TARP 2.0 Forecast, Market Event, Government “On Tilt”, V-Day Dilemma and More!

  • Market tests bottom, passes… why buyers rushed in late yesterday
  • Geithner still closed lipped over TARP 2.0… Dan Amoss’ best guess for what to expect
  • Doug Casey on the stimulus bill and the future of America
  • A Valentine’s Day dilemma… chocolate producers stung by the only two commodities still on the rise
  • Plus, how would The 5 fix this mess, a reader asks… an abbreviated answer, below

  Yesterday was huge for market index observers. The Dow had fallen as much as 245 points by 3 o’clock, a fresh three-month low and a breath from the credit crisis bottom.

But as you can see, traders/investors/the crash protection team… whoever was buying stocks rejected that bottom and brought indexes back around break-even. Last-minute courage came courtesy of the Obama administration, which leaked word that a whole new, surely expensive program was in the works to subsidize mortgage payments for struggling homeowners.

  Heh, but hold on please, Mr. Obama, we hardly understand the plans you’ve already proposed.

“Oh… allow me to explain.”

“I understand the desire for details,” Treasury Secretary Geithner said before the Senate Budget Committee, referring to the Financial Stability Plan, “and I understand the disappointment about the lack of details. But part of the disappointment is because people were hoping that we do things that, in my judgment, would have been too generous and not responsible for the taxpayers’ money.”

Ha! With a price tag of up to $2.5 trillion, we think the current plan is plenty generous.

  “Here’s my guess,” offers Dan Amoss, “at how this arrangement might develop in the coming weeks: Part of the new Financial Stability Plan involves an unspecified ‘public/private’ partnership to buy up toxic assets. Apparently, the idea for a public/private partnership was a last-minute development leading up to Tuesday’s announcement. Word is that several prominent hedge fund managers met privately with Larry Summers, one of the administration’s top economic advisers, just days before Tuesday’s announcement.

“Long-term financing from the Treasury to distressed debt hedge funds is a very creative way to hide a government subsidy. The potential cash-on-cash return for hedge funds interested in cheap toxic assets is probably not enticing enough for them to pay what the banks are asking. But if the Treasury acts as a prime broker by providing, say, 10-year financing at 4%, so hedge funds can lever up their equity by five times, maybe the funds will be willing to pay a bit above the banks’ asking price and still earn a decent five- or 10-year return. This is a backdoor way to recapitalize stressed banks and get toxic assets into stronger hands without exposing taxpayers to too much credit risk. Combined with a major new mortgage refinancing initiative, this might have a shot at success.

“One thing is clear: The authorities are not going to just sit by and do nothing. I’ll be looking closely at the details of the Financial Stability Plan as they are revealed in the coming weeks.”

So how should you trade it? Dan’s got several ideas, which you can check out here.

  Another scheme brewing… The New York Fed is quietly looking to add two more primary dealers of U.S. Treasury securities. The Fed will likely auction off over $2 trillion in paper this year, and, evidently, 16 dealers aren’t enough to shove these bills down our collective throats. MF Global and Japan’s Nomura Holdings are the top candidates for the gig. They would replace the recently snubbed Merrill Lynch, Lehman Bros. and Bear Stearns.

  “A poker player would say the government is ‘on tilt,’” says the incredulous Doug Casey , “placing wild, desperate bets in the hope of getting rescued by good luck.

“The things they’re doing are not only unproductive, they’re the exact opposite of what should be done. The country got into this mess by living beyond its means for more than a generation. That’s the message from the debt that’s burdening so many individuals; debt is proof that you’re living above your means. The solution is for people to significantly reduce their standard of living for a while and start building capital. That’s what saving is about, producing more than you consume. The government creating funny money — money out of nothing — doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency.

“Over several generations, huge distortions and misallocations of capital have been cranked into the economy, inviting levels of consumption that are unsustainable. In fact, Americans refer to themselves as consumers. That’s degrading and ridiculous. You should be first and foremost a producer, and a consumer only as a consequence.

“In any event, the government is going to destroy the currency, which will be a mega-disaster. And they’re making the depression worse by holding interest rates at artificially low levels, which discourages savings — the exact opposite of what’s needed. They’re trying to prop up a bankrupt system. And at this point, it’s not just economically bankrupt, but morally and intellectually bankrupt. What they should be doing is recognize that they’re bankrupt and then start rebuilding. But they’re not, so it’s going to be a disaster.”

  “It will be impossible for anyone in Congress to even read the stimulus bill,” Greg Guenthner points out, “unless they have superpowers. Barack Obama wants it on his desk by Monday, for maximum political impact. But ‘today’s version’ is 1,071 pages long. This thing will get passed… and we still won’t know what the hell we did. I just hope there’s pork in there for me, or maybe for the methadone clinic up the street.”

Besides… they’ve got to pass this thing in time for a fun little trip to Europe:

  13 members of the House (and their spouses, assistants and security enclave) are leaving Saturday for a nine-day vacation… oh sorry, “delegation”… to Europe. They’ll stop at NATO headquarters in Brussels to talk about NATO’s role in Afghanistan. Then off to Paris, where we presume even the 10 spouses coming will meet with the OECD. Then Vienna for a meeting with the Organization for Security and Co-operation in Europe. Last, to Germany, where the group can meet with NATO again, this time to tour a new training facility.

Not one to miss out on the fun, Speaker Pelosi will leave for Rome tonight, presumably after the stimulus bill is passed. She’ll meet the Pope there and most of the Italian government, discuss Italy’s involvement in our efforts in the Middle East (say what?) and receive an award from an Italian legislative group. That’s great, really.

  Meanwhile, back in the country where actual Americans live and work, home prices fell 12% in the fourth quarter, the most on record. A National Association of Realtors report says today that the median sale price fell to $180,100, down 12% from the same time in 2007. Sales of foreclosed and defaulted homes accounted for a stunning 45% of national sales during the period… ouch.

  Economists expect a 4.6% decline in U.S.GDP in the first three months 2009, says a Wall Street Journal survey today. That’s a huge shift from the survey before, when the same group predicted 1.2% growth for this quarter back in September 2008.

The second quarter of this year got a similar treatment… economists revised a call for 1.9% growth, to a 1.5% decline. Most are still predicting very modest growth in the third quarter, but there will be plenty of time for them to revise those forecasts again.

  On the other side of the pond, the eurozone has suffered its worst quarterly economic contraction since records began in 1995. According to Eurostat, GDP in the eurozone shrank 1.5% in the fourth quarter of 2008, eight times the third-quarter loss. As if it weren’t completely evident already, the Euros are now in a textbook recession.

The contraction was larger than consensus expectations of a 1.2% drop, and now euro speculators are clamoring for the ECB to cut its lending rates ASAP. Unlike the Fed, the ECB still has a few bullets left… its main lending rate stands at 2% today.

  With worldly GDP projections like these, we’re not surprised to see oil near credit crisis lows. Light sweet crude goes for just $34 a barrel this morning… a buying opportunity, if you ask us.

  Part of oil’s decline is thanks to an unwavering dollar. Despite all the uncertainty this week surrounding the U.S. economy, the dollar has managed to stay afloat. You’ll find the dollar index today a few ticks higher than its score Monday… around 86.

  But gold remains the star commodity of late, suddenly indifferent to dollar strength. After soaring to $950 this week, it’s managed to hold up nicely and sells for $940 an ounce as we write.

  Last today, a Valentines’ Day concern: The chocolate industry might be the only sector in the world still struggling with high commodity prices. Check out cocoa over the last year, from the WSJ:

Crop disease and supply issues in Ghana and the Ivory Coast have bumped up cocoa prices 38% from November. What’s worse, harvest troubles in India stung the sugar crop this year, and thus sugar prices are up 23% in about the same time as well. Poor chocolatiers… the two staples of their product are the only commodities to post significant gains over the last few months.

The move has “forced” Hershey’s to hike prices by 5% in the fourth quarter… raw materials account for almost 50% of choclatier’s costs. We dare not doubt the power of love (or is it guilt?) that will give chocolate sales quite a boost this week, but boosting prices suddenly on an already highly discretionary food item… in this economy? Good luck.

  “In addition to the fact,” starts a reader, “that we came out of World War II with 50% of global GDP (due to the destruction of the industrial capacity of much of Europe and Japan), don’t forget that some part of our production DURING the war was for lend-lease programs, under which we were selling a good chunk of that wartime production to our allies, and for which we accepted their IOUs until after the war (payable in gold, of course). How do your other readers think we ended up with all those gold reserves by the end of World War II?? (Remember those convoys of supply ships to England that were such rich hunting for the fabled wolf packs of German U-boats? They were paid for by England, not us.)

“It was partially this debt that gave the U.S. the political muscle to force the dismantling of British colonial ‘properties’ in the Middle East (the Suez Canal, oil fields, etc.), and which conveniently created the vacuum into which the U.S. stepped to grab oil fields and listening posts in Iran, as well as other strategic and economically advantageous ‘positions’ in the region. Many of our current (mis)fortunes in the Middle East are due to this strategic postwar transfer of hegemony from the British Empire to the U.S.

“And while it has now turned sour, it was a HUGE advantage to the entire American economy, as we imported cheap Middle East oil from the end of World War II to 1973, which basically subsidized the postwar automobile/interstate highway/suburban housing/retail shopping mall construction boom that is so painfully ending as we speak.

“The reason war spending can’t work now is that there is currently no other party to indebt to us, and no booty to grab, to make up for the debt we continue to build up. World War I and World War II, arguably, were of great benefit to the U.S. industrial economy in the global market. The rebuilding of the world after World War I and World War II could be considered the first step in the current phase of globalization. We were the first export-stuff-import-money model, and our 1950s-1960s wealth came from that, not from domestic recovery from the Depression.”

  “Regarding the crash and the bailout package,” writes a reader, “I know your role as you see it is to be the financial gadfly, and don’t get me wrong — you did us all a great service when you warned us years ago about what was coming.

“But don’t you think that now it’s a reasonable question to ask you, with your apparent deep knowledge of economics and history, what you suggest? It seems easy to keep throwing the stones at the Dems who are making a sincere effort to turn things around, but to those of us who have already lost our jobs, that’s just not enough at this point!

“What would you do instead? This thing is starting to bite!”

The 5: Well, we only have 5 minutes in this gig, not to mention it’s Friday… getting a little late to hash out a decent scheme. But off the cuff, we’d just ask the government to stop what they’re doing and get out of the way.

Stop intervening. Stop spending our money. Stop printing more money. Stop keeping people and businesses in places they can’t afford. Withdraw our military from its zillion bases around the world. Slash and simplify our burdensome tax laws. Nip all the protectionist trade policies brewing in Washington. Make our entitlement programs sustainable or get rid of them.

And we’d ask our representatives to set an example. Americans need to pull back, start saving again and move toward a productive, sustainable way of life.

“History shows,” reads the foreword to Financial Reckoning Day, which we just happen to be updating for release later this year, “that people who save and invest grow and prosper; and the others deteriorate and collapse.”

“No one, of course, wants to hear it. They want a quick fix. They want to buy the stock and watch it go up 25%, because that’s what happened last year; and that’s what they say on TV.”

Have a nice weekend,

Addison Wiggin
The 5 Min. Forecast


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