GDP Plummets, FOMC Meets, FBI Goes After Subprime, Chinese Ban Bags, and More!

by Addison Wiggin & Ian Mathias

  • Scary GDP reading… IMF says brace for worse
  • House passes economic stimulus… Dr. Richebacher on what to expect from this government aid
  • Cheap dollar spurs foreign investments… Chris Mayer on the unlikely targets of international companies
  • Federales promise to do for subprime what they did for corporate governance
  • Another funky Chinese law… Gunner on Asia’s next “all-out war”

 

The U.S. economy grew at a snail’s pace in the fourth quarter of 2007 — up a smidge more than half a percent. That’s the U.S. slowest quarter since 2002, reports the Commerce Department, and it pales in comparison with the optimistic third-quarter GDP growth of 4.9%. Economists, quants and Larry Kudlow were all expecting 1.2% growth or more.

For the year, the economy grew 2.2%… also its slowest pace since post-tech bust 2002. No surprise, housing led the way down. Spending in that sector fell almost 17% — the most in 25 years.


The House approved a $146 billion economic stimulus package yesterday. Apparently, the 385 members of the House of Representatives who voted yea on the bill actually believe the $600 bucks they plan to throw at American consumers will help spurn a recession. Heh.

The bill heads over to the Senate this afternoon… where it will no doubt be amended, earmarked, and porked up ad nauseam. Don’t you love how much faith your editors have in the government?

Gas prices have fallen over 12 cents this month, from a national average price of $3.11 to $2.98.


“We read hopeful comments that the drop in gas prices and the imminent tax rebates will considerably bolster the consumer’s purchasing power,” writes the late Dr. Richebacher, seemingly commenting on today’s news from the great beyond.

“For sure, they will help him. But it is a race, and, in our view, a hopeless race, of these benefits against much bigger current and future income losses…. To us, those figures about the consumer’s finances suggest above all an unbelievable financial recklessness, for which there is but one explanation: high-riding expectations in conjunction with unbridled overconfidence in policymakers.

“Obviously, the American consumer is simply betting on the economy’s V-shaped recovery that everybody predicts. And to be sure, he has a lot of company in this respect. Not only that, another very important factor in this respect is certainly the almost religious faith in America in the power of central banks in general, and of Mr. Greenspan in particular, to prevent any recession.”

The good doctor wrote those words in August 2001, the last time the government slashed rates and started handing out checks. As they say, history rarely repeats, but often rhymes.

As if they timed it perfectly, the International Monetary Fund added insult to injury this morning. The usually cheery IMF slashed its forecast for U.S. growth in 2008 from 2.2% to 1.5%.

The IMF also suggested that few other nations will be able to avoid an imminent “global slowdown.” Global growth will fall from 4.9% to 4.1% in 2008, mystics in the employ of the Fund say. They expect the eurozone to fare the worst. The forecast for the chocolate-making countries fell a point, to 1.6%.

By extension, emerging markets will continue to be “the engine of global growth” said the IMF’s chief economist, but “here too we expect growth to slow this year”, from 7.8% in 2007 to 6.9% this year.


Today, the Fed concludes deliberation on further rate cuts. We, like the rest of Wall Street and the financial media, await the magical time of 2:15 EST.

After today’s GDP number, futures in Chicago are pricing an 84% chance of a 50-point cut. But given the market’s 6% rally since the surprise 75-point cut last Tuesday… we won’t be surprised if they are more cautious. Either way, the rate cuts are baked in. Both the market and the dollar are likely to fall slightly on the news. If we’re wrong, you can blame Ian, as usual. Thanks, Ian.


The major indexes plodded ahead a little less than a percent yesterday. The dollar sits tight not far from record lows.


“The weak U.S. dollar makes U.S. assets look cheap to foreign buyers,” comments our managing editor Chris Mayer. “And they are buying.”

In 2007, foreign purchases of U.S. assets topped $400 billion. That was a 93% increase over the year before. The top foreign purchasers were Canadian, British and German, with their loonies, pounds and euros. But the Middle East and Asia — most especially China — are quickly catching up.

“It’s interesting what they are buying, too,” Mayer writes. “Hardwood trees in Pennsylvania, for example. In fact, there are six Chinese companies in the process of closing deals in that state. The Chinese are also looking to set up manufacturing facilities here. The weak U.S. economy means that some pockets of the country have high unemployment — lots of skilled workers without their old manufacturing jobs. Enter the Chinese.

“In South Carolina, the unemployment rate is 6.6% statewide. In some areas, it’s more like 10-15%. Chinese investment has come in to soak up some of that excess. Haier, a Chinese appliance maker, has a refrigerator plant in South Carolina. There is also a Chinese-owned chemical plant, a printing company and a general contractor.

“Not only can Chinese manufacturers find good workers, but land is cheap. Also, electricity is about a quarter of the cost in China. Plus, in South Carolina, the Chinese are closer to their customers — mostly Americans.

“It’s an odd mix of realities, isn’t it? First, America’s manufacturing jobs go to China. Now the Chinese are bringing them back. It’s not that simple, of course. But down on the ground, in small ways, there is this interesting shuffle going on. Even 10 years ago, I think such investments by Chinese businesses would have been very unusual. Over the next 10 years, I think such investments will become quite common.”

[Ed note: Mr. Mayer’s book Invest Like a Dealmaker just hit the shelves. If you’d like a solid primer on our investment strategy here at AF, Chris has laid it all out in an easy and fun-to-read manner, right here… 34% off.]


Indian car manufacturer Tata announced today an “outright purchase” of the Land Rover and Jaguar brands from Ford. America’s No. 3 carmaker showed no interest in keeping a minority stake… and thus another piece of Americana has been auctioned off to a booming Asian industry.


The FBI announced yesterday that it is investigating 14 different subprime lenders, housing developers and Wall Street firms for possible accounting fraud and other crimes involving subprime lending.

Hmmmn… haven’t we seen this movie before?

Yeah, that’s it. The same fearless federal bravado right after the tech bust in ’00-’01 led to the ever-so-popular Sarbanes-Oxley corporate governance reform law, didn’t it? Yeah, it did. We can’t wait to see what kind of new regulations Capitol Hill will dream up following this mess.


Watch out Mozilo… the Feds are coming


Meanwhile, these subprime “perps” are still atoning for their misdeeds. Swiss bank UBS announced a $11 billion fourth-quarter loss, thanks entirely to a $14 billion mortgage related write-down.

UBS will likely register a loss for the year — as much as $4 billion.


China has banned the production of plastic bags used by grocers and merchants. According to the Chinese government, the country uses too many plastic bags — about 3 billion per day. Many aren’t disposed of properly, and none are biodegradable.

“Right now, China is beginning an all-out war,” Greg Guenthner tells us. “It’s not a war on drugs or a war on terrorism. It isn’t even a battle for human rights or safer working conditions. Right now, with the 2008 Beijing Olympic Games rapidly approaching, China’s No. 1 enemy is pollution. It’s literally choking the country and threatening the economic miracle.

“But China’s not the only nation concerned about plastic. In fact, plastic is coming under heavy scrutiny across the globe. Even here in the United States, some cities and towns are looking to ban thin plastic bags. After all, this country uses more than 250 million barrels of oil to make plastics and chemicals each year.”

Here in Baltimore, grocery stores are beginning to charge a penny or two for those nasty little bags. As the hammer of “green government” comes down on plastic consumption, one bulletin board company is set to lead the way with a unique renewable alternative. Naturally, Gunner’s on the case. Learn more here.

“Interesting chart on the average stock holding period,” writes a reader. “I would suspect the advent and growth of mutual funds has a great deal to do with it. Managers have to make their money, you know? End-of-year selling to avoid looking like fools!”


The 5 responds: We might agree, but the trend has been in place for a number of years now. It’s more a symptom of how people regard stocks. Rather than invest for dividends and income like traditional investors have done since the early part of last century, today “investors” look at the stock market like a giant ATM machine. They buy and sell stocks so they can keep up their spending. Or not, as the case may be…


“I’m in York, Pa.,” writes another reader, right on cue. “I have been working on our local rich guy’s house, the Grumbacher Mansion. They’re in retail chains, I think, Bon-Ton, etc. — not sure of all of it, nor do I care. The mansion is in its second year of real work. The first year they spent securing the bribes to change zoning laws, so it can ‘fit in the hills all regal and stuff.’ Right from the general contractor’s mouth.

“About two months ago, we were notified that construction would stop due to ‘changes in the stock market.’ We smaller contractors that took the work are now hurting. All the big guys in the area are building really ugly expensive houses, and commercial joints that won’t be visited by anyone.

“The mason on site at the mansion, like the plumbers, painters, carpenters, roofers, has been turning down work to keep up with the demands of the Grumbachers. I kept many of my customers. I simply did more work in the evenings and at my shop. But many of these guys needed certain equipment, they bought it and now the job’s being buttoned up for a year. They’re alarmed.”


The 5: You provide a good example of why the Fed gets spooked when the markets get squirrelly. It’s the reverse “wealth effect.” When the markets are going up, everyone feels like their business is booming. When the markets tank, a lot of people — some who don’t even have money in it — get hurt. It’s the nature of our speculative economy.

At least you don’t live in Canada:


“How would you feel,” asks a Canadian reader, “living in a country where the ‘good’ news is that you’re nearing parity with the U.S. dollar? It still costs me an extra 95 cents to subscribe to PennySaver last month.

“To add insult to injury, we can buy only second-rate lumber at Home Depot, and I had to buy my new HP laptop from the Canadian Web site, which is more expensive and has less choice.

“Even worse, although I live in Victoria, British Columbia, which is an hour drive south of the 49th parallel and only four miles from Friday Island (which is part of the U.S.), we can’t buy anything from the States without having to pay brokerage fees plus 5% GST and mail it, which might take two-four days to Friday Island and then takes at least an extra week to come the last four miles.

“Similarly, importing goods from Baltimore, I paid an equal amount to get the product from the border as it cost to get it across the entire continent. Go figure.

And gas is C$1.08 per liter ($4.12 per U.S. gallon).”

Cheers, eh?

Addison Wiggin,
The 5 Min. Forecast

P.S. “When will the movie I.O.U.S.A. be on DVD,” asks a reader, “and how can I get a copy of it?”

The DVD could be a few months off. We learned a lot about our movie and the subject matter when we did our test screenings last week at Sundance. Patrick, Christine and I did some hard thinking yesterday on a conference call…and today, we’re going back in to make improvements to the movie.

As you know from reading The 5, the story is developing very quickly. We’d like to have as complete a picture in place as we can before hitting theatres in time for the ’08 general election. That… and there’s the little detail of finding a distributor who can put the movie in front of a general audience. One reviewer on an independent film blog suggested we skip the festival and theatre runs altogether and go straight to TV and DVD. We’re not sure we want to go that route… but we’ll keep you posted either way.

rspertzel

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