China’s Gold Rush, Treasury Trepidation, Lewis vs. Paulson, Brushing Off Bad News, and More!

by Addison Wiggin & Ian Mathias

  • Another sign China’s ditching the dollar? Gold holdings overtake the Swiss
  • Chuck Butler on the Treasury auction that might "break the proverbial camel’s back"
  • Market celebrates awful numbers because they’re better than expected
  • Somebody’s lying here… Is it Ken Lewis or Hank Paulson?
  • The 5 wades into the global warming debate… Hey, the water’s fine

 As we’ve been suspecting, the Chinese have been accumulating gold, slowly, but surely. They made the announcement this morning. Really, what would you do if you were sitting on $1.9 trillion in foreign reserves – more than half of it minted in U.S. dollars?

The State Administration of Foreign Exchange says China’s reserves now total 1,054 metric tons – up from 600 in 2003. If you’re keeping score at home, that’s a 76% increase in five years.

These new numbers place China fifth among nations that disclose its gold holdings – just ahead of Switzerland.

Given pronouncements made by Premier Wen leading up to the G-20 meeting last month, you can count on China to pick up a fair share of the $12 billion the International Monetary Fund (IMF) plans to sell this year.

 Bankers and finance ministers from the G-20 countries meet again in Washington this weekend. The Chinese have indicated they’re going to hang some details on the proposal to move away from the dollar as the world’s reserve currency… and toward the quasi-currency “special drawing rights” issued by the IMF.

 The news is enough to keep gold above $900 this morning. It sits around $908 as we write. It’s also enough to push down the dollar. The dollar index is down almost a full point, to 84.6, this morning.

  “I’ve been carrying on,” writes Chuck Butler in the Daily Pfennig this morning, “about how the deficit spending here in the U.S. is going to require a TON of Treasuries to be sold to finance the government.”

“Well… Yesterday morning, the U.S. announced that they would sell Treasuries in these amounts, and tenors… $40 billion 2-year, $35 billion 5-year and $26 billion 7-year, next Monday, Tuesday and Wednesday, respectively.

“OMG! That’s over $100 billion in new Treasury issuance that the markets are going to have to digest… Is it the straw that breaks the proverbial camel’s back? Are the markets saying, ‘We don’t believe you will be able to successfully auction that amount without aggressively raising the yield?’ I think so…”

For the record, we believe that’s Chuck’s first use of “OMG” in print – a significant event, to be sure.

 Gold and stocks have been moving up in tandem as we approach week’s end. Yesterday brought a bumpy ride for stocks. A couple of regional banks turned in good earnings. So did Apple. But the good news tussled with the unemployment claims numbers we brought you yesterday. In the end, the Dow and the S&P both gained a little under 1%.

 The good vibes have carried into today, with both of those indexes up more than 0.5% at the opening.

The market is sloughing off bad news from the two of the Big 3 Detroit automakers. GM confirmed the rumors that it’s shutting down 13 assembly plants for as many as nine weeks this summer. Chrysler, meanwhile, might have to go to bankruptcy court even if it can work out a deal for Fiat to take a big stake in the firm. (Yawn…)

The one U.S. automaker that’s not circling the bowl, Ford, reported a $1.4 billion quarterly loss. But hey, it wasn’t nearly as bad as feared… so Ford is up nearly 20% as we write.

 Traders are likewise cheered by the news that durable-goods orders fell 0.8% in March. Analysts were expecting that orders for cars, appliances, furniture and the like would fall nearly twice that amount. So… hooray?

 Continuing the administration’s “glimmer of hope” media tour, Treasury Secretary Tim Geithner took timeout yesterday to opine in the Financial Times that the worst of the recession is behind us. Probably.

“In recent weeks,” says Tiny Tim, “there have been some encouraging signs that the global economic downturn may be slackening.” Of course, significant challenges and risks remain. (Yawn. Streeetch.)

  Today’s the day America’s 19 biggest banks get their results from the rigorous "stress tests" Geithner’s Treasury men have administered in recent weeks.

Of course, you and I will know the results a week from Monday, giving Treasury officials plenty of time to spit shine the figures into a nice sheen. Still, the methodology used to perform the tests will be made public today. Analysts will have more than a week to apply that methodology to the numbers they already know and draw their own conclusions. Will this exceedingly slow and painful rollout of measures aimed at calming the markets backfire? We’ll see… if we don’t claw our eyeballs out first.

  Traders are also ignoring revelations about exactly what went down when Bank of America took over Merrill Lynch last September.

In testimony to New York Attorney General Andrew Cuomo, BoA head Ken Lewis explained why he never informed his shareholders about Merrill’s huge losses before completing the takeover: Then-Treasury Secretary Hank Paulson ordered him not to.

If Lewis went ahead and disclosed Merrill’s losses anyway, Paulson would have had him fired, along with the entire board of directors. Lewis said Paulson forced him to choose between the government and his shareholders.

Oh, and this order came "at the request" of Fed Chief Ben Bernanke.

Paulson and Bernanke have both issued denials. So someone’s lying here. If Lewis is lying, he committed perjury. If Lewis is telling the truth, Paulson essentially ordered him to break the law by not disclosing "materially significant" financial hits to the shareholders. What a mess. (This is still America we’re writing about, isn’t it? Oh, yeah… it is. Just checking.)

 Someone’s lying here, too:

“Now that lawmakers have set aside a tidy $1.6 billion for scientific research in areas such as climate change,” suggests Barron’s this morning, “(much of that likely will go to those who think man-made pollution will have disastrous consequences for Earth), it might be well to look at what the skeptics say.”

"There’s definitely been a cooling trend over the last couple of years," Jeremy Ross, a meteorologist at Storm Exchange, a weather risk-management firm, told Dow Jones’ weekly rag. “Indeed, 2008 was the coolest the North Pacific Ocean has been since 1956, which is ‘partly responsible for the cooler winter we’ve been having this year.’"

For a comment on Ross’ claim, The 5 was able to reach the former Vice President Al Gore, the guy who has already won the Nobel Prize for, umn, Peace for converting his PowerPoint presentation about other people’s work on the subject into a movie:

Of course, the climate, like economics, is a fickle beast. “Climate is known to be variable,” says Michael Reilly of the Discovery Channel, “a cold winter, or a few strung together, doesn’t mean the planet is cooling. Still, according to a new study in Geophysical Research Letters, global warming may have hit a speed bump and could go into hiding for decades…

“Following a 30-year trend of warming, global temperatures have flat lined since 2001 despite rising greenhouse gas concentrations, and a heat surplus that should have cranked up the planetary thermostat.”

At least we got the regulations on the books condemning those gases before the climate really starting cooling down again. Phew.

 “Well, I have to say something about your comment on Obama cutting $100 million of expenses. Now, I am not a fan of his, but do think that making fun of any government attempt to save money is not the right thing to do? What needs to be done is a pat on the back and encouragement to do some more cutting. It’s like with little kids – you have to reinforce the kudos so they try harder, not make fun of their attempt.”

The 5: We’re making fun of him… but you compare the president and the Cabinet to little kids. Hmn. Another reader sent this graph showing how much more encouragement they really do need:

Former economic adviser to George W. Bush Greg Mankiw ironically put it this way: “Imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had to be cut? By $3 over the course of the year – approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.”

 “Hot Topic was smart for getting the preview tour of the Twilight stars,” writes a reader, responding to the cage match HOTT inspired between two of our top options analysts. “Some malls had 1,000-2,000 teen girls waiting to get into the store to see their new heartthrobs. The entire Twilight series was a home run to Hot Topic. Now how does it repeat that home run in 2010?”

The 5: It’s working that, for sure. Yesterday, a director was named for the third movie in the series, due for release in 2010 – even while shooting’s still under way on the second movie now. By your response, I’m guessing you’re coming down on Burritt’s side of the debate.

 One last note today: Our trusty steed “Extreme” Ian Mathias is out today and will be for the next 10 days. We’re told he found some lodging in San Juan, Puerto Rico, and is going to hole up there without his “bike, the Internet or TV” for awhile. We wish him bonnes vacances today.

At the same time, we welcome writer-in-residence, the reformed blogger known as “Dollar Bear” Dave Gonigam to the bridge. Dave’s going to help assemble The 5 over the next week or so. We expect smooth sailing until Thursday of next week, when we head over to London for some meetings regarding our new partners in India.

’Til then, have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S.: Wayne Burritt, our analyst who’s long HOTT for now, has hit on a way to generate steady, reliable income from stocks you already own. One of his recent moves gave readers the chance to pocket a quick $5,020. If this sounds like something up your alley, check this out.

P.P.S.: Our film, I.O.U.S.A. will be screened tonight at the Washington, D.C., International Film Festival. The Concord Coalition’s Bob Bixby will take questions from the audience – a can of Tab by his side, we presume.

Our friends at the Peterson Foundation have a game they’d like you to try. DebtSki is “an online flash video game that spotlights the dangers of excessive debt, challenges young people to avoid destructive financial behavior and spurs fiscally responsible action,” according to the e-mail we received from the group yesterday.

We tried playing it a few times. It’s hard. We keep going bankrupt before we get to the third level. Give it a try for yourself. Share with a toddler.


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