The Worst is Over, Baltic Dry’s Big Comeback, The $25 Billion Dinner, Fannie & Freddie Raise Cash, and More!

by Addison Wiggin & Ian Mathias

  • Economists predict worst of 2008 recession is over… consumers say it’s just begun
  • Dollar’s back in the dumps… which two foreign currencies benefit most from the latest downturn
  • Fannie Mae and Freddie Mac both seek sudden cash injections… leverage at all-time-scary levels
  • Baltic Dry Index back at record highs… Chris Mayer interprets this “canary in the coal mine”
  • Zimbabwe introduces the $500,000,000 bill… but what will it buy you in the land of 165,000% inflation?
  • Plus, the government pension debate rages on… our best attempt to put the argument to bed, below

The U.S. recession will bottom out sometime this quarter say the gray flannel suits at the National Association for Business Economics. Its survey of economists says if the worst isn’t over, it soon will be.

The balance of economists polled predicted 0.4% GDP growth in the U.S. during the current quarter and then at least 0.6% growth for the remainder of the year. Yippee!

U.S. consumers couldn’t agree less. The Reuters/University of Michigan consumer sentiment survey struck a 28-year low on Friday. The school’s index of consumer sentiment shed 3 points, to a score of 59.5, worse than expectations and to levels unseen since 1980.

Of the many facets of the Michigan index, consumer inflation expectations skyrocketed from April to May. In the year ahead, the consumer — far more aware of real inflation than the 2-3% “core” the government feeds them every month — expects the inflation rate to rise 5.2%.

That’s also the worst reading since 1980.

On the heels of the dismal consumer sentiment report, the dollar index finally let go of the 73 mark and fell nearly half a point. The euro strengthened to $1.55. The pound moved up a notch to $1.95, and the yen staged a nice rally to 102.

Commodity currencies, specifically the Canadian and Australian dollars, had a hell of a weekend. The loonie leapt up a full cent, to regain parity with the U.S. dollar. And the Aussie moved up 2 cents, to 95 cents — a 24-year high.

Major U.S. stock indexes were a big yawn on Friday. The University of Michigan sentiment reading and record oil prices kept the buyers at bay, and the Dow, S&P 500 and Nasdaq all finished where they started.

But for the week, index investors fared well. The Dow climbed 2%, the S&P 2.7% and the Nasdaq shot up 3.4% in one of the better weeks for broader investors in 2008.

Government mortgage masters Fannie Mae and Freddie Mac are looking more horrid by the day.

On Friday, Fannie Mae announced it will be lowering the minimum down payment requirement on the home loans it purchases. Starting June 1, Fannie Mae will accept down payments as little as 3% for a single-family home. The company had previously insisted that higher down payments were needed in markets in which home prices were precipitously dropping.

In what was heralded as Fannie Mae taking steps to unfreeze the U.S. housing market, the policy alteration seems more like a way to make some easy money. After all, Fannie sold off some $3.5 billion in three-month bonds last Wednesday. That’s what most normal companies do when they are in immediate need of cash.

Freddie Mac is faring no better. This morning, it put $6 billion “worth” of similar paper on the market. As of this morning, Fannie Mae and Freddie Mac each have enough capital on hand to cover less than 2% of the mortgages they guarantee.

Both Fannie and Freddie, “pose significant risk to taxpayers, as well as to financial institutions and other investors,” admitted James Lockhart, head of the Office of Federal Housing Enterprise Oversight, over the weekend.

“The Baltic Dry Index just hit a new record high,” Chris Mayer tells us this morning.

The BDI is a gauge for the world’s dry shipping… from grains to ores to coal, the index tracks the cost of moving stuff around the globe. After a roller coaster ride early in 2008, the Baltic Dry is back up, big-time:

“The BDI is volatile and risky,” warns Chris, “but it’s also interesting to follow, because it gives you a little window into the patterns of global trade. Right now, the strong demand for commodities and congestion in key ports, particularly in Brazil and Australia, drives shipping rates.

“As such, the shippers are sort of like the canary in the coal mine. If the commodity market cools or if global growth slows down, you ought to see it here early. You ought to see shipping rates fall. So far, that hasn’t happened.”

And, in fact, the BDI has led both gold and the CRB commodities index to new highs, as these next two charts show:

The Baltic Dry Index is effectively suggesting that the global economy can weather the current pessimism of the American consumer. If you’re holding the EverBank World Energy CD, we told you about last month — comprised of the loonie, Aussie and Norwegian krone — these are the trends you want to read about here in The 5. If you’re not holding it… you may want to. Learn more here.

Nor do you want to miss the “Chaffee Royalty Program” — a great way for you to tap the royalties many commodities producers thrive on. Details here.

Saudi Arabian oil ministers have agreed to increase their oil production by 300,000 barrels a day.

President Bush traveled to the Middle East over the weekend, in part to plead with King Abdullah to lower prices. “You’ve got to be concerned about the effects of high oil prices on some of the biggest customers in the world,” he repeated to the Saudis for the umpteenth time on Friday. “High energy prices are going to cause countries like mine to accelerate our move to alternative energy.” (Duh.)

The king responded, immediately. Not by increasing production… but by announcing that the Saudis had already increased production the previous week.

Following the royal visit, oil shed a buck, to $126.

But this morning, the light sweet stuff is already right back to all-time highs, around $127. The Saudi increase, it turns out, represents only about 0.3% of global daily demand.

“The Bush visit was a real disappointment,” says our resource adviser Kevin Kerr. “The Saudi increase is basically worthless… they just wanted to send him home with something. A lot of people were looking for Bush to take a really hard line. And at least get a significant increase. Assuming, of course, the Saudis really have much more to give, anyway.”

We asked Kevin what he thought of Goldman Sachs recent call for $141 barrels by the end of the year. While he thought that forecast was “a bit aggressive,” we couldn’t get him to bet against it.

“If the dollar continues to weaken significantly,” Mr. Kerr opines, “Well… $140 is only about $10 away. Incredible!”

The national average for gas hopped up to another record high today. Now at $3.79 a gallon, gasoline is up 30 cents in the past month and 70 cents year over year.

And for the first time in the history of the Lundberg Survey, two major metropolitan areas average above $4 a gallon — Chicago and Long Island. San Francisco and Hartford, Conn., are just a penny away.

Diesel drivers are getting it even worse… the national average for diesel is now at $4.52 a gallon. This is not a good time to be an in independent truck driver.

Gold is up this morning. The yellow metal inched up through the weekend and is trading at $910 in New York this morning.

Here’s an interesting observation from our friend James Turk at When gold hit a record $1,033 in March, it was trading in lock step with oil. Since then, the two have parted ways… gold’s down 14%, while oil has surged around 15%.

“The gold and crude oil relationship is out of whack and due to adjust,” says James. “Gold has a lot of catching up to do and will rise as a result.”

Couple that with the BDI charts above and we may be looking at the next leg up in gold’s bull rally.

Hey, look at this:

That’s what it takes to buy a cheap dinner for four in Zimbabwe… around 25 billion Zimbabwe dollars today.

The Zimbabwean “government” issued its first 500 million dollar bill late last week — a testament to the power of fiat money and government recklessness.

Under Robert Mugabe’s watchful eye, the Zimbabwe inflation rate has reached a milestone: 165,000% since 1980. Back then, the U.S. dollar and the Zimbabwe buck were nearly equal in value. Today, your average $200,000 home in the U.S. would cost over 50 trillion Zimbabwe dollars. In other words, the latest Zimbabwe bill — the mighty half-billion note — is “worth” around US$2.

Prices for goods in Zimbabwe nearly double every week. Note-strapped banks run out of cash by 10 every morning. And the nation’s central bank has issued eight new multimillion-dollar notes this year just to keep up. The unemployment rate is estimated at 80%.

Kudos to President Mugabe. He’s really doing a bang-up job. And… he’s just received a shipment of 3 million AK-47 bullets from China to ensure that he can keep doing such a great job after this month’s impending election.

“It is true that once upon a time,” writes a reader, “‘public’ employees were paid less than private industry equivalents. That condition became a mere myth a long, long time ago. My wife recently retired from law enforcement after 33 years of ‘public’ employment. Her pay as a police sergeant far exceeded $100,000 per year. She now receives ‘only’ 90% of her former pay as her retirement pension, plus COLA, of course. Had she continued to work for another two years, she would now be receiving 100% of her final pay scale, instead of the paltry 90%.

“She faced much danger during her career, and I don’t minimize that risk. But to imply that she was poorly compensated in exchange for job security and pension is absolutely insane. The pathetic aspect is that she still doesn’t appreciate what a fantastic deal she has. She’s never had to meet a payroll. She never had to risk her job estimating what products or services she should offer. Her retirement was completely taken care of for her. All she had to do was report for work. She put a lot of bad guys in jail, but to imply that she was marginally compensated is ludicrous.”

“I am receiving 50% pay after retiring from 20 years USAF service,” writes another. “My active duty and retirement pay as a fighter/test pilot (includes 332 Vietnam combat missions) was/is considerably less than what was/is received by airline/defense industry pilots.

“After retirement at age 43 in 1982, I used my V.A. credits to update my nuclear engineering B.S. (circa 1962) with a B.S. in computer programming and an M.S. in aero/mechanical engineering, before working for 18 years as an engineering manager for an aerospace company. Throw in a few other considerations such as moving wife and four children 15 times in those 20 years, serving three years unaccompanied remote tours (Iran, Vietnam, Thailand) and countless TDYs away from home, I bluntly and firmly argue I earned the retirement pay and V.A. credits. I went in knowing the 20 years service would not be all gravy, but I was ensured there was reasonable compensation at the end. And I was doing something that I totally loved.”

The 5 responds: We’re on the lighter side of service to any career, so it’s not ours to judge at the moment. But here’s the real point: If these pensions aren’t properly financed, the debate over whether cops, firefighters or fighter pilots DESERVE the public funds will be moot.

A larger “cohort” cannot retire at the expense of a smaller one with a pay-as-you-go system. The math just doesn’t add up… and unfortunately, it will be our cohort that gets stuck with the bill. Then, the number of malcontents who say people in service to the public don’t deserve their pay or benefits is going to swell. We suspect we’re almost there now.


Addison Wiggin
The 5 Min. Forecast


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