by Addison Wiggin & Ian Mathias
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Bush pushes "panic" button… Congress replies with bailout rumored to be "done deal"
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Lawmakers debate $700 billion for Wall Street… $630 billion for Washington already approved
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Data disappoint… durable goods, new home sales, ad spending, jobless claims all surprise to the downside
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2007’s most famous short seller sets his sights on new foreign targets
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Ed Bugos’ bearish case for gold, and a six-month outlook
Shock and awe is what we feel this morning. Shock and awe.
“Our entire economy is in danger,” President Bush warned the American public last night. Unless Congress quickly passes the largest rescue package in the nation’s history, the president insisted that all sorts of “panic” and a “painful recession” would ensue.
If you missed the president’s 13-minute address, here it is in a nutshell: Either we write Hank Paulson a check for $700 billion or the Mogambo Guru is right — we’re all freaking doomed!
Funny. We did an interview with CNN yesterday on this very subject… apparently, it’s running in a loop on American Morning today. To sum up:
In 2002, we wrote a book called Financial Reckoning Day , which likened the U.S. tech wreck to what had happened in Japan 10 years before. Government response, we said, would likely mutate a bubble on Wall Street into a housing and consumption bubble.
In 2005, we published Empire of Debt , not-so-ironically subtitled “The Rise of an Epic Financial Crisis,” in which we suggested that if stress fractures in the economy were to appear anywhere… they’d likely come from the housing market and an ARM/mortgage-backed security bubble on Wall Street. The book served as the impetus for the film I.O.U.S.A…. which then took another 2½ years to make.
Also in 2005, we published a report about derivatives exposure at Fannie and Freddie. The oversight committee canned Franklin Raines and a few other executives at the time, hoping the scandal would get swept back under the rug. It only got worse.
So even to armchair economic observers like us, the "crisis" has been well-known, documented and a cause for concern for at least seven years… yet if you look at what’s happening with Paulson’s bailout proposal, the conservatorship of Fannie and Freddie and the acquisition of AIG… you’d think the administration just discovered the economy last week.
And now… they’re using the "sudden urgency" of the crisis to ask for a bailout with a price tag greater than the entire cost of the Iraq war to date — in one check. Out the window goes all the free market rhetoric of the Bush administration… not least of which was one of the justifications for using the military in Iraq. Out goes Bernanke’s now infamous admonition of the Japanese for not letting their big banks fail, thus prolonging their debt deflation for going on two decades now…
As we calculated the other day, Paulson’s plan will take the government’s total bailout plan to $1.6 trillion in 2008 alone. Not to mention another $1.6 trillion in Treasury swaps and short-term paper the Federal Reserve has lent out during its auction facilities. Who, we ask incredulously, thinks it will actually work?
Good thing Congress is making “tremendous progress” and the bailout is “almost a done deal.” According to Pennsylvania Rep. Paul Kanjorski, a senior member of the House Financial Services Committee, the “votes are there” for a passage from both chambers.
“Tell the American people the cavalry has arrived,” Kanjorski said, without cracking a smile. Just what we were afraid of.
For their own enjoyment, the House also quietly approved a $630 billion spending bill, ostensibly to keep the government’s doors open through March. The 2009 spending bill, passed by a vote of 370-58, greased along with over 2,300 “pet projects” for individual representatives.
The spending bill includes a $25 billion loan to U.S. automakers, which they’ll have to pay back over 25 years at an interest rate of 5%. Yeah, that’s a free market. They’re also giving a record $488 billion to the Department of Defense.
Twenty-six large financial institutions are now under FBI investigation. FBI Director Robert Mueller announced recently that the FBI is specifically focusing on accounting fraud, insider trading and the misrepresentation of mortgage-related securities and other toxic investments. Fannie Mae, Freddie Mac, AIG and Lehman are known to be among the 26 firms under investigation.
"The U.S. gov’t.’s cognitive dissonance here astounds even this morose irony lover,” opines Greg Grillot of Whiskey & Gunpowder fame. “I mean, how can you ban short selling on the one hand, and then use a short seller’s tools to investigate the same companies the short seller might short?”
“Or put another way, I think Dan Amoss is smarter than the entire FBI — sorry, as I am to insult Dan with that comparison.” Dan launched a similar investigation into Lehman Bros. — BEFORE it went bankrupt. Strategic Short Report readers pocketed 492% gains… probably better than our friends at the bureau will fare. Learn about Dan’s latest short, here.
John Paulson, the fund manager who pocketed the most money in 2007, is now shorting U.K. banks. Paulson famously sold short American subprime lenders far ahead of the crowd last year and netted a cool $3.8 billion salary for his efforts. This week, according to U.K. regulatory filings, Paulson has trained his sights on Brit banks.
Specifically, Paulson is betting against Barclays, mortgage lender HBOS, Lloyd’s and Royal Bank of Scotland. Hmmn…
New home sales in the U.S. plummeted 11.5% in August, to their slowest annual pace since 1991. Now 34% lower than this time last year, the pace of new home sales has ground to “only” 460,000 units a year.
Year over year, the median price for a new home fell sharply too. It’s down $40,000, to $221,900.
Initial unemployment claims soared to a seven-year high last week. According to the Labor Dept.’s weekly jobless claims report, claims jumped 32,000 last week, to a “seasonally adjusted” 493,000. That’s the biggest count since September 2001, just after two planes collided into the World Trade Towers in New York.
Orders for durable goods plunged 4.5% in August — the biggest monthly drop in the current fiscal year. Economists were looking for a 2% drop, and thus the durable goods number put a nice dent in pre-market trading this morning.
Sifting through the report, we noticed a few particularly notable blemishes. Demand for civilian airplanes fell 38% in the month. Capital equipment goods — those commonly used by businesses — fell 7.5% — the biggest drop this year. Shipments for all durable goods fell 3.5% — the biggest drop since 2001. Orders for primary metals plunged 9.3% — their biggest drop in 15 years.
Durable electronics orders were among the only gems. They rose 1.9% for the month.
Advertising spending fell the most in seven years during the first half, reports research firm TNS Media Intelligence. The ad world hasn’t seen declines like this since the tech bust.
No surprise, really: Ad spending at newspapers and on radio fell the most.
“We are about to enter the toughest environment that I have ever seen,” management legend Jack Welch said this morning. “This economy is deteriorating… fast. I now believe we are in for one hell of a deep downturn.” The former GE CEO predicted recession in 2009, forecasting the first quarter of next year to be “brutal.”
Ironically, Jack’s former battle-ax GE is suffering a deep downturn of its own today.
The Dow overpowered a gloomy GE earnings forecast this morning. Citing predictable, yet “unprecedented” weakness and volatility in financial markets, the mega-corp scaled back its annual profit forecast, suspended stock buybacks and chose not to increase its dividend in 2009. The move will end a 31-year streak of annual dividend hikes.
GE shares opened down 4%. Still, the Dow, getting high on government bailout fumes, opened up over 150 points.
Gold is keeping its hat in hand this week. The spot price has been bouncing between $885-900 since Monday.
“Here’s a bearish case for gold,” asserts Ed Bugos, alternating his usual point of view. “The Fed says it will no longer support this boom and let interest rates adjust sharply higher. The dollar recovers safe haven status. The U.S. government dismantles its wasteful institutions, downsizes and sets off a new productivity cycle.
“Clearly, not one of these is likely. The events suggest just the opposite. In fact, it is hard to see how the printing presses will not kick in, given the costs of these programs on top of the deficits already forecast by the CBO before the latest dole outs. The U.S. economy is not transforming for the better.
“This week should continue to generate bullish news for gold — it could break to $1,000 — but I would expect to see a pullback in October. After that, I expect you will see a rally to the $1,500 mark by the time the new administration is making itself at home.”
If you’re looking to add gold stocks to your portfolio, Ed’s your man. Learn about his Gold & Options Trader, here.
“I confess, I like the back of the new pennies ,” writes a reader. “One shows the collapse of the housing industry, another the increase in unemployment. The third symbolizes the dismantling of constitutional laws, and the fourth points the finger of blame at a generic government building. All on a financial instrument that costs more to make than it’s worth.
“It doesn’t get more appropriate than that.”
“Interesting chart from Doug Casey on gold and the S&P 500,” writes a reader, “but the question is which will happen — gold moves up or the S&P 500 moves down, to achieve the 1.3 ratio?
“When the average P/E ratio is at 15, you can look at earnings and assets and figure what a fair stock price is. But if that ratio drops to a P/E averaging 10, due to recession, stagflation, inflation, fire, flood, insurrection and/or another Bush running for president, you may, indeed, achieve that ratio without the price of gold increasing.”
“Yes, using Doug Casey’s chart back to 1975,” writes our last reader, “makes a great point of gold being undervalued relative to the S&P. Gold bugs like to use such charts to prove their point. If he used the same chart starting in 1991, it would show that gold is OVER-valued.
“Don’t get me wrong, I’m a gold buyer, and believe it WILL go up, due to this mess and the falling dollar. But using a ‘spiked’ chart like this one to ‘prove’ your point smacks of sensational investment letter advertising. You (and Doug) could do better.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Looks like Amazon might have snagged a few copies of the I.O.U.S.A. book , if you’re interested in getting a copy. The publisher told us it wouldn’t have books in the warehouse until Oct. 6, but it appears it must have a few. First come, first served, we suppose.