Crazy Consumer Credit Stats, Dollar’s Huge Rally, Wall Street’s Latest Burden, and More!

by Addison Wiggin & Ian Mathias

  • Consumer credit skyrockets in June… U.S. credit users now world’s sixth largest economy
  • Dollar rallies big-time… Chris Gaffney on the greenback’s sudden surge
  • The latest funky debt security plaguing Wall Street… and how it will cost banks billions 
  • Earnings reports from Fannie Mae and MBIA… brace yourself
  • Plus, important reader questions regarding the credit crisis… answered by The 5

  With all the hemming and hawing about how “lousy” the economy is, you’d think consumers would be coming to their senses, spending less and borrowing less, right? 

Right. Well, if you thought that, you’d be wrong.

Consumer credit rose $14.3 billion in June, the Federal Reserve announced yesterday. That’s more than double what Washington wonks and Wall Street quants expected. And it clocks in as the fastest accumulation of revolving consumer debt since last November — during the height of the holiday buying season.

Thus, consumer credit has grown to over $2.5 trillion this year — a number larger than the entire annual GDP of France, the world’s sixth largest economy. Incroyable.

Did you get your tickets for the premiere of I.O.U.S.A. yet? 

  We defy you to explain this:

The dollar index rallied 2 points yesterday. The dollar hasn’t been this dear versus its chief global competitors since February.

Having spent the better part of the past decade researching deficits, debt and the dollar, all we can say is we love it when the dollar rallies. Moves like this make no sense. But they do confirm our suspicion that markets are irrational. People who believe in “efficient markets” get their asses handed to them when this kind of thing happens. And that’s just… well, fun to watch.

  “The dollar started its big move,” says EverBank’s Chris Gaffney, offering a slightly more insightful explanation of what’s getting the dollar’s gander up, “just after Jean-Claude Trichet gave his statement on his views of the European economy.”

After the European Central Bank elected to leave interest rates the same yesterday, Trichet said the bank sees “particularly weak” growth in the eurozone and that “downside risks prevail.”
 
“Currency traders had been pricing in another interest rate increase by the ECB before year-end,” Chris continues, “but now they have abruptly changed their bets. The currency market starts looking for a reason to move one way, and no matter what the data look like, they spin it to fit the direction they want the currencies to move.

“Earlier this year, traders were looking for a reason to sell the dollar. Now they are looking for reasons to buy it. But have the fundamentals changed? Is the U.S. economy any stronger now than it was a few months ago?
 
“Nope.”

  If you’re traveling in Europe this weekend, you’ll be pleasantly surprised. The euro has fallen to $1.50, down 6 cents this week. The pound is in similar shape, way down to $1.92. Even the typically stable yen is feeling the greenback’s oats, and now trades for 110.

  Commodities are the biggest victim of the dollar’s sudden rally. Crude oil is down nearly $4 today, to $116 a barrel. Gold is getting shelled, down to $855 an ounce. Grains, metals, animals… no commodity is safe today. A look at the CRB basket shows that the commodities have nearly arrived in bear market territory:

  Wall Street’s got a whole new thorn in its side: auction-rate securities.

As you might know, the $330 billion market for these debt instruments completely froze in February. To the best of our knowledge, there hasn’t been a bid for one of these puppies in months.

Yesterday, Citigroup reached a sudden settlement with the New York attorney general that orders Citi to buy back $7.3 billion auction-rate securities from retail customers. The N.Y. regulator accused Citi of selling these securities to clients as safe, totally liquid methods of protecting income. Heh… judging by Citi’s quick offer to make a deal, those allegations seem rooted in truth.

Under the agreement, Citi will buy back those ARSs at 100% of their original sale value. Citi’s also agreed to help clients unload (in other words, borrow against or trade for something else) another $12 billion worth of auction-rate securities. It’ll pay regulators a $100 million fine, too… since a good deed by the government should NEVER go unrewarded.

  And not long after Citi’s announcement, other auction-rate securities dealers started coming out of the woodwork. Merrill Lynch “volunteered” to buy back $12 billion in ARS. Like Citi, Merrill is being investigated by a Massachusetts regulator for “misstating the stability of the auction market.” Also, like Citi, the rush to make a deal makes Merrill look less than innocent.

And this morning, The Boston Globe rumored that UBS would soon launch a $19 billion buyback. Details are the same as Citi and Merrill… state and federal investigations, rushed settlements, shady circumstances.

All the banks involved claim the actual losses on these buybacks will be minimal. We’ll let you know if they’re telling the truth (ha!) this time around. Morgan Stanley is also a big player in the auction-rate securities market, although we haven’t heard much from them yet. Stay tuned.

  Also moving the market this morning is the latest Fannie Mae earnings report. Like Freddie earlier this week, Fannie dropped a wretched quarterly statement today. The company shed $2.3 billion in its fourth straight quarterly net loss. That boils down to about $2.54 a share, more than three times the losses Wall Street analysts expected. Also, as with Freddie earlier this week, Fannie announced today that its dividend will be slashed to basically nothing.

Fannie Mae was already down 27% since Freddie’s release on the 6th. This morning, shares have fallen an extra 11%. If there’s any bright side to the government’s impending bailout of Fannie and Freddie, it’s this: By the time Washington finalizes the plan to buy shares, they’ll be very, very cheap.

  Yesterday, the Dow and S&P 500 shed nearly 2% apiece after AIG and Wal-Mart doled out their cheery earnings announcements. The Citi settlement hit the tape with just enough time left in the trading day to drive the indexes down even more.

Today seems more like a return to the upside. That earnings report from Fannie and the auction-rate securities debacle is weighing down equities. But on the other hand, oil is falling, the dollar is looking exceptionally strong and MBIA gave the market a bit of a surprise (more on that below). As we write, the Dow is up over 200 points.

  Bond insurer MBIA surprised Wall Street today with an exceptionally “good” earnings report. The company claimed a second-quarter profit of $1.7 billion — eight times its earnings from the same quarter last year. If that alone doesn’t make you suspicious… well, hopefully someone else manages your money.

“MBIA’s second-quarter ‘earnings’ are of very poor quality,” says our resident CFA, Dan Amoss. “MBIA booked a $3.3 billion mark-to-market gain because its CDS spreads blew out during the quarter. In other words, as the market’s assessment of MBIA’s creditworthiness deteriorated, the market value of its guarantees fell. Theoretically, MBIA could cancel some of its guarantees at a discount and book a gain. But in reality, it doesn’t have the capital to do so on a large scale.
 
“MBIA’s executives had a self-congratulatory tone on the conference call. They celebrated the fact that their own loss assumptions didn’t change in the second quarter. This is like celebrating an ‘A’ on a test you graded yourself.”
 
Dan tells us the company booked only $22 million in loss provisions for the quarter… a pathetically tiny cushion for the enormous credit risks MBIA still faces. His Strategic Short Report readers currently hold MBIA puts, positions that still warrant accumulation. Get Dan’s advise on shorting MBIA, along with his latest report, here.

  And since it is 08/08/08, no decent forecast would be complete without a nod to the start of the Olympic Games. We read that the Chinese government has spent up to $300 million on the opening ceremony show alone, more than double the Athens party and easily the most expensive in history. The ceremony is expected to capture the attention of 2.3 billion viewers around the world, the most watched TV event in history. We hear NBC has already made a billion bucks selling advertisements.

Our forecast? It will be a record-breaking games, good and bad. Record revenues, attendance and TV ratings. But probably record arrests, censorship, protests and controversy… at least. If you would like to place a bet that this will be an Olympics to remember — and get your hands on some pretty gold and silver — check out these Olympic coins our friend Nick Bruyer has acquired.

  “In The 5 last month,” writes a reader, “you wrote, ‘The Fed announced this morning it will extend its TAFs and TSLFs to the end of the year. Combined, both measures have lent out over $1.4 trillion to struggling financials in the past seven months.’

“So basically, the Fed has swept $1.4 trillion of toxic garbage under the carpet and will keep doing so UNLIMITEDLY. Therefore, I don’t see how bad this financial crisis can get. The majority of the write-downs will be under the carpet, no? Please enlighten me.”

The 5: It could get worse, because we’re running out of carpets. Maybe the government can save financials… the way financials saved housing… as housing saved tech. But what boom or bubble will bail out the government? Some say green tech. But we’ll have to wait and see.

We’re of the opinion that if the credit crisis doesn’t get worse, it’ll just mean the next fiscal crisis — that of the U.S. government — will be all the more dramatic.

  “When S&P and Moody’s stripped the AAA rating from Ambac and MBIA,” the same reader asks, “the market didn’t seem to care and didn’t drop. Why?”

The 5: The market had likely priced in the rating cut. Did you know a single person who still thought those companies were AAA?

“From here on out, its all about insurance regulators,” says our short side analyst Dan Amoss of the bond insurers. “Here’s how, for example, MBIA could play out: Regulators could start worrying about the safety of municipal policyholders’ claims on MBIA. The New York State Insurance Dept. could seize MBIA’s insurance subsidiary and place it into runoff mode. These regulators want to ensure that municipal bond policyholders are left with enough resources to meet claims after structured credit policyholders eat through billions in MBIA resources. If this seizure happens, it will quickly bankrupt MBIA Inc., the publicly traded parent company.”

The real worry isn’t the fate of the bond insurers themselves, but the ratings of the bonds they insure. A AAA bond is no longer AAA if it’s insured by a company on the brink of insolvency. Financials have billions of this type of crotte on their books. They’ll have to write ’em down or put them on the market eventually.

  “On the high cost of heating oil,” writes our last reader. “I thought of a ‘silver lining’ for this cloud: Medicare should benefit from this huge rise in heating oil. After all, with a population that is so old, there will be fewer broken bones from household falls this year — think about it: It’s hard to hurt yourself when you fall while you’re wearing four or five sweat suits/sweaters and pants, etc., in order to keep warm!
 
“So my idea: Short medical stocks and go long on Russell Athletic wear.”

The 5: Heh.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We’ve had a number of radio stations request tickets to give away for the I.O.U.S.A. premiere on Aug. 21 . Unfortunately, time is drawing near. And logistically, we won’t have time to get the tickets out or the giveaways set up. So if you’re interested in having a radio station near you give away tickets, we need the radio station and, hopefully, a contact by the close of business today. Thanks for all your help.  

rspertzel

Recent Alerts

So Now EVs Are Evil Too…

Here at Paradigm Press it’s not good enough for us to shake our heads at the hubris of the control freaks and power trippers… We seek to follow the money. Read More

“A Radical Environmentalist Government”

A spate of wind turbine collapses is indicative of Canada’s “Just Transition” legislation… Read More

The Weaponized Dollar Misfires

The weaponized dollar keeps misfiring… So what do you do about it? Read More

S&P 500 on Steroids

Why is the S&P holding up so well when everything else looks terrible? Read More

Update: Four Years (Max) to China War

If China were to make a move on Taiwan… this week might be as good a time as any. Read More

No Family, No Faith, No Freedom

It’s a topic we’ve addressed now and then over the years in these virtual pages — so-called “deaths of despair.” Now the “mass formation” theory provides some context. Read More

An Unstoppable Metal Trend for 2023 (And Beyond)

“The copper squeeze has begun, which is definitely a plus for mining shares,” says Paradigm’s mining-and-metals expert Byron King. Read More

The Day the Social Security Checks Bounce

Here we go again: As of tomorrow, the U.S. Treasury will resort to “extraordinary measures” to stay below the debt ceiling. Read More

Davos: Whitewashing the Great Reset

It’s as if everything about Davos that’s burst into public consciousness during the last three years… just… never… happened. Read More

How to Play the Energy Rally of 2023

Paradigm’s trading authority Alan Knuckman joins us today with the final round of the Paradigm team’s 2023 predictions. Read More