Audit the Fed, China’s New No. 1, Short Canada? and More!

by Addison Wiggin & Ian Mathias

  • Idiocracy in action: Congress blocks bill to audit the Fed
  • No surprise: American loan defaults hit record… Surprise: Could Canadians be next?
  • China takes another “World’s No. 1” from U.S.
  • Dan Denning, Byron King on recent triumph and tragedy in the oil patch


  Great news: The Federal Reserve will retain its right to operate in secrecy. 

“Thank God for Rule 16!” 

Late yesterday, the Senate majority put the kibosh on a last-hour provision in the 2010 spending bill that would audit the Fed. Not because it’s a bad idea… but because of the arcane Rule 16, which prohibits policy legislation from being added to spending bills. (The kind of “rule” that’s only evoked when the majority gets uncomfortable.)


“The Federal Reserve will create and disburse trillions of dollars in response to our current financial crisis," said Sen. Jim DeMint, who spearheaded the failed audit addition. "Americans across the nation, regardless of their opinion on the bailout, want to know where the money has gone.” Under his proposed plan, the Government Accountability Office would take a look into the Fed’s discount window lending, various funding “facilities,” bank bailouts and agreements with foreign players. 


Shame on Mr. DeMint for such an outrageous request. Down-to-the-wire appropriations should be reserved for truly exigent causes… like protecting the makers of wooden arrows designed for use by children. Why bother wasting the time of the GAO with a simple audit of the most unaccountable monetary body in the world? 


You can watch Mr. DeMint get what’s coming to him here. Ron Paul’s bill — that other shameful attempt to audit the Fed — now has 249 co-sponsors in the House. Wonder what brand of parliamentary fine print Barney Frank or Nancy Pelosi might summon to quash that one.


  The number of U.S. consumer loans in default has hit a record high, reports the American Bankers Association. The ABA just polished off its first-quarter delinquency report (little late on that one, fellas) and revealed some disturbing results: Of all the consumer loans in America, 3.23% are more than 30 days in arrears. That’s the highest level since at least 1970, when the ABA started keeping track.

Of course, it’s no shocker that things got tough in the first quarter. But what of the most recent three-month stint, during the best of the sucker rally? “The No. 1 driver of delinquencies is job loss," hints ABA’s chief economist, James Chessen. "When people lose their jobs, they can’t pay their bills. Delinquencies won’t improve until companies start hiring again and we see a significant economic turnaround."

So practically no one expects the unemployment rate to stop its accent until at least 2010. And just as many are willing to admit there are boatloads of souring loans still on bank balance sheets. Hmmm….

  While certainly better off than the U.S., Canada could face a consumer debt crisis of its own, reports the Bank of Canada. In its biannual Financial System Review, the BoC said yesterday that “There has been a further deterioration in the financial position of the Canadian household sector.” The average ratio of debt to income has hit a record level for Canadians… household debt there is averages roughly 140% of disposable income. Here in I.O.U.S.A., it’s closer to 170%. Suffice to say neither ratio is desirable.

We don’t want to say too much here, but when it comes to a few select Canadian financials, our short analyst Dan Amoss has his finger on the trigger. Stay tuned for more.

  China has taken yet another “World’s No.1” title from the U.S., reports Chris Mayer.

“In 2000, China’s exports to the Arab world came to just $6 billion,” says Chris. “Last year, China’s exports to the Arab world climbed to $48 billion, which nearly passed America’s $50 billion in exports to same region. Earlier this year, China finally passed the U.S. to become the Arab world’s largest trading partner.

“This is a historic shift. What we’re seeing here is the New Silk Road in action…

“Today’s traders are following in the footsteps of their ancestors. The bookends of the new Silk Road are China and the Middle East, especially the Arab world. The Eastern bookend gets all the press, but what many people fail to appreciate about the rise of China is how it also sired the rise of the Arab world.

“What does this new Silk Road mean for investors? I believe the New Silk Road gives us a framework for looking at markets and sniffing out opportunities in energy, water, food and more.”

  And just how Sino-centric has the Arab world become? “Dubai, for example,” continues Chris, “houses the DragonMart. It is the largest building to sell exclusively Chinese-made goods outside of China. It measures nearly 1.6 million square feet! And China seems to go out of its way to make Arabs feel at home in China — even using state money to build mosques. According to Ben Simpfendorfer, the Chinese will issue visas for visiting Egyptians in 24 hours. It takes 18 days for an Egyptian to get one for America.”

The “New Silk Road” is one of the pillars of Chris’ current investment approach. For specific ways to invest in this sea change, click here.

  Back in the U.S., lawmakers are looking to make it harder for traders to buy and sell the Middle East’s largest export. The Commodity Futures Trading Commission said late yesterday that it’s mulling limits on position sizes in commodity contracts — namely, for crude oil. No doubt the move is aimed directly at Wall Street, which played a significant role in driving oil to $145 this time last year… and back down to $33 in January.

“The CFTC is barking up the wrong tree,” opines Dan Denning, “if it wants to blame high energy prices entirely on speculators. One factor in oil’s rise is clearly investment demand from traders and institutions that foresee the decline of the U.S. dollar. Another factor subject to much debate is Peak Oil itself (that global oil production is peaking).

“For now, we’d say this is another sign of increasing government control of the markets. Some people think this is good and long overdue. Some people don’t. Either way, it looks like the world we’re headed to. And it looks to us like a sure sign that the U.S. government wants to have a lot more control of what you do with your money (capital controls). We reckon the oil trading will just move to London.”

  Commodity traders continue their crude oil sell-off today. The front-month contract fell as low as $61 a barrel this morning. That’s almost a 14% fall just from this time last week.

And look for oil to be under even more pressure for the rest of the day. The Energy Department announced late this morning another uptick in oil and gas inventories.

  “In the West, we are WAY too focused on our own oil demand,” says Byron King. Before we allow him to continue, a quick tip of the cap: Byron called the oil top almost to the day last month when he told you to take oil profits. Bravo.

“People look at U.S. inventory numbers, for example, and then think that the U.S. supply-demand situation ought to control oil prices. But that’s ancient history now.

“This year, we’ve encountered a new situation. Oil demand from the developing world is about equal to the demand from the developed world. That is, the developing world is using half the world’s daily oil output. And that developing-world demand is growing.

“China’s oil demand was up 12% in one year (May 2008-May 2009), during a time when the world’s economy fell off a cliff. It makes you wonder what the increase might have been if the world economy had not fallen off a cliff. And the volume of increase — 800,000 barrels per day — is TWICE the amount that passes daily through the Alaska Pipeline.

“These kinds of dramatic numbers out of China bolster the case that oil prices will continue to rise in the face of overall rising world demand.” Energy economist Michael Economides of the University of Houston expects to see $100 oil by the end of this year.

Will your portfolio benefit? Click here for Byron’s favorite oil plays.

  Oil and energy stocks led the market down again yesterday. The major indexes fell about 2%.

Stocks today are drifting … we suspect any real moves will come after the closing bell when Alcoa kicks off the second-quarter earnings season. Of course, we’ll keep an eye on it for you.

  The dollar, and subsequently gold, have been a pretty dull trade this week. Today we’re seeing just a bit more action, with the dollar index trending up to 80.6 and gold falling a few bucks, to $918 an ounce.

  “The insane suggestion that we need more government stimulus,” writes a reader, “is similar to someone asking for more paper because the initial bonfire isn’t big enough to burn America to the ground fast enough. That’s the first insanity, but there’s more.


“Instead of cutting taxes on small businesses, where 90% of most profit-producing (hint: nongovernment) jobs are created, the feds plan on imposing a federal health care program that will cripple business’s ability to keep or add jobs. But that’s still not enough.


“There’s one more insanity to go: cap and tax. Here the perfect triple storm of economic disaster becomes complete. The feds will now add unnecessary energy taxes that will resonate throughout the economy, driving prices higher, profits lower and people out of work and ushering an era of perpetual penury for the vanishing middle and systemic lower classes. All this from the wiser and smarter-than-the-rest-of-us people in Washington, D.C., who started the dismantling of the greatest economic engine in history by deciding to get into the mortgage business and awarding homes to people who couldn’t afford them.


“I continue to reread the Declaration of Independence and see history repeating itself once again. Government tyranny is destroying our nation, and if we do not throw it off, it will crush us.”

  “What if Barney Frank were Californian?” asks another reader, in reference to Moody’s recent downgrade of California’s credit rating.

“I haven’t seen it yet, but I imagine we will soon see politicians vilifying those Fitch rapscallions for self-serving, anti-American greed, arbitrarily lumping them into the same group with those evil capitalist ‘speculators.’


“It wouldn’t be funny, but we’d still laugh and laugh.”

The 5: It would be humorous if the ratings agencies finally tasted some congressional wrath — not for their totally illogical/unethical ratings for financials over the last three years, but for their legitimate downgrades of U.S. municipalities. But you’re right… it wouldn’t be “funny ha-ha.” More like “laugh ’cause it’s easier than crying.”


Ian Mathias

The 5 Min. Forecast

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