charging $995 when its ready for the public… but as a reader of The 5, there’s a way for you to continue enjoying Dan’s short plays for free. Click here if you’re interested.

China’s Inflation Rate Jumps in November
Pandit vows to review Citigroup structure
Fannie/Freddie to Face a Tough 2008


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