Amazing U.S. Debt Benchmark, Auto’s Get Bailed Out, China to War, and More!

by Addison Wiggin & Ian Mathias

  • Government debt crisis reaches new historic benchmark
  • Solution? Bush announces automaker bailout, Obama “new deal” grows even bigger
  • Chris Mayer on Chinese industrial output… and how it affects your mining investments
  • Market dives on S&P nonsense… Greg Guenthner on the equity opportunity awaiting
  • Plus, the surprise target of China’s first naval mission in 600 years


Which is greater? The U.S. government’s mountain of debt or the entire net worth of all U.S. citizens?

For the first time in our history, it’s the former.

As of the end of September, the U.S. government held “$56.4 trillion in debts, liabilities and unfunded promises for Medicare and Social Security,” said research published this week by the Peter G. Peterson Foundation. The number comes directly from the Treasury release we harped on Wednesday.

And our collective net worth? $56.5 trillion, as calculated by the Fed at the end of September as well.

“Given more recent developments, it’s clear that America now owes more than its citizens are worth," said PGP Foundation president and protagonist of I.O.U.S.A. David Walker. "Passing this shocking milestone highlights the need for President-elect Obama and the next Congress not only to turn the economy around and boost consumer confidence, but to put a process in place that will lead to tough choices getting made to strengthen the government’s financial condition once the economy begins growing again."

  What perfect timing… This morning, the White House unveiled a $13 billion automaker bailout package . More free money. Perfect.

There will be no congressional debate on this one. The checks are already in the mail. GM and Chrysler will get the funds almost immediately.

Details? The $13 billion will be a three-year loan. But if the two automakers don’t show themselves to be viable by March 31, they have to pay it all back immediately. Executive pay will be limited. Union wages and pension programs must be brought down to levels similar to those of competitors. No dividends will be paid by either company. In exchange, the government will get warrants on stock and access to the companies’ financial bookkeeping.

As we forecast, the money will be plucked from what’s left of the TARP. As we mentioned yesterday, this will nearly drain the first $350 of TARP funds authorized by Congress. Paulson and company will soon need to plead with Capitol Hill for the second half.

Already built into the rescue is a provision for another $4 billion shot in February, if automakers can meet certain benchmarks and provisions.

  At the same time, the price tag of the Obama “New New Deal” package has ballooned to $850 billion. No longer content with mere symmetry to the Treasury’s $700 billion TARP, the president-elect’s team is rumored to be scheming an even bigger deal… one that would amount to over 6% of our total GDP.

  Music to China’s ears, no doubt. Without I.O.U.S.A.’s nonstop stream of dollars, China’s industrial output growth rate fell to 5.4% in November — the weakest reading since the red nation began keeping track in 1999.

“For the moment, at least,” notes Chris Mayer, “no relief is in sight for all those who depend on Chinese steel, such as iron ore producers. As making steel requires gobs of energy, so too has energy demand fallen like hailstones in Sichuan province.

“So you see a lot of mining companies cutting back. The most recent to do so was Anglo American, which cut its capital budget in half, to $4.5 billion. When you look around in the mining world, there are billions and billions of dollars of spending that are just gone poof! Preserving cash is priority No. 1.

“And when China catches a cold, the commodity world goes on deathwatch. Already, the Reuters/Jeffries CRB commodities index hovers near its lowest level in six years. This past October, it fell more than it ever has in a single month. The index began in 1957.

“The Chinese government plans to throw a lot of money around in a stimulus package, as I wrote about in my last letter to you. Everybody is doing it. Even little Vietnam cobbled together a $1 billion stimulus plan, supplemented with $6 billion in tax cuts.

“And the U.S. government plans to spend a lot of money, too.”

  The stock market seemed content with the auto bailout announcement. The Dow opened up 100 points, despite dismal-looking futures in early-morning trading.

But today could be a rocky one for equity traders. It’s a quadruple witching day… only four times a year do index futures, index options, stock futures and stock options all expire on the same day.

  “I don’t recommend sitting on the sidelines of this market for too long,” suggests our small-cap man, Greg Guenthner.

“Here in the United States, the household savings ratio has stayed below 2.5% since 1999, according to our friends over at The Economist. Instead of stashing our money in savings accounts, we spent with reckless abandon and used our homes as savings, borrowing against their ever-increasing value whenever cash was needed.

“But now that the stink has hit the fan, the once unstoppable American spender is doing something quite curious: playing it safe with his money. And he’s certainly not buying stocks. One look at the crashing yield curve says it all. No-interest 90-day T-bills are flying off the shelves…

“Of course, the same folks who are buying Treasuries and stuffing money under mattresses right now are the ones who were telling us house prices would never go down and subprime was nothing to worry about. Looking back even further, these were the same people frantically buying stock back in late 1999, when the global price-to-earnings was 35.

“The Economist writes that when American P/E ratios are low, returns on equities over the next 10 years average 8%. And when they are high, returns average 3%. You can’t argue with those numbers. The time to consider stocks best is while everyone else’s back is turned. We’re looking at a global P/E near 10 right now…opportunity awaits.”

  Stocks ended down yesterday, led by GE. The market was slowly drifting lower… until S&P lowered GE’s credit outlook from “stable” to “negative” late in the day. That gave the whole market a rash, and traders quickly pushed major indexes to approximately 2% losses.

Not that we know too much about GE’s credit… but it’s simply amazing that anyone cares what Standard & Poor’s thinks anymore. Has our memory faded already?

  S&P also cut its ratings on 11 banks today. Bank of America, Barclays, Citi, Credit Suisse, Deutsche, JPM, Morgan Stanley, RBS, UBS, Wells Fargo and Goldman Sachs were all cut. None are rated lower than A, but the group noted that credit deterioration might continue. Thanks, S&P!

  A record 344 hedge funds — 7% of the whole industry — closed their doors in the third quarter. That’s more than three times all the funds that went bust in 2007, says a report from Hedge Fund Research today. In the first nine months of 2008, 693 funds failed, also a record. Considering the group’s research and projections for the fourth quarter, the total could easily reach 1,000 by the end of the year.

  The U.S. dollar managed to halt its free fall today. The dollar index bounced from 77 to 80 yesterday when stocks sold off. As we write this morning, it remains around 80, a historic point of support.

  The dollar’s turnaround has accelerated oil’s plunge. Crude oil plunged to $34 a barrel this morning, the expiration day of the January contract. That’s the lowest since April 2004.

But looking to the future, traders are less bearish. The February contract, which will be the front-month contract after today, has already popped up to $41.

  Sign of the times… Somali pirates are likely to be confronted by an unlikely government:


Avast! Pirates take heed…

“There will be an announcement very soon,” regarding a naval mission against African pirates, a spokesperson for China’s ministry of national defense said today. We were ready for Team America: World Police to be the sole protagonist in this matter, especailly after Somalis hijacked a Saudi oil tanker last month . But rumor has it that China is willing to embark on a long-range naval affair… its first since the 15th century.

  Gold’s retreated a bit on dollar strength and profit taking . The spot price is about $30 off of yesterday’s high, at $840.

  “Any reasonable reading of the gold chart,” writes a reader, responding to Ed Bugos’ thoughts in yesterday’s 5 , “indicates gold has been in a deep and vicious downdraft since going a bit over $1,000 an ounce, and will soon start the next deep leg down, and the long-term chart support level will be in the range of $600-635 before we should look the gold bug in the eye again. Then, Ed (and the big-picture view of The 5) are likely correct — there should be a nice bounce, at least, if not a tremendous takeoff. However, any neural chartist would suggest Mr. Ed needs to check those patterns again, and, for now, keep his powder dry.”

  “As a member of the PoFolks Society,” prefaces another, “I’ve been a working man all my life. I’ve worked in union shops and nonunion shops. I prefer nonunion shops myself. I have always been able to earn more money in them than the union shops.
“I don’t like the union shops here in Pennsylvania. I had, by law, to join them to work for the last company I was hired at. I have always viewed unions to protect the worthless, lazy, the incompetents. In my position at that company, I was able to work up through the ranks, from the assembly floor to field service position.

“So I’ve worked with many management people. Now I’ve come to view them, for the most part, to be exactly like unions: They promote the worthless, the incompetent and the lazy and place them in midmanagement places.

“So when you guys say this: ‘UAW workers will be paid 95% of their salaries while sitting at home waiting for your tax dollars to keep them employed,’ well, it seems to me that fat cat top folks that made this mess still get their multimillion-dollar bonuses, the royalty-type perks. Is it a disparity? Why do you not calculate their hourly wage?

“I would think that, in some cases, they are bilking thousands of times more plunder then the lower midmanagement or workers could possibly dream of. They seem to be getting the huge money too, compared with the $50.00-75.00 per hour union folks get — if those are even correct numbers. I don’t know — I’m just a shop guy.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. If you haven’t heard, we’re launching several new products before the year’s end. Some of them will be available for free, but only to readers of The 5. Learn about these opportunities, here.


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