Americans Stop Spending, Crucial Week for Treasury and Banks, Canada Strikes Back and More!

by Addison Wiggin & Ian Mathias

  • Finally, Americans are saving more than spending… can it last?
  • Pivotal week for Treasuries, U.S. debt outlook… Bill Gross on investing accordingly
  • Chris Mayer says banks still in trouble… even those begging to repay TARP loans
  • Canada strikes back… angry mayors pass “Buy Canadian” resolution
  • Plus, dollar snaps losing streak… euro, commodities, stocks suffer


  For the first time since at least the Second World War, Americans are acting like… well… everyone else.

Americans are spending less this year than they did in 2008. Believe it or not, that’s a first since World War II. What’s more, we’re saving at a historic clip… the personal savings rate (updated Friday) jumped from near 0% last year to 5.7%, a 14-year high and the fastest growth rate since at least 1950, when the government started keeping track. Check it out:

  “We believe this is crucial to household balance sheet repair,” says our macro-man Rob Parenteau, “but it can only continue if some other sector of the economy is willing to reduce its net saving or increase its deficit spending. Otherwise, in a dynamic sense, saving by one household simply leads to income shortfalls and dissaving elsewhere.

“Contrary to the textbook story, intended saving does not automatically provoke planned investment, even with interest rates lower. With the monthly trade deficit improvement beginning to stall as U.S. consumption and production stabilize, the only other sectoral source that can support higher household saving besides fiscal deficit spending is higher business reinvestment rates, but that is probably a good year out from now.

“At best, then, we can hope the gross personal saving rate stabilizes near current levels until business investment revives. In the meantime, it all hangs on fiscal stimulus getting traction.”

Even if the stimulus gains traction… will it matter? Rob answers this question and more here — his 2009-2010 forecast.

  This week could decide how much it costs I.O.U.S.A. to push the stimulus through. The U.S. Treasury will attempt to sell $35 billion in 3-year notes tomorrow, $19 billion in 10-years on Wednesday and $11 billion in 30-year bonds on Thursday. The later two auctions are the first long-term efforts since the bond crisis began in earnest… thus success is critical to Uncle Sam’s agenda.

Yields are already perking up, a sign things might not go so smoothly. A 10-year currently yields 3.83%, barely off Friday’s seven-month high of 3.88%.

“It is obvious,” writes Bill Gross, “that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board — which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds…

“The concern is that this can be accomplished in only two ways — both of which have serious consequences for U.S. and global financial markets. The first and most recent development is the steepening of the U.S. Treasury yield curve and the rise of intermediate and long-term bond yields. While the Treasury can easily afford the higher interest expense in the short term, the pressure it puts on mortgage and corporate rates represents a serious threat to the fragile ‘green shoots’ recovery now under way.

“Secondly, the buyer of last resort in recent months has become the Federal Reserve, with its publicly announced and near-daily purchases of Treasuries and agencies at a $400 billion annual rate. That in combination with a buy ticket for over $1 trillion of agency mortgages has been the primary reason why capital markets — both corporate bonds and stocks — are behaving so well. But the Fed must tread carefully here. These purchases result in an expansion of the Fed’s balance sheet, which ultimately could have inflationary implications. In turn, nervous holders of dollar obligations are beginning to look for diversification in other currencies, selling Treasury bonds in the process.”

So how does Gross recommend you proceed?

“Bond investors should, therefore, confine maturities to the front end of yield curves, where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago.”

  Another potentially pivotal moment of this week: The Fed is expected to announce this week which banks are allowed to repay their TARP loans and the conditions of repayment. Goldman, JP Morgan, Amex, Morgan Stanley, State Street and U.S. Bancorp are on the short list to get the green light. Along with BB&T, each of those have requested to repay the loan… but of course, in America in 2009, it couldn’t possibly that easy. We’ll let you know the government’s proposal when it emerges.

  “Don’t be fooled,” writes Chris Mayer, “banks are still in trouble. The thing to hide is debt. And our banks have mastered the art. The Financial Accounting Standards Board, or FASB — I’m sure its members are a blast at cocktail parties — is close to closing a loophole with some new rules. The new rules would require banks to bring some of their off-balance sheet assets back on their balance sheets.

“‘Off-balance sheet,’ is code for hiding in the footnotes. Banks during the boom created all kinds of special purpose vehicles to hide stuff. Well, the nerve of the FASB has the banking sector in an uproar. Bankers are writing pleading letters to Treasury Secretary Timothy Geithner to try to get FASB to play ball.

“That’s because they’ve got trillions of dollars of debt hidden off balance sheet. And if they brought these debts back on their balance sheets, they would need to raise a lot more capital. That would dilute their shareholders and kill their stock prices. It would also shatter any remaining confidence that these banks are in good shape.

“And the numbers we are talking about here are huge. According to Bloomberg, off-balance sheet assets just for the four biggest U.S. banks were about $5.2 trillion at the end of 2008. The rumor is that the new rule would force these banks to recognize only around $1 trillion of that. And though people say ‘off-balance sheet assets’ — what we are really talking about is more assets bought with very little equity.”

BTW, you can currently test drive a month of Chris’ highest-end analysis for just $1. Learn about this practically free trial,here.

  More “zombie bank” fodder: The Obama administration is expected to announce new CEO compensation rules this week. Under the rumored plan, companies that have received federal aid will be required to inform the White House of major executive pay changes. Those changes will go to “Special Master of Compensation” (no kidding) Ken Feinberg, who will pass them through some sort of ridiculous Washington-ized test and blah blah blah… another nail in the coffin of capitalism.

  Well, at least we can fall back on strong, positive trade relationships with our closest ally… uh-oh:

A consortium of Canadian mayors have passed a “Buy Canadian” resolution. In retaliation to protectionist provisions in our stimulus bill, the Federation of Canadian Municipalities voted over the weekend to shut out American bidders from city contracts. The AP claims the resolution will “support cities that adopt policies that allow them to buy only from companies whose home countries do not impose trade restrictions against Canadian goods.”

The move is more of a nonbinding shot across the bow… but we imagine Prime Minster Harper and President Obama heard it loud and clear. Could get interesting.

  The dollar is now firmly on the rise. The dollar index had already managed to stop the bleeding by the end of last week, and Friday’s not-as-terrible jobs report ignited a rally. Thus, the dollar index is up a point and a half from Friday’s low, to 81 on the dot.

That puts the pound down to $1.58, 4 cents worse than Friday’s price. The euro is in even worse shape, as Ireland lost another notch on its credit rating this morning. Now a nasty AA, the Emerald Isle helped pull the euro down to $1.38, 4 cents from Friday.

  The greenback’s rise is putting a damper on dollar-denominated commodities. Oil’s down $2 from its brief 2009 high of $70 a barrel. Gold is hurtin’, down $20 Friday and another $15 this morning, to $945.

  Stocks are in trouble today, too. Energy and commodity stocks have been market leaders over the last week or so. Thus, the fall in commodity prices is now driving stocks down. The Dow opened down over 100 points. 

“Friday’s celebration of a “less bad” payroll report,” notes Dan Amoss, “may mark the end of the rally-on-less-bad-news phenomenon. It’s becoming increasingly clear that in order to sustain the recent rally, the market will have to be more convinced that employment will start rising, rather than just shrinking at a slower rate.”

  “Your reader made a misinformed blanket statement,” writes a reader, referring to Friday’s issue, “that everyone comes here to the U.S. for all the latest in medical technology. I am a physician, and faced with a health challenge would very likely look into treatments in Europe, India and Mexico, which include a wider scope of treatment modalities than just invasive procedures or expensive unproven pharmaceutical ‘discoveries.’ Americans are beginning to go to other countries to get affordable medical care, and our insurance companies are happy to pick up the markedly reduced bill.”

  “After 34 years in health care,” writes another reader, “from academia to the head of R&D for a decade for commercial firms to hospital administration as well as patient care, I can tell you that your readers are totally in the dark.

“At least 65% of that so-called vaunted Western medicine is pure garbage, from drugs that are more dangerous than what they treat to procedures that have no basis for any patient value to medical practice that spends 70% of its time doing CYA to hospital charges for the sake of revenue (e.g., the epidemic of CAT scans in this country). With reimbursement 95% favoring treatment, but having hardly a penny for prevention, the financial interests (physicians, insurance companies, hospitals, pharmaceuticals, etc.) are simply far too entrenched to be usefully modified by competition and the marketplace any longer.

“The situation is so bad even intervention by the government will now be an improvement! The handwriting has been on the wall for a long time — rationing and denial of medical resources will be the only possible outcome. A rational plan to do this would have been much better, but any inside player knows that this is not possible any longer. It will take the clumsy and inept hand of government to begin this needed pruning, along with reimbursement for prevention. And we will on average live decidedly longer and better as a result.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. As if you needed any more proof that Rush Limbaugh is an idiot, on Friday, he labeled Resource Trader Alert’s Alan Knuckman a mouthpiece for "state-run media." Yeah, that sounds like Agora, doesn’t it? Nice work, Rush — right on target, as usual. 

P.P.S. The fact that Alan got under Rush’s skin should be reason alone to check out Resource Trader Alert. But if you need more, we’ll knock 50% off of his high-end commodity trading service — if you click here.


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