Too Big to Fail V2.0, The Fall of Charity, Deflation is Good, Oil Investing and More!

by Addison Wiggin & Ian Mathias

  • Here we go again… mega-acquisition creates the next “too big to fail” financial
  • Stocks continue sideways… Paul Volcker on the “long slog” ahead
  • Doug Casey on why deflation “is actually a good thing”
  • Two bullish bits for oil, plus Byron King on the oil patches of tomorrow
  • As stocks go, so goes generosity… the record crash in charitable giving


  Just when you thought “too big to fail” was going out of style:

Ohh… and they’ve already got a great, devious name!

BlackRock announced a $13.5 billion merger with Barclays Global Investors today, making the former company the biggest money manager in the world. BlackRock will soon oversee $2.7 trillion in assets, making it roughly twice the size of State Street or Fidelity, its closest competitors. That’s $2.7 trillion under management… with a market cap of just $34 billion.

If that marriage of assets to equity wasn’t unnerving enough, BlackRock will also pick up iShares in the deal. That makes the new world’s biggest asset manager also the world’s biggest wielder of exchange-traded funds (ETFs) — the rabidly popular, complex derivatives (many of which track other complicated derivatives) that millions own, but very few truly understand. Hmmm…

  But never mind this crisis of tomorrow… stock investors resumed buying yesterday after a successful long bond auction.

Unlike Wednesday’s tepid response to the government’s auction of 10-year notes, yesterday’s sale of 30-year bonds was a surprising success. So called “indirect bidders,” mostly foreign central banks, saved the day by scooping up the biggest percentage of long bonds at auction since the 30-year’s reintroduction in 2006. (Sounds a bit fishy, no?)

The auction’s success bumped long bond yields off their recent highs and gave stock traders the green light to buy. The S&P gained as much as 1.7% during the peak of the euphoria, but par for the course this week, traders sold heading into the close. When the dust settled, most major indexes were up about 0.5%.

  Stocks got off to a boring start again today. With the exception of yesterday, the Dow and S&P have gone nowhere all week… today might be much of the same.

  “An expectation of some growth late this year and next in the United States seems reasonable,” said former Fed Chairman Paul Volcker during a speech last night in Beijing. However, "a really strong recovery, typical of most recessions, seems unlikely. Rather, it is going to be a long slog, with continuing high levels of unemployment."

Perhaps most importantly, Volcker suspects, "This is not an environment in which inflationary pressures are at all likely for some time to come.” The man certainly knows inflation. Thus, his word is well heeded… or is he now just an Obama administration mouthpiece?

  “Inflation is very bad,’ writes Doug Casey. “But deflation is actually a good thing. In a deflation, prices drop and money becomes more valuable, so deflation encourages people to save money. Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. And during a deflation, when money becomes more valuable, everybody wants money. They want to save. Whereas during an inflation, you want to get rid of the money. You want to consume. You want to spend. But you don’t become wealthy by spending and consuming; you become wealthy by producing and saving.

“Inflation encourages people to borrow, because they expect to pay the debt off with cheaper dollars. It encourages people to mortgage their future.

“The basic economic fallacy in this is that a high level of consumption is good. Well, consumption is neither good nor bad. The problem is the emphasis on consumption financed by debt — which leads to the national bankruptcy we’re facing. It’s much healthier to have an emphasis on production, financed by savings.”

For better or worse, Doug is one of our Investment Symposium highlights. His… umm… “unique” presentation style always garners the largest amount of both rowdy applause and vicious booing. Love him or hate him, he can’t be missed… be sure to check out our event this July in Vancouver.

  In line with Doug’s forecast, total household debt in the U.S. fell 1.1% in the first quarter, or $13.8 trillion. The 2% decline in the fourth quarter of 2008 was the first on record, and thus last quarter’s decline marks the first ever consecutive quarters of household balance sheet repair. Consumer credit led the way, dropping 3.5% last quarter — the steepest decline in the 35 years the Fed’s been keeping track.

But as debt fell, so too did household net worth. Total American wealth plummeted $1.3 trillion, or 2.5% in the first quarter of 2009. Household net worth is now around $50.4 trillion, $14 trillion shy of the 2007 high.

  Oil’s down a buck from yesterday’s 2009 high of $72. But over the last 24 hours, we’ve found two more bullish bits for the black goo:

· The International Energy Agency increased its global oil demand forecast for the first time since August. (Heh, perhaps a contrarian indicator… that’s the same month oil peaked). The Parisian oil gurus bumped daily worldwide consumption estimates by 120,000 barrels, to 83.3 million bpd. That still puts the world on pace for a 2.9% consumption contraction this year, the worst since 1981

· China’s crude oil imports shot up to a 14-month high in May, its government reported yesterday. The 5% monthly leap was the second biggest on record.

  “Most of the major oil discoveries that remain to be found in the world will be offshore, in deep water,” reports Byron King from the annual convention of the American Association of Petroleum Geologists.

“The other day, I attended a spirited session concerning deep-water energy development. The always-ebullient Brazilian geochemist Marcio Mello — CEO of Brazil’s HRT Petroleum Co. — wowed the crowd with a discussion of the oil potential of the South Atlantic. He was quick to point out that six of the last 10 giant oil discoveries in the world were offshore Brazil. And then Marcio moved the discussion to the other side of the South Atlantic and gave an eye-popping description of the oil potential of the offshore regions of Namibia.

“‘The Namibian offshore is analogous to that of Brazil,’ Marcio stated, with slides and hard data to back it up. Then he showed his proprietary research into natural offshore oil seeps off Namibia, and the geochemistry that demonstrates immense hydrocarbon potential. As for the reservoirs, he showed a slide of proprietary seismic data. ‘And look at this turbidite stuff,’ he yelled, as a couple hundred seasoned geologists in the room both gasped and chuckled.

“Indeed, Namibia is destined for oil riches.”

Byron has a company in the Outstanding Investments portfolio that’s mastered the art of subsea energy systems — a crucial technology to deep offshore drilling. Outstanding Investments is such a remarkable value… the ticker alone is worth the annual dues. Get in, here.

  Traders sold the dollar in anticipation of yesterday’s bond auction, and then bought it back up when the long bonds flew off the shelves. But the dollar is even higher today… the dollar index is up a full point from yesterday’s low, to 80.4.

“Here’s the skinny,” says our friend Chuck Butler, “The chicken traders are scared to death of having short dollar positions ahead of the G-8, where they fear U.S. Treasury Secretary Geithner will say that the U.S. favors a strong dollar! Geez, Louise! Here we go again! How many times can a U.S. Treasury secretary go to the well with that saying and get positive traction?”

Heh, amen.

  Gold is down today on that dollar strength. The spot price has fallen $15, to $940 an ounce.

  A lone morsel in the data cupboard today: Consumer confidence is up to a nine-month high, though only by a very small margin. The University of Michigan’s gauge of consumer feelings rose to a score of 69 in the first week of June, just a hair above May’s 68.7. That’s the fourth month in a row of improved sentiment.

  Last, a sad sign of the times: Charitable donations in the U.S. have fallen by the most in 53 years… at least. Companies, foundations and individuals shelled out $307 billion in charitable giving in 2008, says a study the Giving USA Foundation released this week. That’s an inflation-adjusted 5.7% decline from last year, the largest annual drop since at least 1956, when the group started keeping track.

Now here’s the really interesting part: Donations to religious causes didn’t fall a bit. In fact, religious groups garnered a 1.6% inflation-adjusted increase in donations from 2007-2008. Donations for the other two philanthropic causes Giving USA tracks — education and human services — fell 9% and 16%, respectively.

  “Kudos to the CEO who so closely monitors his holdings in penny stocks,” writes a reader, responding to our week-long debate on CEO compensation. “However, this simply is not practical for the vast majority of investors. Few have enough shares to warrant flying across the country to attend stockholder meetings, and many have their stockholdings via funds. The real tragedy is that the funds do not seem to care what the corporations do to their stockholders. They don’t know and don’t care whether the boards are being fair to the shareholders. I was on a bank board for many years and always felt that the stockholders deserved the best we could do for them, even though my re-election was virtually automatic.”

  “There is a flaw in your reasoning,” adds another, “behind the power of voting proxies to control CEO salaries. A vast majority of most stocks are owned by mutual funds. Mutual funds have been around a long time, but since ERISA, just about every corporate worker in America has money in one or more mutual funds. Mutual fund managers buy individual stocks for one simple reason: they expect the stock price to rise. If they expect the price to fall, they sell it (a little at a time, to avoid a stampede). The board of directors accountability has been forever severed. Unfortunately, there is no hope for reversal. It’s just like repealing the tax code, only completely different. But alike in the sense that neither will change. Unlike in the fact that the tax code actually COULD be repealed easily, but mutual funds couldn’t be eliminated, without the collapse of the Wall Street machine… Wait, maybe I’m onto something here.”

The 5: Perhaps you are.

Thanks for offering your thoughts on this matter all week. We’ll kick this debate to the blog and forge ahead to greener pastures… feel free to keep the convo going there. Don’t forget, nearly every issue of The 5 is archived on the blog, along with a handy search engine for finding vintage charts, quotes and 5 Min. bits.

Have a great weekend,

Ian Mathias

The 5 Min. Forecast

P.S. Check out our resource trader Alan Knuckman — the man is on fire:

72% on a coffee play on May 7

80% on silver on May 7

67% on the Canadian dollar on May 8

85% on the Aussie dollar on May 20

70% on Treasury bonds on May 27

200% again on the Canadian dollar on June 2

148% again in silver on June 5

His Resource Trader Alert readers cashed in all those gains — in just the last 30 days! If you’re not trading along, obviously, you’re missing quite an opportunity. Click here to learn how to follow along.



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