Money Supply Crashes, Financial Forecasts, An Unusual Metal Play, Chinese Stimulus Package, and More!

by Addison Wiggin & Ian Mathias

  • M3 growth crashes… Dan Denning on what that means for your investments
  • Former banking chief and current investment juggernaut forecast rough seas for financials
  • Chris Mayer with a commodity “due for a bounce”
  • Chinese stocks soar… red nation rumored to be orchestrating economic stimulus package
  • Plus, just 2 days until I.O.U.S.A.… tales from the road to the big screen 

  Here’s what a credit crisis looks like on a chart:

Despite the Fed’s best efforts, the broadest measure of money supply in the U.S., including outstanding credit — known as M3 — has fallen off a cliff. July saw the biggest one-month drop in M3 since the government started keeping track in 1959. 

  “It takes new money to keep a credit bubble inflated (or to keep it from deflating),” says Dan Denning, watching events from down under. “If the figures from the Fed can be trusted, and if they show that new money isn’t forthcoming, then it may be a sign of even greater financial asset deflation in the months ahead.

“Translation: It’s going to get a lot worse. If stocks are cheap, they’re going to get even cheaper. It means if good resource projects are good values now, they’ll be even better values as the market falls.

“Not that it’s an easy thing to stomach. But let’s remember what we’re watching here. As investors delever and pay down debts, they sell assets to raise cash. It’s a bull market in cash. And money that is used to pay down debt is money that is not spent on stocks or new cars or the things people spend money on when they aren’t worried about debt.”

  As if to put a point on the issue, mortgage applications fell to their lowest level in nearly eight years last week. The Mortgage Bankers Association’s application index fell to 419.3 today, the worst score since December 2000 and a 61% crash in volume since February 2008. For reference, that same index peaked at 1,856.7 in 2003.

  “The U.S. is not out of the woods,” chimed in Harvard professor and former IMF chief Kenneth Rogoff this week. “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.”

Speaking at a conference in Singapore, the former head of the IMF said, “We’re not just going to see midsized banks go under in the next few months; we’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks… Probably Fannie Mae and Freddie Mac — despite what U.S. Treasury Secretary Hank Paulson said — these giant mortgage guarantee agencies are not going to exist in their present forms in a few years."

  Goldman Sachs also warned today it expects this fall may not be such a great time for financials. Goldman analysts cut third-quarter and full-year forecasts for Citi, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley yesterday — all in one fell swoop.

“We believe a major recovery is still a few quarters away," wrote lead analyst William Tanona. “We assume no or negative earnings for the majority of firms in our universe this quarter.”

Heh. Not that we disagree with Goldman on this one, but it must be nice to be able to downgrade all your major competitors. Nope, no conflict of interest there.

  One last word on Goldman… quants on the other side of the building reiterated their call for $149 oil today. Back in early summer, Goldman said oil was poised for a “superspike” to $200 sometime before 2009. In June, they promised $149 barrels by the end of the year, and today they proudly claim they are holding fast.

  The U.S. stock market suffered from a barrage of bad data yesterday. The crazy-high PPI number mixed in with more nasty housing starts and permits reports. Throw in a generous pinch of renewed financial distress and most markets were recipes for notable losses. The Dow, Nasdaq and S&P 500 all fell a little over 1%.

  Crude oil has been all over the place this week. Futures shot up to $116 yesterday on a briefly weaker dollar, worries of Fay taking a second swipe at the Florida coast and some supply concerns in Georgia.

Today, oil is back down to $113 after the weekly Energy Dept. supply report. Crude stockpiles soared by 9.4 million barrels last week, more than triple analyst expectations. The only item keeping oil from entering free fall was the EIA’s measure of gasoline supply in the U.S. It declined by 6 million barrels — twice as big as forecast.

  The dollar’s recent rally, as you might guess, has eased a bit. The dollar index hit a yearly high of 77.4 yesterday, but some profit taking and the dark mood surrounding Wall Street today has brought it back to 76.8.

The euro is still at a six-month low of $1.47. The pound has it even worse, dwelling near two-year lows of $1.86. The yen appears to be coping with the dollar rally well, at 109.

  Thus, gold is on the up and up. The spot price jumped $15, to $815, yesterday in New York and has stayed there since.

  “Nickel prices are due for a bounce,” suggests Chris Mayer. “Nickel prices have come down, as have the prices of most commodities recently. The stainless steel industry has a lot to do with the price of nickel, as nickel is an important alloy.”
In a note to his Special Situations subscribers, Chris passed along these words of wisdom from Companhia Vale do Rio Doce, a metals company that ought to have a good sense for the market:
“Although nickel inventories have been slowly dropping on the London Metal Exchange since the end of April, the downward trend of nickel prices has not reversed.
“On the other hand, the demand from non-stainless steel applications of nickel, which represent 35% of global consumption, remains robust. This is the case with alloy steel — used in the production of equipment for mining and energy — and nickel superalloys — used for aircraft and marine engines, foundry and batteries manufacturing…
“In the medium term, the combination of low stainless steel inventories and the decline of nickel inventories creates an environment conducive to a strong nickel price recovery in the next expansion cycle of developed economies.”
With that in mind, Chris recently offered Mayer’s Special Situations readers a way to play the possible rebound in nickel. Get the ticker here.  

  On the other side of the world, we notice the Shanghai Composite soared 6%. Not because China is hosting what is — so far — an incredibly successful Olympic games, but get this… the Chinese government is considering a fiscal stimulus package. Apparently, China’s “sluggish” 10% growth rate in the first half has Chinese officials spooked.

Rumors are circulating that a stimulus package worth $29-58 billion is in the works. We’ve heard tales of rebate checks, homebuying incentives, even extending trading leverage regulations… all to keep the white-hot Chinese economy ablaze.

Seriously, have they learned nothing from I.O.U.S.A.?

  “Your reaction to the German writer was less than satisfying,” writes a reader responding to yesterday’s 5 , “inasmuch as you refused to engage his points and simply labeled him something contemporary society deems wicked. Stop and consider that evolutionary psychology and biology reveal that yes, humans are tribal and, heaven forbid, even different (oh, the horror!) with varying temperaments, capacities for civil society, and the list goes on.

“Sticking your head in the sand won’t make this fact go away. Nor will throwing out labels in order to stifle debate. Nor will unthinking servitude to the ultimate and overarching principle of liberalism — ‘nondiscrimination.’ Science marches on, dude, and it don’t make no nevermind what your particular political philosophy is.”

  “I am the proud daughter,” adds another, “of an immigrant who learned English, ran his own small business, bought a house, sent his kids through college and never forgot his roots and customs. He died a proud and happy American when he was well into his 80s.

“Your response to the reader who wrote in about foreigners becoming Americans was off the mark. Waves of Americans emigrated from Ireland, Italy, Eastern Europe, Germany, Japan, Scandinavia, Vietnam, Korea, China, etc. All joined the ‘melting pot,’ learned English, were industrious and helped make the USA great.

“The reader is not suggesting that an immigrant family leave behind some old granny or grandpa. What that reader is suggesting, quite correctly, is that newcomers should be prepared to become part of our society, learn the language and work — no going on the dole, no ESL, etc. For you to respond ‘Ugh’ is just plain wrong. Nuts to you!”

The 5: Really? We thought our comments were pretty entertaining. Guess this issue just doesn’t get us worked up.

  “Why don’t you put I.O.U.S.A. on pay-per-view so we in Canada and other areas can have a chance to view it?” asks a reader.  

  “Would love to see the film on Aug. 21,” writes another, “but the nearest theatre is in Seattle, which with travel and hotel, etc., would be a $600 experience. I am a regular contributor to PBS to help ensure that this quality medium stays available to the sane part of the population. It seems to me that I.O.U.S.A. is the kind of programming that PBS would just love to have a chance to broadcast. I am sure that many like me would love to see your film, and I (and, I hope, many others) would pledge $200 to PBS if you could arrange such an event. The general public is financially blind, and it is time for a wake-up call. Wishing you the utmost success on your Aug. 21 showing of I.O.U.S.A.”

The 5: Thank you, they’re both good suggestions. The success of tomorrow’s event will largely determine where the film goes next. So… we urge you to make the effort to see it in a theatre near(est) you.

In fact, Addison is willing to bribe you to do so. Aside from a night of entertainment and a live town hall discussion, we’re offering I.O.U.S.A. moviegoers a free gift. Get your tickets at the link below. Then forward the confirmation e-mail to . In return, we’ll comp you a year’s subscription to Strategic Investment free of charge. We normally charge $99 for that publication, so it’s a good deal. If you already subscribe, we’ve got an equally handsome offer waiting for you.

Buy your I.O.U.S.A. tickets, here.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. “Some wonder,” the Economist writes of our film, “if it might do for the economy what Al Gore’s An Inconvenient Truth did for the environment — perhaps with this comparison in mind, Mr. Walker and his supporters talk of a ‘red-ink tsunami’ and bulging ‘fiscal levees.’ But unlike the former vice president, he is no heavy hitter.

“Even jazzed up with fancy graphics, punchy one-liners and a splash of humour, courtesy of Steve Martin, tales of fiscal folly are an acquired taste. Still, I.O.U.S.A is a bold attempt to highlight a potentially huge problem. The Dark Knight it may not be, but for those who care about economic reality as much as cinematic fantasy, it might just be the scariest release of the summer.”

You can read the rest of the Economist piece here.

P.S.S. “We’ve been talking to all matter of the fringe elements of society,” Addison writes from the road. Apparently, he appeared on a socialist collective, all-volunteer radio station in Minneapolis yesterday, which he called an entertaining reprieve from his “regular tour of the ‘vast right-wing conspiracy.’” He’s got seven more interviews today. Frankly, this editor has lost track of whom he’ll be talking to and when.

Tomorrow, Addison hits the road for Omaha for the silver-screen debut Thursday night. Stay tuned for his thoughts from the front lines… and on his dinner with Buffett.

Buffett, by the way, will be in studio on CNBC Friday morning sharing his thoughts on the film and the markets.


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