The Slippery Slope, Commodities Boom, Consumer Deleveraging, Poor Man’s Gold and More!

by Addison Wiggin & Ian Mathias

  • Losing footing on a slippery slope… House passes bonus “claw back”
  • Greg Guenthner on how to beat the spread between gold’s spot and street prices
  • Commodities boom after FOMC statement… Byron King with a short-term oil outlook
  • Rob Parenteau on the macro story no one’s talking about… but everyone should know
  • Plus, your thoughts on China: Will the red nation boom… or bust?


  The slippery slope got steeper — and a lot greasier — yesterday.

The mob in the House passed a bill that, if it makes it through the Senate, would impose a 90% tax on bonuses given to employees of companies that have received over $5 billion in government bailouts. The bill passed after 40 minutes of debate. Only 93 members voted nay.

"We want our money back now for the taxpayers," mob leader Pelosi whined after the bill passed, holding a proverbial pitchfork in the air. (Perhaps her time could have been better spent in her office yesterday, watching this local news story.)

Jay Leno gets it. This is “kind of scary,” he told the president on his show last night. If the government decides they don’t like you, they can just legislate your money away. That’s always been true in theory. Now it’s precedent.

  The president set another precedent yesterday, too. In an effort to harness the populist rancor over AIG bonuses into general, if vague, support for his plans to stimulate, stymie, reform or dismantle everything from jobs, foreclosures, health care to the financial system, he appeared on The Tonight Show With Jay Leno.

President Eisenhower made TV a player in presidential elections. Obama is the first to try to use the boob tube to govern. The show was the fourth-highest rated sideshow in late night’s history, behind Leno’s first show at the helm and farewell tributes to Seinfeld and Cheers.

  Meanwhile, AIG is suing Countrywide for — get this — misrepresenting the health of a loan portfolio. And at the same time, Countrywide is suing AIG for failing to cover the loan losses it insured. Heh. The hydra is beginning to consume itself.

  Barring disaster today, the American stock market will wrap up its second consecutive week of gains. Despite some small profit taking yesterday, the Dow is up 2.5% for the week. Markets opened up again this morning and are battling with break-even as we write.


Keep an eye open during the last hour of trading today… it’s another quadruple witching day. Four different varieties of stock futures expire at the closing bell — an event that occurs only four times a year. Historically, that means higher volatility and the potential for sharp swings. On Sept. 19, for example, the Dow shot up over 3%… but that was also the day our “government” outlawed short selling.

  An SEC filing this week showed the government-controlled mortgage-enabler-turned-foreclosure-champion Fannie Mae intends to hand out bonuses of $470,000-610,000 to its top brass this year, in addition to base salaries. That’s double the size of last year’s bonus pool. Freddie Mac has a similar plan.

Where’s the outrage over these guys?

  Back in what’s left of the free market, the last 24 hours has been all about commodities. As Dan Amoss forecast yesterday, the FOMC’s latest move opened the floodgate for hard assets.

Every one of the 19 commodities on the Reuters/Jefferies CRB Index gained yesterday.

  Gold, for starters, just capped off a nearly $80 rally. It leapt from Wednesday lows of $885 all the way to $965 early this morning. We’re seeing some profit taking today, however. The spot price has drifted down to $945.

“It has become more and more difficult to buy physical gold,” notes Greg Guenthner, highlighting a trend many readers have brought to our attention. “Even if you do locate it, you pay quite a bit more than its spot price. In the chart, see the premiums investors have begun to pay to buy gold bullion on eBay:

“These buyers were willing to spend up to 25% more for gold than its melt value. That’s like giving your broker a quarter for every $1 share you buy.” Another sign that indicates the spot price will skip back over $1,000, soon.

  Silver futures for May popped 13% yesterday, to $13.49 — the biggest single-day gain for a “most active” contract since 1979.

“Silver is not commonly thought of as an inflationary hedging tool,” continues Gunner. “That is, until times get tough. During the 1978-1980 precious metals rally, silver showed up late. Almost all of the large gains in silver came in the last few months.


“We see the same events unfolding this time around. As we pointed out in the past, gold has always traded for about 16 times as much as silver, until the past few decades. Currently, the ratio sits around 71,” leaving a lot of room to the upside for silver, too.

  Oil got a nice bump yesterday, too. The front-month contract rose as high as $52.25 yesterday, the most expensive it’s been since Dec. 1, 2008. As with the rest of commodities today, profit taking has pulled oil back a buck or two as we write.

  “I expect the $50 price level to hold steady for a while and then move up more,” says Byron King. “Sure, there will be ups and downs. But the trend is up. OPEC output cuts are starting to hit home.

“Back near the beginning of 2009, some OPEC players began to choke back the valves. So tankers didn’t load. And now, two-three months later, those tankers that didn’t fill up with OPEC oil are not docking at Western terminals. Oil that does not unload doesn’t get refined. And oil that doesn’t get refined does not become gasoline at a filling station near you.

“At any rate, oil supplies are tighter and prices are higher. One of my old admirals used to say, ‘When all else fails, count the other guy’s ships.’”

  Should Byron’s prediction come true, gasoline prices will rise, too. After cratering at the end of 2008, the price at the pump has been steadily inching up. It has risen nearly 40 cents, from its low to $1.94 for the cheap stuff today, just off a four-month high.

  With the Fed’s help Wednesday, the dollar is now on track for its worst week ever versus the euro.

The greenback is down nearly 6% against the Esperanto currency this week. If the trend holds, that’ll mark the worst weekly drubbing since the euro debuted on the international scene in 1999.

The dollar index — which tracks the dollar versus the euro, pound, yen, loonie, franc and krona — is headed for its worst week since 1985. The index is down to 82 and change today — a whopping 5 points from its score Monday.

Hats off to AF currency trader, Bill Jenkins. He took an edgy contrarian stance Monday, telling MOT traders to buy calls on the British pound. Those who followed his advice cashed out of half their position this morning for a 98% gain in less than five days. If you’re not one of the fortunate, but would like to be… find out how to trade these currency trends here.

  “The larger story,” opines Rob Parenteau, keeping a sturdy eye on the macro picture for us, “can be found in the deleveraging effort of households, which accelerated in the fourth quarter of 2008.

“We have never seen such a sustained buildup of credit flows to the U.S. household sector like the one that began in the late ’90s. Nor has the U.S. economy experienced such a reversal of household credit flows since the Great Depression.

“Policymakers, investors and entrepreneurs need to grasp this essential piece of the puzzle:

“There are good reasons why the household sector is paying down debt in an environment of declining asset prices and personal income. Falling asset prices reduce wealth faster than households can pay down debt.

“We believe this has a number of very important implications, not the least of which is for the restructuring of global growth away from a growing dependence on consumer debt binges in Anglo-American developed nations. Not to mention the policy objective of renewing lending to the private sector… it’s misguided.”

Yet it’s the very core of the justification for the TARP bailout and the broader congressional stimulus plan. Rob unpacks this phenomenon in the latest issue of The Richebacher Letter, entitled “Deleveraging Demystified.” You can learn more on the site.

  The Organization for Economic Co-operation and Development (OECD) is considering cutting its growth forecast for China. As the trend goes lately, the international group suggested today that its next China forecast — due next week — will be bumped down to 6-7% GDP growth in 2009.

That’s a nice segue to the question we posed yesterday: China, boom or bust? You successfully overwhelmed us with ideas… here are a few:

  “During my many stays in China for over a decade,” writes one reader, “I witnessed something not in evidence anywhere in this country in decades: a tremendously strong work ethic and the resulting productivity. In China, the buzz of production begins at sunrise and does not dwindle until after sunset.

“While so many Americans are a ‘drag’ on those who are productive, this is not the case in China. Being on welfare, food stamps, housing allowances and all the other handouts working Americans provide to a double-digit percentage of the American population is nonexistent in China.

“So while the Obama administration sets about increasing the numbers of those dependent upon the rest, further weakening our financial position and the potential for a rebound in our declining economy, we can rest assured that there are about 1.3 billion people in China who are working hard to secure their future, while millions in this country are looking to the government to take theirs from the rest of us.

“Which would you bet on with your money?”

  “Messrs. Burritt and Guenthner did a fine job expressing the ‘China bull’ rationale,” opines another. “In my view, the Chinese may experience a hiccup or two in absorbing their bad debt loss (i.e., U.S. Treasuries, due to inflation) and in replacing their foreign customers (us — who never really paid them, anyway) with domestic customers. Over the long term, however, despite the above noted possible short-term dips, they are headed onward and upward. Not necessarily forever, but certainly on a time scale of what investors consider long term: the foreseeable future (i.e., the next two-20 years or more).

“The only thing that could stop them: physical resource constraints (i.e., world runs out of oil before a replacement fuel is found, or out of other needed commodities such as copper, zinc, potash, etc.). Of course, such constraints could potentially stop us all in our tracks some day. After all, the world works on cycles, right… large and small? Nothing grows forever (not even at a very low rate of growth). But so far, so good…. right?”

  “Sorry, but I’m still not convinced on China,” writes a third. “That middle-class statistic reminds of how they used to talk prior to the Asian currency crisis in ’97, in the last era when we were enamored over the Red Dragon miracle before getting a reality check. Remember, first, that their middle class and our middle class are hardly a parallel. Given China’s wage structure, it’s still questionable whether someone living on a middle-class Chinese income can afford a Big Mac, let alone a flat-screen TVs or SUV.

“What’s more, another way their middle class differs is that few (if any?) carry red-hot Visa cards. Impulse shopping is still, by far, a Western art. Why else would the Chinese government, right now, be handing out over $100 million worth of ‘shopping vouchers,’ in hopes to spur purchases? Trouble is, the goods China makes to sell are tailored for the markets of the West, not the East.”

More on Monday,

Addison Wiggin

The 5 Min. Forecast

P.S. We were backing out of our driveway this morning and ran into a pile of construction waste someone had dumped behind our garage. Bricks, plaster, wood chips and dust piled up in bags. Someone must have driven through the alley at night and dumped the bags quickly. They were busted up all over the alley. We called the city. The city said it’d get right on it.


“We should have it cleaned up within 14 days,” the gentleman said. 


P.P.S. One of our top analysts just released a report on the government’s most pernicious “stealth tax.”It’s about to get a whole lot worse. Check it out… it’s critical thinking for the wise investor.




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