Agora Financial’s 5 Min. Forecast – The Auto Bailout Failure, The Piano Biz, Dollar Top, Oil’s Big Rally and More!

by Addison Wiggin & Ian Mathias

  • Auto rescue fails: Why bankruptcy makes sense, but still might be avoided
  • Can we survive without the Big Three? Consider our history… of piano making
  • U.S. household net worth falls by record amount… how Americans are pulling back, whether they like it or not
  • Has the greenback peaked? Key market and technical indicators triggered
  • Chris Gaffney on the currency to buy if Detroit goes under… or short if it doesn’t

  We’re surprised today. Didn’t think the unions had it in ’em.

But indeed, the current rendition of the automaker bailout is dead in the water. The bill was tripped up by the UAW, too rigid to adapt to the bailout’s terms… or an increasingly globalized marketplace, for that matter. Senate Republicans wouldn’t budge either, and that was it. Just to be sure, Democrats insisted on voting on a measure that would bring the bailout bill to a formal vote (how’s that for a microcosm of how inept our government has become?). It didn’t pass.

  “The best thing that could happen to the auto industry,” opines Oliver Garret of Casey Research , “is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible…

“The choice is clear: Either the Obama administration can continue on the path of nationalizing entire segments of our economy (so far, banking, insurance, auto — next, health, airlines…) and run them into the ground. Or it can let poorly managed companies fail, thereby making it easy for successful businesses and new entrepreneurs to buy the assets of these organizations. Step back and let the markets work their magic, instead of blaming the market for ills that were created by special interests and poorly designed regulations.”

  An automaker failure, “is something that our economy cannot withstand right now," said White House Press Secretary and resident hottie Dana Perino. "If we don’t act and these companies go away, we could wake up and not have any domestic auto industry, which is certainly not the outcome that this president wants.”

GW could still find a way to use TARP funds to rescue the automakers… it’s not over yet.

  Trolling through the papers this morning, we note there is hardly any celebration surrounding the potential salvation of at least $14 billion of your money. That boils down to roughly $45 for every man, woman and child in the U.S. We won’t speak for you, but we prefer to keep the dollars we fairly earn. So… hooray!

   “What about the time before the car?” asks Jeffrey Tucker of the Mises Institute, trying to bring some historic perspective to this mess. “Look at the years between 1870-1930. As surprising as this may sound today, the biggest-ticket item on every household budget besides the house itself was its piano. Everyone had to have one. Those who didn’t have one aspired to have one. It was a prize, an essential part of life, and they sold by the millions and millions…

“By 1890, Americans fed half the world market for pianos. Between 1890-1928, sales ranged from 172,000-364,000 per year. It was a case of relentless and astounding growth…

“The American piano industry was the greatest in the world, not because the Americans came up with any new and great manufacturing techniques, though there were some innovations, but because the economic conditions made it most favorable to be manufactured here…

“All of this changed again in 1930, which was the last great year of the American piano. Sales fell, and continued to fall when times were tough. The companies that were beloved by all Americans fell on hard times and began to go belly up one by one. After World War II, the trend continued, as ever more pianos began to be made overseas.

“In 1960, we began to see the first major international challenge to what was left of the US market position. Japan was already manufacturing half as many pianos as the United States. By 1970, a revolution occurred as Japan’s production outstripped the United States, and it has been straight down ever since. By 1980, Japan made twice as many as the United States. Then production shifted to Korea. Today, China is the center of world piano production. You probably see them in your local hotel bar…”

“Does anyone care that much? Not too many. Have we been devastated as a nation and a people because of it? Not at all.”

Tucker goes on about the great piano industry in a piece we encourage you to read, here.

  “I dread looking at Wall Street tomorrow,” lamented Harry Reid late last night when the rescue officially died, as if it were the job of a senator from Nevada to buoy shares of the Dow. And banks. And brokers. And automakers. Ugh.

  While Reid’s intentions were wrong, his intuition may have been right. It appears the market had — to some extent — priced in an automaker rescue. Thus, sellers were back in the driver’s seat this morning.

The Dow opened down 150 points.

  Traders may have seen this one coming, as the market staged another last-minute dive yesterday. Investors were already in a sour mood after jobless claims hit a 26-year high and some lousy earnings forecasts from Procter & Gamble. Then word leaked that the automaker bill might be in trouble, and the market braced for the worst. The Dow and S&P 500 fell about 2.5%. The Nasdaq plunged 3.6%.

  Hmmm… how could everything suddenly get even gloomier? How about discovering one of the biggest investment frauds in U.S. history?

Bernard Madoff, a legendary Wall Street money manager and market maker, was arrested today for what he himself called “basically, a giant Ponzi scheme.” It’s a long, complicated affair, but here’s the punch line: Another $50 billion just disappeared from the war chests of the business, funds, charities and high-wealth families Madoff represented.

  Total household net worth fell $2.8 trillion in the third quarter, the biggest decline since records began in 1952. According to the Fed today, a combination of real estate losses, the stock market collapse, and rising unemployment caused the most damage to the average American’s bottom line since the Depression era.

And that’s the third quarter… the Fed will likely announce another record fall once numbers arrive for the last three months of 2008.

  But this is encouraging: U.S. household debt shrank for the first time since 1952 as well. Household debt, as measured by the Fed, fell 0.8% in the third quarter. We’d like to think Americans noticed their declining net worth and chose to pull back, save money and pay down their debts. But this is the “credit crisis,” after all… there’s an equally good chance that the pullback was involuntary, and fresh lines of credit were simply less available. Foreclosure is a “great” way to slash household debt too, and there’s been no shortage of them this year. 

  Is the dollar’s time in the sun coming to an end?

For the first time in the latest leg of this equity bear market, the dollar has fallen in tandem with the stocks. Before, the dollar was the safe haven of investors fleeing equities, but this week at least, it ain’t so. The dollar index has also fallen below its 50-day moving average for the first time in the recent dollar rally… a noteworthy event for technical traders.

The dollar index is down 2 full points from Wednesday, to about 83.4.

  “The big winner in the Senate rejection of the bailout plan was the Japanese yen,” notes EverBank’s Chris Gaffney, “as Japanese car makers are predicted to grab an even bigger piece of the U.S. auto market. The yen, which has been rallying due to global deleveraging and carry trade reversals, suddenly had another reason to rally. The yen rose to a 13-year high, trading below 90 yen per dollar, and some are now predicting a rise to 80. Finance Minister Shoichi Nakagawa boosted the yen further after telling reporters in Tokyo that Japan isn’t considering intervening in the currency markets.”

  But we doubt the dollar’s value is on anyone’s radar on Capitol Hill. Wholesale inflation fell by a large margin again in November, the Labor Dept. reports today. The producer price index fell 2.2% during the month, following a record 2.8% decline in October. Energy prices led price deflation again, falling over 11% in November.

Also like October, the PPI “core rate” rose, despite a large fall for the headline number. Core, prices excluding food and energy, rose 0.1%.

  Commodity investors have benefited form the dollar’s recent fall. Crude oil enjoyed a big rally yesterday, shooting up 10%, to just under $48 a barrel. Threats of production cuts emerged from both OPEC and Russia, which certainly didn’t slow down the buying spree.

But traders are taking profits in the oil patch today, along with nearly every other asset class. Crude has given back almost all its gains, and now trades around $44 a barrel.

  Gold’s been handling all the drama very well. It peaked just above $830 yesterday, and has since been holding steady around $815.

  “I am a big fan of your newsletter and your investment services,” writes a reader, beginning with flattery, which we’ll never turn down. “You guys provide me with a really wonderful macroeconomic education. Thank you.

“However [here we go], yesterday’s comments from Chris Mayer , in my opinion, really miss the boat. He blew it big-time. Mr. Mayer talks about the unseen consequences of loaning money to the Big 3 automakers, but he’s strangely silent about the unseen consequences of not loaning them some money. If the Big 3 go under, consider the consequences to the Big 3’s direct suppliers, and then consider the consequences to the indirect suppliers — the big ripple effect.

“Such indirect workers and companies as the truck drivers, the dockworkers, the chemical companies, the companies growing/producing the fabric in the car seats and the carpeting, the fertilizer companies supplying the companies growing the fabric in the car seats and the carpeting, the truck drivers delivering this fertilizer and on and on and on. It’s a very large web. And what about having a manufacturing base for the defense industry? Who should we have available to build our vehicles and weapons if things get ugly? Some other country? Maybe China, India or Vietnam can be our source!”

  “The auto OEMs have made tremendous changes in the last 10 years,” writes another, “the union problem being the toughest of them all. But progress was being made relentlessly, if slowly. If those jackasses in Washington pull the plug, the auto industry won’t be the only industry circling the drain. It’ll pull plenty of other industries and businesses into the vortex. Think twice about the law of unintended consequences before you conveniently bash Detroit. That good feeling won’t last if Detroit doesn’t make it.”

The 5: Oy… here we go again.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. As promised, another Reserve member shares his experiences with Eric Fry at our annual Symposium:

We’ve been sharing these videos with you all week because two valuable opportunities are about to pass: The first is an early registration offer for our Investment Symposium. If you know you are going to come this summer, call 800-926-6575 today… you’ll save $300 a seat.

Also, our latest application period for the Agora Financial Reserve is coming to an end. If you desire the full brunt of our economic and financial advice, the Reserve is the only way to go. Not to mention, you get a boatload of great benefits… like free admission to our Symposium every year. Learn about the Reserve, here.

P.P.S. The holiday season is officially upon us here at 808 St Paul. Addison is attending a holiday program for his kids at school this morning. Many of our editors are rushing in for some of the last big meetings of 2008. And tonight, we have the annual Agora holiday party. If it’s anything like years past… innaproprate behavior will ensue.


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