Rule Breakers, Home Prices, The Gold Standard, Coming Oil Price Shock and More!

by Addison Wiggin & Ian Mathias

  • Government does it again… market interpretations of the latest intervention
  • Chris Mayer on the economic “convergence” still alive and kicking
  • “Dollar’s days are numbered” says Bill Bonner… Russia calls for gold standard
  • A new year, same problems… the first home price index of 2009
  • At last, a government guide to dealing with the crisis… just think happy thoughts

  They must know how it goes by now. Change the rules, and the market tanks:

We hit the finer points of the latest auto bailout yesterday. Now you see what the market had to think.

Traders had a game plan for U.S. automakers (and all the industries that support them). The return to optimism over the last few weeks plus a “no news is good news” vibe emanating from Detroit had bid up GM 100% from its recent low.

Yesterday, after the government rewrote the playbook — again — GM crashed 30%.

  Up until yesterday, the S&P 500 had been enjoying a technical bull market. The index was up 21% in about three weeks. By definition alone, that’s a load of bull.

If we had to bet on stocks booming to new highs or testing old lows from here… well… let history be your guide.

  Here’s a bizarre market sea change: Google’s market cap now exceeds GE’s. That might sound right — if you say it fast enough and don’t think about it. But wait… Google booked $21 billion in annual sales last year. GE pulled in $182 billion, nine times greater revenue.

Yet by market cap, Google’s got the Dow stalwart beat by a couple billion bucks. We’d be surprised if either of those valuations lasts very long.

“The great convergence continues,” writes Chris Mayer, with a market note of his own. That phrase is most often referring to “the rapid growth of China and India and the subsequent narrowing of income gaps with the West. Yet this financial crisis has cast some doubt on whether this trend will continue.

“I am still a big long-term bull on China and India, for a variety of reasons. And I caught a headline this week that seems to say the great convergence is still very much in play.

“IBM will lay off about 5,000 people, and most of those jobs will move to India. The bigger tidbit in this story was the fact that 71% of IBM’s 400,000 person work force is now overseas. I bet a lot of folks would be surprised to learn that.

“Depression 2.0 or no — the great convergence continues. It may slow and experience fits and starts, but India and China are on long-term growth curves.”

Recently propped by the growing chorus of “it’s not so bad,” oil tumbled 7% as the bleak economic outlook returned in full force. The front-month contract now trades around $49 a barrel.

  "We are three, six, maybe nine months away from [an oil] price shock,” forecast oil guru Matt Simmons last week. “We are not talking about three to five years away — it will be much sooner.

“These prices now are dangerously low,” Simmons told Reuters. “The lower prices fall, the less oil will be produced and the greater the chance of an oil spike. Unless oil demand falls by 10% or 15% per annum, which it is not going to do, then we don’t need to wait for oil demand to come back before we have a supply crunch.

"Within a few months, we are going to realize our visible inventories are really tight — squeaky tight — and what would really be inconvenient is to see a recovery in the economy."

"Sooner or later we will burst through [last year’s high of $147] like a hot knife through butter." Be sure you’re well positioned with Energy & Scarcity Investor… 50% off for the next two days.

  Gold’s been bouncing around in between $910-930 over the last few days. You can get yourself an ounce today (in theory) for $925.

  The dollar has given back most of the gains it stole yesterday. As stocks inch up, the dollar index is back down to 85.4, about a half a point from yesterday’s high.

  “The dollar’s days are numbered,” says Bill Bonner. “We are beginning to feel sorry for it…as we do for all lost causes.

“Almost every price on the planet ultimately relates to dollars. You can buy an orange in Granada for euros. But the global market in oranges is priced in dollars. So when people figure out how much something is worth — in global terms — they typically refer to dollars. And when countries want to make sure they have enough money on hand to settle up their debts with other countries…or enough money to buy Florida oranges…or enough to purchase oil to run their factories — they lay in a supply of dollars.

“But while the value of everything is referenced to dollars, what’s the dollar’s value referenced to? At the end of the day, upon what rock does the world financial system rest? Ah…that’s the weakness of it…there ain’t no rock. Look at the foundation of the world’s money system and all you find is mush.”

  Yesterday, the Russians suggested the world return to the gold standard.

The Kremlin’s chief economic adviser, Arkady Dvorkovich, said Russia would like to include the price of gold in the new global reserve currency. Dvorkovich called on the IMF to use its “special drawing rights” to create this new system of money, saying that “more effective use of gold in this system” would be “logical.”

What a strange world we’ve created where Austrian economists and officials from the Kremlin find themselves commiserating.

  The root of all this mayhem, home prices nationwide are now down 30% from their peak, says the latest release of the S&P/Case-Shiller Home Price index. We gave you the 2008 wrap-up last week, and today we see the first colors of the new year… and they are… black: 


Both the Case-Shiller home price indexes set record falls in January. The 10-city plunged 19.4% annually with the 20-city close behind. From their peaks in 2006, they’re both 30% down. If there is any comfort to be found in the chart above, it’s that home prices no longer appear to be accelerating into the abyss… just slowly, steadily inching down.

  Mortgage rates have plummeted to 52-year lows, reports Bankrate today. Thanks to Federal Reserve manipulation, the national average 30-year fixed is down to 5.19%, the lowest since 1956.


That’s around 150 basis points from the 6.7% average six months ago. The difference, on a $200,000 mortgage, is about $200 a month.

“Your reader is misinformed,” writes a reader responding to another reader’s accusation that “foreigners” are stealing American jobs and don’t have to pay taxes. “H1-Bs do not get a tax-free stipend in the U.S. and a salary back home. That privilege is reserved for L-1 visas. H1-Bs have to pay their fair share of taxes: state, federal, Social Security and unemployment. After that, they are unceremoniously kicked out after six years and enjoy no benefits for any of the taxes they pay.

“And the fortunate L-1 holders? Why, the generous stipend is typically less than the $1,800 in unemployment wages that many Americans can’t seem to live on.”

The 5: Ahhh… you’re making the mistake of believing the immigration debate has anything to do with reason or facts.

  “The 5 seemed distressed,” writes a reader, “that Wagoner ‘was unceremoniously dismissed’ as CEO of GM.

“Let me see, here’s a man who headed a company that hasn’t logged a profit since 2004, reporting losses since then of $82 billion, and helped guide GM into a huge bet on gas guzzlers, trucks and SUVs that have piled up unsold at dealers’ lots. Here’s a company that he took over in 2000 with shares above $70 and that is now trading for $3.62, or about 5% of the previous level.

“Perhaps it was the process that annoyed The 5, with the government’s man Steven Rattner doing the firing, rather than properly the board of directors. Is it not clear that the board of directors has long ago lost the cojones and ought to follow Wagoner out the door? Is it not clear that if you suck up billions in taxpayer dollars only to project you might need tens of billions more, you have lost some of your normal governing rights?”

The 5: Exactly. We meant to write, ‘ceremoniously’ dismissed. It was/is a charade.

  “Must heartily disagree with you,” writes another, “Obama has every right to ask for [Wagoner’s] resignation. His 30 years of experience was not enough to overcome the difficulties, and the board refused to do its duty for the last 50 years.


“GM has our money. If it were I, he would have been asked to leave the day he got the check, and the only other thing Obama could have done is have asked for/demanded [United Auto Workers President Ron] Gettelfinger ‘s departure as well.


“If you’re going to plead for money instead of taking the route to bankruptcy, like every other business (yes, and the bank robbers should be gone too), the creditor calls the tune.


“Good riddance, and I only hope his parachute won’t place him in penury. Right.”

The 5: Fact is, we could give a rat’s patootie about Rick Wagoner. Or Gettelfinger. As with the banks, or AIG and its executive bonuses, GM and Chrysler should have gone bankrupt. That would have solved the “issue” without a “Cabinet-level task force” or billions… trillions… more piled on the national debt.

That’s what would happen to us if we published ideas that nobody wanted or made forecasts that were inaccurate and got our investors in deep s#^t. But then we don’t honor union contracts, care about a voting base or have massive counterparty risk takers with tentacles in the Treasury Dept.

  That said, we leave you with wisdom from a guide to Getting Through Tough Economic Times launched last night on the Dept. of Health’s Web site.

It’s a handy pamphlet that “provides practical advice on how to deal with the effects financial difficulties can have on your physical and mental health.” Inside, you’ll find warning signs, stress management advice and the like.


So… how does one “get through” these times?

“Acknowledge that economic downturns can be frightening to everyone, but that there are ways of getting through them — from engaging in healthy activities, positive thinking, supportive relationships, to seeking help when needed from health professionals.”


It’s just that simple. Question authority? Challenge the status quo? Take charge of your financial assets and liabilities? No… just take the pill… think happy thoughts.


Addison Wiggin

The 5 Min. Forecast

P.S. Or figure out how not to get caught up in them. This report, for example, will help you examine the most critical market story of the next decade.



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