The Stock Rally, China’s Nuclear Option, An Emerging Trend, Greenspan and More!

by Addison Wiggin & Ian Mathias

  • Obama assures it’s “not as bad as we think”… but is the economy improving, or just the market?
  • Alan Knuckman on what stock stabilization means for commodities
  • China’s “nuclear option”… Premier “worried” about U.S. Treasuries
  • Jim Nelson with an emerging trend — and possible IPO — worth your attention
  • Plus, was the bust really Greenspan’s fault… a reader writes in, and The 5 responds


  Phew. The economy is “not as bad as we think,” declared the leader of the free world yesterday. Gone are
last month’s warnings of “collapse,” “catastrophe” and “Armageddon." Today, the president is “highly optimistic” for the future.

As soon as he has dealt with this whole once-in-a-lifetime-crisis thing, Mr. Obama labeled the rest of the nation’s economic hurdles as mere “structural problems” yesterday.

  Markets make opinions, even of presidents. The Dow is up 10% over the last three days, including yesterday’s nearly 4% shot. The index’s immediate threats have come and gone: Citi claims to be making money; GE seemed fine losing its AAA rating; even GM says it doesn’t need any more government money, for the time being.

The inimitable Marc Faber, who’ll be joining us in Vancouver in July, suggested to The Business Insider that “All the new government spending and money creation might not fix the economy, but would cause a stock market rally.”

“Equities could rally between here and the end of April,” says Faber. “The government’s efforts will fail to boost economic activity. They can boost stocks. Stocks have adjusted meaningfully.”

  There’s even hope in the commodities markets. “When stocks stabilize,” writes our resource man Alan Knuckman, “we can get back to our pure commodity opportunities that have been overshadowed by unprecedented negativity. Technically, the Dow looks to be on a run to 7,400 and the S&P 790-800, where this latest leg to the downside started weeks ago. Markets often come back to their breakout points, so technicians will watch to see the reaction when and if the previous area of support is eclipsed on the upside.

“Gold, wheat, corn, sugar, beans, silver, cocoa and our coffee are seeing significant rebounds from sell-offs, but KEY levels above need to be breached to confirm a bottom has been formed. This week has laid the foundation for future commodity upside moves, but only follow-through price action will prove that as a fact.

“Keep an eye on stocks for just a little while longer, as we may finally be seeing the disconnect that the commodities markets have been looking for.”

  Indeed, we’re seeing a bit more sense in the commodity market this week. Gold has come off its recent lows. It rallied off support at $900 Wednesday and is back up to $935 as we write.

  And despite a few big swings, oil is back up to $48 a barrel this morning; a reasonable price for the stuff, for now anyway.

  But what’s this? Uh-oh… a fly in the ointment.

“We have lent a huge amount of money to the U.S.” said Chinese Premier Wen Jiabao overnight of the nearly $1 trillion in U.S. Treasuries China has purchased over the last few decades.

“We are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Hmmm, to our knowledge, that’s a first. We’ve heard from professors, government advisers and members of the Chinese legislature… but never from Wen himself… and certainly not in public.

  The “structural problems” are many. We’re still facing the potential collapses of the financial industry, dumping of U.S. Treasuries by foreign investors and central banks, the commercial real estate market, Alt-A loans, or state budget and pension plans… could they really be priced in? We doubt it.

We may be able to take down the crash flag for the moment. And we’re happy to do it. In 1933, stocks rallied 66% off historic lows by the end of the year. In the 1990s, stocks in Japan rallied 30% or more on five different occasions, before seeking all-new lows.

Bear market rallies are a respite from the madness. But don’t be the greatest fool and jump back in. We recommend you use the rally to sell.

  “Houston, we have a problem,” oilman Byron King points out another potential challenge to price stability in the oil markets. “China has spent the past eight months frantically filling its own version of a strategic petroleum reserve. Call it the Great Well of China…

“Oil has been a relative bargain because the price has tumbled, compared with last year. And at $48, is holding at relatively low levels. The Chinese are secretive and don’t reveal the exact numbers.

“But now all of the Chinese SPR sites are full. The Chinese are even talking about just leasing surplus tankers for floating storage. Next step? Well, what if the Chinese have to stop buying because they don’t have any more room? Uh-oh.
“There goes another pillar of support for current oil prices. And what will OPEC do? Cut output a bit more to support the soft pricing environment?

“Wow… when (if?) the world economy gets ‘back on track,’ there will be one heck of a snapback in oil demand. And the relatively lower oil output will cause prices to spike fast and furious. Strap in for a few more years of wild rides.”

  Household net worth in the U.S. crashed by $11 trillion last year, say data from the Fed yesterday. From its peak in mid 2007, that’s a 28% decline. Nearly half of last year’s drop occurred in the fourth quarter alone.

By every measure, it was the worst year for household worth since the Fed starting keeping track in 1951.

  Families are reigning in their debts as well. Not fast enough to keep up with plummeting net worth, but still. Household debt shrank 2% in the last quarter of 2008. That’s also a first since records began in 1951. Consumer debt fell 3.2% in the final quarter of 2008, says the Fed, the first quarterly contraction since 1992.

  In the jobs scene, more bedlam. A record 5.3 million people are claiming unemployment benefits, the Labor Dept. said yesterday. The number of weekly new jobless claims stayed above 600,000 last week for the sixth week in a row.

  At least the U.S. trade deficit is scaling back. The trade deficit shrank back to “just” $36 billion in January, the Treasury reports today — its lowest level in six years. In fact, the trade deficit has declined for six straight months, the best streak in the history of Treasury record keeping.
But before you get too lathered up… Most of the pullback is due to cheap oil. U.S. consumers paid 25% less for fuel in January than a year ago, bringing the nation’s oil tab to its lowest level since 2005.

  “About 75% of Americans own at least one car,” writes Jim Nelson with a burgeoning opportunity rising through the shifting sands of a dysfunctional consumer economy. “One in four owes more on their car than it’s worth. That’s a frightening number. Many Americans are desperately trying to sell their vehicles. With the number of car owners finally dropping for the first time in decades, a new industry is starting to take off.

“Zipcar is an hourly car rental, or car sharing, company located in many major U.S. cities. The company has been around for about 10 years, but as a recent New York Times article points out, “[It] almost seems to have been founded with 2009 in mind.”

“A favorite among college students, Zipcar lets its 250,000 members take a car for a few hours at a time to go grocery shopping, visit friends or just go for a drive in the country. This setup is ideal for the millions of Americans looking to sell their car.

“It only costs members $50 per year membership fee, plus a one-time application charge. After you are onboard, you pay just $9 per hour or $66 per day (for most locations). This covers all your gas and insurance. Zipcar’s membership has been doubling almost every year since its inception. It expects annual revenue to reach $1 billion over the next few years, and could be a lucrative company to own. I’ve had many friends use this service, and all seem to be pleased with it.

“Zipcar has been stirring the news circuit with rumors of a potential initial public offering (IPO). We haven’t been able to report on any IPOs in quite awhile… the market has been bone-dry since the Lehman collapse last year.

“But if they pull it off, an IPO like Zipcar’s might just be one we need to jump on.” If you’d like to know how, check out Jim’s recommendation in the Sleuth.

  As we’ve been forecasting, this week’s optimism in the stock market has caused the floor to fall out from under the dollar. The dollar index has fallen from 89 earlier in the week to 87 and change this morning.

  Switzerland has apparently grown tired of providing a reasonably safe currency to the world. Having lowered rates to as low as they could, the Swiss central bank announced today that they will buy currencies on the open market to “prevent any further appreciation of the Swiss franc against the euro.”

In the late ’90s and early 2000s, the Japanese propped up the U.S. dollar with similar machinations. Do the Swiss have the capital to keep the euro afloat? We’ll see…

  “I think you guys are slightly missing the boat,” writes a reader kicking off a long, deeply ponderous e-mail, “on the reason for our massive debt and the reason for our current crisis. I think you blame Alan Greenspan a bit heavily too. Who could juggle a fiat currency system?

“The original U.S. Constitution sought to limit government by only giving it the right to coin, weigh and measure gold and silver as money. Founding Fathers like Jefferson argued forcefully for a gold coin standard and a separation of money and state.

“It is the abuse of a fiat currency that is responsible for our current crisis and our massive debt. A classic gold standard forces real decisions about spending by government that must either borrow and displace private investment or tax excessively to spend excessively. Printing money has allowed for spending and debt accumulation that would not have been remotely possible without the printing press. The BLS estimates that the dollar has lost over 95% of its value since the 1913 Federal Reserve Act started the process of fiatizing our money. That devaluation has been a disguised tax and way for government to avoid paying the real cost of its debts and has destroyed a principal check and balance upon government spending and borrowing. It has also come at the expense of everyone getting massively in debt and debt/GDP growing to the unsustainable levels reached prior to the Great Depression yet again.

“Greenspan is partially right in what he says: Long-term rates did decorrelate with the Fed’s short-rate manipulation starting in the late 1990s. A primary reason for this has to do with the fact that a fiat currency does not really balance trade. Under a pure gold standard, a trade deficit country faces a money supply decline as gold leaves for the surplus nation, leading to lower prices. The surplus country faces a money supply increase as gold reaches their shores and their prices rise. The shift in prices forces a new balance in trade whereby not too much gold is leaving or arriving in either country. Under this free market system, as Ricardo observed, both sides gain from trade that is sustainable. Producers are given a true reflection of demand to adjust to in order to optimize production efficiencies in a beautiful allocation of resources to meet demand.

“But a fiat currency does not balance trade and gives false messages of unsustainable levels of demand to producers. The surplus country accumulates dollars, and the deficit country does not face a decline in money supply. Trade isn’t really balanced. Instead, China accumulated T-bonds to offer cheap producer financing to consumers who leveraged up massively on cheap loans until collateral values fell. Producers around the world could not distinguish between real demand dollars and those created under fiat credit creation.

“As collateral started to decline from the inevitable credit bubble, the entire world faced a long-delayed and massively increased misallocation of overproduction to adjust. Demand without greater and greater credit creation was not sustainable, and the production that had adjusted to that unsustainable housing-ATM induced level of U.S. consumption is now in for a long retreat to reality. Greenspan couldn’t have stopped this process, because it is inevitable under a fiat currency system, where the currency has no intrinsic value and the foxes of government are supposed to guard the value of absolutely everything in the economy via the money…”

The 5: Uh, we agree with you. We laugh at Greenspan for discussing and writing about this after his tenure. Especially given the fact he’s famous for having written the go-to tract regarding “Gold and Economic Freedom” back in 1966.

“All things correct eventually,” we remember writing about John Law in Financial Reckoning Day, “even the reputations of men.” Greenspan is in full legacy-repair mode. His Op-Ed in The Wall Street Journal is like the congressional stimulus package: He’s trying to print his way out of a deflation.

Thanks for the deep thoughts,

Addison Wiggin
The 5 Min. Forecast

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