Redefining Deficits, Inflation Plummets, Market and Oil Forecasts, The Dububble and More!

by Addison Wiggin & Ian Mathias

  • Feel like getting angry? Treasury publishes latest debt/deficit details
  • But Fed now encouraged to intervene more… latest data show historic inflation drop
  • How to invest accordingly? Burritt on near-term trading, Grantham on the long haul
  • Byron King explains why $40 oil is “worst of both worlds”
  • Bill Jenkins explains the dollar’s recent downturn
  • Plus, the Dububble expands… refrigerated beaches on UAE shores

  However dire you think U.S. government’s fiscal condition has become… today we learn it’s even worse. For starters, would you invest in this business?

2008 fiscal year net operating cost: $1 trillion. Triple that of 2007. And those aren’t funky alternative accounting methods… today’s charts and numbers come directly from the 2008 Financial Report of the U.S. Government, issued yesterday.

What is “net cost”? It is “computed by subtracting earned revenue from gross cost,” the GAO explains on Page 29 of the government’s 194-page release. A layman might even call it a deficit. A layman who reads The 5 might notice it’s more than double the “official” 2008 federal deficit of $454.8 billion.

  And how about this balance sheet?

God bless America!

  And here… we saved the best for last … this chart, exactly as it appears in the Treasury’s report:

Our balance sheet shows a $10.7 trillion mountain of debt. In the same report, the Treasury suggested unfunded liabilities like Social Security and Medicare now exceed $43 billion. Put the two together, as we did for I.O.U.S.A., and the U.S. is in the hole for at least $53 trillion.

Late yesterday, John Williams estimated it was closer to $66 trillion. Still want to buy those 10-year notes?

  By the way, “The federal government did not maintain effective internal control,” noted the GAO in the same report, “over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of Sept. 30, 2008.”

Not to worry, just some “serious financial management problems at the Dept. of Defense” and other unlawful accounting happening in Washington. But we can still trust them, right?

Oy. We encourage you to read the report yourself, which you can find here.

  Fear of deflation is what has brought the Fed balance sheet so low. Unfortunately, today, U.S. officials got more ammo for defense of their spending plan:

The Labor Dept.’s consumer price index (CPI) fell 1.7% in November, the government reported today. That’s the biggest seasonally adjusted monthly fall since the department started those adjustments in 1947. Filter out adjustments, and CPI dropped 1.9%, the greatest fall since 1932.

As you’d guess, energy and gasoline prices led the way, falling 17% and 29%, respectively. On an annual basis, the government says consumer prices are up just 1.1%.

  New housing starts crashed 18% last month, the Commerce Dept. said today. Now at an annual rate of 625,000, starts have slumped to their slowest pace since at least 1959, when the government started keeping track.
And yesterday, the National Association of Home Builders’ gauge of builder sentiment stayed at its record low score of 9… as in 9 points above the worst sentiment possible.
What a mess.

  At least the stock market is breathing a sigh of relief this morning. The intricacies of Goldman Sachs’ balance sheet interests it far more than the government’s.

Goldman lost $2.1 billion in their fiscal fourth quarter ending Nov. 28… a notable departure from the $3.2 billion profit they pulled off this time last year.

Despite being worse than expected, Wall Street seems relieved by the news. Goldman earnings per share came in $1.24 below the Street’s expected $3.73 a share loss… but traders are buying GS anyway.

The stock popped 4% on the news and helped push major indexes up this morning. The Dow opened 75 points higher than yesterday’s loss of nearly 1%.

  “No banks could ever be high quality” investments, Jeremy Grantham recently told Forbes. Grantham, if you recall, predicted early last year a “global bubble” in essentially every asset class.

Grantham was an “alarmist perma-bear” then… but the “smartest money” today.
“The most difficult decision we’ve had to make in a long time was when we started our quality fund four years ago — the question was whether banks could ever be considered high quality. All the quants in the shop were saying, ‘What do you mean? They’ve got high, stable returns.’

“But all the historians were saying, ‘Yeah, but every 15 or 20 years, the market takes half of them out and shoots them. That doesn’t happen to the Coca-Colas.’”
Today, Grantham says the big blue chips are “the cheapest part of the market.” His fund’s top holdings are Coca-Cola, Procter & Gamble, Microsoft, Wal-Mart and Johnson & Johnson.

  “When stocks have managed a small rally, it doesn’t amount to much,” notes our John Wayne Burritt. “In fact, any move higher is quickly zapped by tough resistance. That’s why the S&P 500 has had little success moving outside its 12-day moving average — the red line on the chart (below) — for months.


“The downward pressure on the U.S. equity markets is still intense. It’s so intense, so deep, that it’s tough to find any real reason to even think about buying call options on stocks.

“Frankly, I wish it weren’t so. I’d like nothing more than to tell you, ‘The bottom is in,’ and that the colossal downdraft we’ve had to suffer through is finally over. But the facts simply don’t bear that out.”

“Now, there’s a chance the markets will meander around until the holidays are over. That’s usually the case, since traders and investors alike are busy with other things. And while I think that bias will certainly be to the downside, don’t expect a huge downdraft until the beginning of the new year.”

Mr. Burritt’s Easy Money Options traders are well positioned to take advantage of the pressure piling up on the broader market — the retail sector in particular. To get his advice, learn about Easy Money Options here.

Don’t forget, as a Reserve member, you get his service for free.

  The U.S. dollar got shelled yesterday in anticipation of today’s super-sized rate cut by the Fed. Traders rushed out of the dollar the moment U.S. markets opened, selling the dollar index down over a point and a half, to 82.

The euro is now at a two-month high of $1.37. The yen is still strong at 90, just off a 13-year high.

“We saw a massive move in both the sterling and euro yesterday,” writes our currency trader Bill Jenkins. “The sterling was carried higher on a sympathy move as the euro began its takeoff. Both were aided by stunning Treasury info (as if the above charts above weren’t bad enough, ugh), which was released at 9:00 a.m. EST.

“October showed a dismal drop in the foreign purchases of U.S. securities. October numbers came in at $1.5 billion purchased… down from $65.4 billion in September!
Foreign investors were not interested in buying our paper in October.

“At the same time, U.S. investors pulled back on their purchases of foreign paper as well. In times of crises, everyone wants their money close to their wallet.”

  A barrel of oil is up a buck, to $45, this morning. But that’s not high enough, says our oilman Byron King:

“The recent drop in oil prices to the $40s is the worst of both worlds. Consumers lose that price incentive to save, economize, be efficient, drive smarter, reorder their energy priorities. And the political will to ‘do something’ about energy declines.
“Plus, the fact that at $40-or-so per barrel, the energy industry is faced with a bunch of uneconomic investments in next-generation energy projects. Canadian tar sands development, for example, is decelerating fast. E.g., Petro-Canada’s decision last month to defer $17 billion in new investment in just one tar upgrading project. And that’s just one example out of about $30 billion total of announced cancellations and deferrals.
“You see the deceleration in offshore projects as well. There are numerous deep-water projects — from the Gulf of Mexico to Nigeria — that are getting scaled back, slid to the right on the calendar, deferred, placed in abeyance, etc.

“In many respects, we are set back a decade. If projects were marginally economic at $40-or-so oil 10 years ago, they are marginally economic today at $40-or-so oil. It’s just that we’ve spent 10 years draining out the other, older reserves that were discovered in the 1950s and 1960s (North Sea, Alaska, western Siberia, Mexico, even the OPEC fields.) The projects that got built in the last decade are now operating at break-even, or even at a loss. That’s not how you capitalize the next phases of development, now, is it?”

  Gold got a $20 kick from yesterday’s dollar sell-off, and sells for around $835 today … a critical point of resistance, according to Ed Bugos.

  We were on a call-in radio program in Toronto this morning. The callers were all freaking out that the Canadian government is learning bad habits from the U.S. brand of federal finance… and that eventually the U.S. would go bankrupt and take the Western world down with it.

“If the entire world is going broke,” one guy wanted to know, “where is the U.S. getting all that money?”

  One of the places the U.S. borrows its money is from the oil-exporting nations. From their behavior, one could argue, we could do worse than spend their money. For example, here’s one way petrodollars are being employed on the other side of the planet: Refrigerated beaches.


Despite the biggest global slowdown of our lifetimes, “smart money” in Dubai has chosen to invest their petrodollars in heat–absorbent pipes and wind blowers that will cool the beaches of the Palazzo Versace Hotel.

“We will suck the heat out of the sand to keep it cool enough to lie on,” explained Soheil Abedian, president of Palazzo Versace. This is the kind of luxury that top people want.”

  “I was rather amused,” writes a reader, “by the reader yesterday who stated that they would place a stick of the good stuff in the cord wood.
“A neighbor in England had his firewood raided quite often. His remedy was to drill a hole in a particularly knotty log, which would not be chopped into kindling, put a friendly gesture in and patch over the hole and cover it with mud and then place it on the pile of logs so that it would be one of the first to be lifted.

“We waited, and sure enough, the culprit was identified when the chimney inside the house disintegrated. He knew where he got the wood, and we knew who had taken what wasn’t his!
“Really appreciate your writings and books.”

  “Whatever happened,” writes another, “to all those yoiks that used to write in accusing you of being anti-American? I never knew ignorance and bile ever stopping anyone’s mouth (or e-mail) before. Where’d they go? Or have you simply (as I advised you years ago) stopped responding to them?”

The 5: Not at all, in fact: We’ve been noticing, too… your hate mail has been remarkably supportive. Except maybe this one:

  “I am a loyal reader of The 5,” the reader wrote, “and enjoy your snarky commentary on macroeconomics. However, I was appalled at the sexism displayed in Friday’s 5 in reference to the White House press secretary. If she were a good-looking man, would you have called her a ‘resident hottie’? Readers of your newsletters are not only men, and even if they were, I would hope a forward-thinking company like Agora would refrain from perpetuating the inequality of professional women in our society.

”Thanks for listening.”
The 5: You’re right. Of course, it’s a total coincidence that Bush chose Ms. Perino — an attractive, articulate young woman — as his press secretary during the depths of his unpopularity. Shame on us.
All apologies,
Addison Wiggin
The 5 Min. Forecast


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