What Worries Us, Learn from Zimbabwe, Hidden Inflation, Housing Forecasts and More!

by Addison Wiggin & Ian Mathias

  • One letter says it all… latest congressional blunder epitomizes current American dilemma
  • Senate adds $64 billion tax cut to stimulus plan… how would Dr. Richebacher get us out of this mess?
  • Bill Bonner on an economist you’ve never heard of, but everyone should know
  • Alan Knuckman reveals hidden inflation… either our hands are getting bigger or cereal boxes are shrinking
  • Three dark details of the housing bust… and a home price forecast worth betting against

  Perfect. Here’s all that’s worrying us in the news this week, in one convenient little package:

“Microsoft has a moral obligation,” reads a letter Sen. Chuck Grassley (R-Iowa) sent to Microsoft CEO Steve Balmer, “to protect these American workers by putting them first during these difficult economic times… It is imperative that in implementing its layoff plan, Microsoft ensures that American workers have priority in keeping their jobs over foreign workers on visa programs.”

Crazy, don’t you think? We could go on and on here, but we have only 5 minutes. In short, the above highlights two dangerous trends currently gaining real traction in I.O.U.S.A.:

1) American protectionism, at any cost
2) “Acceptable” government meddling in private business decisions

For further proof, just over the last few days, see: Citi Field , Buy American , Davos Warnings , Obama on Wall Street , etc.

  As we predicted, the Senate has already added billions more onto the infamous economic stimulus bill. The tally is now up to $885 billion, the Congressional Budget Office estimates, roughly $64 billion more than the House’s approved plan.

The bulk of the new price tag comes from a “patch” to the equally infamous alternative minimum tax. Senate Republicans are looking to shield middle- and upper-income families from the widely criticized AMT, a mutated tax that was originally designed to affect only the very wealthy.

Of course, there isn’t an extra $64 billion sitting around in Capitol Hill. And Congress wouldn’t dare cut that much out of their own budgets. So this “tax cut” is just a classic Washington move… this generation enjoys the party, the next generation gets the bill — with interest.

  “We sincerely doubt,” suggests Rob Parenteau, steward of The Richebacher Letter, “that Dr. Richebacher would see public deficit spending and protectionism as a road back to sustainable economic growth. Rather, we suspect he would vastly prefer to see a rebalancing of the global production structure and a simplification of the financial structure. Asian nations need to become more domestic demand driven, and the Anglo-American nations in particular need their household sectors to save out of income flows, while their production sectors reinvest earnings in tangible capital equipment at home, rather than in outsourcing, mergers or stock buybacks.”

  On the other side of the world, we see what happens when a government tries too hard to correct its economic woes: Zimbabwe announced yesterday it will slash 12 zeros off its currency. Effective immediately, Z$1 trillion equals one Zimbabwe buck.

Before the slash, one U.S. dollar was trading for somewhere above Z$300 trillion. Thus we can hardly blame Zimbabwe’s central bank for lopping off all those zeros… must be tough to operate in the realm of trillions, quadrillions and quintillions without going cross-eyed.

Old Zimbabwe money can still be used until June, if you can find anyone that will take it. Most Zimbabweans prefer foreign money, as most foreign paper is unlikely to lose half its value overnight. The latest official reading of inflation there — back in July 2008 — registered a rate of 231,000,000%. It’s easily in the billions by now.

  “The economist that everyone should be paying attention to,” writes Bill Bonner, “is Gideon Gono.

“Gono, if you haven’t heard of him, is Robert Mugabe’s right-hand man. And Robert Mugabe is the No. 1 man in Zimbabwe, an African country with a real ‘riches to rags’ story. It was one of the wealthiest and safest countries in Africa when it was run by Ian Smith in the ’70s. But the meddlers and world-improvers couldn’t leave well enough alone. They helped put Mugabe in power. Since then, the place has gone to hell.

“Gideon Gono, 47 years old, lives in a 47-bedroom mansion in Harare. He says he doesn’t drink, sleeps only four hours a night and runs regularly. He is known as ‘Mr. Inflation’ for his Olympian efforts to increase the country’s money supply. He does this the old-fashioned way — by printing pieces of paper will lots of zeros on them. Newsweek magazine seems to have found him in a talkative mood. Asked what he thought of the worldwide credit crash, he replied:

“‘I sit back and see the world today crying over the recent credit crunch, becoming hysterical about something which has not even lasted for a year, and I have been living with it for 10 years. My country has had to go for the past decade without credit… Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not.’”

  Bond traders are making bets the inflation is coming to the U.S. The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.

  “Sometimes, we get inflation that you don’t see,” adds our new commodity man, Alan Knuckman. “It just sneaks up on you when you aren’t looking and just trying to start your day with the usual bowl of oat wheat sugar flakes cereal and, ‘Hey, either my hands have grown larger or this box is thinner than just a few weeks ago!’”

Pretty slick, eh?

Alan passed on a recent study from Nielsen Co., which said that 30% of all packaged foods in America have lost content over the past year… most without altering price.

“This downsizing of packages is one way for food manufacturers to avoid raising prices. At first, it was to offset higher fuel and commodity prices, but now it has turned into profit growth — with 10 less potato/potatoe chips in my bag.

“The indented bottom of a Skippy peanut butter jar got more indented, turning an 18-ounce jar into a 16.3-ounce one. Ice cream containers shrank by one-quarter of a quart. And for breakfast, a jug of Tropicana orange juice got 7 ounces lighter, while that box of Froot Loops lost more than 2 ounces.”

By the way, if you’re looking to make a buck or two in 2009, you have to check out Alan’s Resource Trader Alert. Trading commodities would be a great way to offset last year’s losses and boost your buying power for the year ahead. Learn about his service, here.

  For energy traders, there’s still little sign of inflation. Crude oil’s been hanging out around $40 a barrel the last couple days, about $9 short of its recent high.

  Gold, on the other hand, is riding high on growing inflation concerns. Its safe-haven, inflation-hedge status has gained popularity. Thus, the spot price has managed to stay above $900 over the last week. You can get an ounce for $910 as we write.

  “Gold seems like a clear winner in the current environment,” says Eric Fry in today’s Rude Awakening. “Maybe not immediately, but the risk of not owning the stuff seems much greater than the risk of owning it
“I know, I know, we are always somewhat bullish on gold. So is our affection for the barbarous relic just a bad habit or a bona fide investment call? Both is probably the honest answer. We always liked gold. But we absolutely love it now. If ever there were a time to risk looking like a complete idiot by buying gold, that time is now.”

  Major stock indexes looked like they might have eeked out a gain yesterday, until Macy’s crashed the party. The legendary retailer said it would be slashing 7,000 jobs and cutting their dividend by 63%. We wondered, what took them so long? But the move spooked the Street, and major indexes took a hit. When the dust settled, results were mixed: The Dow fell almost 1%, the S&P 500 broke even and the Nasdaq jumped up 1.2%.

  Thanks to plummeting prices, pending home sales jumped 6.3% in December, the National Association of Realtors reports. Just as we witnessed in last week’s measure of existing home sales, buyers are slowly becoming enticed by low home prices. The NAR’s median home price plummeted 15% in December, year over year, to $175,400… the steepest drop on record.

Almost hilariously, the NAR projects the 2009 median home price to be $198,100. That’s a 12% hike from today’s median. And in 2010, your home’s value will pop another 5%, to an average of $207,700. Seriously? Some people never learn:

“The broad trend over the coming year,” forecast Lawence Yun, the NAR chief economist, back in December 2007, “will be a gradual rise in existing home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.” He predicted the median home price would rise to $218,300 last year… just a tiny bit off. Yun still leads the NAR economics unit.

  The housing market lost $3.3 trillion in value last year, says a report from Zillow.com.

  According to a Census Bureau report today, a record 19 million American houses were uninhabited at the end of 2008.

  “As the CEO of a startup company,” writes a reader, furthering our Wall Street bonus debate , “I wonder what hole some of your readers came out of. How about if China starts dictating to the United States financial terms for us based upon this country’s devaluing them as a creditor. They are the 900-pound gorilla on the block.

“Would the idiots that write in applauding the dictatorial terms the government is handing to the CEOs of financial institutions of this country like it if China were to do the same to the people of this country? Looking at the decisions of elected officials in Washington, there are quite a few morons voting in this country.

“Oh, and by the way, China will be dictating what happens here shortly. I can’t wait for the weeping and gnashing of teeth. What is good for the goose is good for the gander. If you are not prepared, you have nobody to blame but yourself.”

  “Many in the financial service industry,” writes another, “have employment contracts for their services. What they are paid is a function of their talent, demand and performance. Often the performance compensation is paid in the form of a year-end bonus. It’s their share of the money they made for their company. If they do their job well, they get paid well. If they do poorly, it’s reflected in their smaller bonus. God forbid we reward people for doing their job well or punish those who perform poorly!

“For the government to come in and say you must take a pay cut because your boss screwed up is like telling the Congress that they too should take a pay cut because they screwed up our economy. Do we see them cutting their own salaries? Do we see Franks, Dodd or the rest of the Financial Services Committee taking a cut for screwing up our economy by excessive intervention and bad economic policy and poor oversight? They waste our tax dollars worse than any of the CEOs bailed out. How are they held accountable?”

  “While we stockholders,” adds the last reader, “cannot directly impact these undeserving management morons, we can directly affect the corporate board members. I recommend that the next proxies you receive, you vote NO on all board members. We may not be able to affect the board makeup, but we sure can send them a message.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast


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