Fed Speak Translated, VIX Spike, Water Crisis, and More!

by Addison Wiggin & Ian Mathias

  • The 5 translates the latest Fed fodder… more rate cuts imminent, but by how much?
  • Investors experience tech bust-level fear… how the VIX shows us the hard times might just be starting
  • Dan Amoss on the real reasons behind the surprise rate cut…
  • Chris Mayer on a project that will “quell all doubts” about the West Coast water crisis
  • Plus, more from the land of ski suits and the silver screen… a Sundance update below


Following its “surprise” rate cut yesterday, the Fed released this statement:

“The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction, as well as some softening in labor markets… Appreciable downside risks to growth remain.”

Translation: The U.S. is barreling toward recession and the market is tanking. Time to bail investors out, even though the market will probably get worse anyway. Dollar be damned.

“Bernanke appears to have moved,” confirms our friend John Williams of shadowstats.com, “as Greenspan did in the October 1987 financial panic, to abandon fully the greenback in hopes of propping stocks artificially. Irrespective of what happens in the markets today and tomorrow, there is no happy news in this circumstance, with the U.S. financial system so heavily dependent on foreign capital for liquidity.

“Beyond the short-term games played by the central banks, the general outlook remains pretty much the same, with a deepening inflationary recession, a major bear stock market, heavy selling of the U.S. dollar and heavy buying of gold…”

Although the market did find brief solace in the Fed’s move, premarket trading, before the Fed’s announcement, brought major indexes down by as much as 5%.

When the opening bell sounded, not long after Bernanke’s 75 bps cut, the Dow and S&P rebounded immediately.

By the end of the day, the Dow and S&P 500 lost about 1%, while the Nasdaq fell 2%.

In this month alone — just 14 trading days — the Dow and S&P 500 are down 10% and the Nasdaq has fallen over 13%. Two or three more days like yesterday and all three of these indexes will be 20% off their all-time highs — a full-blown bear market.

Future rate cuts are nothing short of an absolute certainty, say the futures listed in Chicago this morning. Traders have priced in a 100% chance of a 50 bps cut when the Fed meets on the 30th and — get this — a 70% chance of another 75 bps cut. In other words, anything less than a 0.75% cut at the next Fed meeting will flush stocks further down the toilet… yikes.

The volatility index — an index on the CBOE that measures investor uncertainty — spiked to tech bust highs yesterday.

The volatility index (VIX) opened above 37 yesterday morning, its highest score since 2002. As you might guess, the higher the score, the more fearful and uncertain the markets. While the VIX retreated quickly back down to 32, it’s worth noting that traders are feeling more uneasy about the market than at any time during this subprime bust.

“Emotion — not rational decision-making — is driving the selling,” adds Dan Amoss, “so don’t panic with the crowd and sell quality stocks when they are cheap. This is not 1987. Thirty-year Treasury bond yields are not spiking toward 9%, as they were in the months leading up to the 1987 crash. Instead, they have been plummeting toward 4%:

“The Fed’s emergency 75 basis point cut sparked a late morning recovery, but it’s more of a psychological move than anything. Investment banks must still take losses on toxic mortgage-related securities that they had assumed were covered by bond insurers MBIA and Ambac.

“But those banks with access to the discount window now have access to Fed credit that’s nearly a percentage point cheaper this morning and will get even cheaper in the coming weeks. The yield curve is still flat after this rate cut, but it will eventually become positive. Inflation is coming down the pike, but right now, the market is fearful of unknown financial sector write-offs.”

If you’ve been following Dan’s Strategic Short Report recommendations, this fearful market has handed you some impressive profits… the average open position in his short portfolio is up 102%. Frankly, there hasn’t been a better time to be shorting stocks in years… click here and take advantage of this gloomy market today.

Ironically, venture capital investment in U.S. companies in 2007 also climbed to tech boom levels.

According to a Dow Jones report yesterday, venture capital investment reached almost $30 billion in 2007, 8% higher than in 2006 and at levels similar to those in 2001. Energy, health care, Web technology and green technology companies received the lion’s share of capital injections in 2007. The median investment for such ventures rang in at $7.6 million, the highest since 2000.

Asian markets celebrated the Fed’s rate cut with impressive rallies overnight. Hong Kong’s Hang Seng shot up over 10%, its biggest one-day gain in a decade, nearly erasing the 13% it had shed since Monday.

Markets in Australia snapped a 12-day losing streak with 4.4% gains. Japan regained 2%, while China bounced back about 3%. India’s Sensex, which was shut down yesterday for an hour to prevent potentially catastrophic losses, regained over 5%.

The dollar declined on news of the Fed’s cut yesterday. But not nearly as much as we expected. Our trusty sidekick, Ian, holding down the fort while we’re hosting screenings here at Sundance (comments below), watched the dollar index all day, waiting for the floor to fall out from under the greenback. Surprisingly, it didn’t. The index maintained a score of about 76.5 — while still near all-time lows, that’s impressive in the light of such a massive rate cut.

In other currencies, the Japanese yen remains the story of the month, as it continued to strengthen against all its competitors. This morning, the yen trades at 105, a 2½-year high versus the dollar.

Gold is holding onto the $880-890 range reached during yesterday’s U.S. market scare.

“If you have any doubts about water availability in the West, the latest efforts on the desalination front should quell them,” reports Chris Mayer keeping his eye on investments outside the reach of the Federal Reserve and their shenanigans. “Desalination means taking the salt out of seawater so you can drink it. A company called Poseidon Resources will build a $300 million desalination plant in Carlsbad, Calif., north of San Diego. It will be the biggest desalination plant in the Western Hemisphere — pumping out 50 million gallons of water per day.

Poseidon’s new plant in California.… sweet lagoon

“The common problems with desalination usually involve the costs. But in the last decade, the cost has dropped in half. It’s more competitive now than it’s ever been, but still expensive. One reason is that the process is energy intensive. And the technology has a reputation for fickleness.

“Nonetheless, desalination is attracting some big money from General Electric, Citigroup and others. Of course, the biggest problem with desalination is that it doesn’t help you unless you are within easy reach of an ocean. Water is expensive and difficult to transport. Most experts put the limit somewhere around 50-100 miles. That’s why acre-feet in places such as Arizona, Nevada and Colorado go for thousands of dollars.

“So desalination does not have much impact on these kinds of places. But it could still create many interesting opportunities for investors. Building new plants requires new materials and technologies. Getting water where it needs to go requires pumps and pipelines. It all just adds another layer for water investors to play in.”

Click here for Chris’ “Blue Gold” portfolio

“Mexico has been an ongoing pay-as-you-go construction project for about 20 years,” writes a reader in response to our forecast of a Mexican housing boom. “That’s a direct result of the 1980s peso collapse, which just about wiped out the middle class and inspired an entire generation of young people to seek their fortunes farther north.

“Even today, very few Mexicans have bank accounts, and many of them tend to ‘save’ — i.e., preserve value — by sinking that money into an ever-growing house. Many towns in Mexico are veritable forests of rebar, waiting for the next installment. It’s what happens when you’re in the modest classes and cannot rely on government to protect the value of its currency.”

“Anybody who thinks that the average CEO’s salary,” writes another reader, “is dictated by the free market or true capitalism doesn’t understand how most CEOs have their compensation determined.

“The game goes something like this:

“1. The CEOs invite a bunch of cronies to join their board and receive generous options and monetary compensation for attending an occasional meeting. (With very little personal work responsibility… this is a pretty cush job, which they appreciate.)

“2. The board then forms a compensation committee, which may or may not pay consultants to tell them how much average CEOs like theirs should make. (Consultants who throw out low numbers do not do much consulting business.)

“3. The board concludes that its CEO is above average and should receive above-average compensation.

“4. Next year, surprise… the average has risen and the cycle repeats.

“You’ll note that the owners of the company (the shareholders who pay the salary) have very little to say about the matter. In my opinion, it’s not unreasonable to change that (perhaps by law).”

“I find it more than ironic,” comments another, “that congressional mandates on CEO pay are being discussed. Is not the fox already in the henhouse? These are so-called ‘statesmen’ who give themselves raises, pass budgets loaded with personal pork, take junkets at will and years ago set up a retirement program that is not part of Social Security.

“So while they have voted to appropriate Social Security funds for general expenses over the years, instead of putting the taxpayers’ money in an interest-bearing lockbox, they, in turn, give themselves a better retirement program that is untouchable. And you want these hypocrites to decide what a CEO should be paid? How about your pay too? Get real.”

The 5 responds: Get real, indeed. When we interviewed Arthur Laffer for the film I.O.U.S.A., he suggested an alternative… rather than Congress regulating CEO pay, maybe we ought to tie congressional pay to their performance. Heh. That would be interesting, eh?


Addison Wiggin
The 5 Min. Forecast

P.S. Yesterday, during one of our screenings at the Prospector Square Theatre here in Park City, we had the pleasure of talking with Mary Milliken, Reuters L.A. Bureau chief. She understood our project to a T… “I.O.U.S.A., based on the book Empire of Debt,” she then wrote in an article about the movie, “may be to the U.S. economy what An Inconvenient Truth was to the environment. The Oscar-winning documentary premiered two years ago at Sundance, the top venue for independent film and documentaries.

“In An Inconvenient Truth, former Vice President Al Gore offered his touring slideshow on global warming and made a compelling case for people to push their politicians to pass legislation to help clean the environment.”

Read the whole article here: Can debt be funny?

At the same time, the movie was also called “the scariest movie in Sundance” by LA Times reviewer Kenneth Turan.

When we originally began this project, we were working with a production company that specialized in horror films and teen comedies. Guess that auspicious start was more than prophetic.

To follow along with reviews and critiques of the movie, see the site we set up to track it.

P.P.S. It’s odd, too, how, as with An Inconvenient Truth, the entertainment and financial worlds are colliding on this issue. CNN was interested in doing a live TV interview with us this morning. The station’s been covering the festival since day one. But we got bumped because the news broke that Heath Ledger died.

Alan Alda was at our screening yesterday. And we ran into Matthew Perry at a party the agent for our film threw on Monday night… co-sponsored by, of all papers, The Wall Street Journal.



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