Fed Leaves Rates Alone, Gov Confiscates Stimulus Checks, Mexico Threatens U.S., Chinese Car Buying Surges, and More!

by Addison Wiggin & Ian Mathias

  • Fed leaves rates unchanged… Buffett on the likely future of interest rates, and the U.S. economy
  • Why the government might be cashing your stimulus check for you
  • Zimbabwe dollar plummets into the abyss… $1 now worth 100,000,000,000 Zimbabwe bucks
  • Median home price falls big… but latest existing home sales drama comes with a silver lining
  • Byron King on the Mexican oil dilemma threatening to devastate North American economies
  • Doug Casey on how the Chinese have already scooped up Saudi Arabia’s recent output hike

  "Although downside risks to growth remain,” said the Federal Reserve yesterday, “they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

The Fed’s main lending rate was left unchanged, at 2%, where we imagine it will stay for some time.

  “We’re right in the middle of it, right now,” Warren Buffett warned yesterday. “I think the ‘flation’ part will heat up and I think the ‘stag’ part will get worse… I think inflation is really picking up. Whether it’s steel or oil, we see it everyplace. It’s exploding.”

Buffett was asked on CNBC yesterday what he would do if he were Fed chairman…

“I’d resign.”

  The U.S. consumer looks to be in stuck in the middle, as well… Of the economic stimulus checks issued so far, nearly $2 billion will be confiscated to pay down consumer debt to the government. Treasury Department computers cross-check debt records with those eligible for the stimulus. Anyone overdue in government-mandated debt — like child support, back taxes or federal student loans — has their check cashed for them, so to speak.

Quite a convenient byproduct, don’t you think?

  "Business conditions continue to weaken in the U.S.,” said American Express CEO Ken Chenault yesterday, “and so far this month, we have seen credit indicators deteriorate beyond our expectations.”

On top of a recent $1.8 billion settlement with MasterCard, Amex is facing some stiff head winds. Unlike MasterCard and Visa, American Express actually issues credit to its customers, instead of just processing transactions on behalf of banks. The credit card company predicted the monthly write-off rate for bad credit would peak at 5.3% this year… a level already attained back in March.

We’ll keep an eye on Amex’s earnings report next month… likely another “canary in the coal mine.”

  And the last thorn in the consumer’s side today… the median price of an existing home fell 6.3% in May, year over year. According to the latest from the National Association of Realtors, home prices suffered the fifth biggest annual decline on record during the month. The average home now sells for $208,600.

There were some bright spots in today’s NAR report. Existing home sales edged up 2% in May, better than expected. The inventory of unsold homes shrunk a bit as well, to a 10.8-month supply.

  Also grabbing housing headlines, the state of California has joined Illinois in suing Countywide Financial. California state officials cited the same “unfair and deceptive” practices as Illinois did earlier this week.

Thickening the plot, shareholders finalized Bank of America’s purchase of Countrywide today. BoA will soon back every penny of Countrywide’s $95 billion loan portfolio – for better or worse.

  But never fear… all is well in the la-la land of government reporting. First-quarter GDP was revised up to an annual rate of 1% this morning. According to the Commerce Department, stronger-than-expected consumerism and exports ticked our annual growth rate up 0.1% from the original estimate of 0.9%. This is the third and final revision of first-quarter GDP.

  The U.S. dollar is — so far — the biggest victim of the Fed’s purposeful inaction. The dollar index has fallen a full point since Tuesday, down to 72.7 this morning. That’s about two points above its record low.

The euro shot up 2 full cents in the past 24 hours, and is now at $1.57. The pound soared by nearly the same margin, up to just shy of $1.99. Yen traders weren’t quite as enthusiastic… $1 will fetch you 107 yen today.

  Poor Zimbabweans… their dollar is now virtually worthless. In the wake of all the political turmoil there recently, Zimbabwe’s currency (the entire nation, really) has totally fallen apart.

Inflation has soared somewhere above 1,000,000%… probably safe to stop counting once in the millions. One U.S. dollar will officially get you Z$11 billion today. Just a week ago, the same greenback was worth Z$6 billion. What’s worse, Zimbabweans don’t follow the official exchange rates anymore… we hear the real exchange today to closer to $1 for Z$100 billion.

  For the first time in a long time, oil failed to rally as the U.S. dollar declined. Yesterday’s U.S. crude supply report put the weak-dollar trade on the back burner… the Energy Department said supplies rose last week, despite analysts expectations of a 1.7 million barrel decline.

MasterCard also threw its hat in the ring, saying that gasoline sales fell 2.7% last week compared with a year earlier. For the month, MasterCard said gas sales fell nearly 4%.

A barrel of light sweet crude sold for $134 this morning. But that didn’t last long… oil is already back up to $138 as we write to you today. We’ll let you know why tomorrow.

  Plummeting output from the Cantarell oil field could be trouble for Mexico and the U.S., reports Byron King today. Byron’s had his eye on Pemex, Mexico’s state-owned oil company. The Cantarell field, Mexico’s biggest source of oil, is in a rapid state of decline. Check out this chart:

“Pemex has accelerated the depletion of the Cantarell field,” says Byron. “In the ’90s, Mexico’s government wanted to raise more revenues from oil sales. So Pemex built the world’s largest nitrogen injection project right on top of Cantarell. One could say that the project worked too well. Now the easy oil is out of the field, and output from Cantarell is declining around 14% a year.”

For Mexico and the U.S., that’s a huge problem. Over 40% of Mexican federal revenues come from Pemex profits. At the current rate of Mexican growth and the Cantarell’s depletion, Mexico will cease to be an oil exporter by 2012. “That will be a disaster for Mexico,” says Byron.

Mexico is the third largest source of imported oil for the U.S. They send over around 1.2 million barrels a day.

Byron’s Outstanding Investments readers bought stock yesterday in a company poised to profit from Pemex’s plight. Its still below Byron’s “buy” price… subscribe today to get the ticker.

Chinese auto sales are skyrocketing in the face of rising oil prices and high inflation. In the first five months of 2008, China’s auto sales grew 17% compared to the same period in 2007, writes our friend Doug Casey today. “The rise in Chinese auto sales has been so dramatic that projections by China’s government for auto sales in 2020 were already exceeded by 2005.

“Assuming that the 7.3 million new car owners in 2008 each drive 5,000 miles a year and they achieve 40 miles per gallon, the result would be an additional 45.6 million barrels of crude demand, equivalent to 125,000 barrels per day. In other words, new Chinese drivers will devour 25-30% of the recently promised Saudi production increase in a single year.

“To those predicting an imminent decline in world oil demand, we say: Don’t bet on it.”

For more from Doug and his crew at Casey Research, click here.

  One thing’s for sure… the Chinese aren’t buying many GM cars. Take a look at the GM stock price today.

 

We couldn’t even find a chart rolling back to 1955… but you’d have to go that far back to find GM shares this cheap. Yikes…

 Continuing the theme, check this out… Of all the places in the world to build car factories, here are the most recent construction sites for Honda, Toyota and Nissan: Russia, India, Morocco and China.

  Markets had a mixed reaction to the news from the Fed yesterday. Major stock indexes ended on the upside, but by varying degrees… the Dow finished unchanged, the S&P 500 rose 0.6% and the Nasdaq shot up 1.3%.

  Today, the U.S. stock market is getting slammed. We reading lousy earnings reports from every sector under the sun… downgrades from investment banks coming left and right. As we write, the Dow has fallen over 230 points, to a nearly two-year low. Check us out tomorrow for the full market rundown.

  And gold, as you’d expect, is taking all the news in stride . The precious metal has broken out of its weekly range, up $20 this morning, to $912… and rising.

  “About the latest milestone of 10 million millionaires,” writes a reader. Without reading the report, did they clarify that these were ‘American dollar’ millionaires? I suppose that’s a given, so I guess what I’m really asking is did they touch on the fact that if they price these folks from a year 2000 baseline in euros, oil, gold or maybe yen, perhaps there are NOT 10 million millionaires? I wonder how many new millionaires (or maybe quadrillionaires) there are if they counted them in Zimbabwe dollars???”

The 5: Good point. Yes… the survey was in U.S. dollars. Judging by our Zimbabwe note above, anyone who can get their hands on one U.S. cent is worth as much as Z$1 billion. Scary.

  “Here’s my 2 grams about how much precious metal to hold and for how long,” writes a reader.
 
“How much gold and silver? Under all circumstances, 5% of your holdings should be physical gold. It’s insurance for disaster. It won’t make you rich, but it could be your one functional form of cash in an unforeseen disaster. It’s the thing that allows you to eat and pay the bills while everybody else is selling off their prized possessions. The same school of thought says that when the economic outlook is shaky, those holdings should be 10% for the duration of the crises. Any gold or silver in excess of that is the stuff you play the markets with. If things are looking bleak, you plough the profits into more physical metal. If it looks like a possible bull market top, profit out in cash.”

Enjoy your day,

Ian Mathias
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