The Next Credit Crisis, Cash for Clunkers, Being a “Stealth Investor,” Geithner’s House and More!

by Addison Wiggin & Ian Mathias

  • Credit card defaults getting worse by the day… dark forecasts from typically upbeat institutions
  • Bill Bonner on what bank profits really mean for the U.S. economy
  • “Cash for clunkers” kicks off… U.S. gov., Chrysler prove they’ve learned nothing from credit crisis
  • Want to stay under Wall Street’s radar? Jack Pugsley’s “stealth investor” secrets
  • New, existing home sales supposedly on the rise… so why can’t Tim Geithner sell his place?

  The next shoe to drop… credit cards?

By the time this is all over, another 14% of the $1.9 trillion U.S. consumer debt market will default, the IMF predicted over the weekend. That’s another $266 billion in coming losses for American mega banks. The IMF (not known for their worst-case scenario forecasts) expects $172 billion in similarly soured loans in Europe.

Of those bad consumer loans, credit card defaults are rising fast. Credit card charge-offs, loans that banks don’t expect to ever be repaid, have risen to a record 10.7%. Moody’s, the steward of this particular data, says charge-offs will continue to rise until unemployment begins to abate. By their estimate, joblessness will peak at 10% next year and credit card charge-offs will top 13%… both rosy projections.

And in terms of total soared bank loans, we’re already in uncharted territory. By the St. Louis Fed’s best guess, charged-off loans already account for 2% of the total loan assets of U.S. banks… a record high that’s still soaring into the stratosphere:

The above chart includes commercial loans, another potential “next shoe to drop.” We can’t forecast today which one might come first, or which will hurt more, but it’s starting to seem obvious…the same way subprime loans led us into the first leg of this mess, other varieties of easy-money-gone-wrong will likely lead us into the next.

  “The big banks are most profitable when speculation is rampant and debt is growing,” Bill Bonner said Friday. As usual, Bill was the final speaker at our annual Investment Symposium. “That is, when people are going further and further into debt… and speculating on rising asset prices. We know you don’t really prosper by borrowing and gambling. But that doesn’t make casinos unpopular, or lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.

“But this is a minority opinion. Most economists disagree with us. And there are so many of them… if all the economists who disagreed with us were laid end to end… it would be a good thing. They believe that the economy is stabilizing… and on its way back to normal. Trouble is ‘normal’ ain’t what it used to be.

“Wall Street banks are making money, ’tis true. But they’re not financing new businesses… or factories. They’re not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts… and speculating on zombie assets. This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question: Where did all this money come from?

“My guess is… from you.”

If you’d like to listen to all of Bill’s presentation, along with the other 25 blockbuster Symposium speakers, check out the CD/MP3 set. Today will be the last day we offer them at a discount… grab yours here before the price goes up.

  Seven more banks failed over the weekend, bringing the 2009 running total to 64. Georgia remains the bad bank capital of the U.S., with six of banks shuttered late Friday. Waterford Village Bank of Clarence, N.Y., took the seventh spot.

The FDIC has spent more than $13.5 billion this year keeping banks afloat, roughly half its total war chest.

  The bank of I.O.U.S.A. is still doing what it does best. The U.S. government is set to issue a record $115 billion in debt this week. They’ll cut $6 billion in 20-year TIPS today, $42 billion in 2-year notes tomorrow, $39 billion in 5-years Wednesday and $28 billion in 7-year notes Thursday. Heh, notice how readily Uncle Sam writes those short-term IOUs. And only $6 billion in long-term, inflation-protected paper? It’s as if he were afraid of betting against inflation.

  The government will use some $1 billion of its debt sale proceeds to finance the “cash for clunkers” program, which officially starts today. Ugh… in case you are unfamiliar with this madness, here’s the gist: If you own a car (must be “drivable” and made after 1984) that gets less than 18 miles per gallon, you can get up to $4,500 in government money if you trade it in for a car that gets at least 22 mpg.

Already own a fuel-efficient car or have no trouble affording your gas-guzzler? Like every crisis bailout in the past few years, those who made prudent financial choices will get nothing more than the prideful self-assurance that they’re not total jackasses.

And get this: Chrysler — you know, that bankrupt automaker — announced last week that it would offer “cash for clunkers” buyers an additional $4,500 in “free money” or 0% financing. Have they learned nothing?

  “The flipside of cash for clunkers is this,” adds Dave Gonigam, one of our fine resident thinkers. “How many people still driving a ’93 Monte Carlo can really afford to buy even something like a stripped-down Ford Focus? I predict this program will have only a marginally higher number of takers than Hope for Homeowners, another feel-good boondoggle that can’t even accomplish its stated goals.”

  At 78.5, the dollar index has fallen to just a hair above a 2009 low. You would think it fell half a point since Friday thanks to the kind of news we’ve mentioned above. But no, it’s just reacting to perceived economic and market strength in the U.S.

  “The euro and Aussie have reached new 60-day highs,” notes our currency man Bill Jenkins, “and the pound is traveling to the upper end of its recent trading range.


“These ‘risk currencies’ were aided by a couple pieces of news. Germany consumer sentiment rose to 3.5, from 3.0 in the last month, and house prices from the U.K. were stable for the third month running. But this is on the back of the worst GDP news in the U.K. since the 1970s. Five consecutive quarters of contraction: hardly anything to get excited about.

“The next real EZ test will come on Thursday when Germany reports its unemployment numbers. At that point, we will see if the sentiment number is reflective of reality.”

  “Real goods, real tangible assets, are the only long-term protection from the inflationary polices of all governments,” Jack Pugsley told us during a breakout session at the Investment Symposium. Jack was one of our most popular speakers. A diligent, analytical investor, he’s built a reputation as the go-to-guy for undervalued, unnoticed recourse stocks. During his breakout, he shared this initial stock screen:

Pugsley was also nice enough to reveal the ENTIRE Stealth Investor portfolio to our attendees — a list of small resource and energy stocks his readers pay a hefty fee to ascertain. We jotted down the most recently added companies and included them in the Symposium CD/MP3 set, along with notes and specific recommendations from dozens more breakout sessions.

  Oil is still climbing, thanks mostly to the rising stock market. Light sweet crude goes for $68 a barrel today.

  Gold is holding steady, just as it did last week. One ounce will (technically) set you back $954.

  The stock market is struggling to break even today after last week’s 4% rally. Some not-so-hot earnings from Verizon, Honeywell and Aetna have pulled the market into the red. But this latest data point is keeping stocks from plunging to the abyss:

  New home sales shot up 11% in June, said the Commerce Department. That equates to an annualized rate of 384,000 homes, which far surpasses Wall Street’s estimate of 352,000. Prices are still down 3%, year-over-year sales are down 21% and much of the bump was attributed to the Obama administration’s $8,000 homebuyer tax credit. But you know how it works… the Street has latched onto the headline.

  If the housing market has really bottomed, why can’t Tim Geithner sell his mansion? Geesh, you would think the U.S. Treasury Secretary — likely the most financially connected man in the world — could find a buyer for this crib:

But no, Sec. Geithner recently took his $1.6 million home off the market after it sat unsold for at least 3½ months. The epitome of the American dream, Geithner and his wife took out a $1.25 million mortgage to buy the place in 2004 and today — even after lowering the price to below what they originally paid — they can’t get rid of this New York pad. Local papers report he’s now renting it at a loss.

The National Association of Realtors claims existing home sales rose in June for the third straight month… must be in some other neighborhood. Tim, we recommend you start falling behind on monthly payments. Maybe then you’ll qualify for one of your boss’ assistance programs.

  “Your negativity is quite funny,” a reader writes, “as the market has roared back over 36% since the March lows. Maybe it is time to get on the bull bandwagon. You have been wrong for months, and the market continues to ignore your daily bashing. You are wrong, and it is time to admit it.

“I still enjoy your 5 Min. Forecast immensely.”

The 5: We’ll do no such thing! We’ve been getting quite a few e-mails with similar themes lately… guess it’s time to visit the archives. How about this nearly perfect call from Chris Mayer during the final days of 2008: “I actually think we’ll see a big rally early 2009 a la 1930, when the Dow was up 48% from its bottom by April. Big rally coming, and that will be your last chance to dump your weaker holdings.”

What about March 13, when (with the help of Marc Faber, of all people) we suggested a market rally might be coming? That was just four days after the market “bottomed.” Or March 24, after the S&P 500 had already risen 18%, when we said the market, “might be sitting pretty for a while.”

And we think we’ve been pretty consistent in terms of our judgment of this bear market rally. Our favorite reference (one we’ve noted at least twice in the last six months) is the Nikkei 225, which rallied 40% on 10 different occasions in the last 20 years… yet is still 50% below its all-time high. So don’t save us a seat on the “bull bandwagon.”

Glad you enjoy The 5.


Ian Mathias

The 5 Min. Forecast

P.S. Last call on discounted Investment Symposium CD/MP3 sets. At midnight tonight, we jack up the price $100. This discount is your reward for grabbing these sets before word gets out and demand rises. Get ’em here.


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