Huge trend reversal: Dollar busts, commodities boom… why, and will it last?
Rate cuts round the world… U.S. and China slash, Japan considers
U.S. three months away from “official” recession
Two new bailouts: Who’s lining up for help, plus Uncle Sam’s October tab
Denning and Nelson on beating inflation with the right long-haul stocks
The U.S. dollar fell by its largest percentage in 13 years yesterday.
Et voila, the trend we believe is your friend returned with some impressive steam:
The Reuters/Jefferies CRB Index popped 5.9% — diddly squat compared with equity moves lately, but still the biggest daily gain for the index since its inception, in 1956.
Alas, despite the rise, the CRB is still down 24% this year.
Still, the Fed trimmed its target interest rate by 50 points yesterday, to a skimpy 1%. Lower rates generally bode well for investment in resource companies. Cheap money will boost inflation, consequently boosting dollar-denominated commodities.
The central bank of China joined the Fed sponsored rate-slashing party yesterday too. In fact, the “people’s” bank cut its lending rate for the third time in six weeks yesterday, to a bestial 6.66%. As the world’s biggest consumer of industrial metals, China’s rush to cheapen money isn’t so bad for commodities, either.
We suspect there will be mayhem yet before the commodities bull market continues in earnest. But yesterday’s action was a good sign.
Gold posted the least impressive gain of the commodity rally. It popped only $20 in the American trading session, and this morning, most of those gains were given back. An ounce goes for about $755.
Oil climbed as high as $69 a barrel yesterday, up $5. Oil got some extra help from a lower-than-expected supply report from the Energy Dept., along with more rumors that Opec is considering another production cut… already.
Copper, the sleek sista, is the standout this week. After striking a three-year low Monday, it has risen quickly every day since. Yesterday alone, it soared 12%.
The Bank of China — a state-owned lender — released earnings yesterday . Profits increased 11.5% year over year in the third quarter. The bank made about $2.5 billion during one of the worst credit environments in history. Chu se de gong zuo!
“Don’t know if you’ve noticed,” Chuck Butler points out this morning, “but the Chinese renminbi has remained virtually unchanged this week. Yes, the peg was dropped in July 2005, and it should move some each day, right? Well… When you realize that the reality of the situation is simply that China is a communist country and can do whatever they well please with their currency! And it looks to me as though China has restored the peg… Maybe it’s just a move to sit on the sidelines during these tumultuous times in the financial markets.”
The U.S. dollar played a big role in commodity gains yesterday, as well. The dollar index spent another day in the doghouse, falling 4 full points from Tuesday’s high, to 83.5. Turns out — and this might be hard to believe — loaning money at a mere 1% rate does not make your currency more valuable.
“The currency market is driving everything right now,” suggests Dennis Gartman. “It’s leading the capital markets, leading the commodity markets.” Among other things, Gartman predicted a 1-to-1 dollar-euro ratio in the coming years.
The Japanese government unveiled a $300 billion stimulus package overnight. Following in the footsteps of I.O.U.S.A., Prime Minister Aso said the package would include loans for small businesses and handouts for families.
And since Japan has already made one bad decision this week, keep an eye on the Bank of Japan this Friday. Rumors persist that the BOJ is considering cutting rates for the first time since 2001, to a silly-low 0.25%. In fact, traders are giving 60% odds that the BOJ cuts… incredible.
Fueling the fire for the cut was yesterday’s Japanese industrial output data, which showed the third straight quarterly decline. The yen’s recent 13 year high versus the dollar isn’t helping matters over there, either.
Factor all this in and you’ve got a decent explanation for a wild market yesterday. Stocks continued Tuesday’s rally most of the morning, but — as we forecast — “sold the news” of the Fed’s 50-point rate cut.
The major indexes leapt near the end of trading on word that the Japanese might be intervening in their banking system… but then gave it all away in the last minutes of the session. Stocks ended down… the S&P 500 dropped 1.1%. The Dow fell 0.8%. And the Nasdaq lost 0.5%.
GDP officially contracted in the third quarter, says the Commerce Dept. today. The economy shrank 0.3%. That’s good news, sort of, since Wall Street expected a 0.5% decline.
But still, it’s the biggest quarterly decline in seven years, when the U.S. entered a post-tech bust recession.
Hmmm, let’s see… economy is shrinking, stocks stumbling… the dollar reverting to its intrinsic value… what’s a big government to do? How about more multibillion-dollar bailout packages?
Not one, but two super-sized bailouts are currently brewing on Capitol Hill. According to Reuters, the FDIC and Treasury Dept. are working on a new federal program that would provide government guarantees on up to $600 billion of U.S. mortgages. They’re looking to back more than 3 million at-risk home loans, since it worked so well for Fannie and Freddie.
The White House also confirmed yesterday that the Treasury Dept. is in talks to bail out General Motors. GM and the rest of the “Big Three” are lobbying for a larger chunk of the $700 billion financial rescue plan passed in September. Apparently the $25 billion loan Congress approved for it earlier this year ain’t enough.
Here’s a question Congress is incapable of asking: Can we afford it? For an answer, we check in on the Treasury site again to assess the nation’s credit limit:
The Federal debt has risen $502 billion since the end of the ’08 fiscal year, Sept. 30.
Funny story. We put out a press release for the film pointing out that the debt was rising this fast and cited the Treasury’s own chart. We were immediately attacked as alarmist. The numbers — and our credibility — were called into question.
The weight of denial out there in media-land is, well, very heavy.
“Equities — certain ones, mind you — are going to make much better inflation hedges than bonds,” suggests Dan Denning, “especially U.S. government bonds. There’s going to be a stiff penalty for staying in Treasuries as the supply increases. Plus, all that new stimulus. All that new borrowing.
“If you don’t want to own best-of-brand businesses now at these prices (including resource and energy companies), then would you ever want to own them? If you’re going to be in the equity markets at all, you could probably make a list of just five or 10 companies to own for the next 10 years, buy them now and throw away the key.
“Look to build a Crusoe Portfolio: stocks that could make you rich if you were stranded on a desert island for the next 28 years (or 10). Global brands, mostly lots of cash, selling as cheap as you’re likely to find them again.”
“Now’s a great time to be hunting for quality DRIPs,” adds our colleague Jim Nelson.
“Stocks offering dividend reinvestment plans (DRIPs) allow you to both receive dividend checks in the mail and buy more shares at a discount. For example, if Company A wants you to reinvest your dividends back into more shares, they could offer — as a benefit for signing up for their DRIP — a market discount on every purchase. Company A will take your shares and sign you up for this plan. When the dividends come out, they’ll reinvest them by buying more shares for you at a 10% discount to the market price.
“It’s as if the company were matching 10% of your investment, just like an employer-based 401(k). Here’s the best part: Most companies will let you split your shares into half ‘pay now’ and half ‘reinvest for later.’ So you are collecting current income from half your dividends while saving for your retirement through an employer-like ‘matched gains’ program from the other half.
“There are already over 1,000 DRIPs, most of which allow you to split your shares, and a few hundred of these ‘matched gains’ retirement plans. Many more are jumping on the bandwagon.”
The average cost of getting a higher education has continued to rise this year. Overall expenses of attending a university rose about 5% this school year, the College Board said yesterday. The average cost of a four-year private university rose 4.8% this year, to a price tag of $34,132 a year. Public colleges are getting pricier too, up 5.7% this year, to in-state costs of $14,333 each year.
Among all college graduates in 2007, 60% were in debt. The average exceeded $22,000.
“If Dean would have used an approach to his critique” writes a reader of Dean Baker’s scathing review of our film, “like the approach I.O.U.S.A. used in making the film, I wouldn’t have dozed off after Page 7. The future generations that he refers to happens to involve my children, and the U.S. spending problem is here today and probably still will be here in future generations.
“The lack of confidence in our government is here today and will continue if we don’t do something now. Maybe we, as supporters of the I.O.U.S.A. message, should pool our funds and buy him a copy of the DVD. He apparently didn’t hear the same message I did.
“Keep up the good work.”
The 5: Thank you. As you’ll see, not everyone agrees…
“I visited the Center for Economic and Policy Research Web site and read a couple of Dean Baker’s articles,” writes another. “As you commented, he seems to be on the same page as the Agora folks in a goodly number of his essays, but his political inclination clearly is leftist, as is CEPR’s. Why are you surprised that he took offense at a criticism of Social Security or deficit spending? He is a Big Government leftist criticizing Big Government conservatives.”
“Having Pete Peterson, Robert Rubin, et al. in your movie discussing the ‘debt’ is a big joke,” suggests the last reader today. “Rubin has helped ruin Citigroup with his DO NOTHING TITLE AND FAT CAT compensation. He was complicit in this leverage party and is still standing. He’s a disgrace and should be up on charges, just like his former ‘boss,’ Sandy Weill and ‘Chuckie Cheese’ Prince.
“As to Peterson, his Blackstone firm used the credit markets to buy up and sell companies with real people losing thousands of jobs, running up debts on the balance sheets and taking home HUGE paydays. He even has called himself a FAT CAT himself. You want to glorify a former NIXON Cabinet member who also has some responsibility for this mess we are in? I’m outraged at you for shilling for Peterson and Rubin to support this movie. If you would have done your homework further, you could have probably found other funding/promotional sources.”
The 5: Obviously, you haven’t seen it.
Still, to you, I say, “Bring it on!” If all we’ve done is start a fight between Big Government “liberals” and Big Government “conservatives,” that would be fine with us. We’ve had our reservations about working with the Peterson Foundation, too.
But I will say this: We’ve been writing about this stuff for over a decade. Given the response the film has been getting from audiences around the country and the high level of interest and discussion that follows each screening, I’d say we’re doing a hell of a lot more than picking fights and shilling for FAT CATS. Every screening is followed by the suggestion we put the film in high schools. We’ve noticed students in universities across the country are taking it upon themselves to screen the movie and hold discussions. For the first time, people are actually discussing the topic rationally, without dismissing our assertion that building up trillions in government debt as “gloom and doom.”
We don’t vote, so it’s the least we could do to help save the Republic. Heh.
The 5 Min. Forecast
P.S. You can get a copy of the I.O.U.S.A. book and DVD, as well as a subscription to Capital & Crisis, for a screaming deal… right here.