Bernanke on the Economy, Greenspan on the Dollar, New Home Sales Sink, Lake Mead Sucked Dry, and More!

by Addison Wiggin & Ian Mathias

  • Bernanke back on Capitol Hill… “Fed speak” translations show more rate cuts, higher inflation
  • Why a former Fed chairman gave the dollar a “slap in the face”
  • Housing takes another turn for the worse… surprisingly bad new home sales data below
  • Oil retreats from $102, but only for a moment… Byron King with a battle plan for oil’s next pullback
  • Chris Mayer on the worsening U.S. water crisis… you can kiss Lake Mead goodbye


“The economic situation has become distinctly less favorable,” Ben Bernanke told the House Financial Services Committee yesterday.

With the euro breaching $1.50 for the first time and the dollar index at all-time lows, we thought maybe, just maybe, Bernanke would get an earful from at least one upstart young congressman trying to make a name for him or herself.

Alas… “Downside risks to growth remain,” he stressed in his prepared remarks. The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Translation: Dollar be damned… more rate cuts are coming. What else is he going to say?

Meanwhile, across the globe to the right, a former Fed chairman is doing his best to usher the demise of the dollar in at a quicker pace.

Middle Eastern nations who drop their dollar peg would significantly decrease inflation,
Alan Greenspan told Saudis at a conference in Jeddah yesterday. Inflation in the Saudi kingdom is surging at roughly the same rate as the U.S.’s PPI, up 7%, a 27-year high. Likewise, in the UAE, inflation is climbing at a rate of 9.3%, a 19-year high.

“In the short term, free floating,” Greenspan said, “will not fully dissipate inflationary pressure, although it would significantly do so.” As if the dollar weren’t in bad enough shape… the former chairman of the Fed is telling Saudis to ditch the greenback.

“Talk about a shot across the dollar’s bow,” cries Chuck Butler from the EverBank trading desk.“A slap in the face! All those types of metaphors rolled together. The former Fed chairman who had his hands deep into the mess that started all this is telling people to abandon the dollar!

“I actually felt sorry for [the dollar] at one point yesterday. The selling was so strong, and by noon yesterday, the euro was trading 1.514! And all the currencies joined in. In the old days of football [when I played] this was called ‘piling on’…”

And pile on they did… between Bernanke’s testimony, Greenspan’s advice, durable goods and new home sales data, the lowly dollar didn’t have a leg to stand on yesterday.

The dollar index fell to a fresh record low of 73, and as Chuck mentioned, the euro breached $1.51 for the first time. The pound shot as high as $1.99, the loonie rose to $1.02 and the yen climbed to just short of 105. Like yesterday, the trade of the day was to sell the greenback.

“I’m going to be the first one to tell you that this has gone too far, too fast,” Chuck continues. “The euro spent less time in the 1.50 handle than it takes for you to read the book about ‘what a man knows about a woman.’ So if the markets stop, take a pulse and go back to fill in the gaps… that certainly seems in order right now.”

Not surprisingly, gold held record ground yesterday as the dollar circled down the bowl. After hitting $965 premarket, gold prices flat lined at $960 all day and still trade there now.

Durable goods orders fell 5.3% in January — the steepest drop in five months, evidence that the slowdown conceived in the housing sector is spilling over into the “real” economy. Yesterday’s Commerce Department report showed the first net fall in durable goods orders since October. But the larger-than-expected 5.3% drop erased all gains made over the past two months.

Defense orders led the way, you might be surprised to learn, falling nearly 20% in January. Orders for “transportation equipment” were down too, falling 13% last month. Computers and fabricated metals fared poorly as well, down 11% and 4%.

But housing isn’t done yet. New home sales fell 2.8% in January, to an adjusted annual rate of 588,000. That’s a 34% decline year over year — the slowest rate since 1995.

Likewise, the median price of a shiny new house slid 4% from December, to $216,000, said yesterday’s Commerce Department report. One year ago, the median new home price was $254,400, 15% more than today.

U.S. markets traded flat yesterday. Benchmarks enjoyed hefty gains after Bernanke’s testimony, but slowly sold them back as the day progressed. Most American indexes ended where they began.

IPOs worth more than $21 billion have been pulled off the global docket so far this year, reports Thompson Financial. Following 2007, the biggest year for IPOs in history, the $21 billion in dead deals marks the highest on Thompson’s record. In fact, this month will go down as the first February since 1992 when IPO activity declined from January.

UBS shareholders approved a $12 billion sovereign wealth fund injection at the annual shareholders meeting we told you about yesterday. The Government of Singapore Investment Corp. will now own an approximate 2-3% stake in the super-sized Swiss bank.

Oil prices backed off recent highs of $102. Traders took a day off buying light, sweet crude to new all-time highs and oil retreated to $99 this morning, mostly on news of a better-than-expected weekly supply report. By lunch time, prices were back up to $102.

“If oil does take a dive, it won’t last for long,” advises Byron King. “OPEC has already announced that if the price of oil falls, the cartel will just restrict output and drive prices back up. Thus, if oil prices decline, be ready to step in and bulk up your portfolio with the best of the oil finders and oil service companies.”

Naturally, Byron recommended three such companies for your “oil dive watch list” in his latest Outstanding Investments alert. Gain access to the OI portfolio by subscribing here.

As oil flirts with new highs every day, Congress is doing its part to ensure it reaches $150 per barrel.

The House approved a multibillion-dollar oil tax bill yesterday. Should the bill be approved by the Senate and President Bush, the bill will roll back two tax breaks for the U.S.’s five largest oil companies… one helps manufacturers compete against foreign state-owned oil companies, and the other gives U.S. companies tax breaks for using American oil and gas services.

Authors of the bill estimate the bill will cost those five U.S. oil companies $18 billion. The bill would then, in turn, use that money to invest in alternative energy research.

And on the scarcity front, Lake Mead, a critical water source for much of the Southwestern U.S., could dry up in the next 13 years, says a study by UC San Diego.

Researchers claim that along with natural evaporation and higher temperatures, the rapidly expanding Southwest population is sucking more H2O from Lake Mead each year than the Colorado River can replace.

That ain’t paint… Lake Mead at critically low levels

Lake Mead’s water supply system is already operating at half capacity… supplying water for over 8 million people in Las Vegas, Los Angeles and San Diego is no easy task.

“We were stunned at the magnitude of the problem and how fast it is coming at us,” said Tim Barnett of the University of California at San Diego. “Make no mistake, this water problem is not a scientific abstraction, but rather one that will impact each and every one of us that live in the Southwest.”

“The water level of Lake Mead has fallen so low that it threatens to dip below the water intake pipes,” Chris Mayer tells us. “These pipes, like giant straws, suck water out of the lake. So authorities there have fast-tracked a project to extend the length of the intake pipes closer to the bottom of the basin. Literally, we are getting close to the bottom of Lake Mead.

“There aren’t any places to draw new water. New pipeline projects take time and money. Meanwhile, population growth in Nevada is among the highest in the country. Something has got to give. One is that the price of water rights will rise significantly. The other is that people can expect many more water use restrictions out there.

“As an investor, you can own a company that owns water rights out West. You can also own the company that supplies pipes for new pipelines. We’ve got ’em both in C&C.”

Follow along with Chris in Capital & Crisis, including his “Blue Gold” water portfolio, here.

“I think some of your readers have some misconceptions about manufacturing versus services,” writes a reader. “I have been a marketing manager in a manufacturing business for 25 years. Direct labor costs seldom exceeded 13% of our total costs. As we continue to automate, that portion of our costs keeps falling. Selling, general and administration costs and R&D labor costs are many times greater than direct labor costs. Eventually, our direct labor costs as a portion of the total will be even lower, and whether we continue to make our products in Canada or the U.S. (we have plants in both countries) or move production to China, the net loss of income to North Americans will be miniscule.

“Our major costs are ‘internal’ service costs, some of which could be outsourced to other pure service companies. Whether a widget is assembled by robots here or by cheap labor in China doesn’t make much difference to our direct laborers. They will all become redundant eventually. The main value in a product is in its design, which is determined by customer need/desire (market research), research and development, engineering and general management. That is what we do in North America.

“Eventually, production will move back here to be carried out by robots. Either way, blue-collar direct labor jobs are gone forever. You must remember that China is an assembler of imported components. The Asian Tigers make a lot of the components that are shipped to China for assembly and sold in North America.

“North American industry should be focusing on manufacturing high-end components with high intellectual content and selling them to Chinese companies who can assemble the components cheaply.”

The 5 responds: In a recent interview we did with former Treasury Secretary Paul O’Neill for I.O.U.S.A., he suggested that many of the measurements we use for the economy… the ISM manufacturing index could be considered one… were created and discussed by economists who have ideas about the world more consistent with thinkers in the 1930s than the way the world actually works today.

His fear is if people revert to that way of thinking, the risk of protectionism and demagoguery — two trends prevalent in the politics of the 1930s — will also return. “Take a look at the candidates for president right now,” we paraphrase him from memory. “The only one within shouting distance of the economic issues the country faces is Ron Paul. But he comes with so much baggage on other issues he represents no one will listen to him.”

The S&P/Case-Shiller home price index “is a self-serving chart to make the housing situation look like a financial disaster,” another reader comments. “CLOs and CDOs aside, the housing situation is far better than the rate of change chart portrays.

“The year-to-year drop in housing prices to November 2007 moves housing prices back to the 2004 level. The rest of my input on growth in pricing and household wealth still stands. With the drop in fed rates, we do not hear much about ARM reset problems anymore. It is likely that the housing prices will bottom in 2008, and may have already done so.

“Here in Phoenix, one of the fastest rising and hardest hit markets, Realtors report that home sales are up and prices have stabilized since November.

“Too much gloom and doom is not constructive.”

We’ll keep that in mind,

Addison Wiggin
The 5 Min. Forecast


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