Bankruptcy Filings Surge, Bernanke’s Subprime Plan, Oil and Gold in Wild Swings, China’s New #1 Priority, and More!

by Addison Wiggin & Ian Mathias

  • Bankruptcy, foreclosure filings at multiyear highs… Bernanke offers his cure for the subprime ailment
  • Dissent among the ranks… Fed governor says inflation is new “paramount risk” to U.S. economy
  • China’s new No. 1 priority, and how it might change the global economy
  • Commodities endure wild swings… Kevin Kerr on where to take profits
  • Care to profit from a global food crisis? UBS unveils a way to put your money where your mouth is

76,120 Americans filed for bankruptcy in February — a 15% rise from January.

Personal bankruptcy filings, says the American Bankruptcy Institute, are now at their highest level since 2005. Business bankruptcies shot up as well, to a four-month high of 4,326.

Total personal filings surged to an incredible 800,000 last year. The institute estimates a million people will file this year. That’s a lot.

Adding to the discomfort, foreclosures and mortgage delinquencies continue to rise. And home prices continue to fall.

“In this environment,” Ben Bernanke suggested yesterday, offering what is possibly the most bizarre intervention strategy ever to be recommended north of Venezuela, “principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”

Say what?!

“The fact that many troubled borrowers have little or no equity suggests that greater use of principal write-downs or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders.”

Translation: Because banks made bad loans to people who can’t repay, they should be willing to accept less money back. It’s in the best interest of both lenders and borrowers to reduce the amount borrowed… and the amount to be paid back.

This is crazy. Bernanke wants a “Mulligan” — a “do-over” — for the whole housing bubble. Remember all the rising prices we were fired up over about two years ago? The very “engine of economic growth” in the country — nay, in the world? Just forget about them. They never happened.


Surprisingly, markets saw right through Bernanke’s plan.

As the chairman spoke yesterday, the Dow hemorrhaged a good 200 points. Along with some bad news for Citigroup, it looked like a serious case of collective angina in the trading pits.

But a unnamed consortium of banks administered the Pepto-Bismol — word leaked that a bailout for bond insurer Ambac could arrive as soon as the closing bell — the Dow and S&P 500 rallied back to near break-even.

The Nasdaq finished in the black.

“I consider the perception that the Fed is pursuing a cheap-money strategy,” commented Dallas Fed President Richard Fisher in a speech yesterday, “to be a paramount risk to the long-term welfare of the U.S. economy.”

For his part, Fisher is officially tapped out. He pledged he will heretofore urge his Fed brethren to stop cutting rates.

“We cannot,” he said, “in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient.”

Good for him.

“The primary task for macroeconomic regulation this year,” said Chinese Premier Wen Jiabao, addressing the equal and opposite reaction on the other side of the planet, “is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation.”

In his annual policy speech to China’s legislators, Wen clearly labeled rising commodity prices and subsequent food shortages as China’s No. 1 policy issue for 2008.

“Chinese inflation indexes are heavily weighted to food prices,” says Christopher Hancock of Free Market Investor. “Price controls are a short-term solution. Going forward, yuan appreciation would go a long way to alleviate this problem, as commodity imports would be cheaper.

“Export dependence has thwarted policy. But Chinese dependence on an export economy is waning. The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year to the fourth quarter of 2007.

“Domestic demand, not exports, contributed 10.8 percentage points of the 11.2% growth rate.”

In a related vein, China’s largest state-owned bank bought a 20% stake in South Africa’s biggest financial institution this morning. The Industrial and Commercial Bank of China paid nearly $5 billion for its new stake in South Africa’s Standard Bank.

Standard Bank operates in 38 nations, mostly in Africa, and will surely provide China an interesting partnership in what we can only guess is a Chinese effort to begin extracting the huge bounty of African resources.

China is now the largest Standard Bank shareholder.

As we suspected would happened, the dollar found a temporary foothold in the slippery walls of the monetary abyss yesterday. The dollar index inched up slightly from Tuesday’s all-time low of 73.3 to just short of 74. We know, hardly a rally… but these days, you’ve gotta take what you can get.

The euro, pound and yen all backed off by very small margins. Prices this morning are around $1.52, $1.98 and 103, respectively. The loonie rallied to regain parity… $1.00 on the dot.

We note the Canadian dollar retained its parity with the U.S. dollar despite a surprise 50-point rate cut by the Bank of Canada yesterday. BOC Gov. Mark Carney noted that further reductions might be needed as U.S. exports slump.

“The Canadian dollar looks like it will stay trading right around parity with the U.S. dollar,” notes Chris Gaffney in The Daily Pfennig, “as both administrations seem happy with this level. With a majority of exports flowing south into the U.S., I would expect the BOC to mirror any further rate cuts by the FOMC and the Canadian dollar to stay stuck at the current levels for the near term.”

Nothing puts a point on the uncertainty of markets these past few days better than a look at the spot price of gold.

“It was time for a breather,” our friend Doug Casey wrote yesterday after gold fell for the first time in six sessions, silver for the first time in 11.

But as we write this morning, it’s skyrocketing back to new highs of $993. Could today be the day for gold $1,000?

Oil, too, shed nearly four bucks, to close yesterday at $99 per barrel. But as of this writing, it’s right back up to $104, a new all time high.

OPEC officials chose to leave global oil production as is, the group announced after its meeting today. In spite of pleas from the U.S. and Japan, the cartel will not alter its production schedule, claiming that crude stockpiles were well within their five-year average.

In fact, “I would prefer in this situation to lower production because demand globally is going to be lower,” said OPEC president and Algerian oil minister Chakib Khelil. Presidents from Algeria, Iran and Venezuela all called for OPEC to cut its production.

“Understand the consequences of high energy prices,” commanded President Bush in a speech directed to OPEC officials yesterday. “I think it’s a mistake to have your biggest customers’ economies slowing down as a result of higher energy prices.”

Hey, he’s right. In America, the customer is always right, right?

Heh. Go, Dubya.

U.S. gas prices increased again yesterday, too. The average price now stands at $3.18, a nickel shy of its all-time high.

Soft commodities, however, took a hit. Grains like corn, wheat and soybeans all backed off recent highs yesterday.

“A sign of a healthy market is a correction that comes during overbought conditions,” Kevin Kerr reminds us. “That’s what we got today; nothing more, nothing less. What you need to focus on now is which profits to grab and which to let ride back up — and most importantly, which commodities offer good value to establish new long positions.”

For what its worth, Kevin and his Resource Trader Alert readers have recently pocketed profits in silver and sugar… both around 200% gains. He’s also headlining a group of products we call the Resource Reserve, which is comprised of Outstanding Investments, Resource Trader Alert, Energy & Scarcity Investor and our soon-to-be-released Gold and Options Trader. Together, these services provide a comprehensive strategy for playing the booming energy and resource markets… details on your discounted Resource Reserve offer are coming soon. Look for them.

Also, if you’re looking to place bets on the rise and fall of food prices across the world, here’s a new chance:

UBS unveils the UBS Bloomberg Constant Maturity Commodity Food Index today. The Index will track 13 commodities directly linked to human food consumption. Stewards of the index note that this is the first commodities index that directly targets food prices, and as such, raw materials not found in other indexes, like red winter wheat, cocoa, orange juice and lean hogs, will be included.

“Why worry about the price of gasoline now?” asks a reader. “Let’s remember, it’s an election year. Big Oil wants Republicans in office, and two years ago, gasoline prices dropped under $2, just in time for the elections.

“No wonder Bush never considered that prices could go that high while he is in office. They went back up by over 50% within six months, and if the pattern repeats, we will have big problems for 2009, but we can look forward to a break in the meantime. We just have to stop driving from now until October.”

The 5: Heh.

“You spend a lot of time talking about the loss of purchasing power of the dollar,” notes another reader. “And rightly so. Therefore, I fail to see the problem with anyone spending dollars as quickly as possible and incurring debt. That dollar spent today will be worth less, if not worthless, tomorrow, and the dollar repaid will be of lower value than the dollar borrowed.

“Can’t have the argument both ways.”

The 5 responds: Not sure how we’re having the argument both ways. We’re lamenting the demise and the futility of saving at the same time. People who save and invest build wealth over time. If you spend and borrow and spend more — especially because the currency in which you’re spending in is losing purchasing power — that’s hardly a recipe for prosperity.

“I enjoyed your use of a Bob Dylan quote today,” says another reader about yesterday’s edition, “but an equally good one is:

“Maybe someday, you will understand
That something for nothing is everybody’s plan.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “How do I get a copy of I.O.U.S.A.?” remains our most FAQ in the 5’s inbox. We’re still finishing the movie, doing our best to bring it to a big screen near you in time for the election. DVDs and a book about “the making of,” too. Please bear with us while we work out the kinks… we think it’ll be worth the wait.

In the meantime, perhaps you’d like to check out this podcast from… they just posted it this morning. Patrick, David, Bob and I did the interview during a brunch we hosted at Sundance.

P.P.S. The speaker invitations… the theme… the sponsors… all sent and ready to roll.
In light of your daily briefings here in The 5… we were hard pressed to identify a more urgent and important topic than this year’s symposium in Vancouver. Get all the details here. Sign up soon… space is very limited.


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