Your Share of the Debt, GM Dies, Silver Still a Buy, A Pivot Point and More!

by Addison Wiggin & Ian Mathias

  • Brother, can you spare half a million? Your family’s (new and improved) share of U.S. debt
  • GM officially kaput… the dirty details and a brief rant, below
  • Markets hit a critical “pivot point,” says Rob Parenteau
  • The one number from China that’s boosting stocks, commodities and currencies today
  • Plus, two good reasons to buy a precious metal… especially silver


  Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household — thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total U.S. tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65. 

 Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed — U.S. Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. "As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis."

In the meantime, Geithner assured students at Peking University that China’s investments in U.S. paper are “very safe.”

  “I doubt the Chinese believed him,” says the man, the myth, the legend Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former U.S. Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

”It all comes down to the fact that the U.S. needs China more than the other way around.”

  General Motors, once the backbone of U.S. manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in U.S. history:

  • Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
  • Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
  • The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north.
  • Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
  • Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

  “GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the U.S. government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing or Tokyo.

  Sign of the times… GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citi is the former owner of Travelers, which it spun off in 2002.

  The market baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.

  “We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebacher Society.

“As we have documented in recent weeks, the list of U.S. macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

If you seek a better, richer life through macroeconomic awareness, you’ll be right at home in the Richebacher Society. Get in, here.

  Like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze:

  China’s manufacturing sector expanded for the third month in a row in May, its government reports today. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.

  Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number.

  The dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.

  Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the U.S. dollar. Break out the black crepe and armbands of mourning for the U.S. dollar.


“Specifically, silver has always been the "poor man’s gold." Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (‘cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is — believe it or not — leaving gold in the dust.


“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Heh, get your ticket here: Byron’s latest special report on precious metals investing.

  Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?

  “I’m a raving fan, but sometimes you guys get misled a bit,” writes a reader in response to Robert Gordon’s call that the recession has bottomed.

“The so-called ‘ultimate indicator’ of recession ends of the four-week moving average of initial jobless claims is hardly as accurate as suggested. It is true that it does turn down typically, just as a recession ends from the retrospective declaration of that recession, but it is NOT true that every time the four-week moving average of initial jobless claims turns down during a recession, the recession ends.

“In the ’81-’82 recession, the indicator turned down from over 500k four times before a correct signal — in December ’81, February 82, May 82, June 82, and finally at the real ultimate peak in October 82. In the 1990 recession, it turned down in January of ’91, before its ultimate peak in April 1991.

“In the 2000 recession, it turned down in June 2001 from high levels, to give a false signal before peaking in October 2001, although many other recession indicators suggest that the recession went on for far longer than in the graphic you presented.

“Virtually every recession therefore has witnessed false signals of at least one and often many times before the ultimate peak in initial claims and before the later declared end of the recession. Why would this time be any different — particularly in view of the potential for auto mess to lead to accelerated claims?”

The 5: We agree… guess we didn’t lay the skepticism on thick enough when we introduced the idea. Glad to hear you’re a fan.

Thanks for reading,

Ian Mathias

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