The Surprise Report That Set Off the Rally, IMF and Fedheads Both Seeing U.S. Recession, Amoss Unpacks Fed’s Newest Liquidity Scheme, and More!

by Addison Wiggin & Ian Mathias

  • Oil Touches Record Set Only Last Month… The Surprise Report That Set off the Rally
  • IMF, Fedheads Both Seeing U.S. Recession… And Guess Who Says It’s Already Started?
  • Amoss Unpacks Fed’s Newest Liquidity Scheme
  • Williams’s Hyperinflationary “Armageddon” Outlook
  • New Commodity Boom: Thieves Get the Lead Out
  • Hugo vs. Homer: Clash of the Titans

The Energy Information Administration’s weekly inventory report this morning shows oil supplies fell 3.2 million barrels over the last week — a far cry from analysts’ estimates of a 2.5 million barrel increase.
Within minutes, light sweet crude shot past $111. If it closes above $110.13, we’ll have a new record high today.

Get used to it, says the EIA. Hours before the inventory report, the EIA raised its average oil price forecast for the year from $87 back in January to $101…with or without a recession in the U.S.

“Consumers are beginning to shrink,” admitted our friend Alan Greenspan on CNBC yesterday, continuing his Rep Rehab tour, “the automobile markets are beginning to contract, production is beginning to ease and we are in the throes of recession.”

Over the weekend, he said he didn’t think the U.S. was in recession yet. But we hesitate to accuse the former Fed chair of misspeaking. In his mind, the “throes” of a recession may well be something different from an actual recession.

The International Monetary Fund (IMF), for its part, expects a “mild recession” in the U.S. this year. It put a price tag of $945 billion on losses from the credit crisis this morning. That would mean — with only $232 billion in write-downs behind us — we’re barely a quarter of the way there.

“There has been a collective failure,” says the IMF’s director of monetary and capital markets, Jaime Caruana, “to appreciate the extent of leverage in the financial system and the associated risks of disorderly unwinding.”

Minutes from the Federal Reserve’s Open Market Committee meeting last month released this week reveal the Fedheads are only mildly freaked by their situation. “Many participants,” the minutes say, “thought some contraction in economic activity in the first half of 2008 now appeared likely.” Some fretted about “a prolonged and severe economic downturn.”

If you’re keeping score at home, the FOMC meets again April 29-30. In Chicago, traders have priced in a 100% chance of another 25-basis-point cut, with 44% odds of a 50-point cut.

Meanwhile, quants behind the scenes are desperately trying to engineer new ways to increase liquidity…without dropping the fed funds rate.

The Fed’s Term Auction Facility (TAF), offering 28-day loans to commercial banks, spat out another $50 billion yesterday, for a total of $310 billion since last December. But they need more, more, more…

“The likeliest option…is for the Treasury to issue more debt than it needs to fund government operations,” surmises Greg Ip at The Wall Street Journal
this morning. “The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit, and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury.”

“There are good reasons for legal limits on the Fed directly purchasing Treasuries,” comments our Dan Amoss, appalled at the Fed’s gumption. “Doing so basically means the Fed would print dollars to pay for the federal budget deficit — a move that would quickly lead to a total loss of confidence in paper money. History shows that when central banks start directly monetizing government deficits, confidence in paper money collapses quickly.

“The idea to expand the supply of Treasuries is also bad. This would put more purchasing power into the hands of a wasteful federal government. Since the government doesn’t produce any goods or services to offset its buying power, this idea would also add pressure to consumer prices.

“In short, there are no easy answers to a problem created by easy money and runaway credit growth. Expanding the money supply — no matter how sneakily — will only hurt confidence in the dollar.”

“The U.S. has no way of avoiding a financial Armageddon,” says our friend the always chipper John Williams, expecting something much more ominous than a mild recession.

“Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations — a solution rarely seen outside of governments overthrown in revolution…”

At the current pace, “Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests and gross mismanagement.

“While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar.”

“You don’t have to predict it,” Paul Volcker replied yesterday to a question about the coming dollar crisis at the Economic Club of New York. “We’re in it.”

We’ve met the former Fed chairman several times. Once at a Grant’s
conference at the Regis Hotel in New York a few years ago. And then again a few months ago when he granted us an interview for I.O.U.S.A. At the time, he warned Ben Bernanke not to let inflationary pressures build in the economy because once they start…they’re very hard to stop. Volcker earned his reputation the hard way fighting the inflation by forcing interest rates to heights this economy would suffocate under.

Yesterday, he said he’s experiencing flashbacks. Citing the rising price for soybeans and oil as two indications we’re “at a point when we have to worry” about inflation, he went on to warn today’s Fed not to favor special interests and “subordinate the fundamental need to maintain a reliable currency” in order to steer clear of recession at all costs.

“The Fed has a particular duty to defend the integrity of the ‘fiat currency’ in its charge,” the WSJ paraphrases Mr. Volcker. “And exchanging dollars for ‘mortgage-backed securities of questionable pedigree’ both raises the specter of moral hazard and potentially undermines the world’s faith in the integrity of the Fed’s balance sheet.”

In other words, look out below.

We told you yesterday our fully updated and revised edition of Demise of the Dollar
is on Amazon yesterday. Unfortunately, we gave you the wrong link. Try this one instead. And if you’re in the Philadelphia area, there is a screening of I.O.U.S.A.
tonight at 5:00 p.m. at the Philadelphia film festival.

The dollar index remains at 71 today…a whisper away from all-time lows.

As the dollar remains weak — and, by all accounts above, it could get weaker — and energy, by extension, gets colossally more expensive, now would be a good time to think about diversifying your savings into EverBank’s World Energy CD. The new CD is indexed equally to Canadian and Australian dollars and Norwegian kroner in an effort to take advantage of those currencies’ exposure to oil, natural gas and uranium riches.

The new World Energy CD is available for the first time today. And because of our close working relationship with Chuck Butler and his crew in the trading pit, we’ve been able to arrange an exclusive offer for their new World Energy CD for the next week or so. It’s best to get all the particular details from them. You can do so here.

The anticipated $5 billion bailout plan for Washington Mutual led by private equity firm TPG snowballed into $7 billion by the end of business yesterday. Good thing, too, since first-quarter losses total $1.1 billion, just a wee tad higher than the $344 million expected.

In the deal, TPG will get two seats on the WaMu board. The quarterly dividend will shrink from 56 cents per share last November to one penny this quarter. All of WaMu’s 186 home-lending offices will get shuttered…and 3,000 heads will roll.

WaMu shares jumped 29% on the rumor Monday. The news on Tuesday knocked them back down 11%.

Traders are holding their breath this week, waiting for earnings season to begin in earnest. Investors still believe, despite forecasts by the IMF and Wall Street’s own banks, that we’ve seen the worst of things and we’re only a week or two away from buying stocks as usual.

Major U.S. indexes drifted lazily downward yesterday — the Dow, S&P and Nasdaq all lost less than half a point.

Gold traders, too, are biding their time until meetings tomorrow by the Bank of England and the European Central Bank. Gold is at $915 as we write.

Sales of previously-owned homes fell nearly 2% between January and February, according to the National Association of Realtors. The NAR’s index now sits at 84.6, a record low.

The 1.9% month-to-month drop is substantially more than the 1.1% drop outside analysts had forecast. The year-to-year numbers for February fell 21.4%. As usual, those figures take into account only signed contracts. Factor in cancellations, and it’s probably much worse.

But the NAR folks, ever the optimists, see brighter things ahead for the rest of 2008. “The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met,” says NAR chief economist Lawrence Yun.

Mr. Yun must assume the Fed’s relentless rate cuts will bring mortgage rates down. So far, no dice.

Oy. A dictator’s work is never done, is it? After taking on the global behemoth Exxon, kicking out the Mexican monopoly cement maker Cemex, thumbing his nose at the evil imperialist George W. Bush and reorganizing the Venezuelan electrical grid, Hugo Chavez has found a new villain: Homer Simpson.

Venezuela’s Comic Strip Doofus Takes on the U.S.’ Homer Simpson

On Chavez’s command, Venezuela’s National Telecommunications Commission has notified the Televen channel that Televen might have run afoul of the country’s Law on Social Responsibility in Radio and Television by airing reruns of Homer and family at 11:00 a.m.

Rather than risk a drawn-out fight, the station removed Homer and family from the schedule…and replaced them with Baywatch Hawaii. Now, there’s some fine family viewing.


Monday, we relayed the story of a tanker driver accused of siphoning grease from behind a Burger King in California. That was funny. Today’s thievery story is a little more sacrilegious.

The hard way to pilfer from the collection plate.

Having seen a sevenfold increase in price, thugs are now stripping lead from the roofs of churches in England and selling it on the black market. Wags are calling the trend “the most concerted assault on churches since the Reformation.” Yeah, that’s what we were thinking, too.

“‘Democracy cannot survive overpopulation,’” writes a reader, quoting the late Isaac Asimov. “‘Human dignity cannot survive it. Convenience and decency cannot survive it. As you put more and more people into the world, the value of life not only declines, it disappears. It doesn’t matter if someone dies. The more people there are, the less one individual matters.’”

“This statement,” he then comments, “apart from being a bleak prediction of our possible future, implies three threatening outcomes from overpopulation: (1) population increase negates democracy’s effectiveness; (2) population increase decreases supply of resources, and in doing so decreases living standards; and (3) population increase decreases psychological well-being…

“The Earth has finite resources, including those which it can replenish.”

The 5 responds:

Amen. You should join us in Vancouver.

“What part of Greenspan’s statement, ‘Omniscience is not given to us’ don’t you understand?” another reader asks, following our coverage of the Great Greenspan Reputation Rehab tour. “All of your picks do not bear fruit. It is so easy to be critical after the fact. I don’t remember you being so critical during the times when he was trying his best to protect an economy just as they all do. It is easy to sit on the sidelines and criticize the ones trying to make this world a better place. You’re just a bunch of armchair quarterbacks.

“Maybe you guys should try to get appointed to his position. Obviously, you are all qualified, because you know what he knows and you know what you know, so you are bound to be smarter. I know you will have some witty and all-knowing statement to condemn my opinion. Hindsight is terrific. Tell me what tomorrow brings. You can’t. You can only guess (educated as it may be), just as Greenspan did. Sometimes you bite the bear…sometimes he bites you.”

The 5 responds: We’re all out of witty and all-knowing comments this morning. And frankly, we agree with you.

Greenspan’s description of a vibrant economy in which busts are simply part of the landscape is far more agreeable to us than one that is centrally planned or overly medicated. Paulson’s plan to expand the Fed’s jurisdiction is an affront to free markets.

But yesterday, we were making an entirely different point. If history proves itself this time — as it usually does — no matter what Greenspan says now, the level of blame attributed to him in this bust will be as out of proportion with reality as was the praise and credit given him while the bubble grew. That is something we forecast nearly a decade ago.

Unfortunately, his effort to stem the tide of regulation following this housing mess will meet with about as much success as a porn star trying to break into family movies.


Addison Wiggin
The 5 Min. Forecast

P.S.: It can turn tires into liquid fuel. It could revive dormant oil wells in the West. And it has the capacity to tap U.S. oil shale in a way no other technology can touch. Byron calls it an “Oil Vacuum”…read all about this new technology and the effort to develop “energy independence” here.


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