Populism Here to Stay, A “Compelling Investment,” Stimulus Details and More!

  • Populism rears its ugly head… Obama says “not the time” for profits
  • A stimulus bill provision even its beneficiaries are pleading not to enact
  • Global currencies in hot water… Putin disses dollar, Soros smacks euro
  • Eric Fry with “a very compelling investment”
  • Plus, why not a Keynesian solution? a reader asks… our answer, and more

  This new populist era is going to be fun:

“There will be time for them to make profits, and there will be time for them to get bonuses,” president Obama said yesterday , referring to an article he read about the $18.4 billion in Wall Street bonuses paid out in 2008. “Now is not that time.”

Are we prepared to let the president decide when and where bankers can make profits… when and how much they can take home in bonus pay? If the federal government hadn’t thrown billions in bailout money at some of these firms, we assume the bonuses would have been smaller, in some cases.

  But the fact is bonuses were actually down about 44% from the year before, back to 2004 levels , which is roughly where the housing market is . We didn’t hear anyone complaining then.

Still, Obama grabbed some valuable airtime and got a lot of people fired up about those evil, profit-mongering Wall Street folks.

  Meanwhile, American companies announced some 148,000 job cuts this week alone. Consumer staples, consumer discretionary, financials, industrials, tech, housing, Big Pharma, telecom. The job losses are broad and strike pretty deep. Here are some of the more notable ones:

  Thus, a provision dubbed “Buy American” in the stimulus bill passed by the House Wednesday requires all infrastructure materials to be purchased from American providers … even if those providers are overpriced, inexperienced, of inferior quality or all the above.

The Senate is currently enhancing that provision, effectively requiring that all equipment, products, labor and materials used in stimulus spending be American.

Feel that pendulum swing…

  Not everyone agrees it’s a good idea to write protectionism into law at this time. “We believe it invites reciprocal restrictions on U.S. exports," said a General Electric spokesperson, a business that would, ironically, be a huge beneficiary of the provision. "When you take competition out, it drives prices up. We’re in a globalized world — we can’t turn back the clock."

The EU has already threatened to challenge such a move if it’s brought into law — which would, essentially, be an instant global trade barrier. We also note that the U.S. signed a G-20 trade agreement as recently as November 2008, in which member nations vowed not to enact trade restrictions in 2009.

“There is no company that is going to benefit more from the stimulus package than Caterpillar,” Caterpillar’s Bill Lane told The Washington Post, “but I am telling you that by embracing Buy American, you are undermining our ability to export U.S.-produced products overseas. Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism.

“It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression."

  "If there are protectionist measures,” warned India’s trade minister Kamal Nath in Davos this week, “India will be compelled to also take commensurate measures against those countries, which will be good for no one… one must recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their noncompetitive production facilities, it’s not going to be fair trade.”

  Also in Davos, “The one reserve currency has become a danger to the world economy,” opined Russian leader Vladimir Putin. “That is now obvious to everybody." Putin delivered a stern message to the World Economic Forum in classic Russian form: “Facilitate the emergence of several reserve currencies."

This was the first time a Russian leader had ever set foot in the annual forum in Davos. Putin had just one chance to speak, and this is the message he chose to convey.

  “The euro may not survive the crisis," George Soros said yesterday, casting a vote of no confidence for the world’s second most popular currency. Soros said members who share the currency need to strike a deal or the euro risks failure. “One would need a type of agreement on lost capital, so that the burden is shared, and in which every country is part of, otherwise more countries will suffer.”

Soros made a billion dollars in one day back in 1992 shorting the British pound… so when he says a worldly currency is at risk, traders listen. Factor in a likely ECB rate cute at its next meeting and the euro got slammed overnight. It’s down 3 cents, to $1.28.

The dollar index shot up in response, up 2 full points, to 86.

  Despite dollar strength, gold is on the up and up today. It busted through Monday’s high in Hong Kong trading late last night, to just above $920 as we write. That’s a six-month high.

  Oil did not follow gold on its way up today… nor did it tremble in fear at the dollar’s quick rise. Light sweet crude is about where it was yesterday, $42 a barrel.

“At $42 a barrel, crude oil is a very compelling investment,” explains Eric Fry, “for two reasons. From a defensive perspective, oil is an attractive investment because it provides a hedge against dollar depreciation. But that’s not all. Oil also functions as a kind of call option on global economic growth. As an investment, therefore, oil is both offense and defense.”

Eric sets up the case for why oil is too cheap in today’s Rude Awakening. Check it out, here.

  Investing in oil companies is paying off today too. Exxon Mobil, despite all the global slowdowns and strife, reported $7.8 billion in net income for the fourth quarter of 2008. For the whole year, the company reports today, profits exceeded $45 billion. That’s a record for any U.S. corporation and up 11% from 2007.

  Market indexes have swung high and low this week, but today, it’s looking like they’re on track to finish the week near break-even. The S&P 500 had registered a nearly 5% gain by midweek, but swift profit taking yesterday and all the lack of real, genuine “good news” have brought the index back down to earth.

The major indexes are down almost 1% as we write.

  Pushing the market down this morning is the latest GDP reading: The U.S. economy contracted 3.8% in the fourth quarter, says the Commerce Dept., the biggest quarterly decline in 26 years.

The market briefly rallied on the news, as the consensus was braced for a plunge greater than 5%. But that enthusiasm left as quickly as it arrived… even if the reading is better than expected, even if it’s been manipulated by the government… the worst quarterly growth since 1982 still isn’t good.

By logical accounts, the economy should have retracted over 5%. For example, business inventories grew significantly during the quarter. The government perversely interprets this as “growth,” even though the rise in inventory was only a result of businesses being unable to sell their products.

Factor the “inventory rise” out of today’s data and GDP fell 5.1%.

  Last, sorry… we can’t resist:

A huge copper homage to the shoe hurled at former President Bush at a press conference in Iraq last year. It was unveiled in front of an orphanage in northern Iraq this morning, what we can only assume to be a reminder to the children to “stick it to the man.”

In an unrelated note, here in Baltimore, we learned this morning a group of Lithuanians has gathered enough money to erect a statue of the rock hero Frank Zappa, similar to the one they already have in their capitol city Vilnius. Zappa grew up in Baltimore.

  “I get what you’re saying about letting the market correct itself,” writes a reader in a longish populist diatribe of his own. “I’m also worried about the huge deficits that any government bailout will run up. However, one thing you haven’t really addressed in all your commentaries is what all the millions of people who are out of work are going to do?
“How are the millions who are unemployed going to find ways to make a living given that production of everything has evolved into the complex, specialized and globalized systems we have today? You say that in the past when societies became too complex, they naturally collapsed and something simpler took over. However, when Rome collapsed, and the Mayans, Aztecs, etc., the world had much smaller populations, the problems weren’t global and most societies were already largely self-sufficient. That’s not true anymore. It’s not like we can just move somewhere else or start a farm to support ourselves (all the good land is already someone else’s).
“Most of these millions out of work were largely innocent in all of this, as well. Yes some got into too much debt, but many (especially outside the developed nations) were largely being responsible. And the innocent of the innocents are all the children whose parents are out of work. I suppose if I were a child and had a choice of eating today and living to tomorrow facing large deficits, I’d probably choose the former over the alternative and potentially not even making it to tomorrow.
“All this is going on while the millionaires and billionaires keep getting richer — or maybe they’ve taken a hit, but they’re far from the poorhouse (I don’t see Oprah scaling back on her number of houses). Damn right there should be redistribution of wealth… especially from those thieves (in business and the government) who had a responsibility to make sure we didn’t get into this kind of mess.
“So it seems like the only viable option to maintain even a reasonable amount of civility is for the governments to step in and in essence become employers and run up deficits. Otherwise, I think we’ll face a total break-down of society. Maybe the Mayans and Nostradamus had it right when they predicted the world will end in 2012. If the governments don’t do anything, there will be massive civil unrest, riots, etc., and surely the end of civilization as we know it will happen.

“Maybe that’s a reasonable and necessary "correction" (as you like to call it) for those of you without children, but for those of us with kids, that’s just not acceptable.”

The 5: Hey, we have three kids, and this worries us too. What we’re saying is government spending of the magnitude their proposing cannot do what they say they think it can do. In many cases, it will only prop up failing institutions and prolong the inevitable — in effect, make matters worse. Did the $600 checks mailed last spring help? Did Hank Paulson’s plan to bail out the banks work? Just because “change” has come to Washington doesn’t mean somehow deficit spending will miraculously work.

Japan has been embarked on an massive government borrowing-and-spending plan since their credit bubble burst almost two decades ago. That hasn’t worked, either. What’s more, the U.S. bubble dwarfed Japan’s in size and scope. So will the spending plan the government is likely to follow.

What millions of people out of work really means is — and we paraphrase Warren Buffett from I.O.U.S.A. — the ground is fertile for a demagogue to come along and do some very foolish things. Getting angry and making the argument for a redistribution of wealth will only abet them.

Best wishes,

Addison Wiggin
The 5 Min. Forecast

P.S. Next week, this issue of Time will hit newsstands. Whether you agree with or mistrust the rise of stem cell therapies, they are capturing the public imagination. And there’s still time to get into some good investments before they enter bubble phase themselves… read more here.


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