The Debt Ceiling, Dividend Plays, A Currency Sea Change and More!

by Addison Wiggin & Ian Mathias

  • Say what? Geithner begs for higher debt ceiling, says it will restore world confidence
  • Deficit now three times last year’s record… so Congress buys 8 private jets
  • A currency sea change? Bill Jenkins on the dollar’s surprise rally
  • Jim Nelson on the best sectors for income investing
  • John Williams digs deeper into Friday’ jobs report… four data distortions you need to know


  “It is critically important that Congress act before the [debt] limit is reached,” Tim Geithner wrote over the weekend in a letter to lawmakers, “so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations."

Sounds like our Treasury Secretary is finally putting his foot down, insisting that Congress pull back its lavish spending programs and start addressing our incredible $11.6 trillion national debt.

Wait… what’s that? Oh, Geithner’s actually asking for Congress to raise the debt ceiling. If Congress authorizes our government to dig deeper than $12.1 trillion in debt (our current glass ceiling) our partners here and abroad will somehow “remain confident.” How perverse is that?

  The U.S. budget deficit rose $181 billion in July, to a record $1.3 trillion, the Congressional Budget Office reported over the weekend. You know the drill by now… tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%.

That’s a $530 billion increase in spending from fiscal 2008.

The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008’s record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers.

  Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of their way to publicly embarrass Big Three execs for jet setting from Detroit to D.C.

Prepared for a public backlash, Congress has a several lame talking points at the ready… that the current fleet of private jets is outdated… that having new high-tech planes will be better for the environment and ultimately lower cost… and that these planes will be used mostly by the Pentagon and only about 15% of the time for lawmakers.

But here’s our favorite: Legislators are eager complete the transaction so that they can have a new fleet in time for the busiest congressional travel period of the year… August, when they are all on holiday!

  Here’s the crucial difference between 2009 and 2007: While the government is still spending with reckless abandon, the consumer is rapidly deleveraging. Consumer credit fell for the fifth consecutive month in June, the Fed announced Friday. Credit outstanding fell by $10.3 billion in the month, to a total of $2.5 trillion. That’s more than double what the Street expected. Revolving credit, namely credit cards, fell by $5.2 billion — a record 10th month in a row of decline.

Now in a state of contraction since February, the average American is embarking on the longest credit pullback since 1991.

  “We are clearly in an economy-wide deleveraging process that will last for years,” writes Strategic Short Report’s Dan Amoss. “We are not in a typical inventory-led recession. Sure, the next few years will not mirror the 1930s, because the government and central bank are debasing the currency to prevent a dreaded debt deflation spiral. We probably won’t have 1930s-style bank runs (although the FDIC is running dangerously close to needing to tap its line of credit with the Treasury to replenish its Deposit Insurance Fund).

“But make no mistake: We will pay for the inflationary bailouts at some point down the road with a currency crisis. Central banks cannot keep abusing savers and the bond market to this extent without eventually provoking a collapse in demand for paper money.

“A collapse in demand for paper money, not a decline in the ‘output gap,’ will eventually bring about inflation. We’ll see signs of it as real Treasury bond investors keep balking at these low rates at Treasury auctions, leaving the Fed to step in and monetize the debt. Eventually, there’s a risk that the Fed will lose the tiny bit of independence it has left and the printing press could come under the control of Congress, which would accelerate the endgame for the U.S. dollar. The market for gold-related assets will look ahead to this possibility.”

Dan’s Strategic Short Report readers own calls on GDX, and recently took on a short position in a very well-known bank. We’ll be telling you much more about this fishy financial soon… keep an eye out tomorrow.

  The benchmark 10-year Treasury bond just suffered its worst week since 2003. Investors forced yields up 38 basis points last week, to as high as 3.88%.

  But the stock market continues to climb. Friday’s better-than-expected jobs report (more on that in a minute) bumped the major indexes up about 1.3%, to their highest levels since October. The Dow and S&P 500 finished up over 2% for the week.

The market looks a bit timid today. After opening down, the Dow and S&P are near break-even as we write

  “It’s been a rough year for dividends,” says our income analyst Jim Nelson, “but if you know where to look, your income will be just fine. Below is a breakdown of S&P 500 yields by sectors:

“As you can see, the biggest loser on the list is financials, which shouldn’t be a surprise. The segment’s dividend yield fell 300 basis points (right-hand column) from last year to now.

“The sector that pays the most is doing so under the radar: telecommunication services. This is a favorite of ours. That 14 basis point increase is primarily due to AT&T and Verizon — both paying out around 6%.

“These dividends aren’t nearly as safe as we’d like, though. Instead of gunning for the U.S. telecom industry, we like to play that game in emerging markets. We already have a Pacific Rim telecom in the Lifetime Income Report portfolio, and we’ll be adding another this week. Even after that, we’ll continue to keep our eyes peeled and noses to the ground in case something else pops up in that industry.

“Going back to that table, you can see the next two best-paying sectors are utilities and consumer staples. Our portfolio is already loaded with these, and we’ll continue looking in these directions as well.”

If you seek stable, dividend yielding stocks with serious upside potential, Jim’s Lifetime Income Report is where it’s at… details here.

  It’s Monday… time to check in on the annual bank failure tally: Two in Florida and one in Oregon bit the dust over the weekend. That brings the 2009 running total to 72. The three took a $185 million chunk from the FDIC’s war chest. So far this year, the agency has lost over $15 billion from its bank insurance fund.

  The dollar is holding onto its surprise Friday rally today. As we mentioned then, we were taken aback when the dollar index jumped from 78 to 79 after the better-than-expected jobs report.

“For months now,” explains Bill Jenkins, “every time there was good news for the economy (like Friday’s jobs report), it was bad news for the U.S. dollar. But not on Friday. The initial reaction to the good U.S. news was to sell the dollar. Then suddenly, the market reversed its course and began selling the other currencies with both hands, and buying the U.S. dollar, instead. In other words, the tide shifted, and good news for the U.S. economy also became good news for the U.S. dollar.

“So has the U.S. dollar put in a bottom here? Are we about to see a knee-jerk reaction favoring the greenback to other currencies? Only time will tell. But FX traders better be on alert. My readers saw a 42% profit in the Swiss franc on Friday’s move.”

42% in one day? Nice. There’s plenty more where that came from… just check out Bill’s Master FX Options Trader.

  Since the dollar remains strong, gold is still under pressure. The spot price is down about $20 from Friday’s high, to $945 an ounce.

  “Why is every analyst, yourselves included,” a reader asks, “so quick to believe the government’s unemployment and GDP figures, when the political interests of the White House are at stake in the numbers and the White House controls the executive departments that generate these figures? We know from past unhappy experiences (e.g., weapons of mass destruction in Iraq) that the White House is capable of lying when it suits political purposes. Not to mention that GE, Murdoch and the other oligopolists who control the news we get are politically and financially motivated to play along and hype the figures.”

The 5: We’ve talked about the dubious nature of the jobs report so many times (like here, here or here) that we thought we had gotten our point across. Guess not.

Uncle Sam — though the power of statistical ploys like the birth/death model, seasonal adjustments and margin of error — can put the jobs numbers just about wherever he wants. We follow ’em because they can greatly affect the prices of your investments, they influence policy and public opinion and there are very few viable alternatives. We quote folks like John Williams often so you get a worthy alternative point of view. We could only be more contrarian by ignoring government stats altogether, which would be a disservice to you, whom we promise to inform, enrich and entertain.

And speaking of Mr. Williams:

“Heavily distorted seasonal adjustments have artificially reduced the levels of new claims for unemployment insurance,” writes John in his latest Shadowstats alert. “They appear to have flowed through not only to July unemployment and payroll reporting, but also to the July purchasing managers manufacturing survey.

“July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed the pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries, as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported seasonally adjusted monthly gain in July, up by 28,000 jobs…

“The severity of the ongoing economic contraction has started to generate other distortions in data reporting:

  • Year-to-year comparisons will begin to see a flattening in annual declines, as year-ago numbers used in comparisons were in severe contraction.
  • Extreme economic disruptions have distorted patterns of regular activity and related seasonal-adjustment processes.
  • The birth-death model overstates payroll levels during recessions.
  • Short-term discouraged workers begin to disappear from the broader BLS unemployment measures as their "discouragement" extends beyond one year…

“While Wall Street likely will hype the July employment results as confirmation that the economy has turned the corner, such hype and resulting overly optimistic expectations should be slammed in the months ahead, when the positive reporting distortions reverse out in a normal catch-up process.”

Hope that helps,

Ian Mathias

The 5 Min. Forecast


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