China Bucks the Trend, GM Goes to Europe, Inflation Prediction, Jobs and More!


by Addison Wiggin & Ian Mathias

  • While American stocks stumble, Shanghai soars… why Chinese equities are bucking the global trend
  • More data disasters… ADP jobs report, auto sales register scary declines
  • Tired of shaking down U.S. taxpayers, GM aims abroad… EU begged for Detroit dollars
  • Obama, Bernanke talk up Uncle Sam’s book… Eric Fry on how rampant inflation still seems inevitable
  • Chuck Butler takes a stab at the $10 trillion question: “How long will this dollar strength last?”


  There’s always a bull market somewhere, the cliche goes. Today — and so far in 2009 — Shanghai’s been a surprisingly good spot to place your bets.

The Shanghai Composite climbed another 6% yesterday. Rumor has it the Chinese government is considering doubling its own economic “stimulus” package, from around $580 billion to $1 trillion… maybe more.

There are a couple data points being published lately that have traders excited. The Chinese purchasing managers’ index, for example, rose to 49 in February, just a hair short of the contraction/growth score of 50 and an improvement from November’s record-low score of 38.

The Chinese sovereign wealth fund has been pumping money into its biggest banks, too. And with the fall of financial giants here in the U.S., those Chinese banks are becoming, umn, relevant. Middle-class demand for goods and housing, while slowed, is still growing.

  A record 20% of all U.S. residential mortgages were “underwater” in December. That means more than 8.3 million mortgages carried more debt than the value of the home they were borrowed against. The “sand states” — California, Nevada, Arizona and Florida — have it worst. For example, 50% of all Nevada mortgages were underwater in the last month of the year.

“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize," said Mark Fleming, chief economist of First American CoreLogic, which published the survey. No word on what happens if they don’t.

  Private American companies shed 697,000 jobs in February, ADP claims today. The payroll management company’s gauge of monthly employment registered 83,000 more schlubs kicked to the curb than the Street expected… and marks the 14th straight month of decline.

The Bureau of Labor Statistics (BLS) is expected to announce 650,000 job losses in February. If ADP’s report is any indicator (and that’s a big “if”), Friday’s BLS report will be worse than expected as well.

Regardless of the accuracy of either report, you can get a pretty fair look at the employment scene by charting both. Look very closely and you might spot a trend.

Even we’re getting bummed out by these numbers.

  Doing its part, the U.S. auto industry had its worst month in 27 years during February. Sales crashed 41% year over year, to an annual pace of “just” 9.1 million. That’s the slowest pace since 1981… amazing, especially considering there were around 75 million fewer Americans back then.

A year ago, yearly sales exceeded 15 million cars and trucks.

  Tired of driving their own hybrids to Washington, GM execs are now pleading with European governments for bailout bucks over the phone. The degenerates’ case: Without a multibillion-dollar boost, up to 300,000 Europeans will lose their jobs when GM’s EU plants run out of money. Hmmn… that sounds familiar, doesn’t it?

GM is asking Germany for $4 billion in exchange for partial ownership of European operations. The FT says the automaker is also in talks with the U.K., Spain and Poland. Just what the global economy needs, eh? A global shakedown.

  The stock markets opened decidedly higher this morning. After stumbling to a small loss yesterday, the Dow popped up 100 points at the opening bell today… for… umm… no real reason at all. Other than this curious sound bite:

  “What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal," newly elected president turned financial adviser Barack Obama said yesterday, "if you’ve got a long-term perspective on it."

Here’s a question: How many of the retiring baby boomers with gutted portfolios and bitch-slapped pension plans have a long-term perspective “on it”? Solid, like Barack.

  “We are quite confident,” added Fed head Ben Bernanke yesterday before Congress, “that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences."

The chairman marched to Capitol Hill yesterday to defend his multitrillion-dollar campaign to save us from ourselves. He insisted that he “had no choice” but to bailout AIG, and soothed lawmakers with assurances like this: “If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.”


  And as the Fed chairman massaged Congress with one hand, the other quietly orchestrated the first day of the Term Asset-Backed Securities Loan Facility (TALF). (That sounds dirty, doesn’t it?)

Between his printed dollars and taxpayer dough lent from the Treasury, the program to rekindle student, auto, credit card and eventually mortgage loans will have a war chest exceeding $1 trillion.

  “The question facing every investor today,” writes Eric Fry, “and the one that could wield a very large influence over one’s investment fortunes — is whether deflation or inflation will hold sway during the next couple of years.

 “To preview our conclusions: We’re betting on inflation.

“No one knows, least of all Ben Bernanke or Timothy Geithner, if the Fed will conjure up one dollar too many. And no one knows if the Fed could ever coax its magical deflation-fighting dollars back into the cauldron, once their services were no longer needed.

“At least, in theory, no one knows…

“In reality, everyone knows: The excess dollars will never return to the cauldron. They will escape into the economy at large, where they will run rampant, and cause the price of eggs to increase to $10 a dozen…or $20…or maybe even $100…

“And what if inflation arrives much sooner than expected? What if the widely anticipated deflation never materializes? The holders of long-dated Treasuries would fare very, very poorly. And the nonbuyers of gold would be very chagrined, at best. So consider this two-part question:

“1) Is the 2.89% yield of a 10-year Treasury so thoroughly compelling that it justifies risking an enormous capital loss (if inflation appears sooner than expected)?

“2) Are commodity plays at their current depressed quotes so thoroughly risky investors should continue to shun them, no matter the price?”

  Oil has snapped back $3, to $44 a barrel. Most of the buying support today comes from the Far East, as the latest momentum from China gives traders hope that the world’s second biggest user of the gooey black stuff is still guzzling away.

  But gold isn’t getting any love today. The spot price fell another couple bucks overnight, now at $910 an ounce.

“The monetary and banking problems driving gold higher for months have not disappeared,” James Turk assures us. “They will remain for the foreseeable future because the imprudent lending by banks will take years to unravel, highlighting the essential need for a safe haven for one’s money.

“Gold is the safest of safe havens because it does not have counterparty risk. Gold also preserves purchasing power, which is an attribute that will become increasingly important in the months ahead as all the new money being printed by central banks around the world takes its inflationary toll.

“Gold has not yet made a new record high in U.S. dollars, but I expect one soon.”

  After hitting a fresh three-year high yesterday, the dollar index is still holding strong today. It scores just under 89.

“I get asked all the time,” notes EverBank’s Chuck Butler, “how long will this dollar strength last. I said some time ago that I believed that by late summer/early spring, the credit markets might be showing signs of unlocking, and that could bring the risk takers back out from under their respective rocks, and that a return to the fundamentals would bring about an end to the dollar strength. The end of July marks one year of dollar strength, when the you-know-what hit the fan with subprime loans and this whole lockdown of credit and liquidity caused a huge deleveraging in the markets.

“While I still believe this thought has merit, I also have to figure in the fact that the previous stimulus plans didn’t work, the money was wasted on Wall Street buddies and cronies… And now we need another one, but only this new one is centered on the wrong things. So I’ll be watching for signs. If none appears, then I’ll have to go back to the drawing board.

“So in an environment when ‘bad news’ rewards the dollar… and the bad news just keeps coming along, that’s not a good sign for a reversal of dollar strength right now. When what used to be called 100-year events now happen almost weekly.”

  “The reader commenting that the best thing for China, et al., to do,” writes our first reader today, “would be to cut Americans off from funding and provide tough love may be missing a big implication. If an unreformed alcoholic is TOLD to stop drinking and his bottle is forcibly removed, do they graciously thank you or come up swinging?
“I believe that if America had its funding removed, we would be fighting World War III within weeks. Ever better to maintain the facade BUT take advantage of opportunities within the charade.”

  “If I have time to read only one of the many, many e-letters that I get daily,"  writes another reader, "The 5 is that one. Keep up the great work!”

“Many thanks for continuing the best daily read around anywhere,” says a third.

And a fourth: “You guys are the best…love your timely and wisdom-filled 5 Min. letter.”

“Thank you!” writes a fifth. “Your ongoing thoughts on the markets are ALL excellent, even the ones I don’t agree with. Your thoughts make me think, and sometimes differently to my original thoughts.”

The 5: Thank you! You’ve always been gracious to The 5, but lately, we’ve been getting an awful lot of one-line thank you notes. We’re starting to get suspicious. How about some criticism? If there’s anything you think we’ve been missing or would like to see more of in our daily digest, by all means… let us have it.

And seriously, thanks for reading. It’s our pleasure.

Addison Wiggin
The 5 Min. Forecast

P.S. Before you write in with your beef, let us remind you there’s less than 48 hours to take advantage of the “six months free” offer on our newest options trading service — an opportunity available only to recipients of The 5 Min. Forecast. Our man Bill Jenkins put out a trade on the yen/dollar this morning… it’s up 13% as we write. His target is 33%… risky, but fun. Why not give it a shot for free?

Tomorrow night, we’re taking the offer off the table. If you’re interested in this six-month trial, now’s the time. Just sign up, here.




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