Trade War Threat, Inflation Outlook, Rising Gold, Falling Dividends and More!

by Addison Wiggin & Ian Mathias

  • Distant rumblings of a trade war… Treasury pick fires first shot
  • Warning: Inflation ahead, says John Williams
  • Our forecast fulfilled… FDA decision sends biotech firm soaring
  • Dow sinks below 8,000, but how useful a yardstick is it, anyway?
  • Companies slashing dividends at fastest pace in 50-plus years
  • What’s a "depression," and are we in one? 

We begin with what is potentially the opening salvo in a trans-Pacific trade war.

Geithner tries mind control to sway Senate Finance Committee

Treasury Secretary-designate Timothy Geithner, after evading a few questions over back taxes, used the feisty M word to describe China’s currency policy. “President Obama,” Geithner said yesterday in written testimony to the Senate Finance Committee, “backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”

“This is huge,” commented former IMF chief economist Simon Johnson. “The Chinese are going to be very angry.”

While we were making the film in 2007, the Bush administration tried to get the Chinese to change their strategy in Darfur. The Chinese responded by threatening to use their “nuclear option” and dump their holdings of U.S. dollars. What will their response be to a direct challenge by the U.S. to their currency strategy?

John Snow tried a similar tact when he was Treasury secretary. The Chinese told him to go fly a kite. Geithner was approved as the new Treasury chief by the Senate Finance Committee13-5.

Bond traders assessed this spectacle, remembered the Chinese hold $681.9 billion of U.S. Treasuries and cried, “Sell!” They pushed up yields on the 10-year note to their highest level in over a month.

“The biggest threat to long-term U.S. economic health and social stability is inflation,” writes the government stats watchdog John Williams, on the day the new president meets with Congress to hash out details of his now $875 billion “stimulus” plan.

“Such should become apparent in the year ahead, as funding for stimulus efforts runs head-on into increasingly unwilling investors. With the Federal Reserve the practical buyer of last resort for U.S. Treasuries, increased monetization of U.S. debt will flow through to accelerating growth in broad money and to what will become rapidly rising inflationary expectations.  

“The unfolding near-term view of economic conditions remains one of economic collapse combined with renewed inflation pressures.”

Excellent. Can’t wait. It’s worth pointing out too that the stimulus plan proposed by Sen. Max Baucus this morning includes another hike in the national debt ceiling… this time to $12.14 trillion.

The tables have suddenly turned with the major market indexes. Yesterday, the Dow fell 1.25%, while the S&P fell 1.5% and the Nasdaq fell 2.75%. Blame it in part on rotten housing numbers, rotten jobless claims and 5,000 job cuts at Microsoft.

Today, it’s the Dow that’s looking worse than the broader market, as earnings season gets into full swing. Dow component GE says fourth-quarter earnings are down 46% and 2009 is shaping up to be “extremely difficult.” The Dow started the day with a 150-point drop, back below 8,000. We expect earnings season to wipe out any resistance at this level.

But so what? How meaningful is the Dow these days, anyway? Never mind that it’s just 30 stocks. “It’s a price-weighted index,” explains Chris Mayer, “which means that higher-priced stocks have a bigger impact than lower-priced ones.”

“In a mind-bending note circulating on the Internet, James Bianco of Bianco Research points out a startling fact. If Citi, GM, Bank of America, Alcoa, JP Morgan, American Express and GE all opened at zero, the Dow would lose only 528 points. That’s because many of these stocks are below $10 per share and don’t have much of an impact on the Dow anymore.

“Conversely, if IBM alone — a $90 stock — dropped to zero, the Dow would lose 652 points. So the Dow is saying that IBM is more important than Citi, GM, Bank of America, Alcoa, JP Morgan, American Express and GE — combined! Even though GE’s market cap alone is $132 billion, which is more than IBM’s market cap of $121 billion.”

The rash of bad news this week has been getting gold’s attention. The spot price is up 3%, to $883. It doesn’t hurt that holdings in GLD, the most widely held gold ETF, have reached a record high of 819.11 metric tons.

Traders are also taking note that hedge fund manager David Einhorn is going long gold. “Our guess is that if the chairman of the Fed is determined to debase the currency,” Einhorn says, “he will succeed. Our instinct is that gold will do well either way: Deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

As gold goes, the opposite goes for oil. It’s back below $42 a barrel. Even the news that Ukraine might want to renegotiate the gas deal it just signed with Russia wasn’t enough to give crude a boost.

As our biotech guru Patrick Cox forecast in this space yesterday , the Obama administration has approved the first use of embryonic stem cells in humans.

The FDA gave the go-ahead for clinical trials to a California firm Patrick recommended just days before the new administration took office. Already, it’s up 35% as we write. But he says it’s not too late to get in; trials with patients suffering acute spinal cord injury get under way this summer.

Brad Wiggin, my brother and 5 devotee, speculated by IM this morning that this development in stem cell research will likely begin the first breakout trend as the economy begins to reassemble itself post-credit crisis, “since all the money that has been invested in developing nations is deleveraging and decoupling and seems to be coming home to wait for the next opportunity,” he writes. “It could be that the next opportunity is right under our noses.”

The U.K. is “officially” in recession, its first since 1991.

British GDP fell 1.5% in the fourth quarter of last year, on top of a 0.6% drop the previous quarter. Two consecutive quarters of negative growth and there’s your recession. Analysts figure on a 2.1% drop for 2009, with no recovery till at least spring of 2010.
The news knocked down the pound below $1.36 — another 24-year low against the dollar.

Yesterday’s dollar rally carried over into today, the dollar index back above 86 as we write.

“This just shows to go you,” writes Chuck Butler from the EverBank Trading desk, “the ‘trading theme’ of rewarding the dollar every time the data show deeper, darker and more dangerous times for the economy.”

“With no risk takers, the currencies just don’t have any support,” the lone exception being the yen.

Chuck, by the way, heard back from his oncologist yesterday and the cancer he’s been fighting off for the better part of two years is largely in remission. “If it weren’t for this rogue metastasis in my left eye,” he writes, “it would be all seashells and balloons!” We’re still pulling for you, my good man.

At a time when stocks aren’t delivering much in capital gains, at least you can console yourself with dividends, right? Not so much. One out of 10 S&P 500 companies cut their dividend payments in the latter half of 2008 — the fastest pace since S&P started keeping records in 1956.

Five more companies in the S&P 500 cut $7.5 million in payments this month — more than all the cuts from 2003-2007.

That’s really putting a hurt on income investors at the worst possible time. It’s one of the reasons our own Wayne Burritt recently launched his new service with an alternative strategy for generating income. You can read about it here.

Hedge funds are gearing up for another horrendous year in 2009. Morgan Stanley says what was a $1.8 trillion industry at the start of 2008 shrank to $1.2 billion by year-end. And it could be down to $750 billion once 2009 is in the books. That would bring the industry back to 2002 levels, down nearly 60% from the peak.

“Back in the ’80’s,” writes a reader, continuing our dialogue this week on financial euphemisms, “my sister came home from work one day and remarked that several employees had been ‘surplused’ that day. She didn’t flinch a bit — no thought that this was a code word for something truly terrible.

“No thought at all — corporate Orwellian Newspeak at its best.”

“With regard to verbal correctness,” writes another, “please define the ‘D word’ as it was defined historically (1929 era). If the same basis is used today, the U.S. (or any other country) is actually in a ‘depression,’ and the politicospeakers and media are trying not to cause further perceived panic by using only the ‘recession’ word.

“Even if the D word is used for a mild case, instead of a deep recession, is this the sort of cathartic correctspeak that might begin the psychological advance toward true recovery? Can natural cycles be avoided by just not recognizing their existence? If it looks like a duck, walks like a duck, quacks like……………, then it must be a d……………? Is there a nonfuzzy definition for ‘depression’?”

The 5: The technical, nonfuzzy definition for a depression is five consecutive quarters of negative GDP growth. A recession is two consecutive quarters of negative growth. So… according to “official” government stats, we’re only at the beginning of a recession right now.

However, in this cycle, unemployment is pernicious. Using falling employment as a metric, the National Bureau of Economic Research, the muckity that is responsible for labeling economic cycles, says the recession began in December 2007, which puts the first quarter of 2009 squarely in the cross hairs for being labeled the first depression since the 1930s.

A depression is “a decline in real GDP that exceeds 10%,” writes someone from The Economist on this very subject “or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929-1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months, it was not the longest: That dubious honour goes to the one in 1873-79, which lasted 65 months.

“Japan’s ‘lost decade’ in the 1990s was not a depression, according to these criteria, because the largest peak-to-trough decline in real GDP was only 3.4% over the two years to March 1999.”

“I was horrified by the American contributor who analyzed the Canadian attitude toward Americans as condescending,” writes a Canadian reader. “I have also been shocked when asked by fellow travelers if Canadians really hated Americans.

“First of all, it seems that the U.S. media get its information about Canada from Montreal, and French Canadian politics are extreme. A newspaper article can generate a 180-degree turn in attitude one week and the next week turn back on more irresponsible media stories. The French Canadian media really like to yank people’s chains and should therefore be completely discounted at all times.

“What used to be a ideological difference between socialism and capitalism is quickly becoming a nonissue as the U.S. moves toward our side of the fence. You can’t really appreciate capitalism until you have a universal health care system dispensing second-rate health care and a comprehensive social safety net needing a huge administration that requires heavy taxes.

“I know that the vast majority of Canadians appreciate our neighbors to the south, we don’t have an inferiority complex and we really don’t like to hear anyone trashing our friends. We also don’t like to hear anyone analyzing us based on the ‘Quebec’ experience. And finally, since we have one-tenth of the population of the U.S., it follows that we have one-tenth of the wing nuts, so just like in the U.S., don’t believe everything you hear on the tube or read in the rags.”

The 5: Thanks for writing, eh?

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S.: “The Academy had an opportunity to highlight the causes of the nation’s financial crisis to a much wider audience,” our publisher Joe Schriefer wrote yesterday upon learning that I.O.U.S.A. didn’t get nominated, “but turned its back instead.”

“The Treasury has already lost 64 billion of our dollars in the TARP program by giving it to bankrupt banks…” he goes on, “it’s stolen our hard-earned money to make sure the Detroit CEOs continue to work… and it’s already earmarked another $825 billion to ‘stimulate’ the economy. The federal government will go $1.2 trillion deeper in the red this year alone. If consumers aren’t borrowing and spending… and corporations are laying people off and closing up stores… the government, the conventional wisdom says, is the only entity that can bail the economy out.

“At some point, you have to take a step back and wonder, ‘Hmnnn… where’s all of this money coming from?’ This government, like so many others in history, is trying to print its way out of trouble. ‘Hyperinflation’ no longer seems like an ‘if,’ but a ‘when.’ And most people are blissfully ignorant… and believe someone in Washington or New York is smart enough to figure all this stuff out.”

We still have a few copies of the DVD left if you’d like to get a copy and share it with people you think deserve to understand what’s really going on with the nation’s finances. We’re giving it away free when you subscribe to our headline publication Capital & Crisis. You get the companion book and the complete interviews we did with Warren Buffett, Paul O’Neill, Robert Rubin, Ron Paul, Alan Greenspan, Steve Forbes, Bill Bonner, Arthur Laffer and others, too. Check it out.

In a way, we’re relieved we didn’t get the nomination. The reality of the fiscal challenges in the country is sufficiently depressing enough that we’re getting tired of spitting into this particular s&*t storm. Get a copy of the DVD and spread the word. Thanks.


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