The Credit Card Crisis, A 20-Year Outlook, Deficits Balloon, Greenhouse Gas Investing and More!

by Addison Wiggin & Ian Mathias

  • Another “next shoe to drop”… the looming credit card crisis
  • Rob Parenteau on a 50-year shift in personal income… why inflation is the likely endgame
  • Deficit gaps grow… government budget, trade deficits worsen
  • Jeremy Grantham on the social phenomenon that will drive profit margins for the next 20 years
  • Chris Mayer reveals companies NOT to own in the coming carbon emissions war


  Today’s forecast: Thunderstorms for the credit card companies.

According to the government stress tests, credit card losses just for the 19 banks under scrutiny could exceed $82.4 billion by the end of 2010. That’s more than the market caps of Citigroup, American Express, Capital One and Discover… combined. Hmmmm…

And that number is unquestionably light. The $82 billion loss would be a consequence of the Treasury’s worst-case scenario, which we’ve noted before is surprisingly rosy. Even worse, the government tests only examined credit card obligations held on bank balance sheets… not the tens of billions of dollars worth of loans packaged into bonds and sold to sucker investors, a la the mortgage-backed securities of 2008.

Factor in those loan-backed bonds and a nastier marketand consultant firm Oliver Wyman forecasts losses twice as large… up to $186 billion for the whole credit card industry.

  Strip away the fancy accounting and forecasts and give us your gut reaction to this question: Would you expect more credit card losses during this recession (aka the credit crisis) or the tech bust?

While the current fiasco has managed to surpass the tech bust in nearly every regard, credit card losses are still a long way from 2001 highs. Hell, we’re barely above 2006 levels, when the economy was in the midst of a faux boom. And as you can see, the steepest losses have shown up toward the end of the last two recessions… some very dark clouds hovering above the credit card biz.

  “Transfer payments have reached a higher share of personal income than interest and dividend income,” notes Rob Parenteau, highlighting another issue that plagues I.O.U.S.A.

“Together, that means over 30% of the U.S. personal income flows are now being earned for no increase in work devoted to production of goods and services (although we do recognize loans earning interest may, in fact, finance increased production, rather than financial market speculation). The more people get paid without directly producing goods and services, the higher the inflationary bias likely to arise in an economy. Purchasing power without production is another, perhaps more accurate, way of depicting the old saw about ‘too much money chasing too few goods.’

“People spending money who did not produce anything to get the money — now, that’s a recipe for inflation. In this regard, the major rise in transfer payments from 1966-76 may have played a role in the original onset of the stagflationary ’70s, while the surge in interest income from 1978-82 may have contributed to the second wave of stagflation. Higher money incomes without increased production tends to lead to higher prices, unless, of course, saving rates among money income recipients rise sufficiently.”

Rob will once again bring his comprehensive brand of economic analysis to this year’s Investment Symposium. He’s just one of many not-to-be-missed speakers… check out our impressive lineup, here.

The U.S. budget deficit will be at least $90 billion larger than the Obama administration first anticipated. The Office of Management and Budget revised its deficit projections for 2009 and 2010 yesterday, both to the upside. The 2009 fiscal year, ending on Sept. 30, is now expected to rack up a tab of over $1.84 trillion, up $90 billion from February. Ditto for 2010 — the new estimate is $1.26 trillion, up from $1.17 trillion.

Budget director Peter Orszag had plenty of excuses ready, citing mostly issues that were “inherited by this administration.” Specifically, bank bailouts cost more than they expected and tax revenues were down as much as $50 billion from February estimates.

Heh, and remember those hyped-up budget cuts over the past few weeks? The news conferences, the press releases… all for nothing. This additional $90 billion in budget deficit obliterates the $17.1 billion in budget cuts announced over the last month.

This year’s budget deficit is now expected to be 12.9% of our GDP, the highest since World War II.

The U.S. trade deficit increased in March for the first time in eight months, the Commerce Dept. admitted today. The trade gap grew about a billion bucks from February to March, to a $27.6 billion deficit. A slide in exports led the way, namely of autos, chemicals and airplanes.

The paper will tell you this is another sign of recovery, which it is… if we aim to recover to our old way of living. Evidently, spending far more than you earn is still a sign of economic vitality.

  India takes the prize for the worst piece of economic data today. Industrial production there fell 2.3% in March, the worst annual decline in 16 years. Global analysts were expecting a decline, but the printed number came in about three times worse than anticipated.

  Stocks suffered yesterday, as investors of the world took profits. After hitting four-month highs Friday, the Dow and S&P 500 retreated about 2%, the Dow’s worst day in three weeks.

Traders are taking it easy today, waiting for the next big move. The market opened flat and is hovering at break-even as we write.

“Probably the single biggest drag on the economy over the next several years will be a massive write-down in perceived wealth,” writes famous fund manager Jeremy Grantham. “In the U.S., the total market value of housing, commercial real estate and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. This loss of $20-23 trillion of perceived wealth in the U.S. alone (although it is not a drop in real wealth, which is comprised of a stock of educated workers and modern plants, etc.) is still enough to deliver a life-changing shock for hundreds of millions of people.

“No longer as rich as we thought — undersaved, underpensioned and realizing it — we will enter a less indulgent world, if a more realistic one, in which life is to be lived more frugally. Collectively, we will save more, spend less and waste less. It may not even be a less pleasant world when we get used to it, but for several years, it will cause a lot of readjustment problems.

“Not the least of these will be downward pressure on profit margins that for 20 years had benefited from rising asset prices sneaking through into margins.”

  The dollar rose yesterday as investors traded stocks for cash, but the greenback has already erased those gains this morning. The dollar index sank as low as 82.1, a four-month low.

Thus, the euro is sitting pretty today — at a seven-week high of $1.36. The pound is up to $1.53, its highest level since early January. The yen continues to slowly strengthen, now at 97.

  Oil held steady yesterday, despite the stock sell off. Light sweet crude stood its ground at $58 a barrel. Buyers are back today, as the front month contract rose as high as $60 this morning, a new 2009 high.

  Gasoline prices have hopped up about 10% across the country over the last two weeks. Crude’s foray into the upper $50s and renewed optimism in almost every asset class has helped bump the price at the pump up 20 cents since the start of the month. The national average is now $2.24 a gallon, also a 2009 high.

  “The war on the so-called greenhouse gases is officially under way,” writes Chris Mayer, “and it is going to be expensive. Each passing month brings us closer to capping, taxing or cutting the gases thought to cause global warming.

“I don’t think investors appreciate how far-reaching such efforts could be. And there will be definite winners and losers as a result. Some of these are far from obvious and some are in plain sight.

“The first obvious big loser is American coal, from which we get half about of our electricity needs. Already, you see companies reacting to this news. Consol Energy, a big coal company, said it halted two big mines in Appalachia because of uncertainty over the costs of pending new regulations. If you own a U.S. coal miner, I’d fold the hand, so to speak.

“Natural gas-fired plants, though, may be one winner relative to coal, because natural gas burns cleaner than coal. Already, in just the last few months, as the market ponders talk of new emissions caps, you could see gaps opening up between coal utilities and natural gas utilities.

“For example, here is a three-month chart of a Capital & Crisis pick, National Fuel Gas, which uses gas, versus AES, the big coal utility.


“Though the new rules could be a year or more away, those gaps may well widen over time as investors anticipate the likely bad ending for coal. So I would not own a U.S. coal utility right now, either. It is no fun wearing a target on your back — especially since the guy throwing the darts makes all the rules.”

Amen. That’s just a snippet from Chris’ latest issue of Capital & Crisis. Every month he delivers an issue chock-full of forward-thinking analysis, historic perspective and contrarian investment advice… all for an annual price that’s downright cheap. If you’re not already, get on board, here.

  “A few months ago, I wrote to the Postal Service, giving my two cents in favor of the five-day delivery,” writes a reader responding to yesterday’s stamp price increase.

“Just as anyone would expect from anybody working in anything close to a government job… their response was that they were going to ask Congress to let them defer payments into the pension plan… sniff, sniff, because they were the only federal agency required to keep their pension system fully funded… sniff, sniff, it’s just not fair… we want to come begging for our bailout in a couple of years too!

“All I could say after getting that letter was UFB.”

The 5: Our reader gave a translation for that abbreviation… we’ll let you figure it out for yourself.

“Hey, 5,” our last writes. “Thought you might get a kick out of this past Sunday’s Dilbert comic.”


Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. If you’re a true opportunist, you need to read this report. One of our analysts is predicting some very big news to emerge from six tiny companies… the kind of news that could reap transformational wealth for early investors.

The last time we predicted an announcement like this, early investors were sitting on gains of 56% in just two trading days… and 83% in 10 trading days. This time, we’d be disappointed with anything less than a triple-digit winner.

We can’t go into too much detail here, as the nature of the information could reveal the companies and blow up their shares. So if you are interested in being among the first wave of investors, click here to get the details.

P.P.S. Addison sends his regards. While he’s putting the final touches on the second edition of Financial Reckoning Day, I’ll be at the helm of our humble 5 Min. Stay tuned!



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