Inflation Kills Stimulus Checks, Another Bank Fails, Automakers in Big Trouble, Addison’s Back, and More!

by Addison Wiggin & Ian Mathias

  • Consumer costs soar… proof stimulus checks were little more than seasonal inflation hedge
  • Earning more than you did in 2000? One chart shows disposable income crashed 60% since tech bust
  • More financials in trouble… another U.S. bank fails, famous global bank falters
  • Japan on brink of recession… Kuwaiti investors salivate
  • Plus, Addison returns… highlights of “the Chief’s” two-month hiatus below

  We begin today with a shocking piece of data: U.S. consumers spent more than they earned in June. Can you believe it?

With a nice kick in the pants from the stimulus checks, personal spending rose 0.6% in June, reported the Commerce Dept. today. Personal income, meanwhile, inched up only 0.1%. Say it isn’t so…

  But here’s the real news. The Commerce Dept.’s measure of inflation rose 0.8% — the biggest monthly rise in 27 years. That not only negates any gains in personal income, but renders the spending number moot, too. Oy.

“As usual,” “Extreme” Ian writes by IM this morning, “the mainstream media rolled right over these numbers. The data got about 20 seconds of coverage on CNBC this morning.”

Still, the fun doesn’t stop there…

  Disposable income sank even further…it was down 1.9% in June.

Much like personal income, disposable income has gone largely nowhere over the last few generations when you strip away the ever-inflating dollar. In fact, priced in grams of gold, disposable income has crashed about 60% since the tech bust. The following chart is courtesy of our friend Charles Vollum at, whom we saw once again in Vancouver, pith helmet and all:

  Even the so-called “wealthy” Americans have less cash to spend. Luxury goods sales declined 20% in the second quarter, says a survey from luxury industry firm Unity Marketing. When the group asked people earning over $200,000 a year, over half said they will spend less on luxury items in the next 12 months than they did in 2007.

“We face a very different environment for luxury indulgence in 2008 as compared to 2007," said Pam Danziger, the steward of the poll. She also predicts "a very difficult marketplace for luxury goods over the next five years."

Hmnn. Aren’t low tax rates at the highest income levels supposed to dissuade people from cutting back on their spending? Weird.

  What happens when you suddenly have no income at all?

Planned job cuts jumped 26% in June, reports the consultancy firm Challenger, Gray & Christmas today. U.S. employers filled out over 100,000 pink slips in the month — a 141% jump from June 2007 and the second highest of 2008.

Wall Street banks, as you might imagine, are leading the way. Collectively, they’ve already announced 100,775 this year. But “we have seen job cuts increase in the majority of industries that we track," said John Challenger, CEO.

  The credit crisis claimed its eighth victim (of this year) over the weekend. The FDIC closed the doors of Florida’s First Priority Bank late Friday. Like the First National rescue last weekend, the FDIC “saved” the bank by confiscating its assets and selling them off to a better-capitalized bank, SunTrust Bank of Atlanta.

As with last week’s failures, The 5 saw this one was coming. It turns out the “Texas ratio” is a quick-and-dirty, yet effective way to assess a bank’s health. If you haven’t seen the chart of banks on the brink, check it out here. Maybe yours is on it…

  The stock market opened the week down this morning.

HSBC, Europe’s biggest bank, kicked things off by announcing second-quarter profits fell 29% year over year. While HSBC managed to profit during the quarter — more than we can say for most U.S. banks — bank officials were rather gloomy about it. Loan loss provisions have been increased another $10 billion, and they say they expect growth and profits in Asian markets to cool off.

“In Asia,” said HSBC Chairman Stephen Green, “compared with the buoyant conditions of last year, it is apparent that corporate activity in some sectors is slowing and demand for equity-related and wealth products has reduced as equity markets have declined.”

Translation: The West’s only export of value, apart from scrap metal and iPods, is financial services. And the East ain’t buyin’ ’em anymore.

  We’ve often looked to Japan to understand what happens to an economy suffering from a credit-binge hangover. This morning, we have more evidence that it isn’t pretty. Japan is on the verge of declaring recession… again.

After modestly recovering from its latest recession in 2002, Japanese exports contracted in June, for the first time in 55 months. Unemployment has climbed to 4.1%, a two-year high. Inflation in Japan is pushing 2%… pretty high, given the deflationary tendencies of the Nipponese hangover for the better part of the last two decades.

  If you ask the folks running Kuwait’s sovereign wealth fund, a recession in Japan means one thing: “buy.”

The Kuwait Investment Authority plans to triple its current investments in Japan, to $48 billion, Kuwaiti finance minister Mustafa al-Shimali said this morning. That’s notable, considering the Kuwaiti SWF is famously conservative. Tripling its stake in the sketchy, underperforming Japanese market is a change in character.

The Kuwaiti fund manages “only” $200 billion. Thus, Japanese investments will soon represent about 25% of the KIA’s entire portfolio. That’s not insignificant.

  U.S. automakers are in even worse shape than most people thought. Obviously, they are in trouble, but after Friday’s numbers… ugh.

For starters, auto sales in the U.S. plunged 13%, to a 16-year low, in July — the ninth straight month of declines. Automakers sold cars at an annualized rate of about 12.5 million vehicles during the month. The last time they sold that many, George Bush I was getting punished for begging everyone to “read his lips.” Back then, too, the U.S. had 50 million fewer residents.

Then the earnings reports started to trickle in…

GM sales were down 26% in July, 20% for the second quarter. The U.S.’ biggest automaker lost over $15.5 billion during the quarter, four times what Wall Street anticipated and the third biggest loss in company history.

Chrysler sales were down 28% in July; Ford sales fell 14%. Even for foreign automakers, it was not a fun quarter to be selling cars in the land of (the) free-and-not-so-easy-anymore credit.

  Oil continued to trend down over the weekend. After a little buying late last week, crude opened at $123 a barrel this morning — 16% below its record high.

“There is no doubt that 2008 has been an incredible year for commodities,” says our resource man Kevin Kerr. “Heck, it’s been an incredible three years for commodities, and now we are getting a bit of a correction — thankfully so. All markets correct. It’s normal. In this case, it’s also important to look at it for what it really is, a buying opportunity.

“Sure, oil might go lower than it is today. In fact, there isn’t much support below the current level, so we could see another big drop in crude prices. But they aren’t going to stay there… they’ll creep back up. Of course, there’s also downside profit to be made, but I would suggest being very cautious about getting overly bearish on energy commodities.

“Global demand and growth is still very strong, and the same factors that originally drove crude close to $150 are still firmly in place.”

  But apart from rising demand, the oil patch is digesting some worrisome news today.

Edouard started as a mere “depression” on Sunday, but has quickly gained the attention of the oil and gas industry in the Gulf.

The National Hurricane Center says he’s headed straight for the Texas coast and will likely reach hurricane strength before he lands on Tuesday. In fact, forecasters say Edouard will likely touchdown first in Galveston tomorrow. Galveston is the largest petroleum port in the U.S.

Oil jumped up $1 in anticipation. It was just below $125 a barrel as we prepared your daily 5 Min… but crude plunged $4 and change right as we were ready to publish. We’ll let you know why, tomorrow.

  Gasoline is down again today. The national average is now $3.88 a gallon, 20 cents off its all-time high.

  “The dollar stayed in the pretty tight range over the weekend,” reports Chris Gaffney from EverBank’s world currency trading desk. Should be an exciting week, as a number of central banks will be announcing their interest rate decisions.

“As we have been saying,” Chris reminds readers, “the FOMC will be forced to just take a seat and hold on for the ride. In the past, when the U.S. economy weakened, the rest of the world usually followed quickly, and inflation eased as demand for oil and other commodities fell. But the world’s expansion barely slowed last year, and the commodity cycle continued on its long-term upward trend.

“Economies in Asia continue to keep the world on an upward growth path in spite of what is occurring here in the U.S. The Fed can’t count on a global slowdown to bring prices down, but if they raise rates to combat inflation, they will deepen the recession already under way in the U.S. They seem to want to err on the side of growth and hopes inflation takes care of itself — not a good scenario for the U.S. dollar!” Amen.

Might be a good time to check out EverBank’s “Debt Free Index CD ”… a bundle of currencies backed by governments who sport fiscal surpluses… and a few commodity-backed currencies, for good measure.

Of course, The 5 will keep you up-to-date with the Fed’s interest rate decision tomorrow.

  Like the dollar, gold is stuck in a holding pattern until we hear more from the world’s central banks this week. An ounce of the stuff costs $908 right now.

  “If Mr. Greenspan thinks it will ‘take a while’ for the markets to stabilize,” writes another, this one referring to the former Fed chair’s forecast on Friday , “then maybe he should not have been in the interventionist business in the first place. The only reason disasters are prolonged in the I.O.U.S.A. is BECAUSE of intervention by quasi-government agencies. The solution would be to let the chips fall where they may. Then the problems caused by the previous disaster would actually be washed out of the system.

“Instead, our problem is caused by the idea that things are ‘too big to fail.’ This is a bad precedent, which we can thank our most-fearful-of-liberty president, FDR, for. If the problems of the Great Depression would have just worked out by themselves, then we would not have a precedent for intervention. Then we wouldn’t need a Federal Reserve, either!”

  “While I agree that Greenspan certainly must be held responsible for many of today’s current problems in the mortgage industry,” writes another, “the characterization that adjustable-rate loans were foolish compared with fixed-rate loans is inaccurate. There is nothing inherently wrong with an adjustable-rate loan — it’s the loose underwriting guidelines that allowed people to obtain adjustable-rate loans that were, in fact, beyond their ability to pay.

“I have loved my adjustable-rate loan since I got it. It is more affordable than the fixed-rate loan offered to me at the time, and is STILL more affordable. For most people, an adjustable-rate loan is better if rates are relatively high and expected to decline in the future, as long as they can afford some slippage in the rate.”

Best regards,
Addison Wiggin
The 5 Min. Forecast
P.S. Lots of activity in the office here at The 5… Our customer service folks have been inundated with confirmation e-mails for I.O.U.S.A. tickets. But don’t worry: If you’ve taken us up on the offer — and you’ve forwarded your ticket confirmation to us to lock in a year’s worth of Strategic Investment — we’ll get you set up as soon as we can.
If you haven’t, here’s the deal. Simply go here, watch the trailer from the movie… it’s a bit chilling… and then go to “Find a Theatre Near You.” Once you’ve found a theatre and bought your tickets, forward a copy of the confirmation e-mail you receive to and we’ll give you a complimentary subscription to our flagship publication, Strategic Investment. It’s a $99 value, but tickets to the movie and talk are as low as $12.50… so it’s a pretty good deal. And our way of saying thank you for supporting the film.
P.P.S. It’s crazy, but we’ve heard stories of Canadians planning to drive as far as 250 miles to see and support the film. Another reader says the theater in Milwaukee is already sold out. Readers from France and England are buying tickets, even though they know they won’t be able to make it in time by dinghy. Thanks so much to them…
P.P.P.S. As you may know, the film was inspired by a book, Empire of Debt, which we wrote with Bill Bonner. But over the course of the project, the movie took on a life all its own. So… over the past six weeks, Kate “Short Fuse” Incontrera , who served as an associate producer, and I have taken the time to “reverse engineer” the movie back into another book. We submitted the final draft to Wiley on Friday (praise Allah), and now I’m back on 5 duty.
I want to say a very special and heartfelt thanks to Ian for an admirable job of holding down the fort here at The 5 while I paced the nights away pulling the manuscript together. Hope you enjoyed his musings while I was away.
Along with the script of the film, we’re also publishing the complete transcripts of all the interviews we did for it. They include talks with Warren Buffett, Robert Rubin, Alan Greenspan, Ron Paul, Paul Volcker, Arthur Laffer, Steve Forbes, Bill Bonner, Paul O’Neill and a host of other luminaries we had come to affectionately refer to as the “Mount Rushmore Crowd” of the American economic scene. We haven’t had a chance yet to properly review the manuscript, but we do believe it turned out well. Time will tell.


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