Gold $1,000, Housing Forecast, The Next Subprime, Oil Advice and More!

by Addison Wiggin & Ian Mathias

  • Rob Parenteau with the latest housing numbers… and how they foretell the economy’s future
  • Gold $1,000… what’s pushing the world’s favorite metal near record highs
  • Obama to cut budget deficit in half… the flaw in reasoning the press fails to mention
  • A lending crisis brewing in Europe… “just as big as the subprime problem”
  • Byron King explains oil’s 14% pop… time to start buying oil stocks?

  We begin with two charts… and all you really need to know about the end of the world as we have known it. (EOTWAWHKI, if you’re a Mogambo fan).

The first chart, starts and permits:

  “U.S. housing starts and permits have never been so decimated in the half century of available records,” notes Rob Parenteau, explaining our first chart of the day. “Permits, in particular, are fast approaching half the prior business cycle lows. Home builders still report record-low buyer traffic. And they still hold record-low expectations of homes sales over the next six months. Mortgage applications for home purchases continue to slip lower.

“It is no exaggeration to say homebuilders are crouched in a fetal position, and at these minimal levels of activity, a bankruptcy of a major builder is not out of the question before the snow melts.”

“A V-shaped recovery in housing is a low-probability event. Even as homebuilders radically pull back new construction, and even as foreclosure fire sale prices draw bargain buyers in, homebuyers have now experienced enough quarters of home price deflation that their expectations of real estate returns have been damaged.”

“Similarly, bank lending standards will remain tight until the assets banks currently hold no longer present a solvency threat.”

  The second chart, the classic hedge left against financial collapse:

Gold’s spot price peeked above the $1,005 on Friday for the first time since traders bid up a nominal high $1,030 last March.

The SPDR Gold Trust had to scoop up 5 tons of the stuff on Thursday alone to keep up with demand. It now holds a record 1,028 tons. Futures traders are equally rabid over the stuff… the front-month contract broke through the four-figure mark too, also an 11-month high.

For now, the spot price has backed off a bit. You can get an ounce today for around $980.

  Anecdotally, we got a call from a features editor at Newsweek on Friday, too. She’s writing a fluff piece on people who thought they’d never buy gold now cashing out of stocks and moving 100% into gold until a bottom is reached in the equities market.

It could be awhile.

  “There’s no sign that we are anywhere near a bottom,” George Soros suggested over the weekend. "We witnessed the collapse of the financial system. It was placed on life-support, and it’s still on life-support.”

  Consequently, the Dow and S&P 500 are still battling with 1997 lows. Banks have kicked off the week with big premarket gains, mostly on bets that more taxpayer dollars are on the way. But it’s hardly worth hanging your hat on… these days, a “big” premarket rally for Citi will bump it from $2 a share to $2.10.

Some blue chip, eh?

  “A privately held banking system is the correct way to go,” said President Obama’s press secretary Robert Gibbs over the weekend. “It’s possible it may happen,” Sen. Chris Dodd added, hinting that some financials might be nationalized… maybe just for “a short time.”

This morning, Citigroup is in talks with federal regulators. In exchange for more bailout bucks, the government could end up owning 40% of the mega bank, sources say. Not only could Uncle Sam be the biggest shareholder of the world’s largest insurer, but he could control one of the world’s biggest banks.

Moral hazard? Nah. They’re from the government, they’re here to help.

  Despite the stimulus bill, housing bill, banking bailouts and nationalization talk, the Obama administration promised, ahead of its Fiscal Responsibility Summit today, to cut the budget deficit in half by the end of his term.

“By 2013, the end of the president’s first term,” an administration official told CNN, “the budget cuts the deficit to $533 billion or 3.0% of GDP."

And how will that happen?

“Most of the savings will come from winding down the war in Iraq, increased [tax] revenue from those making more than $250,000 a year and savings from making government work more efficiently and eliminating programs that do not work."

Heh. And if the economy tanks – even further – because you raise taxes? Bon chance, Mr. President . David Walker, the protagonist of our film will be at the Summit. (Our invitation must have gotten lost… either because our mail van was totaled in an accident last week or because our building is under renovation. Either way, we’re sure they can muck things up well enough without us.)

Funny how things when things “change,” they really look the same. When we began that project in 2006, president Bush had just promised to balance the budget by 2012… a promise that kept deficit talks out of the press for the remainder of his second term. Hmmmn….

  Another Monday of 2009, another failed bank to report. The FDIC closed up Oregon’s Silver Falls Bank late last Friday. That’s the fourteenth bank to bite the dust this year, compared with 25 failed banks in all of 2008 and just three in 2007.

Silver Falls took another $50 million out of the FDIC war chest.

  On the other side of the world, Obama’s chief rival is playing her part:

“By continuing to support American Treasury instruments,” warned Hillary Clinton, “the Chinese are recognizing our interconnection.” The former first lady brought a hodgepodge of cryptic warnings to Beijing, all designed to keep Chinese cash flowing into the U.S. government.

“It would not be in China’s interest if we were unable to get our economy moving,” she warned the people at the U.S. Embassy. U.S. paper is “a good investment, it’s a safe investment,” she told a Chinese TV show host.

“The United States has to take some very drastic measures with the stimulus package, which means we have to incur debt.” The Chinese are “making a very smart decision by continuing to invest in Treasury bonds,” she patronized.

Two weeks ago, the Chinese finance minister facetiously suggested the country hated the U.S. for leaving them no choice in the matter. The “facetiously” is ours.

  And in Europe, there’s a storm brewing that “could easily be as big as the U.S. subprime problem,” John Mauldin suggests.

“In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

“But in an echo of teaser-rate subprime here in the U.S., there is a problem. Along came the synchronized global recession and large Polish current account trade deficits, which were three times those of the U.S. in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency, this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared with the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

“Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the U.S., we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so.

“The problem is that in Europe, there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion).”

  Such a crisis would do wonders for the U.S. dollar. In fact, we suspect we may be headed back to dollar-euro parity. Today, the euro goes for $1.27, a little less than a nickel from its credit crisis low. And the dollar index scores an 86.5, less than 2 points from its crisis high.

  The price of oil popped up by about 14% late last week, to nearly $40 per barrel.

“It seems that the U.S. inventories were lower than expected,” notes our oilman Byron King, “by a mere 3.1 million barrels. And tanker landings are getting fewer. This means that the OPEC output cuts of December and January are finally kicking in. That is, all those tankers that did not load 45 days ago are now not docking.

“Meanwhile, U.S. driving and fuel usage are up, despite the recession. So Economics 101 works. With lower fuel prices, people drive more. Imagine that. Thus, gasoline supplies are tightening, pricing is firming up and prices at the pump are rising a bit.

“As we close out the winter months, we may now be in for some ‘oil in the $40s’ weeks, and by midspring, we’ll be seeing oil in the $50s. This should offer a small boost to beaten-down service companies. But I don’t think that it’s time just yet to back up the truck and buy shares. Nibble, perhaps, at these fine companies. The world will need them over the long term.

“But don’t spend all your war chest of cash right now on oils or oil services.”

  Last, another sign of changing consumer habits: a new bull market in infomercials.
 
“Since last year, when the recession started,”  A.J. Khubani, CEO of Telebrands, told AOL recently “our business has tripled. Already this year, by January, we’re 20% over last year’s [sales]. We’re expecting another record year.”

It makes sense… people are desperate, looking for fix alls in an economy where everything is broken. More people are staying at home watching TV. And advertising budgets everywhere have shrunken to pennies, leaving nothing but opportunity for the next SaladShooter, Chia Pet, ShamWow, Snuggie or some other material substitute for emotional tranquility.

“We get beachfront property for trailer park prices,” Khubani said of current ad costs.

  “In the late 1960s, when I was in graduate school, we had a USDA-sponsored research project,” writes a reader with a timely anecdote. “The initial funding was $64,000. When we completed the project in 1968, we had $7,200 left over.
 
“I made a phone call to the USDA office that had funded the project to ask where they wanted the excess funds sent. You would have thought I had committed a crime.
 
“I was told they did not want it back, as it would cause their budget for the next year to be reduced by that amount. Besides, they were sure I had not finished all of the research work. I hung up the phone and spent the money. We needed a technician for one of our labs for one year, and at that time, $7,200 was about what it cost to hire a technician. I hired a lady with the understanding that after a year she would be out of work.
 
“Then, I took some data we had not published and wrote a report based on that data. Sent an invoice to the USDA for $7,200 for the report. I would rather have sent the money back, because as a taxpayer, I knew I was paying for some of the technician’s salary and benefits.”

The 5: Perhaps you misplaced your invitation to the Fiscal Responsibility Summit, too?

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S.  Here’s a story about a colleague in the blog world we’ve been following with some interest. As reported by Newsweek this morning: “To most publishers, it would’ve been a touch of golden luck: a manuscript about the worst economic crisis in decades, written by a financial insider and finished months before rivals had even a rough draft ready. Instead, Wall Street investor Barry Ritholtz’s Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy appears to have become a parable for the same corporate shenanigans that it catalogs.

“In early 2008, McGraw-Hill paid a five-figure advance to Ritholtz, a frequent CNBC guest and author of The Big Picture, a popular finance blog. When Congress passed its $700 billion bailout bill, McGraw-Hill’s contract with Ritholtz looked prescient. The imprint started taking preorders and set a March release date. Then, in early February, it dropped the book.”

Apparently, Mr. Ritholz came down hard on the ratings agencies, calling them, among other things, “pimps.” Included in the accusation was Standard & Poor’s, who, it just so happens, is owned by the same company as McGraw-Hill. Hmmn…

The truth will out, yeah? You have to believe that. John Wiley and Sons, our publisher, is reportedly in negotiations for the manuscript. If they win the bid and we have our way, you’ll be among the first to grab a look at it. In any case, it’s about time someone took a hard look at the handmaidens of this miscarriage.

rspertzel

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