Bernanke’s Forecast, A Busted Sector Worth Buying, African Oil, Retail Rebound and More!

by Addison Wiggin & Ian Mathias

  • $50 trillion lost around the globe… but Bernanke says crisis will end by 2010?
  • Stocks have best week since November… Sarnoff on filtering out the market “noise”
  • Byron King on a great American boom gone bust… and its possible return to prosperity
  • Chris Mayer’s “great frontier” for oil companies of the world
  • Plus, The 5 follows the money… unusual trends in remittances, U.S. debt purchases

“$50 trillion in global wealth has been erased over the last 18 months,” Larry Summers estimated during a speech at the Brookings Institution over the weekend.

“This includes $7 trillion in U.S. stock market wealth which has vanished, and $6 trillion in housing wealth that has been destroyed. Inevitably, this has led to declining demand, with GDP and employment now shrinking at among the most rapid rates since the Second World War.”

Surely, even Summers knows this wealth never existed, ’cept on paper. All that remains is the debts incurred by borrowing against these “assets.”

“We’ll see the recession coming to an end probably this year,” Fed Chairman Ben Bernanke reiterated on 60 Minutes last night, keeping time with the rest of the newly upbeat Obama administration. “We’ll see recovery beginning next year. And it will pick up steam over time.”

Heh. You gotta have faith.

Investors have started to look on the brighter side for the time being, too. The S&P 500 rose 10.7% after four straight days of gains last week — its best winning streak since November 2008.

And it looks like today might be five days in a row… most indexes opened this morning up almost 1%.

“To me, most of the news is noise,” writes Steve Sarnoff on his own streak of gains in Options Hotline. “I view each day’s trading as a struggle between buyers and sellers, like a basketball game.

“On Friday, the market saw follow-through to the upside, but the whipsaw character of price movement tells me sellers are not dead yet. Demand should now be stronger, but we must closely watch support (725-731 and 705.75-708.75, basis the S&P 500) on a pullback.

“Some think this past week was just another sucker’s rally. They may be right, but I see a solid wall of worry built for stocks to climb. Shares can still slip and fall, but overall, buyers maintain the intermediate-term edge.”

If you want to trade this bear market rally, Steve’s got the magic beans lately. In the past two weeks, he offered recommendations that rose 103%, 222% and 186%. To inquire within, simply follow this link.

“Two months of better- than-expected results,” writes our economist-in-residence Rob Parenteau, “have brought some stabilization to the underlying momentum of retail sales.”

January and February retail sales reports helped keep the buying juices flowing last week. January’s surprise 1% rise and a relatively flat performance in February have temporarily arrested the crashing sector.


“Retail sales growth could not keep falling at the pace they were in the fourth quarter of 2008 without all of us ending up on a diet of Ritz crackers, canned sardines and water by year-end.

“A number of discretionary categories like furniture and electronics showed some response to heavy discounting. Some segment of the household sector feels it has enough job security to scoop the mega-deals. Tax refunds have been running ahead of last year, which may be helping, but that the consumer is no longer in free-fall mode, despite harsh employment and wealth hits, is, indeed, encouraging.”

If you’ve been following along, you know Mr. Parenteau has been ably filling the enormous shoes left behind by the silver-tipped-cane-wielding Kurt Richebacher. Early this afternoon, we have a conference call with members of Kurt’s family and a select group of our friends in the publishing industry.

We’re discussing the formation of a society to honor Kurt’s work, his uncanny forecast of the collapse of housing in the U.S. and with it the demise of the global financial system… and his penchant for making big, profitable trades on those trends. We’re tentatively calling it the Richebacher Society… more details as they emerge.

Of Rob’s work in The Richebacher Letter, one reader and fan of Dr. Richebacher writes:

“Dear Mr. Wiggin,

“When you announced that Dr. Richebacher would no longer write his letter, the bottom dropped out for me. I doubt anyone got more from reading him than I did…

“I thought it would be impossible to replace the man… it took you about a year, and as you said, it was not easy… but I began reading Mr. Parenteau, and I must tell you he is very, very good.”

A point on which we are in agreement.

As U.S. stocks regain their popularity, the dollar continues to fall. The dollar index is down to 86 and change today, about three full points from its high.

Gold, though, has yet to make its next move. Nature’s own money has been sticking to $925 or so an ounce since we wrote you last.

“The great American drilling boom is over,” laments an article in today’s New York Times. The number of oil and gas drilling operations has been cut in half since last summer, from 2,400 to 1,200 rigs.

With the crash in oil and natural gas prices, the once sexy prospects of shale drilling and squeezing every drop out of existing wells are now far less attractive.


Even worse for American drillers, “the cost of drilling and servicing operations, while falling, is still roughly double the 2005 level,” says the NYT, “while the prices oil and gas companies earn from their production are suddenly below the 2005 level. Meanwhile, the cost of borrowing money for exploration and production has soared recently in the credit crisis.”

“The cutbacks in the oil patch,” comments our oilman Byron King, “have led to systemic transformations, and rather quickly. Near half the rigs in North America have been laid up in the past eight months. More are headed for the boneyards, as well. Lots of laid-up rigs translates into lots of fuel not getting bought and burned. And lots of drill pipe not turning, lots of drill bits not grinding, lots of drill mud never processed. And there have been significant layoffs among drill crews, suppliers and vendors to the industry.

“Many of these drill deck jobs were the ticket to relative prosperity for many a hard worker. (And believe me. Having thrown some chain in my misspent youth, it’s damn hard work.) A roughneck without a job is just as unemployed as an autoworker whose plant has closed for the duration. Worse, maybe, because there’s no union hiring hall where you can go to see if you might have bumping rights toward some other, less-senior union man at another plant.

“And through it all, the North American energy market will just blow down the gas in the system and drain the oil in the reserves… until.. the Next Crunch. And mark my words, the Next Crunch will come. And when that crunch comes? We’ll wish we had those rigs out in the field. We’ll hear the same old songs about how there’s ‘not enough drill pipe.’ And there’s a ‘manpower shortage’ and ‘not enough skilled hands to run the crews.’ Yep. Been there, done that.

“So the long-term thinker and investor will just watch the likes of the oil service greats… the likes of Schlumberger, Baker Hughes, Halliburton, Weatherford and so many others. Just nibble away. Buy some shares here and there. Buy ’em low. Hold on. Wait. Because it’ll turn.”

“Africa is the great frontier for oil companies,” writes Chris Mayer, overturning rocks on the Dark Continent. “It is the largest continent open to oil companies. It has vast and untapped interior areas for exploration… new deep-water tracts and ultra-deep-water basins we’ve gleaned only tiny bits of.

“It also a place where history of long ago still has an impact today. The scramble for Africa after the 1884-85 Berlin Conference… the arbitrary mapmaking following World War I… the Cold War tussles that divided post-independence Africa… All of these shape the modern struggle for oil in Africa. You may not appreciate how old the oil game is in Africa. In some places, the history of oil is over a century old. It’s also an arena with many players. There are some 500 companies working in the African oil industry today.

“What is that potential? It’s hard to say. There is no comprehensive source for proven, possible and probable oil reserves. It’s a lot of guesswork and refined judgment. No one knows how much oil Africa might hold. But a lot of money is looking to find out. In terms of growth rates, Africa is the No. 1 destination for oil investment in the world. Through 2030, OECD estimates peg African oil investment at well over $1.25 trillion — ahead of Russia and the Middle East. About 50% of that money is just for power generation.

“The other half is for oil and gas exploration and production, with a smidgeon for coal. Nearly all of this money comes from outside Africa.”

A record 246,957 wannabe MBAs took the GMAT test last year, says the Graduate Management Admission Council today.

“People sit out economic downturns in school,” says Bob Ludwig of the council. “Business school is no different. They may have had a severance package from a previous job, or are out of a job and looking to park themselves in a program, so when the economy does turn around, they’ll be better equipped.”

77% of full-time American MBA programs say applicants are up. Just what the world needs, eh? More efficiency experts.

The flailing consumer economy in the U.S. has caused a nasty decline in the amount of money foreign workers ship back to their families at home:

Still, according to the World Bank, “remittances,” as those payments are called, exceeded $300 billion in 2008. That money “accounts for 45% of GDP in Tajikistan, 38% in Moldova and 24% in Lebanon and Guyana,” says The Economist.

The seldom-reported net long-term and total Treasury international capital (TIC) flow came in way worse than expected today.

In English, foreigners — and not just the Chinese — are losing their taste for U.S. debt. Global investors sold $148 billion more U.S. debt than they bought.

Caribbean banking centers have reduced holdings by nearly $30 billion since November 2008… no doubt a result of the dash for cash among investors hiding money in island tax havens.

“I love that quote from the Chinese Premier Wen Jiabao,” writes a reader, referring to Friday’s announcement the Chinese are growing wary of U.S. intentions. “It sounds like the Chinese have also had their ‘uh-oh’ moment. As in, ‘Uh-oh, maybe the United States will never give us back our money.’ To have him say that publicly is huge news in a culture that prides itself on subtlety and saving face.

“My back-of-the-envelope estimate, if I’m right, is that each citizen of the U.S. owes China alone $4,000, give or a take a few hundred. Unless we think China will forcibly ask for payment, I could easily see a scenario in a few years in which we tell the Chinese that those Treasury bonds are their problem, and not ours.

“And I’m also happy, for the moment, that the U.S. is surround by those two moats called the Pacific and Atlantic oceans.”

“While Jefferson and the Founding Fathers,” writes another, “insisted that the money supply and government should be separate, this, ironically, is the greatest contributor to the debt problem. Instead of being able to print the currency it needs, government is forced to borrow and incur interest charges, which compound every several years, increasing exorbitantly the cost of governing.

“What does intrinsic value mean? To some, it means money backed up by gold. But a new highway, new public transit and other services have intrinsic value also because they have a functional utility. A cup of coffee has intrinsic value. A nurse or health care professional providing care to the sick is wealth, for this person has a functional utility. All fiat money is, therefore, is a medium of exchange. The real wealth is in what it is backed up by.

“Where inflation rears its ugly head, fiat money exceeds not only a nation’s reserves in gold or other precious metals, but it exceeds productivity. Productivity is the greatest means of measuring and creating wealth. The Chinese are now holding a lot of U.S. dollars and T-bills; it never occurred to them that they have contributed to the problem by increasing America’s money supply in excess of American productivity.

“I believe China will be and should be the nation to lead the world out of this crisis. It has a large population, hence a large domestic market to consume goods and services. Why should America be the only country to which the world looks to consume its products? ‘Buy American’ is good for the world.”

The 5: Huh? Have you been studying old Greenspan testimonies in the C-SPAN archives?

Addison Wiggin
The 5 Min. Forecast


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