Bernanke Testimony, Booming Canadian Housing, China & Gold, The Smell of Subprime, and More!

by Addison Wiggin & Ian Mathias

  • Roller coaster markets turn to the Fed… how Bernanke & company are “not really in control”
  • More blood spilt at Merrill Lynch… bank announces biggest lost in its 94-year history
  • Tired of watching your home get cheaper by the day? Two housing markets experiencing impressive growth
  • Kevin Kerr on a Chinese policy that could send gold “into the stratosphere!”
  • Euro gets beat down, loses 2 cents overnight… Chuck Butler with the blow-by-blow coverage
  • Plus, what does subprime smell like? The most ridiculous story we’ve seen in some time…


After a day of intense volatility yesterday, the Dow is down this morning. Fed Chairman Ben Bernanke is testifying before Congress as we write to you… traders await the sentiment to follow. We begin today with a hint of what’s to come:

“Too many bubbles have been going on for too long,” Former Fed chairman Paul Volcker says in an interview in The New York Times Magazine coming out on Sunday. ”The Fed is not really in control of the situation… Bernanke is in a very difficult situation.”

“Congresswoman Kaptur,” writes Ian over IM, trying to get something of use out of the typical posturing and idiocy that is congressional testimony, “just asked: ‘Mr. Bernanke, as former CEO of Goldman Sachs,’ and blabbered on about ‘unfair’ CEO salaries, only for the whole room to get her to stop asking her question so the record could be cleared… Hank Paulson was not in the room and Ben Bernanke had never worked for a bank before.

Congresswoman Kaptur, current affairs expert

“She then insisted Bernanke answer her question — whether or not the government should institute policies that would limit CEO salaries and/or bonuses when their businesses go belly up.

“‘I’m not answering that,’ Bernanke said.”

My, oh, my. More on this debacle tomorrow…

Merrill Lynch announced a $14 billion write-down this morning, bringing its total past $22 billion in the last two quarters alone. The investment bank was forced to take a $10 billion loss during the quarter, its earnings statement reported, the largest dollar loss in the bank’s 94-year history.

Thus, this week alone, banks marked down some $34 billion in bad subprime bets — $18 from Citi, $1.3 from JP Morgan yesterday, and now $14 from Merrill. Oy… we’re not out of the woods yet.

Homebuilder confidence stayed at record lows in January, the National Association of Home Builders reported yesterday. At a score of 19, the NAHB’s housing market index rose one point from the lowest score since the association began tracking builder sentiment in 1985. The NAHB had revised December’s housing market index record low score of 19 down to 18. Like most other housing surveys, a score of 49 or lower implies pessimistic sentiment and negative growth.

But of interesting note, the NAHB’s measure of six-month expectations rose unexpectedly. With a score of 28, builders now have the most confident short-term outlook since August 2007.

The cost of renting a home barely increased in 2007, reports a study by CNN today. Rental growth was stagnant last year, as the average rental rose 0.5%, or from $1,457 to $1,465. In the 10 regions sampled by the study, Atlanta and Houston saw the biggest annual declines. Rent prices there fell, on average, 12.8%. The median monthly rental in Houston is only $779 per month.

And big surprise, New York City rental prices soared, up over 12%, to a median price of $1,729. San Francisco and Boston were close behind.

During the last 40 days of the year, “economic activity increased modestly… but at a slower pace,” reported an even more drab than normal Fed Beige Book yesterday. The lily-white accounts of the various feelings and vibes of each Fed district disappointed markets by saying effectively nothing.

But while the housing market in the U.S. fades from bad to worse, home prices in Canada are flourishing. The average existing home price soared in Canada during 2007, to a record $326,055, said the Canadian Real Estate Association yesterday. On average, Canuck home prices rose 10.8%. An estimated 362,934 homes were sold there last year, up 8% from 2006.

Granted, sales are expected to slow this year. But compared with the U.S.’ minus 12% drop in existing home sales during the same period… well… Canada is where it’s at.

Chinese home prices jumped over 10% in December, year over year, reports the Chinese government this morning. Average home prices shot up even higher in some cities, such as 25% in Urumqi and 17% in Beijing.

While we imagine Canadians are still happily munching on gravy fries and going about their business, price increases in China are causing severe social unrest, reports the FT. As those owning multiple homes grow richer, protests and riots among the millions of newly displaced poor are a daily occurrence. These Olympics are getting more interesting every day.

Gold trended upward overnight after its sharp decline on Wednesday. Now trading just below $890, gold appears resilient in the face of the latest sell-off. As we hinted in Tuesday’s 5, the introduction of gold futures trading in Shanghai has had a significant effect on current prices.

“Gold sales in China are booming,” reports our resource man Kevin Kerr.

Gold demand in China, according to the World Gold Council, rose 25% in both the third and fourth quarters of 2007. Demand for jewelry was up 24% during the period, while the desire for good ol’ bullion spiked 43%.

“But the real opportunity for gold in China comes with China’s central bank. For several years, Yu Yongding, a committee member of the People’s Bank of China, has advised that China use its foreign currency reserves — the largest in the world — to buy gold. He’s not the only one. Other Chinese economists are urging their government to QUADRUPLE the nation’s gold reserves.

Of China’s massive $1.5 trillion in foreign reserves, 60% is held in U.S. dollars, while gold holdings make up less than 1%. The U.S., on the other hand, is rumored to keep up to 70% of its reserves in gold.

“The U.S. trade deficit with China has reached $232 billion — a very sore point in Washington, D.C. One way to help ease that deficit would be to have China’s yuan appreciate versus the U.S. dollar. And an easy way to do that would be to use those huge amounts of U.S. Treasuries in China’s reserves to buy gold.

“So the U.S. has 70% of its reserves in gold. Let’s say China puts just a THIRD of its foreign reserves into gold. That would be $500 billion — enough to send the price of gold into the stratosphere!”

The euro got whacked for nearly 2 cents against the dollar in dramatic trading yesterday.

“The euro was hanging around at $1.48 and change yesterday,” recounts Chuck Butler direct from the EverBank trading desk, “when ECB member Yves Mersch warned about eurozone growth. The thing that really hurt the euro regarding Mersch’s comments is that he’s always been considered a hawk. And these comments sounded quite dovish.

“Shoot, Rudy, I would have thought everybody and their brother would have known by now that eurozone growth was slowing, and if it weren’t for rising inflation, the ECB would be entertaining rate cuts. But that didn’t stop the profit takers from hitting the single unit with a shot to the midsection. I went to the bathroom, and when I came back, the euro had dropped from 1.48 to 1.4625… OUCH!

“A trader friend and HSBC sent me a note and said that they had seen 1 billion euros get sold in a 10-minute stretch! But hold on, folks. That was nothing but profit taking. This is not a trend reversal. Simply, holders of euros that had huge profits in them — seeing an opportunity to sell — sold… and even began to buy back once the selling was over.”

The dollar index, 57% of which is measured by the dollar’s strength to the euro, consequently shot up to 76.5. The pound held on to $1.97. The yen backed off yesterday’s two-year high… down to 107.

Organizers of the World Economic Forum, which meets in Davos, Switzerland, next week, have installed perfume-pumping machines in each conference room. In hopes that unusually pleasant smells will overwhelm unusually lousy world economics, those behind the forum will spritz the shoulders of CEOs and various heads of state.

“The aroma of subprime is an interesting concept, and that’s one of the reasons I’m fragrancing the rooms,” said Christophe Laudamiel, the “chief perfumer creator” of the event. “I want my perfumes to overcome the gloom.”

Laudamiel has engineered several scents just for the forum, including “Gigabyte — a scent created to inspire high-tech and optimism” and “Glacier — a tribute to the shrinking Arctic ice cap.”

Mr. Laudamiel extracting “essence of Kissinger sweat” for his next aroma

We only wish we were funny enough to make this up. Unfortunately, we’re not. In the words of our dear Mogambo Guru… we’re all freakin’ doomed.

“The person who wrote in about his loving Ron Paul but who will not vote for him is symptomatic of a major problem in this country: There are far too many people who have lost the ability to reason.

“If Ron Paul were elected president, there’s a lot he could do without the cooperation by the two other branches of government.

“Most importantly, he could end the war and bring the troops home from all over the world. He could veto a lot of legislation, which would reduce spending considerably. He could allow alternative currencies to circulate in the country. If Supreme Court justices were to retire or die, he could appoint justices who believe in the Constitution. He could eliminate certain Cabinet posts and the spending that goes along with them. His attorney general would have a good idea what torture is and would ban it. The CIA would be reined in. Privacy would be restored to private citizens. We would have a lot more friends in the world.

“If a financial collapse occurred before his inauguration, he would know, through Austrian School economics, how not to manage the economy, but to let the free market slowly ease us out of the recession or depression… and so much more. Unfortunately, because of so many brain-dead citizens, like the writer who won’t vote for what they know is right, Ron Paul will not be nominated or elected. And that is a tragedy of monumental proportions.”

The 5 responds: But will he cry and truly “find his voice”? And be an advocate for “change”? Is he “likeable”? These are the only things that really matter, aren’t they?

Best regards,

Addison Wiggin,
The 5 Min. Forecast


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