Obama’s Deficit, Fed’s Forecast, India’s Market, Gold’s Victory, and More!

by Addison Wiggin & Ian Mathias

  • Obama’s fiscal “change”… trillion-dollar deficits “for years to come”
  • Fed says economy to shrink in all of ’09, unemployment to rise until 2010
  • Second wave of real estate tsunami swells… office and mall vacancy rates surge
  • Indian market crushed in ’08, starts off ’09 with scandal… Mayer on whether your money is still safe
  • James Turk shows how gold has been the best currency of the 21 century
  • Plus, a notable bull market of 2008 that will likely continue in ’09

  The more things “change,” the more they stay the same…

“At the current course and speed,” said the President-elect Tuesday, “a trillion-dollar deficit will be here before we even start the next budget. And potentially, we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point."

Despite pledging to “bring a long-overdue sense of responsibility and accountability to Washington," yesterday, the future Mr. President said he planned on spending an “extraordinary amount of money" to fix our economy.

The Congressional Budget Office will release its 2009 budget and outlook today. And Barack has promised to discuss these YEARS of trillion-dollar deficits a bit more… we’ll share the vainglorious details tomorrow.

  The U.S. economy will remain weak in 2009, and there is a “distinct possibility” of a “prolonged retraction,” the Fed admitted in its latest Beige Book release yesterday. Bernanke and company broke pace from the usual lily-white statements of the obvious, providing some strong forecasts for the New Year.

The FOMC now anticipates GDP contraction for all of 2009, with sharp declines in the first half and possible small recoveries in the second. The group also forecast the unemployment rate to rise “significantly” into 2010.

"Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern."

Now they’re worried? What exactly were they thinking for the past four-five years?

  ADP, the oft-cited payroll processing firm, said the private sector shed 693,000 jobs in December, way larger than the half a million forecast by the Street.

So far in this recession, the ADP report has been a crummy indicator of the “official” government jobs report. But with this report, ADP says it’s revised the methodology of its employment count so that it’s a better predictor of Friday’s number from the BLS. We’re not sure if that’s a good thing or not, but if ADP’s December number is on target, you can expect over 700,000 lost jobs when the BLS reports at the end of the week.

  The second wave cometh… rents for office space fell 1.2% in the last quarter in 2008, the biggest quarterly decline since 2003. According to a study from research firm Reis Inc., rents fell in 65 of the 79 major U.S. markets during the fourth quarter.

Across the country, office vacancies now exceed 14%. Winners and losers include:

Birmingham? Didn’t see that one coming. BTW, don’t be fooled by NYC. The fourth quarter marked the biggest rise in office vacancies there in 20 years.

For all of the U.S. in 2008, tenants vacated a net 42 million square feet of office space, or about 1.5 square miles. That’s around 730 football fields of empty offices.

  In a similar fold, shopping mall vacancies have reached at least a nine-year high, says more from Reis today. The firm’s measure of regional mall vacancies climbed to 7.1% in the last quarter of 2008, the highest level since the firm started keeping track in 2000. Leaping from 6.6% in the third quarter, that was also the biggest quarterly jump on the books.

Reis’ measure of “neighborhood and community” shopping malls is even worse… smaller malls currently bear vacancy rates of nearly 9%.

  What will happen to those struggling shopping malls if the price of energy rebounds? Owners have some time to think about it, as oil backed off a couple bucks in the last 24 hours. Light sweet crude is down to $45 a barrel as we write.

  Heh… the blissfully ignorant stock market enjoyed another day of gains yesterday. Traders managed to overlook the Fed’s Beige Book, record-low pending home sales, a near-record low ISM measure of the service sector and a decline in factory orders twice as bad as economists expected. If there was a compelling reason to buy yesterday, The 5 missed it.

Still, the Dow and S&P 500 rose 0.7%. The Nasdaq ended up 1.5%.

  The economic data did have an impact, however… on the other side of the planet. In India, the Sensex plunged over 7% this morning.

A huge blue chip accounting scandal — what CNBC has already dubbed the “Indian Enron” — didn’t help matters much. Satyam Computer Services chief B. Ramalinga Raju confessed to all sorts of multibillion-dollar book cooking, earnings inflating and liability understating schemes. Satyam was the fourth largest software firm in India.

Whatever confidence Indian investors had left in their market slipped out the window overnight. With a 2008 like this, it’s hard to blame them:

  “Poor India,” says Chris Mayer, “the old stomping grounds of the great Hindu kings, the playground of the Mughal Empire, had a rough year in 2008 and a bad start to ’09. India has had such a good run — five years of nearly 9% economic growth and a booming stock market — that it had reason to feel it was Fate’s spoiled darling. But in a long and checkered life, a good many things come unstuck. And so India has.

“In 2008, its stock market lost 60% of its value. The rupee lost 20% against the dollar. Foreign investors pulled out in record numbers. India’s best companies struggle. The global economic freeze walloped India hard. So the question is should you buy India or forget it?

“Consider that even as growth forecasts come down from 9% to 5%, India is still one of the world’s fastest-growing economies. Its people are young and hungry for a better life, unlikely to unbutton the old waistcoat and put their feet up. Half of India’s population is under 25 years old. There are many English speakers. The savings rate is near China’s lofty levels. ‘The crowning reason for optimism,’ opines The Economist ‘is the savings rate.’ Unlike the U.S., India is a nation of savers.

“There are good companies here available on the cheap. The economic deepfreeze won’t last forever. If you can sit on Indian investments for a few years, my guess is you will be amply rewarded.”

For Chris’ favorite India stocks and funds, just click right here.

  Gold’s been climbing steadily today, thanks to some renewed dollar weakness. After trading as low as $840 yesterday, the spot price has worked its way back up to $865

  “Gold has done it again,” rejoices James Turk of goldmoney.com . “Gold is up for the eighth year in a row against the U.S. dollar. Here are gold’s rates of appreciation in terms of several major currencies.

“The appreciation gold has achieved over the past eight years is remarkable. Without any doubt, gold’s 16.3% average annual change against the U.S. dollar has made it one of the world’s best performing asset classes this decade, but oddly, gold continues to be ignored by many. I expect this inattention to change in the year ahead.

“More inflation and more dollar debasement can be expected. The Federal Reserve has thrown away the rule book. It is ignoring 300 years of central bank practices and putting the dollar on an untried path in an attempt to avoid the consequences of the inevitable bust that always follows the boom created by easy credit. The Federal Reserve’s grandiose experiment will, I expect, eventually destroy the dollar, and I don’t hold out much hope for any other national currency. To explain why, take a close look again at the above table.

“We can see that gold is rising against every national currency. The reason for this phenomenon is that the dollar is the world’s reserve currency, and because of this role, it is held as a reserve by central banks around the world. The dollar provides part of the base upon which other currencies are created. Therefore, as the dollar is debased, other national currencies are also being debased along with it. In other words, the U.S. dollar is now going down a ‘black hole,’ and its gravitational pull is dragging every other currency down with it, as evidenced by the rising gold price this decade in all currencies.”

  On that cheery note, we see the dollar has declined quite a bit this morning. The dollar index is down almost 2 full points from yesterday, to just above 82. For all the reasons we mentioned in the markets bit, there’s just no reason to be buying greenbacks this week.

  We’ve uncovered another rare bull market of 2008: securities lawsuits.

As we forecasted during the Lehman implosion back in October, certain kinds of lawyers had a banner 2008. According to a study from Stanford Law today, 210 securities fraud lawsuits were filed in 2008, a 19% rise from the year before. Most of the suits involve mortgage-related assets… some against the financials that flagrantly overvalued them, others against the firms that issued or rated them.

And considering our bit yesterday on personal insolvencies , we’re guessing bankruptcy attorneys will miss 2008, too.

  Last, speaking of legal action, a reader’s story we feel obliged to share… a note of levity in an otherwise depressing edition of The 5:

Late last year, the North Dakota postal service finally caught Allen Edward Prochnow. He was a long time mail carrier, who over the course of a decade failed to deliver over four tons of mail, most of which he stored in his house. (Sadly, we couldn’t find pictures of Allen or his overstuffed abode.)

Long story short, we know one of Allen’s victims. A longtime reader, for privacy’s sake we’ll call this person M.M., just got a letter from a USPS special agent. Here’s the best part:

"If you believe you have suffered a financial loss due to not receiving it [mail] in a timely manner… please provide a written statement explaining each instance in which a loss was incurred."

Among other things, M.M. never got the February 2005 issue of the Fleet Street Letter, a service we’ve since renamed Capital & Crisis. Chris Mayer told readers to buy Agrium that month, which gained 232% before he advised readers to sell.

  “What, just what,” a separate reader asks, “has the reader who made the comment that ‘surplus nations’ have been negligent by not buying our goods and services been smoking? He doesn’t think they should be able to purchase Treasury bonds or real estate. Just what are these nations supposed to purchase from the U.S.? Does he have a list of items he thinks they should be able to purchase?

“It would probably be a very short list. Cars that get terrible mileage and fall apart immediately after the warranty expires. They do purchase our agriculture products, and will be buying more of them in the future. The surplus nations are very aware of the decline in the value of the dollar. In fact, they are the ones that continue to support the value of the dollar knowing full well that not doing so would result in a worldwide depression on a magnitude unimaginable by most.

“The few products and services that the Chinese can’t produce on their own seem to be environmentally related. Smokestack scrubbers, etc. Apparently, they could care less if people die at an earlier age due to pollution. The air and the water, from all appearances, are beyond repair. In a few more years, millions will have passed on to a less-polluted world.

“P.S. Do you think he would share that stuff he smokes? I think my doctor would give me a prescription.”


Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget, the next installment of our Emergency Retirement Recovery Series is about to go live. By 5pm tomorrow, we’ll reveal Wayne Burritt’s “Income on Demand” strategy, designed to help you recoup 2008 loses on your favorite stocks.

This webinar is 100% free… all you have to do is sign up, here.


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