Ben and Barack, Water Crisis, Gold Advice, Capital Punishment and More

  Federal Reserve chairman Ben Bernanke gave a boost to markets yesterday. Inadvertently, we think. His prepared testimony before the Senate Banking Committee was booooring, of course. But the Q&A got traders’ molecules rubbing together. Here are the juicy bits:

 – When asked if some banks are “too big to fail,” the Fed chairman shot back an uncharacteristically direct, “absolutely.” Usually, he talks around this one.

 – “We don’t need majority ownership to work with the banks," he said when pressed on bank nationalization matters. "We can work with them now to do whatever is necessary to get rid of bad assets. I don’t see any reason to destroy the franchise value. It just isn’t necessary." In other words, they intend to keep those banks on life-support…

 – The recession will likely end in 2009, he forecasts, but full economic recovery will take "more than two or three years." Yeah. And he knows this, how? His track record is, ummm, shaky.

  After plunging 3.5% Monday, the Dow and S&P 500 whipped back 3.5% and 4.1%, respectively. Banks skyrocketed, as the few investors left felt assured that the Fed was unlikely to wipe out shareholder equity with a sudden nationalization.

Bank of America and Citigroup both gained over 20%.
 

  Yet it’s business as usual in the mob pit that is the House. Members unveiled another pork-laden spending bill yesterday.

This one is “only” $410 billion, but it’s largely designed just to keep the lights on for our overgrown government. Not including all the TARPs, TALFs, bailouts and rescue packages, the budget proposal is an 8% jump from the previous fiscal year.

The bill includes over 9,000 earmarks for special interests estimated at a value of at least $7 billion. Your money set aside for important federal matters like Hawaiian coral reef research, “science enhancement for historically black colleges” in South Carolina, a museum honoring dead House Speaker Sam Rayburn, theater renovations in Idaho and… oy.

We’re not sure how this bill jives with Obama’s newly minted zeal for halving the deficit by the end of his term. But clocking in at 806 pages, we doubt even he read it.

  “Obama’s Deficit Goals Count on Rosy Assumptions,” reads the AP today, to which we add a list of our own.

To meet his current budget forecasts, the U.S. economy will have to return to growth in the second half of the year, with tax revenues assumed to follow suit.

His budget projection also counts on a withdrawal from Iraq, without becoming too committed in Afghanistan; increased tax revues from the upper class and the expirations of Bush tax cuts in 2010;, a reduction in government subsidies in agriculture and for “companies that ship jobs abroad”; plus more revenue from a crowd-favorite “carbon tax.”

All this while unfreezing the credit markets, retooling the financial system, repairing the U.S.’ relationship with the world community and coaxing consumers back into RadioShack and TCBY stores with their shiny new Visa affinity cards.

That’s going to be a tall order, given the following snacks from the data cupboard:

  Existing home sales plunged 5.3% in January, the National Association of Realtors announced today. That puts home sales at an annual rate of 4.49 million, the slowest clip since 1997. Even those sales are suspect… 45% were of “distressed properties.”

The median home price fell a whopping 15% from this time last year, to $170,300.

You may recall last month when housing optimists cheered a surprise 6.5% jump in existing home sales. While “they” thought a bottom might be in, we suggested the decline was due simply to a crash in prices and manipulated mortgage rates. Today, more proof: one month’s data do not a trend make.

  Consumer confidence is at a fresh new all-time low, too. The Conference Board’s measure of sentiment sank to a score of 25 in February, the lowest in the index’s 42-year history.

“Not only do consumers feel overall economic conditions have grown more dire," said Lynn Franco, director of the survey, “but just as disconcerting, they anticipate no improvement in conditions over the next six months.”

  “Mr. President, you are presiding over an epochal contraction,” writes perennial Vancouver favorite James Howard Kunstler with a characteristic harangue on current events. “Not a pause in the growth epic. Your assignment is to manage that contraction in a way that does not lead to world war, civil disorder or both.

“Among other things, contraction means that all the activities of everyday life need to be downscaled, including standards of living, ranges of commerce and levels of governance. ‘Consumerism’ is dead. Revolving credit is dead — at least at the scale that became normal the last 30 years. The wealth of several future generations has already been spent and there is no equity left there to refinance…

“No good will come of a campaign to sustain the unsustainable, which is exactly what the Obama program is starting to look like. In the folder marked ‘unsustainable,’ you can file most of the artifacts, usufructs, habits and expectations of recent American life: suburban living, credit card spending, happy motoring, vacations in Las Vegas, college education for the masses and cheap food among them.

“All these things are over.

“The public may suspect as much, but they can’t admit it to themselves, and political leadership has so far declined to speak the truth about it for them — in short, to form a useful consensus that will allow us to move forward effectively. One of the sad paradoxes of politics is that democracies do not seem very good at disciplining their citizens’ behavior. The wish to please voters and the influence of campaign money overwhelm even leaders with mature instincts.

“In America’s case, this could lead to what I like to call corn-pone Nazism a few years down the road. Someone will design snazzy uniforms and get us all marching around to ‘God Bless America.’ At the point of a gun.”

  Still as bad as the media would have you believe it is here in I.O.U.S.A., we’re certainly not alone. The United Kingdom’s GDP shrank 1.5% in the fourth quarter, the country’s government said today. That’s the biggest British drop in GDP in 29 years. Britain’s economy is shrinking at an annual rate of 1.9%.

  And Japan, once one of the world’s great exporters, announced a record trade deficit today. The nation posted a $10 billion trade gap in January, its worst ever. January was the fourth straight month of net trading deficit, Japan’s worst streak since 1980.

  The dollar remains the stalwart safety trade for this crisis. The dollar index soared Monday was traders fled the market. But it rose yesterday too, despite the rush back into stocks.
 
The index goes for 87.5 as we write, less than 2 points from its credit crisis high.

  Gold traders took profits yesterday. With fickle confidence in stocks, financials, and Uncle Sam in general, gold shed another $20, to around $960 an ounce.

“When to take profits is as important as timing of when to get in,” says our resource man Alan Knuckman, “especially in this environment. Our gold and, hopefully, soon our silver spread exit orders were placed to capture 100% on half of our spreads, and coincidently lie right near our original technical goals.
 
“Significant upside still remains, and I would be the first to tell you that these metals could go to all-time highs…but the low-hanging fruit has been picked from the money tree and the risks get greater from here. Putting money back into our accounts is now the most important focus as other traders wring their hands with worry or jump on board gold at much higher, nearing all-time high, levels.

“The excessive bullish signs from all sides lead me to believe a major profit-taking round could be in the works. The other half of the in-the-money positions are for December, so we can ride through any temporary shakeout and still capture our maximum profit months down the road.

“When EVERBODY is saying it is time to buy gold, it makes me cautious for the near term.”

  Oil is stuck in a range so far this week. Today it’s on the higher side, around $40 a barrel. As we are putting the final touches on today’s issue, crude looks like it might pusher higher still… more tomorrow. 

  “We live in an age in which, for better or worse,” explains Chris Mayer, “people of all kinds are obsessed with reducing their ‘carbon footprint.’ Now there are more footprints to worry about: water footprints.
 
“If you are a longtime reader, you will know exactly what that means. The Wall Street Journal recently gave some examples:
 
“It takes roughly 20 gallons of water to make a pint of beer, as much as 132 gallons of water to make a 2-liter bottle of soda and about 500 gallons of water, including water used to grow, dye and process cotton, to make a pair of Levi’s stonewashed jeans.”
 
“Other examples include the nearly 35 gallons of water behind every cup of coffee, the 700 gallons behind the typical dyed T-shirt and the 630 gallons to produce a single hamburger.
 
“There is a lot more attention focusing on reducing this water footprint, especially since water scarcity issues are cropping up a lot more these days. You know the numbers: Two-thirds of the world’s populations face water shortages by 2025, according to the U.N. And according to the U.S. GAO, about 36 states face water shortages by 2013.
 
“This is an important issue for industrial users of water all over the world. Nike, Pepsi, Starbucks, Levi’s and about 100 other companies recently held a conference in Miami on reducing water footprints. So this is serious business.”
 

  Last, here’s another possible benefit of the fiscal crisis:
 
“We can’t afford that,” Gov. Martin O’Malley of the great state of Maryland decried after reading a study by the Urban Institute . Apparently, killing a convict is a whole lot more expensive than most other alternatives.
 
While the numbers have been known for sometime, the argument against capital punishment is gaining traction in “this era of austerity and tight budgets,” as New Mexico Gov Richardson put it. Lawmakers in Colorado, Kansas, New Hampshire and Montana have all been making a similar case.
 
Hmmn… wonder what the Texans think?

  “I have to admit that I laughed out loud,” writes a reader, “at the poster of I.O.U.S.A. I *still* don’t understand it or how it even relates to the election — LOL — I didn’t even recognize McCain’s face until I read the explanation. The skeleton in the middle is pretty cool, and I think if you got rid of the face and maybe replaced it with the U.S. flag, you could use it to promote the movie. (Turnabout is always fair play…)

“At any rate, all that criticism makes me think you’re making progress. People don’t get emotional when you talk about unimportant topics or are way off the mark. How does that saying go? The truth is first denied, then vehemently opposed, then universally accepted as obvious. That’s not quite right, I know, but close enough. Anyway, keep ruffling feathers, and don’t take the critics too much to heart.”

Thanks for your support,

Addison Wiggin
The 5 Min. Forecast

P.S. If you haven’t gotten a chance to get your free copy of I.O.U.S.A, there are still a few copies available. But by agreement with the Peterson Foundation, we’re about at the end of the line. Get yours here, now. There couldn’t be a more appropriate time.