Deficits Gone Wild, China’s Nuclear Option, I.O.U.S.A. on TV, Gold Outlook, and More!

by Addison Wiggin & Ian Mathias

  • 2009 deficit now aimed at $1.2 trillion… not including TARP, or Obama stimulus
  • Global bond crisis… China slows U.S. debt consumption, German auction fails
  • Ed Bugos’ technical look at gold… when to buy, sell and hold
  • The next beneficiary of government bailout bucks? Porn
  • Looking for a primer on American deficits? I.O.U.S.A. on the tube this weekend

  The numbers are so large now… we are beginning to lose interest.

The Congressional Budget Office forecast yesterday that this year’s federal deficit would exceed 8% of U.S. GDP , creating the most tremendous single-year debt burden since 1945.

Generally, economists start breaking out in hives when a deficit reaches 3-4% of GDP.

Unfortunately, the CBO’s budget doesn’t even account for any of the new spending — or tax cuts — under President-elect Obama’s proposed $775 billion “stimulus” plan. Much of the TARP isn’t included either.

  "Our problem is not just a deficit of dollars,” Obama commented on the report, “it’s a deficit of accountability and a deficit of trust.”

Hmmn… you don’t say.

  Perfect timing for this headline and chart from The New York Times, then, eh? “China Losing Taste for U.S. Debt”

China, which passed Japan in September as the largest holder of U.S. Treasuries, owns around $652 billion in American debt. We’ve often asserted that all China would have to do was “slow down” buying debt, not even give up the habit, and it can dramatically impact interest rates in the U.S.

So consider these trends and ask yourself why would China buy more?:

  • U.S. Treasury yields are at historic lows
  • The dollar has weakened significantly since the fourth quarter, and will likely fall further
  • Direct foreign investment in China has fallen by more than a third since the summer of ’08
  • The Chinese stock market shed over $3 trillion of value in 2008
  • China is expected to run a monthly trade surplus of $20 billion this year, half of the record $40 billion surplus from November
  • Chinese government tax revenue fell 3% in November from a year earlier
  • The Chinese government has promised its own stimulus package ($600 billion) that it will struggle to finance.

According to Fitch Ratings, China will grow its foreign reserves by $177 billion this year, down 42% from 2008.

  In a foreboding move, Germany failed to auction off its debt yesterday for the first time in six months.

The German government wanted to raise 6 billion euros to help finance more than $96 billion worth of bailouts pledged to German banks… but investors didn’t want to foot the bill. They purchased only 4.1 billion euros worth of government debt, and the German Federal Bank was forced to print money to buy up the rest.

France, Ireland and Spain are all planning similar auctions over the next few days. If this becomes a global trend… oy. You may as well bend over right now and kiss it goodbye.

  At least we have an “activist” president awaiting his term at the Hay-Adams Hotel across the lawn from the White House.

“President-elect Obama’s chief in-house economic adviser Larry Summers suggests in a recent Washington Post piece,” writes the Peterson Foundation’s Gene Steuerle, “that the new administration will put a lot of effort into addressing long-term growth challenges, not just short-term policies that generate consumer spending. How? Through ‘investments.’ To make sure we get the point, Summers uses that word or some variation 12 times.

“But the first Obama budget will not be oriented toward investment. Just as with recent administrations, the words will stress ‘investment,’ but the numbers will emphasize ‘consumption’ — not only in the short term, but, more dangerously, in the long term…

“Consider first the short term. If, by the time the recession is over, the government takes on net additional liabilities of, say, $2 trillion and invests even as much as one-fourth of that amount, then its net investment is minus $1.5 trillion. And that assumes that the investments really are investments. Believe me, politicians will now be calling every item they favor, even the subsidized importation of tsetse flies, an ‘investment’…

“The real issue is the long term. If we consume more temporarily as a means of recovering our economic health while moving toward a path of long-term investment, it’s one thing. If we’re planning on only increasing our consumption even further down the road, it’s another.”

  And, against all odds, the bond bubble in the U.S. is still alive and well. The U.S. government sold a record $30 billion in 3-year notes yesterday, with bids outnumbering bonds offered twofold. The rate? An all-time pathetic 1.2% for three years.

  “Everyone,” notes Dan Denning, “and everyone’s dog (and everyone’s dog’s feline foes) is calling for the popping of the bond bubble. But every fiber of our contrarian being says to go against the crowd. After all, it seemed fairly obvious that the Nasdaq was in a bubble when tech stocks were selling at average price-to-earnings ratios of 100. And then the ratio doubled. A real bubble worthy of the name exceeds your expectations and just keeps going up.

“What could keep the Treasury bond bubble rising? Federal Reserve buying!

”We know the Fed is trying to bridge the gap between government bond yields and mortgage rates. The Fed wants to make it easier for Americans to refinance into lower-rate mortgages, and thus heal the mortal weeping wound at the heart of the American economy. So it’s been hacking away at the short end of the yield curve, trying to bring mortgage rates down by proxy.”

And, for the most part, failing.

  The Bank of England took a page from the Fed’s playbook today when they chopped interest rates to an all-time low. England’s central bank knocked 50 points off its main rate, now at 1.5%. While that’s no 0-0.25% like here in I.O.U.S.A. — that’s the lowest rate in the BoE’s 315-year history.

“The world economy appears to be undergoing an unusually sharp and synchronized downturn," the bank said in a statement. Jolly good show, chaps, way to get out in front of this one.

  The BoE’s cut shaved a full cent off the pound, now down to $1.52. That’s a pittance in light of the pound’s performance this week, up a good 8 cents versus the dollar since Monday.
In fact, nearly every major currency is up versus the dollar this week, thanks to the dreadful jobs number expected tomorrow and the government’s (multi-?) trillion-dollar budget projection. The dollar index is down 2 points from Tuesday’s high, to 81.5.

  The U.S. stock market finally came to its senses yesterday, selling off significantly in light off all the lousy data and news we’ve suffered this week. The ADP jobs report got the ball rolling pre-market, and bad news from Intel, Alcoa and Time Warner kept the ball rolling all day.

The Dow fell 2.7%, while most other indexes lost over 3%, the worst day for U.S. equities in a month.

  Commodities weren’t immune from yesterday’s rout. Oil fell 12%, its biggest daily percentage drop in seven years. The front-month contract fell nearly $6, to $42, after the Energy Dept.’s weekly supply report showed a 6.7 million barrel glut of inventory. The Street was expecting 1.5 million.

  Even gold is suffering a bout of schizophrenic insecurity this week. Today, the spot price is back up to just about the middle of $855, but the trend still points down.

“The bulls have bounced off normal primary support at $700 nicely, ” writes Ed Bugos, “and October tends to herald correction lows, seasonally speaking. Most of my leading indicators, including gold shares, moreover, suggest the low is in.

“However, until the last lowest high ($940) in the downtrend is cleared, we have to tame our enthusiasm. What’s more, the current rally has stalled at the downtrend line, which intersects the current time horizon at about $890.

“If the bulls can’t make it back up to at least the $940 high of September/October before the market falls back through $830, then I would worry the market MIGHT either retest its $690 low or go even lower.”

  After writing down up to $40 billion in fourth-quarter losses, U.S. banks will have to raise even more capital in 2009, Oppenheimer analyst Meredith Whitney forecast this week.

”From July 2007 to date,” says Whitney, who famously predicted the financial madness of 2008, “over $5 trillion worth of securities have been downgraded, but our concern here is that the pace of downgrades has only accelerated through 2008… capital ratios will be meaningfully lower in the fourth quarter [of 2008] versus post TARP pro forma levels.”

Translation: Investment banks with or without bailout money are still sucking wind.

  Here’s as worthy a proposal for TARP “stimulation” as any we’ve seen so far for the panic-strewn wasteland 30 miles south of us: the porn industry.

"With all this economic misery and people losing all that money,” said Hustler CEO Larry Flynt this week, “sex is the farthest thing from their mind.” Flynt is teaming up with some other “adult industry” vets and asking for $5 billion in TARP funds to help “rejuvenate the sexual appetite of America.”
“Congress seems willing to help shore up our nation’s most important businesses,” said Joe Francis, the man behind Girls Gone Wild. “We feel we deserve the same consideration."
The two delivered letters to Hank Paulson and their congressional representatives yesterday. We have yet to hear any response.

  “I’m suggesting to anyone who will listen,” writes a reader in a similarly useful vein, “that while it’s still plentiful and cheap, they should stock up on at least a six months’ supply of toilet paper. I’ve got a year supply stashed away.

“Since the time to buy anything is when it’s cheap and nobody wants it, now’s the time. When the dollar falls apart and all hell breaks loose, all the Wal-Mart stores will be cleaned out in a few hours, except, perhaps, for mousetraps.

“Or, go for ‘the Big One.’ Accumulate quietly a five-year supply of toilet paper, and then you can be the Toilet Paper King of the Neighborhood, selling the commodity for $5 per roll.”

  “Yesterday’s Wall Street Journal,” writes another, “headline screams, ‘Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes."

“Can the idiocy of the current situation be any more apparent? Consumers are starting to save, buying less trinkets, reducing their debt — all of which are, apparently, destructive to our must-consume economy.

“As a great economics philosopher has noted, ‘We are all frick’n doomed! ’”


Addison Wiggin
The 5 Min. Forecast

P.S. I.O.U.S.A. is up for a Critics’ Choice Award for Best Documentary Feature tonight at 9 p.m. EST on VH1. We’re still in Baltimore, but if we win, Patrick and Christine, the director and producer, will accept the award. There’s still time to vote for the audience award too.  

Also, CNN will air I.O.U.S.A. twice this weekend, once at 2 p.m. EST on Saturday and again at 3 p.m. EST on Sunday.

And… if you’d still like to get your mitts on your very own copy, we’ve got a hanful of copies [here ]. Get a copy of the book too… share it with friends… commiserate as one.

P.P.S. We’re putting the finishing touches on the latest edition of The Emergency Retirement Recovery Series. This one shouldn’t be missed… be among the first to gain access by signing up here . Don’t forget, it’s completely free of charge.


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