Canada’s Coming Crisis, Goldman’s Profits, Russia’s Dollar Replacement and More!

by Addison Wiggin & Ian Mathias

  • Dan Amoss’ next short… and Canada’s dirty little secret
  • Mainstream shocked at Goldman’s mega profits… we say, “That’s it?”
  • “Worst not over” says Obama’s economic guru
  • The first look at the world’s next reserve currency… if Russia has its way
  • Chris Mayer on ground zero for a global resource grab: Kazakhstan


  “If you think Canada escaped the downward trend in U.S. banking, think again,” Dan Amoss begins. “While the country may not have plunged headfirst into subprime mortgages, it did dip heavily into risky derivatives. The leverage it took on generated impressive returns on equity in good times, but that same leverage is set to wipe out equity today.

“Canada has just entered what will ultimately be an enormous credit loss cycle, and by the time it’s over, the Canadian banks could easily lose their pristine reputations. Until the middle of 2008, Canada’s economy was booming. Its mining, energy and manufacturing sectors are world-class, and every other sector was pulled along for the ride.

“But the wheels fell off last fall. According to Statistics Canada, the unemployment rate rose to 8.4% in May — the highest in 11 years. Ontario, with its heavy manufacturing base and ties to the ‘Detroit Three’ auto companies, is especially hard hit; Ontario lost 234,000 jobs, or 14% of its entire manufacturing work force, since last October. Ontario will lose even more jobs this summer as GM and Chrysler dramatically cut auto production. Alberta has slowed dramatically too. Just a year ago in Alberta, every skilled construction worker was working overtime on oil sands projects. Now many projects are postponed and workers are getting laid off. The unemployment rate in Alberta nearly doubled from May 2008 to May 2009, to 6.6%, and is heading higher.

“For Canada, this credit cycle will probably be worse than the one in the late 1980s. According to RBC Capital Markets, annualized loan loss provisions for the entire Canadian banking system peaked at 2.88% of all loans in 1988. As of April 2009, this figure was just 0.77%. Over the next year or two, loan loss provisions should easily triple or quadruple, which would cut deeply into profits and capital.”

Dan just told his Strategic Short Report readers about one “safe” (and very well-known) Canadian bank on the verge of a solvency crisis. Get the ticker by subscribing, here. And don’t forget, today is the last day you canjoin Strategic Short Report for 50% off.

  Back in the world of American finance, the mainstream is aghast at Goldman Sachs. The investment bank is expected to announce a $2 billion profit in its second-quarter earnings announcement tomorrow. The New York Times is wondering how Goldman “could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.”

We’re wondering… just $2 billion?

GS is an “investment bank,” after all, and we hope they did a little investing during the biggest snap-back rally of our lifetime. During the second quarter, the S&P 500 rose 15%. 433 of its components registered a gain, including Goldman, which shot up 33%. From a January bottom, GS stock has more than doubled.

Goldman is one of the world’s biggest underwriters too… a fortunate place to be in the second quarter, one of the grandest periods of dilutive stock offerings in history. On top of that, they got a $10 billion taxpayer lifeline, a market value of $74 billion and recently issued $28 billion in ultra-cheap FDIC-backed debt.

So only $2 billion? Yawn… for the most politically connected bank in the world during the most rabid rebound rally since the Great depression, we’re not surprised. We suspect the second half of 2009 will be much more interesting.

  Another bank failed over the weekend. The Bank of Wyoming gasped its last breath late Friday. That’s the 53rd failure this year and actually the first Wyoming shutdown since 1991.

The FDIC’s war chest is now below $13 billion, the lowest since 1993.

  No juicy economic data to report today, but the rest of the week should be interesting. We’ll hear the latest Treasury deficit later today, then PPI and retail sales tomorrow. Wednesday will bring consumer inflation data, FOMC minutes and our favorite D-list number — capacity utilization. Jobless claims and TIC flows will show up Thursday. Building permits and housing starts arrive Friday.

  “I don’t think the worst is over,” leader of the President’s National Economic Council Larry Summers told the FT over the weekend. “It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low.” Wow, a candid and easy-to-understand Washingtonian… and a Harvard econmist, no less. Not bad, Mr. Summers.

  The return of economic malaise has kept the dollar afloat and held gold prices down. We know — that’s ass-backward. But with the dollar still the world’s reserve currency, that’s the way it goes. The dollar index is at 80.2 as we write. Gold goes for $911 an ounce.

  But check this out: Russian President Dmitry Medvedev is so serious about a new global reserve currency, he brought a demo to the G-8 meeting.

Would have been cooler if he pulled it
from behind Barack Obama’s ear…

“This is a symbol of our unity and our desire to settle such issues jointly,” Medvedev said as he called for a “united future world currency.” The Russian didn’t really go into detail about how the money would be balanced or what nations would contribute, but we take note of two items:

Medvedev is the first to suggest that a new world reserve currency would actually be used by everyday people. The previously proposed Special Drawing Rights currency was supposed to be one of those shadow monies that doesn’t really exist… just this invisible running tab swapped back and forth between nations. Yet Medvedev suggested on Friday that his money be used by people around the world.

Second, we haven’t heard if there is physical gold in that coin… but we doubt the Russians picked that color just by chance.

  The stock market is just a bit above break-even today, but the bigger picture remains bleak. The S&P 500 lost nearly 2% last week, its fourth consecutive weekly loss. Even more unnerving, the majority of the rise in stocks today is in anticipation of earnings later this week from JP Morgan, Goldman, Bank of America and GE, among others.

  Oil is still under selling pressure too. The front-month contract goes for $58 as we write. The New York Mercantile Exchange says that net-long speculative positions in crude oil fell 62% last week from a week earlier… heh, probably a bad sign for short-term bulls.

  On the bright side, gasoline is getting cheaper. AAA says the national average price at the pump is $2.53 today, down about 10 cents from this time last month.

  “Kazakhstan is one of the biggest prizes in the great game of natural resource control,” reports Chris Mayer.

“Many of the world’s largest oil companies are now active in Kazakhstan. Today, Kazakhstan has about 3% of the world’s oil reserves. Vast areas remain unexplored. And more than $130 billion in spending is on tap for the region.

“China would love to expand its oil supply from Kazakhstan. It helps diversify away the risks China takes by relying heavily on oil from the Straits of Hormuz (out of the Persian Gulf) and the Straits of Malacca (from across the Indian Ocean; the U.S. Seventh Fleet controls these Straits, only adding to China’s oil security concerns). By getting its oil from an overland source, China is less susceptible to oil blockades. That must make Chinese defense ministers smile.

“But Russia has ambitions here as well, in spite of a cruel history toward Kazaks. That makes things much more complex. Kazakhstan’s closest ally is Russia, historically speaking. About a third of the population is of Russian descent. And the two countries maintain a tight dialogue. The president of Kazakhstan meets with Putin once a month.

“Even the U.S. has tried to make nice with Kazakhstan, but it runs a distant third. Kazakhstan is like the girl everyone wants to date in high school.

“Meanwhile, billions of dollars from oil sales flows to Kazakhstan’s coffers. Oil and gas now make up nearly 60% of the country’s exports. Economic growth tops 8%.

“To invest in the boom directly, you can own a Kazakh oil producer. The one that stands out is JSC KazMunaiGas. JSC is the second largest producer of oil in Kazakhstan. Even if you have no intention of buying a Kazakh oil producer, this is a fascinating story on the face of it.”

That’s just a quick, edited snippet from the latest issue of Mayer’s Special Situations. If you seek sharp contrarian thinking and an off-the-beaten-path approach to value investing, MSS is where’s it’s at. Learn more about Chris’ high-end offering here.

  “Both comments in Friday’s 5,” writes a reader, “criticizing the Illinois governor’s proposal to grant early release to 10,000 nonviolent felons who are nearing the end of their terms miss the mark. They argue high rates of recidivism will cost the state more in the long term than releasing the inmates will save in the short term. Such arguments presuppose the inmates belonged in prison to begin with.

“After 35 years in the criminal courts as a prosecuting attorney and defense lawyer, I question that assumption. The Land of the Free has a higher percentage of its citizens behind bars than any other nation on Earth, and by remarkably wide margin. We the People are not the most lawless society on the planet. The high incarceration rate reflects a regrettable politicization of the criminal justice system that began in the 1970s. One consequence of the social upheaval of the 1960s was a visceral desire for order. (Think Nixon and appeals to the "Silent Majority"). Legislators, hoping to hang onto the best jobs they ever had and never deserved, spent the next 25 years burnishing their law and order credentials. The result was that we criminalized all sorts of conduct that had never been considered a crime in the Anglo-American legal tradition or Judeo-Christian religious tradition.

“If you criminalize conduct that does not offend a culture’s bedrock sense of moral right and wrong simply because it offends the sensibilities of the majority or those of a vocal special interest group, you will have a high crime rate. Attach mandatory minimum sentences to these pseudo-crimes and you will tax a society to death building and staffing prisons for people who don’t need them.

“The real shocker is the governor’s justification. He wants to release 10,000 inmates so he can save the jobs of 1,000 prison guards. That all but proves my point. Too often, modern criminal justice isn’t about criminals or justice. It is about political correctness. If, in a time of tight budgets, it is better to pay 1,000 to guard empty cells than to feed the former occupants, shouldn’t someone be asking why those cells were built?”

The 5: Great stuff…

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Remember, today is your last chance to get Strategic Short Report for 50% off.  Even Larry Summers says the worst is still ahead, so why not profit from the next leg down? Capitalize on this opportunity today, here.


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