$11 Trillion Debt, Global Economy to Shrink, Still Believe Buffett?, Rush Limbaugh and More!

by Addison Wiggin & Ian Mathias

  • Passing another debt milestone… what really bothers us about the now $11 trillion debt
  • Buffett drops more nuggets of wisdom… but is the Oracle of Omaha still worth the hype?
  • Rob Parenteau on the jobs pain still to come… and how to spot the unemployment bottom
  • More bank failures here in the U.S., and a super-sized nationalization abroad
  • An investment opportunity blessed by Barack… whether you like it or not
  • Plus, a reader writes in defense of Rush… and our response, below


  On Thursday, the Treasury officially posted a tab of $10.95 trillion. If we’re not at $11 trillion by now, we’re darn close.

The federal government has been assuming nearly half a trillion of debt on your behalf each year since 2003. But the last six months have been particularly breathtaking, as the government has amassed about $1 trillion in national debt…about four times the pace that alarmed us enough to make I.O.U.S.A.

And that’s not including the lion’s share of all the bailouts, stimuli and the inflation rate in clever abbreviations — TARP, TALF, CPFF, TAF, etc.

What bothers us those most about this benchmark? No one’s writing about it. No one cares. The argument “we have to ‘do something’ about the crisis” has completely won the day.

As our friend Bill Bonner used to hum while writing his daily commentary “la-la-la-la, live for today.”

  Another reemerging theme from the movie, consumer credit resumed its ascent in January. Despite a climbing unemployment rate, according to Fed data, consumer borrowing broke a three-month decline at the start of 2009 by climbing 1.2%, or $1.8 billion.

That puts the total consumer debt load over $2.5 trillion… not including mortgages.

  The entire global economy will shrink this year for the first time since World War II, the World Bank predicted over the weekend.

The bank withheld specific projections, reserving some “shock and awe” for the coming G-20 meeting. But we did pick up this nasty detail… the bank expects the economic crisis to push over 46 million people into poverty this year.

  The U.S. economy has “fallen off a cliff,” Warren Buffett said this morning, setting the tone for the trading week ahead. Buffett did one of his biannual “sit down with Becky Quick and think out loud for three hours” interviews this morning… and the sound bites floweth over:

“Not only has the economy slowed down a lot, people have really changed their behavior like nothing I have ever seen”

On a bottom, Buffett gave an ultra-specific guess of “can’t turn around on dime… won’t happen fast.” But did say that five years from now, “I can guarantee you that the machine will be running fine"

Inflation has the “potential” to be worse than the ’70s

And our favorite: "A bank that’s going to go broke should be allowed to go broke.”

  “Stock prices are falling even faster than Warren’s Buffett’s mystique,” writes Eric Fry in his daily missive. “Come to think of it, they are falling at about the same pace. Hmmm…it’s as if they’re one and the same.
“This formerly glistening icon of ‘buy and hold’ has become a bit tarnished. Buffett’s genius, we are now discovering, correlates quite highly with the S&P 500 index. His genius is not quite as highly correlated with the S&P 500 as, say, Bill Miller’s, the former investment genius at the Legg Mason Value Fund. But an observable relationship exists, nonetheless.

“‘Buy and hold’ works brilliantly in rising stock markets, and works particularly brilliantly in the rising stock markets of post-World War II superpowers in the midst of a once-in-a-lifetime economic boom. By contrast, ‘buy and hold’ works poorly in falling stock markets, and works particularly poorly in the falling stock markets of pre-Great Depression superpowers in the midst of a once-in-a-lifetime economic collapse.

”We would remind our readers that Warren Buffett, an investment genius, learned his craft at the feet of Benjamin Graham, also an investment genius. Warren Buffett applied Graham’s principles during the greatest economic boom in American history and became a multibillionaire. Benjamin Graham applied Graham’s principles during the greatest economic disaster in American history and became bankrupt.

“To be sure, many stocks here in the U.S. and elsewhere are now cheap enough to warrant making some initial buys. And probably, many of the stocks that an investor buys today will be worth holding for many years. But that’s not ‘buy and hold.’ That’s ‘buy and watch out.’”

  And judging by pre market trading this morning, it’ll be an uphill battle in the markets this week, too. Most global indexes fell early today, including Japan’s Nikkei 225… with another 1.2% decline, poor Japanese investors are looking at a 26-year low.

The Dow was on track for another sizable fall this morning, but the surprise $41 billion mega-merger between Merck and Schering-Plow helped stave off another early morning sell-off.

  Stocks are trying to pull it together after the worst week of trading since the market crash in November.
The S&P 500 tumbled 7% last week, with the Dow close behind.

(Ed note: We suspect that’s fine with Options Hotline readers. Their QQQQ and SPY puts have provided ample downside protection this year. Both plays are now triple digit winners, and we’re expecting many more to come in 2009. In fact, we guarantee at least 600% gains in the next 6 months… get the details here.)

  With today’s stock turmoil comes, of course, more dollar strength. The dollar index has risen to 89.1, just off a three-year high. Gold, too, is hanging in a pretty tight range. As we write, the spot price is bouncing in between $930-940.

  “Labor shedding is still in full force,” writes Rob Parenteau, keeping an eye on the pernicious growth of unemployment that threatens any kind of economic recovery.

“Before the pace of job shedding reaches a bottom, and well before the unemployment rate peaks, the growth rate of hours worked tends to bottom out. The percent of firms hiring tends to reach a low, too.

“Neither of these conditions is in place. Hours worked are fast approaching the lows of the ’73-’75 contraction. Fewer than a fifth of the private industries are offering new employment, which is the worst reading since 1980.”

You can expect the rate of unemployment to continue at its current pace… which is to say not good.

  Another weekend passed… another dead bank. The FDIC closed down the ironically named Freedom Bank of Georgia late Friday, the 17th bank failure of 2009. That’s another $36 million out of the FDIC’s coffer and the eighth consecutive week of bank failures.

  But the FDIC’s got nothin’ on its British counterparts today. The U.K. government assumed a majority stake in Lloyds Banking Group today. Saddled by toxic assets, Lloyds handed over a 75% stake in itself in exchange for a $367 billion government backstop.

The deal is dripping with irony… recall the U.K. government engineered a deal for Lloyds to pick up HBOS last October, as the latter company was on the verge of a Lehman-style collapse. That move ended up poisoning Lloyds’ already ailing books. Now both companies are bust.

Lloyds is now the fourth bank to be nationalized by the U.K. government.

  We note over the weekend Baltimore’s own Legg Mason announced they’d found a buyer for their portfolio of mortgage-backed securities. The sold the pile of dung for 25 cents on the dollar.

  “I believe a much bigger bubble than thorium,” writes a reader, “or any right now — is higher education. Higher education displays a lot of the historic ‘bubble markers’: significant purchase with credit, entry into the ‘investment’ arena by people who would not have been traditional players and sponsorship/tax incentives by government.

“It’s just not feasible for our students to continue spending $80,000 and five years learning about books before spending two weeks learning to make coffee and $8 per hour. Even a degree with that will always find you a job — say, a master’s in child education — will still take a decade, usually longer, to pay off over a service-sector job. I’m not sure what happens when a bubble in a government-run industry pops — whether prices come down or wages go up — but it has to happen sooner or later.”

The 5: A couple of differences we see: The thorium bubble hasn’t happened yet and there’s still time for individual investors to “get in,” as they say. The bubble in higher education is a virtual monopoly of the elites, has already happened and represents very little opportunity for readers of The 5.

In a similar vein, we offer the next reader’s comment.

  First, a caveat: We’ve never been a Rush Limbaugh listener or fan. But we do enjoy a free press. One reader makes the following comments regarding our response to a more ignorant reader on Friday:

“Rush is a big boy (very big) and doesn’t need me to write briefs for him. But he’s been around 20-plus years doing national radio, making conservative radio commentary and hundreds of millions of bucks. He’s rich. And he earned every dime of it, unlike Bernie Madoff or Robert Rubin or Franklin Raines or so many others.
“Rush’s qualifications for his elevated perch? Why, Rush is a high school graduate. Cape Central High School, class of 1969. No prep school, no Pomona College, no Columbia, no Harvard Law School. No Harvard Law Review. No fancy law firm or law school teaching sinecure at the University of Chicago. By their standards, Rush has got ZERO resume. Indeed, if qualifications would truly govern destiny, then Rush ought to be driving a truck out on I-15 someplace, hauling cows and fueling up near Barstow after he shovels the s**t out of the trailer.
“Yet Rush is one of that rare breed who has made an incredible success of himself by his own efforts and mental focus. He offers an insightful brand of conservative commentary — impresses me, often, and I’m no easy grader — evidence that he works hard at show prep. He has astonishing levels of insight, and an ability to explain things in something far above mere populist, blah-blah rhetoric. He’s very funny, deeply good at wicked parody and great at thinking on his feet (or from his chair, as it is, perched behind the mic).
“My reason for mentioning Rush is that because he speaks ill of a certain recently inaugurated president of the United States, he is now the clear target of one of the dirtiest forms of modern political character assassination. They are ‘McCarthy-ing’ Rush. Rush has got the POTUS himself, and certainly the chief of staff, Rahm Emmanuel, using the public resources of the U.S. Treasury to target him. It out-Nixons Nixon’s much-vaunted — but rather limp — ‘Enemies List.’ Worse, it’s occurring in plain sight. Hell, the freaking news rags and media airheads are reporting it like it was legitimate news.

“Does anyone see anything wrong with this? The chief executive of the United States is devoting time and resources of his office to make personal attacks on a private citizen, albeit a public figure? Recall FDR writing — on White House stationary — to Yale University, asking one of Yale’s publishing arms to fire the writer John T. Flynn because he critiqued the New Deal.
“Again, not to dwell on Rush. But if they take out Rush, who’s next? Other effective critics, I presume. Like Michael Savage? Or Sean Hannity? Or Laura Ingraham? Or perhaps Bill Bonner? We had better watch out, because this new gang has a mean streak a mile wide. They’ll use the Fairness Doctrine if they can. Taking down Rush is merely the first act in the coming circus. Worries me, anyhow…”

The 5: Amen. On this point, we side with Rush. In the same way Noam Chomsky, a far left anarchist, famously defended a far right French academic who published writings trying prove the Holocaust never happened. You don’t have to agree with someone to defend their voice. If in the end it all serves as a ratings ploy, so much the better.


Addison Wiggin
The 5 Min. Forecast

P.S. Last, as we’re sure you’ve heard by now, President Obama intends to sign an executive order today that will end the ban on public funding for embryonic stem cell research. Patrick Cox, our technology adviser, anticipated this move in the fall. The stocks he recommended in his special report are up 63% already. One of them is up over 30% today alone.

If you’re at all interested in following this trend, we recommend you subscribe to Breakthrough Technology Alert today. But hurry. The story is moving even faster than our forecast, and these investments are so tiny that we’re considering a cap on the number of people we allow into the publication.


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