Consumers Doubt Stimulus, U.S. Pension Funds in Trouble, The Dollar Comeback, George Soros Wisdom, and More!

by Addison Wiggin & Ian Mathias

  • New poll shows most Americans think stimulus checks won’t help U.S. economy
  • Local governments take a page from the Fed… nationwide pension plans in peril
  • George Soros on the “new paradigm” about to take over global markets
  • Food prices continue to rise… Kevin Kerr on how to profit in I.O.U.S.A.
  • Chuck Butler on the changing tides amid the global currency trade
  • The 5 aims only “to scare the hell out of people,” writes a reader… our retort, below


Gas prices hopped up 3 cents over the weekend, to another record high. Now at a national average of $3.70 a gallon, gas is up 22% year over year.

More than three in four Americans think the government stimulus checks are a waste of money.

According to a CNN poll, 82% of U.S. citizens have no faith in the government’s $110 billion shot in the arm. Looking through previous polls, it would seem that sentiment is worsening. CNN asked its respondents the same question in February, and 70% said the stimulus wouldn’t work.

“It will boost the economy,” countered President Bush’s deputy press secretary Tony Fratto yesterday. “It’s impossible that it won’t. It’s like saying if I pour water into a cup, will it get wet?”

Here’s an interesting morsel from the CNN survey that Mr. Fratto may have overlooked: Nearly half of the people polled said they will use their checks to pay off bills or debt. 22% promised themselves they’d save the money.

Only 24% say they will actually buy something. The idea of the program is to stimulate consumer spending. But what if consumers are spent… and simply want to keep their money?

The “spend now, worry later” mantra of the Federal government has trickled down to local governments. For example, stock market downturns, the unavailability of credit, soaring health care costs and some shady accounting has put municipal pension funds across the U.S. in serious peril. Check out this data from The Washington Post:


Heh, the first warning sign… the government only provides data going back to 2006

According to the Government Accountability Office, state governments are already facing pension deficits over $750 billion. And after a little homework, that number looks incredibly conservative. The government has authoritative data back to only the beginning of 2007, not long before the housing bust/credit crisis.

On top of that, many pensions are using outdated models to project earnings. Long story short: People are living longer, dying isn’t as cheap as it used to be, and assuming the Dow will return 10% annually — well, that’s a shot in the dark these days.

“We are in the midst of the worst financial crisis since the 1930s,” George Soros said on NPR’s Morning Edition this morning, suggesting it might take a little more than a few hundred dollars in government stimulus to get past this one. Soros, as you may know, has made and lost fortunes betting one way or another on financial crises for decades.

“In some ways, [this crisis] resembles other crises that have occurred in the last 25 years, but there is a profound difference: The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process; the current crisis is the culmination of a super-boom that has lasted for more than 25 years.

“To understand what is going on we need a new paradigm. The currently prevailing paradigm, namely that financial markets tend toward equilibrium, is both false and misleading; our current troubles can be largely attributed to the fact that the international financial system has been developed on the basis of that paradigm.”

Hmmmn… sounds an awful lot like the words and ideas we scribble here in The 5 on a daily basis, doesn’t it? (More on Soros and the twilight of the Great Dollar Standard Era in reader mail below…)

In this “credit crisis,” the private equity world is drying up… sort of. In the first quarter of 2008, private equity firms raised $164 billion in investment capital — the second best quarter on record. But actual buyout volume fell to $82 billion worldwide… a 68% crash from the same period last year.

So the money is flowing in, but there’s nowhere to put it. Look for the private equity kings to start snatching up smaller businesses and putting that capital to work outside I.O.U.S.A.

Stocks took a bit of a hit on Friday. AIG’s foul earnings report exacerbated investor concerns over a second wave of financial disappointments. $126 oil and $3.70 gas didn’t help, either. The Dow fell nearly 1%; the S&P shed around 0.6%; and the Nasdaq, for once, faired best… it fell only 0.2%.

This morning, we hear another financial has dropped an earnings bomb… this time, embattled bond insurer MBIA. But defying conventional wisdom, the market is buying on the news. More on the latest from MBIA tomorrow.

It’s a big week for economic data. We’ve got inflation and housing data early… and then consumer sentiment and unemployment claims later. Be sure to stay tuned to The 5 for a full and unbiased recasting of the data points.

The global market for rice offered a faint glimmer of hope this morning. The United Nations Food and Agriculture Organization guessed today that global rice production would rise 2%, to a record high of 666 million tons.

On the news, rice futures in Chicago dropped a dollar to the low, low price of $22 per hundred pounds.

“Prices are expected to remain extremely firm,” said the UNFAO food guru Concepcion Calpe after the report was released, “at least until the third quarter of 2008, unless restrictions on exports are eased in the coming months.” In other words, nothing short of a record-breaking crop could keep rice prices from continuing to skyrocket.

Then the USDA released a report suggesting damage from the cyclone in Myanmar would decrease rice output from that country by 7%. Futures in Chicago are on the way back up, sitting at $23 as we write — a few bucks short of a new all-time high.

The agricultural dilemma in the U.S. is faring no better. U.S. farmers are planting corn at the slowest rate since 1995. According to this week’s planting report from the USDA, only 27% of the U.S. corn crop is in the dirt, the worst planting progress report in more than a decade. As we’ve been telling you since March, conditions are simply too wet or cold for farmers to get seed in the ground.

At the current rate, the USDA says, farmers will harvest 12 billion bushels of corn this year. Thanks to government mandates, an incredible 30% of that crop will be diverted to ethanol production.

“Farmers are locked in now,” says our resource counselor Kevin Kerr. “They couldn’t switch to another crop if they wanted to. Input costs are so high that farmers are even planting sections that are literally underwater… just to get something in the ground.

“At this point, yields are certainly going be affected. In fact, I hear that in some smaller rural areas, seed and fertilizer dealers have been cut out and have not even gotten what they were promised from their distributors, leaving many farmers without anything. This could be one of the worst years for farming in recent memory and at one of the worst times possible.”

Kevin’s Resource Trader Alert readers have ridden the ethanol craze to some amazing profits. Current subscribers are up 101% on their December calls. Those bold enough to ride along with the Maniac Trader last year pocketed 219% gains in the corn market, and readers managed a “mere” 110% profit on their 2006 corn trade.

Our offer for three free months of Resource Trader Alert ends tonight… why not give it a shot?

Oil backed off recent all-time highs this morning. Light sweet crude shed about a dollar at the New York opening and trades for around $125.

Gold has kept to a tight range lately. After perking up a bit last week, the precious metal hung around $880 for most of the weekend. And that’s where it sits this morning.

The dollar’s held pretty steady lately, too. The dollar index has been clinging to a score of 73 since Friday. The euro, pound and yen stayed put all weekend, too. The euro trades for $1.54, the pound for $1.96 and the yen for 103.

“Futures traders are beginning to go long the dollar again,” notes Chuck Butler this morning. “We haven’t seen this since 2005. But here it is, staring us in the face. This all comes back to the Bear Stearns bailout.

“The markets believe that since the Fed is no longer cutting rates, it’s sounding the ‘all clear’ horn. They also believe that the European Central Bank (ECB) will begin to cut rates in September of this year. So the futures traders have pinned their colors to the dollar’s mast.

“If you’re in currencies to diversify and hedge your portfolio, then these might be somewhat trying times. If you’re simply in currencies to jump on the weak dollar bandwagon, then this is certainly a tough row for you to hoe.”

“I enjoyed your comments about coin clipping,” writes a reader. “Many countries have coins with holes in them. This is actually a good thing. First, less metal is used. Second, the coins have an ultimate value as washers. So as the currency depreciates, the value of the coins will have a floor beneath them established by the value of washers set by the hardware store.

“It may be illegal to melt them for their metal content, but can you legally punch holes in them? You may have a business opportunity turning near worthless coins into valuable hardware.

“Carrying the idea a bit further, perhaps we should reissue all the coins in the following forms:

Penny = 1 washer
Nickel = 1 nut
Dime = 1 wood screw
Quarter = 1 machine bolt
Half dollar = screw eye
Dollar coin = turn buckle

“The whole approach would also save a lot of fuel. People would not need to drive down to the hardware store to get a nut, bolt or screw for the Saturday project. They would just need to rummage through their spare change.”

“Get rid of the penny?” asks another. “What a moronic idea! We actually need smaller coins worth 1/10 of a penny to properly pay those $3.689 (368 pennies and 9/10 of a penny) per gallon at the gas pump. Don’t you feel cheated every time you lose up to 5/10 of a penny because your total is rounded up to the next full penny?”

“There was a time a time when we called the Canadian dollar a third-world currency because of our significant debt,” writes a third, this one from up north. “We also talked about a bankrupt Canada in the mid ’90s, but it never came to pass. Our depreciating currency did eventually turn the corner; exports rose, and then came the commodities boom.

“Canada has enjoyed budget surpluses for about a decade now. Why will the U.S of A. not have the same result? I’m convinced in the demise of the dollar as a world reserve currency, but I’m not convinced that this means the end of the world as we know it.

“I am beginning to feel that your strategy, although a viable one, is to scare the hell out of people and then tell them of all the great opportunities in the American stock market that can help avoid the meltdown of their portfolios.”

The 5 responds: Funny, we used to hear that a lot. We distinctly remember getting accused of trying to scare people when we forecast oil would go to $50 a barrel. It was in the mid-$30s at the time.

Truth is there are a lot of changes going on in the global economy here in the twilight of the Great Dollar Standard Era. And many of them aren’t going to be good for many people. We found ourselves being interviewed by two different social activist radio programs — one in Boston, one in New York — over the weekend. The hosts informed me their listeners didn’t know anything about financial matters or the economy, but were calling in asking what’s happening with the rising price of gas and food and how come we’re “suddenly” faced with a relative scarcity of high-paying jobs. We aren’t making this stuff up… they’re real questions, asked by people who don’t normally think about investing or the markets at all.

Regarding the Canadian debt situation in the 1990s, we’ve actually been using that as an example while doing Q&As following screenings of I.O.U.S.A.. Faced with insolvency, the government of Alberta bit the bullet early in 1994 and cut spending dramatically. The constituents didn’t like it much, but the elected officials didn’t have a choice. It was that or declare bankruptcy. Within a few years, the national government followed suit. In short, they addressed the problem… and your third-world currency turned around.

In this country, the comptroller general of the federal government just resigned his post because of Congress’ failure to act. Until there are serious efforts to both cut spending and raise revenues at the federal level, the dollar is going to continue to suffer. Only in this case, because so many countries and central banks hold dollars in reserve, the crisis could be far more damaging than if the Canadian government hadn’t gotten their act together when they did. A global dollar crisis would make the subprime meltdown look like an evening sail into light winds.

If there were a serious run on the U.S. dollar, as was hinted at by Soros this morning, or Rogers last week, or Volcker the week before that, or Buffett and Templeton last year… it would be the end of the world as you know it, even in Canada. That’s a fact, whether you choose to listen to our opinions about it or not.

And yes, you are correct… we continue to believe that every crisis is also an opportunity. Although it’s not always going to be an American stock that can help prevent the meltdown of your portfolio.

Cheers,

Addison Wiggin

P.S. If you’re not as cynical as our reader to the north and you want to understand why the dollar index is at historic lows and what to do about it… that’s why we updated The Demise of the Dollar, including seven ways to both avoid getting hurt and taking profits. If the number of nonfinancial radio shows that have been requesting interviews is any indication, I’d say you might want to buy a couple of copies for your friends and family, too. You can do so here.

P.P.S. Another great way to play The Demise of the Dollar is by speculating in the red-hot commodities markets. With our Maniac Trader as a guide, you stand a great chance of meeting with success. That’s why we’ve arranged for your “guest pass” to this “Millionaire’s Market”… but you’ve got to claim it now. The offer ends tonight. Claim your pass here.

rspertzel

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