Amazing Demographic Stats, Buffett’s Bond Insurer Bailout, The Cost of the Writers Strike, and More!

by Addison Wiggin & Ian Mathias

  • Stunning U.S. demographic forecasts… better teach yourself Spanish, quickly
  • Buffett offers to bail out Ambac, MBIA and FGIC
  • More bloodshed in the banking sector… is the “credit crisis” really over? Or just taking a breather?
  • Writers strike concludes… the surprising dollar cost of Hollywood’s latest battle
  • Wheat hits another all-time high… Kevin Kerr’s cautious advice on playing the commodity market
  • Plus, why pollution won’t be the only thing gagging Olympic athletes in Beijing


The Pew Research Center released an eye-opening U.S. demographics study this morning — it’s so dense with useful nuggets we’ll just fire ’em out one by one:

– By 2050, the U.S. population will increase by 44%, to 438 million people. New immigrants and their children/grandchildren will account for 82% of the rise
– Over the next 40 years, the U.S. Hispanic population will triple and grow to 29% of the U.S. population
– By 2050, one in five Americans will have been born outside the U.S., versus about one in eight today
– In the same time, non-Hispanic whites, who are now about 67% of the population, will shrink to 47% of the population. The same group made up 85% of America in 1960
– Blacks will remain 13% of the population; Asians will grow from 5% to 9%
– By 2030, 79 million baby boomers will be 65 or older. The “elderly” age group will grow faster than any other age demographic.

If all this isn’t a massive, inevitable investment theme… we don’t know what is.

On the financial front, Warren Buffett offered to buy out much of the municipal bond liabilities covered by Ambac, MBIA and FGIC. Buffett told CNBC this morning that he offered the three major bond insurers a takeover plan that would cover a staggering $800 billion in muni bonds.

One unspecified insurer has already rejected Buffett’s offer, and the lack of response from the other two hints that this proposal may have been dead on arrival. While the proposed Berkshire bailout would alleviate the huge financial pressure currently felt by bond insurers, the proposal is far from altruistic.

“When I go to St. Peter, I will not present this as some act that will entitle me to get in,” Buffett said on CNBC. “We’re doing this to make money.”

In turn, the stock market celebrated Buffett’s offer. The Dow reversed premarket losses and opened up 75 points this morning. All 30 components opened up and quickly amassed a 200-plus point gain.

But we suspect the buyout offer won’t be enough to keep the market afloat for long. Shares of AIG, the world’s largest insurer and the sixth largest company on the planet, plunged 12%, to five-year lows, yesterday after the company admitted to a “material weakness” in the way it values its derivatives.


A report by PricewaterhouseCoopers, the auditor hired by AIG, suggested significant flaws in the way the insurer assigns prices to various credit swaps — particularly CDOs. Thought we were done with these little mortgage-backed buggers, eh? Nope.

The great derivatives unwind continues.

Credit Suisse announced yesterday that the bank’s fourth-quarter profit shrunk 72% after writing down $1.9 billion in subprime-related bets. Since we’re in the forecasting business, we’re willing to bet that while this will be one of the last fourth-quarter write-downs, it won’t be the last of 2008. Not by a long shot.

Bank of America, Citi, Countrywide, JP Morgan Chase, Washington Mutual and Wells Fargo have banded together to form Project Lifeline — a plan to bail out struggling homeowners across the U.S.

According to details provided by the Treasury Department and HUD, the six banks will allow nearly foreclosed homeowners to suspend foreclosure for 30 days, giving them one last chance to refinance. We’re not quite sure who’s bailing out whom on this one, but don’t expect Project Lifeline to have hard-core effects on the subprime bust.

Barring a few last minute formalities, the Hollywood writers strike is over. The latest deal, which is expected to be approved by the Writers Guild of America, gives writers a significant slice of profits from “new media” and Internet sales.

Looking back, the writers strike has been estimated to cost the American economy over $2 billion. The Los Angeles Economic Development Corp. estimated that losses in Hollywood support businesses — caterers, florists, hotels, restaurants, valets and costume/set designers — took the lion’s share of the losses, about $1.3 billion. An estimated $733 million was lost in day-to-day production spending

The last writers strike, in 1988, cost the nation around $500 million, despite lasting a full six weeks longer.

It was suggested by some that we join the Writers Guild when we were writing the movie I.O.U.S.A. Can you imagine? We’d have to have picketed our own house during the strike.

Goldman Sachs raised its three-six month wheat price outlook to $13.50 this week. Such a revised outlook marks a 20% rise from today’s Chicago wheat prices and a 47% hike from Goldman’s previous price estimation.

Goldman analysts say U.S. wheat supplies are at their lowest levels since 1947.

Likewise, the wheat “trading band” has been widened this week for the first time in eight years. In response to upward pressure on wheat prices over the past year, U.S. commodity exchanges are allowing the wheat price to move a maximum 60 cents up or down each day, instead of 30 cents.

On cue, wheat soared nearly 60 cents in Chicago, to a new record high of $11.53. The price retreated quickly, back to $10.48 — 45 cents below its opening price. Swings like this are likely to continue for some time.

“When you get a rally like we have seen in wheat,” explains Kevin Kerr, “the exchanges (and government) get nervous. So they take action. In this case, the limits on the wheat market were raised considerably, and in essence, that will raise margin requirements too, and force many individuals to liquidate. We are not seeing wheat back off too much yet, but it will almost certainly have an impact.

“This has been an incredible rally for the grains, but now is not the time to be overly bold. Now is the time to use caution. Changes like this can send a chill through the market and make traders nervous. This is one of those times to be defensive and secure profits until things get sorted out.”

In the currency world, traders seemed to have taken the day off yesterday. Currencies traded flat across the board. This morning, we’re seeing a strong bias to selling the greenback… we’ll let you know how it turns out tomorrow. Until then: euro $1.45, pound $1.96 and yen 107

Gold has been trading between $917-927 all week. As with the dollar, this morning brought on a quick selling spree, pushing gold to about $912.

But the precious metal has since rallied back, to $920 as we write.

“Private equity deals dominated oil and gas acquisition in 2007,” observes Chris Mayer. In his latest Special Situations alert, Chris noted that in the midst of the so-called “credit crisis” of the last half of 2007, private equity firms snatched up about $7 billion in international energy business. P/E action within the industry outpaced peer-to-peer mergers by both frequency and volume.

“These dealmakers find energy attractive for all the obvious reasons. Oil companies are flush with cash and looking to expand. Oil assets are scarce, however. It’s cheaper and easier to make an acquisition than it is to find new oil reserves, for example.

“It’s not just oil and gas reserves, but also oil services companies and refineries. These companies own assets that take time and money to acquire and develop. In some cases, such as with a refinery, it’s incredibly difficult to build a new one.

“Small refineries are among the best bargains in the energy bin these days — especially when compared with the cost of putting up new refineries. There is lots of activity in the energy sector and plenty of potential suitors and deals. In my most recent issue of Capital & Crisis, I recommended a small oil refinery trading at a deep discount to net asset value.”

Chris’ latest pick, we hasten to add, is still below his “buy” price. Subscribe soon if you’re interested.

Perhaps the only “genuwine” crisis actually happening this week: Millions of BlackBerry mobile devices stopped working for about three hours on Monday. Manufacturer Research In Motion claims it received a flood of complaints from the White House to Canadian Parliament and everywhere in between. This is the third BlackBerry outage over the past year.

Call us old school, but neither of your editors has ever even held a BlackBerry before, never mind owned or used one.

The Chinese government has forbidden any Olympic athlete from criticizing China during the 2008 Beijing games. The U.K.’s Daily Mail reports that “British Olympic chiefs are to force athletes to sign a contract promising not to speak out about China’s appalling human rights record — or face being banned from traveling to Beijing.”

The British Olympic Association has confirmed the “gag order.” China is rumored to have sent similar requests to other competitors. Like it or not, this is the same nation that is rapidly becoming a world superpower… interesting times.

“Don’t let that gorgeous old maple tree go to waste,” responds one reader to the wind-felled tree formerly occupying our front yard.
“I live in Floyd, Va., where as soon as a tree is felled, whether due to Mother Nature or otherwise, it is salvaged.

“Expert woodworkers could cut 2-inch-thick slabs. The tree would make beautiful tables, headboards or even wall sculpture for your whole family. Every family member could have their own special furniture and recall the great day the tree fell.”

“Please consider the economic value of the tree,” suggests another. “I am a wood nut and I know that sometimes trees of that magnitude sell for thousands of dollars for veneers — although if it fell over, there may be deterioration, which undermines its value. It is probably already too late for any economic recovery, as it is, no doubt, ready for the fireplace by now!

“I’m sure there is a metaphoric parallel in here somewhere. At least you’ll stay warm.”

The 5 responds: How’s this for a metaphoric parallel? Early this morning, the city arrived with a huge grapple hook and flat-bed. Nameless men dragged the stump and trunk away. Left the debris… all without so much as knocking on our door.

“It is my understanding that the rebate checks that everyone is about to receive,” writes another reader, on a different government mystery we’ve been following here in The 5, “is not the great windfall that it appears to be. It is a nothing more than an early tax distribution this year that will be deducted from tax refunds next year, assuming there are refunds due.

“Some people will get away without having to pay it back, as they weren’t going to get a refund anyway. But they will be the only ones to escape that. Get a copy of the bill and read it for your own conclusions. I may have it wrong. If this is the case, Wall Street won’t like that. Robbing next year’s ‘Peter’ to pay this year’s ‘Paul.’

“What a fraud.”

“The reader who wrote in,” writes yet another reader, “that he felt China using a sovereign wealth fund is better than China investing directly is a good case of why Americans should never have been able to elect senators by popular vote and why the electoral college is such a necessary thing in a smoothly working REPUBLIC.

“His e-mail illustrates perfectly well why the U.S. cannot continue as it is currently constituted and chained down by this group in Congress and the judiciary. We need a completely new crew of legislators and adjudicators starting over with just the Constitution and throwing the entire rest of the legal codes out and starting over.

“I have no idea what the situation to bring this about will look like.”

“By the way,” the reader continues, changing tack completely, “the Chinese sovereign wealth fund IS a clear and present danger to the U.S., in my opinion. But because we have so many pinheaded dummies in the U.S. hollering for health care and other bennies, our government has no choice but to borrow money to pay for them. Bernanke has made it clear that they intend to inflate until the thing suddenly implodes, rather than let the thing deflate under its own weight. By then, though, I suspect the Hamptons will have relocated to Ecuador and Belize.”

Umn… yeah….

Addison Wiggin,
The 5 Min. Forecast

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