The Geithner Plunge, China’s Big New Problem, A Currency Play, The Stimulus Debate and More!

  • Geithner slams stocks… a possible Dow target as the market tests new lows
  • Jim Nelson searches for dividends in tough times… one country still producing robust yields
  • Chris Mayer on the news no one’s talking about… how to profit from China’s very big problem
  • Coming currency opportunity… Bill Jenkins suspects “bull trap” for major global tender
  • Plus, what really ended Great Depression, a reader asks… The 5 responds below

  Ouch! “TARP 2.0” kicked the Dow right in the cajones yesterday.

Fact is the plan vaguely outlined by Treasury Secretary Geithner is meant to put a floor in the mortgage-backed securities market, halt the plunge in housing prices and stem the gush of foreclosures and personal bankruptcies. That much we get.

“We’re going to spend $2.5 trillion… we’re just not sure how”

Trouble is the market doesn’t have any more faith in this Treasury secretary than it did in the last. Within minutes of Geithner’s testimony, the Dow began to fall. By day’s end, it plunged 4.6%, straight through all 2009 levels of support, to 7,888… about 500 points above credit crisis lows.

  In the lead article for next month’s Futures magazine, we postulated that if we continue to follow the trajectory of the Japanese following their credit bust, we could easily see the Dow hit 6,500, roughly where it was on the day Alan Greenspan first spake “irrational exuberance.”

But should we be afraid?

  “The Dow is down over 44% from its record high in October 2007,” notes Jim Nelson. “While that sounds like a horrible time to be investing, for an income investor, it’s the best investment window we’ve seen in the past two decades.

“Dow components are paying an average 4.41% yield. We haven’t seen yields at these levels since 1991. That’s a full 17 years between opportunities like this one. That’s not to say you should go out and buy the biggest yields you find. We have also seen more dividend cuts in 2008 than in any other year in a long time. A record 62 of the 500 companies on the S&P 500 cut or suspended their dividend last year. So you have to be extra careful which companies you invest in.”

So which companies have caught Jim’s attention? Start in Brazil:

  “Brazil is experiencing the same middle-class boom as the U.S. enjoyed post-World War II,” Nelson continues. “While millions are buying their first car, house and television, we have a chance to cash in. As more Brazilians enter the middle class, investment opportunities begin to open.

“According to The Economist, available credit in Brazil has risen 20% in the first half of 2008 compared with the same period in 2007. This extra credit is leading to some important improvements in lifestyles, like buying a car or a house. But it’s also leading to discretionary spending.

“Today, we have two buying opportunities in this country. They are in safe industries that are both essential to middle-class growth and are steady income grabbers.”

For the specifics, be sure to check out Jim’s shiny new service: Lifetime Income Report .

  Meanwhile, on the other side of the planet, the other great engine of economic growth is sputtering anew.

“China is in the midst of its worst drought since 1951,” notes Chris Mayer. “Beijing has gone 100 days without rain. Nearly one-fifth of China’s wheat harvest is at risk and over 1.8 million head of livestock are short of water. Over 3.7 million people face water shortages, as do nearly 23 million acres of farmland. Rivers and lakes are drying up and farmers are drilling deeper than ever to reach falling water tables.

Even the ass is thinking, “this is futile”

“As is the way with these things, it couldn’t happen at a worse time. The economy is clearly slumping along with the rest of the world. Unemployment is on the rise. And now food prices may also climb. Not a good combination for a country that already has a fair amount of unrest bubbling just below the surface.

“Water mismanagement has long been a problem in China. Wasteful irrigation is one problem. So is pollution and mass urbanization to the cities, particularly in the more industrialized — but water-parched — areas in the north. The government knows this and has swung into action with a number of emergency measures, including financial aid for farmers.

“One of these measures also increases the subsidies to pay for irrigation projects. Over the next several years, I think irrigation equipment is going to play an ever-larger role in helping reduce water use. Water problems will get only worse before they get better. The companies that make the tools and have the expertise to solve those problems will be very valuable. And so will their shares.”

  The U.S. trade deficit shrank 4% in December, the Commerce Dept. reports today. Imports and exports fell for the fifth consecutive month. The $39.9 billion monthly gap was the smallest since February 2003.

But for all of 2008, imports and exports actually managed to both set record highs, and the overall trade gap managed to ring in at a stunning $677 billion. Despite slowdowns both here and in the Far East, our trade deficit with China rose to a record $266.3 billion.

  Trade deficit data had no effect on the dollar’s value, however. Currency traders are still sitting around wondering whose feeble fiat currency will fail first. The dollar index has been holding steady around 85.5 for most of today.

  “The euro seems to be ready for a turnaround,” notes our currency man Bill Jenkins with a hint of trepidation. “The European Central Bank announced its rate decision last Thursday. ECB President Jean-Claude Trichet had all but guaranteed no movement on rates — and he was good on his ‘near-guarantee.’ The zone stood pat with rates at 2%. After an initial sell-off on the day, the euro has risen 3 cents against the dollar. Just on Monday, it broke above a steep descending resistance line that dates back to mid-December, falling 10 cents from that time. At the end of its fall, it failed to make a new low against the greenback. Put all that together and it seems the euro could be starting a bullish turnaround.

“But I’m not convinced. It may be getting ready for a leg up, but I don’t see how it could be more than a bull trap (a seeming run-up that quickly reverses, trapping bulls into a losing trade).

“There are no fundamental changes in the economic situations of the world to warrant such a reversal. The eurozone is in deep trouble. Crowds are rioting and protesting, citizens are setting up blockades against their economic neighbors to protest prices, countries are having their sovereign debt downgraded, making it more expensive to borrow just when they want to borrow more for government spending. Nations that have more are being asked to foot the bill for nations that spend more, and they are getting tired of it. The euro is being tested. We’ll have to see if it can weather the storm. But it looks like any euro recovery from here is standing on pretty weak supports.”

The euro goes for $1.29 today.

  Gold rallied following Secretary Geithner announcing his plan to save the world. As confidence wanes in the U.S. government, it strengthens in the once and future money . Your stash is worth $930 an ounce today.

  Wall Street begins its flogging before Congress today. CEOs of the eight biggest beneficiaries of the TARP program — Goldman, BoA, Wells Fargo, JP Morgan, Citi, Morgan Stanley, NY Mellon and State Street — will all shuffle over to the House Ways and Means Committee and take their lashings. If you’re a fan of congressional grandstanding and populist pomp, you’re sure to love this spectacle. Don’t miss it.

Efficiently using his time, Bank of America CEO Ken Lewis is rumored to be taking an eight-hour train from Charlotte. So it goes.

  On the other side of Capitol Hill, the Senate quietly approved the latest rendition of the stimulus bill yesterday. Now it’s back to the House. Speaker Pelosi says she wants the bill ready for the president by Monday. (Yawn.) We wonder if she opened her e-mail box yesterday.

  Light sweet crude has been trending down most of the week. At $37 a barrel, the front-month contract looks set to flirt with the credit crisis bottom in the low 30s. For now, it looks like oil is purely a “reflation” trade… given the gloom over Geithner this week, we’re not surprised to see traders selling down the black goo.

  Ironically, the price of gasoline is soaring. The national average turned a new leaf with the new year, steadily rising from its Jan. 1 low of $1.61 to $1.94 today. We’ll pat Extreme on the back for calling the bottom almost to the day.

  The New York Lottery announced yesterday it will move its $1.3 billion prize pool out of Treasury securities and into stocks, corporate bonds, real estate and funds. The state is facing a $13 billion budget deficit next year and is pulling out the stops to cover the gap. Officials aim to get an 8% annual return on the investment, umn, during the worst bear market since Nixon was doing his best to destroy the economy.

“We’re not going to be wild and crazy with investments,” said Gordon Medenica, the lottery’s director. He assured New Yorkers he will chose “solid investments, like a pension fund or endowment.” Maybe they’re thinking the Harvard endowment, Medenica’s alma mater? Harvard shed 22% of its endowment last year, an $8 billion loss.

Hmmn… somehow the guys who run a state lottery don’t seem like they fit the value investing profile. But we could be wrong. We often are.

  “I wonder if you can explain,” writes a reader in response to yesterday’s issue, “why the New Deal stimulus package failed — because ‘you cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools’ — yet World War II did stimulate the economy and solved the economic problem of those times.

“That is, an enterprise activity that consumed huge amounts of wealth, to make ships and bombs and whatever else was needed to be blown up — totally destroyed — and then replaced by ever more stuff that was also destroyed, etc., etc. Where was the wealth creation in that?

“It did keep a lot of people very busy in jobs, killed some of them off, used up a lot of valuable resources, created lots of savings (in bonds that were then inflated away) and scarcity in all things on the desirable consumable lists… All under direct government control with mostly suspended private rights…

“Would a war on housing, or directly on debt itself, not be a possible solution — let’s destroy excess housing and all debts — blow them up, lend-lease to other nations so they can help in the effort.

“If the U.S. put itself on a war footing — nationwide — with a whole set of war-parallel restrictions and requirements for public sacrifices — we should be able to work our butts off — destroy all kinds of things in excess supply — starting, perhaps symbolically, with most bank executive offices and the whole of Wall Street. Governments could dole out aid directly to those most damaged, patriotism could swell in every heart and do-gooders could have a decade of ‘field days.’

“Wouldn’t this be far preferable to destroying a chosen enemy (the other frightening possibility)? We’d have far fewer casualties (when all over, we’d need the young workers) — and should get a similar result if done right.

“Maybe this would be the best from a set of bad choices.”

The 5: “The first panacea for a mismanaged nation,” Ernest Hemingway famously wrote in the 1930s, “is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

It’s a mistake to think World War II solved the economic “problems” of that cycle. It did put a lot of people back to work, but as you point out, it destroyed more wealth — by a geometric factor — than it created. Prosperity came in the ’50s because by the end of the war, the U.S. was the only country left with productive capacity. We were net producers of goods and in the early ’50s represented 50% of global GDP.

Still, it is widely believed war gave us the boost we needed when we needed it. Presidents have been using the “war” metaphor ever since to mobilize support for their spending programs… the War on Poverty, the War on Drugs, the Cold War, the War on Terror… none of them have been particularly effective, and all have been enormously expensive.

As Bill Bonner points out in our book Empire of Debt , the empire has a logic all its own. War is just one of the memes.


Addison Wiggin
The 5 Min. Forecast

P.S. If you haven’t taken a look at our latest special report, you should do so here … it might just save your retirement.


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