Another Jobs Record, Huge Deficits, Oil and Gold Forecasts, The Auto Bailout and More!

by Addison Wiggin & Ian Mathias

  • Job market takes another turn for the worse… unemployment data at 26-year high
  • Government solution: spend… budget and trade deficits swell more than expected
  • Byron King on falling oil demand… and what it means for long-term investors
  • Gold soars… Ed Bugos with some fresh price targets
  • Signs of the times… Chinese bank opens in U.S., world’s biggest LBO collapses
  • Plus, Chris Mayer on the automaker bailout
     

  Americans filed over 573,000 jobless claims last week — the most since 1982.

The Labor Dept. also said the number of people collecting unemployment reached a 26-year high too, 4,429,000.

Unfortunately, we’re just getting started if a study released this morning by UCLA is accurate. The Anderson School of Management predicts we will see negative GDP for the current and first two quarters of 2009… and the unemployment rate to reach 8.5%.

  If you’re mildly interested in what it’s costing for the government to “combat” this pernicious downturn, the Treasury announced yesterday the federal government spent $402 billion… for the first two months of the fiscal year.

That’s $53 billion shy of 2008’s entire historically astronomical budget deficit.

We feared we were being alarmist back in October when we forecast a $1 trillion deficit for 2009. At this rate, a trillion will be light.

  The trade deficit expanded in October, too, up 1.1%, to $57.2 billion.

Quants chained to their IBMs in the basement of Wall Street’s investment banks were expecting the deficit to contract, as nations typically pull back during times of economic strife. But something curious happened. Oil and gas got a lot cheaper… and Americans used a lot more. Who would have thought that would happen? The U.S. imported almost 75 million more barrels of oil in October than in September, when the average price per barrel was $107.
 
Year to date, the trade gap exceeds $590 billion… on pace to pummel 2007. But not in line with 2006’s record deficit of $753 billion. Not yet, anyway.

  Oil thumbed its nose at the trade number by shooting up five bucks, to $47 a barrel today.

  Still, global oil demand will contract in 2009, the International Energy Agency forecast today.

The group altered their yearly outlook again this week, this time suggesting that worldwide oil consumption will decrease from 2008 for the first time in 25 years. The world will consume 0.2% less next year, they say, at an average rate of 85.8 million barrels per day.

  “Global oil demand may decline, but it is not going to plummet,” notes Byron King.

“According to this week’s MasterCard Spending-Pulse data, U.S. retail gasoline demand is back to about the same levels it showed earlier in 2008.  That is, high gas prices hurt demand over the summer and into the fall. (I drove less. Didn’t you?)  But the current low fuel prices have evidently allowed demand to recover. People are driving more. It’s basic Economics 101.

“I was talking with an economist for the American Petroleum Institute about two weeks ago.  He told me that overall gasoline demand in October was down 3%, year to year.  But diesel fuel usage was up by the same amount.  Overall U.S. oil demand is down about 8%, but that reflects the slowing use of oil in industry. Out on the road, people are still driving and trucks are still hauling.

“For all the sound and fury about the run-up in oil and fuel prices through July, and then the fall in prices after that, the aggregate demand for oil is only changing at the margins.

“Looking ahead by more than about two years, world oil demand is certainly going to grow.  It almost does not matter what we do in the U.S. or Europe. When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there.  Many of these young people already have a cell phone and a laptop computer.  When they finish school, they will want an apartment and a car.”

  Gold is up another $20 today, to $825.

  “Looks like the bulls are taking aim at $835-850,” notes Ed Bugos, “a psychologically important area of resistance. The $850 level is very important for a few reasons.  First, it is the neckline of the Jan-Jul top; second, it would reverse the bearish slope of the downtrend.

“Driving the market is a bunch of things, including the dollar’s waning momentum and the prospect of an oversold bounce in the commodities markets. However, as usual, all eyes are on the Fed’s upcoming meeting.  Speculators are looking for the Fed to make more unconventional moves, such as the targeting of long-term interest rates, or this idea of ‘quantitative easing,’ which is but a euphemism for ‘madly inflating.’
 
“I expect some [gold] profit taking on the news and I think we’ll see another correction before the market breaks out.  If Wall Street likes the Fed’s inflation-driven bailout package, the stock market may start to rally, which may even boost the dollar in the short term if sentiment turns in the other direction from whence it is heading now.

“So be cautious in the short term. The waters are likely going to stay choppy until the new year when a new trend emerges. But, on the other hand, the ticker tape is looking sharp right now, as it should, and I don’t expect the pullback to be extraordinary.”

  In the U.S. equity market, the Obama buzz seems to be slowly wearing off. Thanks to “Barack the Builder” and his promise to beef up U.S. infrastructure, stocks have surged this week. We saw some of that enthusiasm in markets yesterday, but it was more tempered… materials and energy players led major indexes to roughly 1% gains.

But then, Barack also promised to nuke Iran this morning, if they don’t get their beady little eyes off Israel.

The Dow opened down about 100 points.

  On the other side of the world, we note I.O.U.S.A.’s brand of monetary enlightenment continues to spread. South Korea cut its main lending right by a mighty 100 bps overnight, to 3%, its lowest level ever.

  The Federal Reserve has given the green light to the state-owned China Construction Bank — China’s second largest — to set up shop in the U.S.   Even the CCB’s peculiar ownership structure is a worthy sign of the times… 57% owned by the Chinese government, 20% by Bank of America, 5% the Singaporean SWF Temasek and shareholders own the rest. The CCB has over $1 trillion under management.

Despite the credit crunch, the CCB is the fourth Chinese bank to expand operations in the U.S.

  The largest leveraged buyout deal in history has collapsed.

The 5 reported with curiosity back in July the brave attempt of the Ontario Teachers Pension Plan to buy up Canada’s biggest telecom, BCE. The teachers, trying to set a good example for their students, borrowed $35 billion to fund the $51 billion deal.

Unfortunately, the deal fell apart yesterday when KPMG, accountant’s for the union, sent over some picky details. Turns out the telecom giant is no longer worth all the money the teachers union would be borrowing to buy it.

Of course, the broken deal isn’t without its share of winners. Citi, Deutsche Bank, RBS and Toronto-Dominion Bank won’t have to find $35 billion to fund the deal. And Canadian lawyers will be able to pay for their second (and third) homes. The breakup fee alone for this deal exceeds $1.2 billion.

  The U.S. House of Representatives passed a bill that would extend a $14 billion loan to the Big 3 U.S. automakers. Now it’s off to the Senate. We know how this story ends, don’t we? Hank Paulson’s bank bailout metastasized 450 pages and several hundred billion dollars when it got treated over in the Senate earlier this fall. 

  “About this bailout,” Agora Financial’s managing editor, Chris Mayer wrote this morning,  “I keep thinking of Frederic Bastiat, the old 19th-century economist, and his idea of the “seen and unseen.”

“Most people look at the government’s bailout of Chrysler in 1979 as a success simply because the company recovered, paid off the debts and survived. But what they ignore is the unseen. What if Chrysler had failed? Perhaps GM and Ford would have gotten the pick of the very best of Chrysler’s workers. Perhaps a good chunk of the sales that would have gone to Chrysler instead would have gone to GM or Ford. In both instances, GM and Ford would be stronger.

“Maybe, just maybe, GM and Ford would have avoided the sad fate of begging for money in 2008. If so, then the Chrysler bailout was very expensive, indeed. Old Bastiat would have a field day with the stuff going on today. Lots of people ignoring the unseen consequences of bailouts in general.”

  “Remember the Yugo in the ’80s?” asks a reader.

“We loved to make jokes about it, and it was our favorite example of a poor-quality communist product.  Well, I wonder if 10 years from now people in Asia and Europe will be laughing at the cars that the Big 3 churn out if our government keeps them on life support.  Obviously, some people are laughing already.”

  “A sign of tough times,” writes a reader adding to our list, “one of our neighbors was driving home early Saturday morning from working a night shift. As he turned in to our neighborhood, he found a truck parked next to the three model homes, with a man apparently ‘working’ on the fence.  As soon as his car approached, the man jumped up, hopped in the truck and sped off.  He left behind his power tool and five gaping holes in the fence. He stole the 8-by-4 foot wrought iron fence sections, apparently to sell at a scrap dealer. I guess he didn’t realize that scrap iron prices peaked near 40 cents per pound in July and then plummeted nearly 80%, to 8 cents per pound, today.” 

  "Jupiter moved into Saturn’s sign earlier this week,” writes another reader, boldly making a forecast of his own “and he will be there for about two-three years. Amazing how such ticks in the court of the planets can cause such drastic swings in the stock market. But… it should, or could, be good for natural resources, actually.

“Maraka is the sign of the sure-footed goat climbing up the rocky mountain, followed by the sign we call Aquarius today. Aquarius was the polestar sign at the top of the dome of the sky when the floods occurred many years ago that swamped the equatorial nations.  It brought vast and mighty changes in the world organization, with four or 10 major cities going under the tides — India, Japan the North Sea and, of course, old Noah and his boat around the Caspian. I think that caused droughts and water shortages most places, as well, on land. More water in the sea means less rain and less drinking water. I’m just brainstorming. 

“When Jupiter is in Leo, it certainly does cause gold to advance in daily monetary value. But why worry?  Gold is money and always has been. Hope we get more to bury in the backyard, or under the mattress."
 
The 5: Hmmm… we’ve been having difficulties with our e-mail broadcast system of late too. Do you suppose this has anything to do with the alignment of Venus, Jupiter and the moon?

We’re just brainstorming too.

Addison Wiggin
The 5 Min. Forecast

P.S. "You guys are great,” writes another reader, “After working my deteriorating joints off all day, I can come home and read your column and come away with a smile. That’s just what I need to convince me to unload my gun. Or at least to reload it with blanks."

Thanks… er, we think.

P.P.S. Here’s another Reserve member recounting their experience at the Agora Financial Investment Symposium in Vancouver this year:

The event will be held in Vancouver again in 2009, July 21-24. If you want to join us, please let us know. (800-926-6575) There’s still time to collect a $300 early-early-bird registration discount. Of if you take advantage of our “one-time only” dividend rebate for the Reserve membership , not only will you get $1,500 back, but the Symposium registration is free.

rspertzel

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