No More “Consumers,” Banking and Housing Forecasts, The Commodity Speculation Debate and More!

by Addison Wiggin & Ian Mathias

  • Poll shock: Despite contrary evidence, Americans DO know what’s best for the economy
  • Chris Mayer’s latest crisis forecast: “Bank failures will run well into the hundreds…”
  • Housing starts take surprise dive… Dan Amoss on when the real estate pain will end
  • Are speculators a threat to commodity markets? Our resource man weighs in


  We’ll start today by heeding some good advice:

“I urge you to remove the word ‘consumer’ from your lexicon,” James Howard Kunstler told us at the Investment Symposium last month. “It’s degrading. It suggests we have no duty to our fellow man.”

While the media have trained us to toss the word around with little concern, we’re going to make it a point to take on JHK’s advice, especially today. “Consumer” has this ring to it… as if we were pigs bouncing around in a pen, waiting for nothing more than the next slop bucket to come by. Americans — despite frequent evidence to the contrary — are smarter than that… just check out the latest Gallup poll:

The average Joe is usually a lousy stock picker, but the overwhelming majority of people can see the economic forest for the trees… even though the government and the media are bombarding us every day with recovery hopes and “green shoots.”

  “The head winds against the U.S. economy are pretty stiff right now,” Addison Wiggin told Fox Business News yesterday. “They really aren’t heartwarming toward individual investors. If the unemployment rate continues to rise, and we expect it to go from 12-15%, you can expect the savings rate to spike even higher and retail spending to go down, and we don’t have anything to replace that.

“The government keeps looking for the economy to ‘get back on track’ — buzzwords we’ve been hearing for 18 months now. But the economy was not on the right rack in the first place — we were spending more than we were taking in and speculating on paper assets. That’s not a recipe for a prosperous society.”

  “I fail to see how anyone can get excited about an economic recovery,” adds Chris Mayer, “when the nation’s banking system looks like Napoleon’s Grande Armee on its way back from Moscow. It is taking heavy losses — already 74 bank failures this year, and many more are on the way. My own guess is that bank failures will run well into the hundreds before this is over.

“The familiar past is always a good starting point to make a guess about what the unfamiliar future will look like. And so, if you look back at the big S&L mess, you see bank failures topped 500. See this chart below:

“That seems like a good round figure for a guess this time around too. This bubble was much bigger than that one. Another interesting point to note about that chart above is how long it took for the crisis to unfold. It’s like a Tolstoy novel. So again, I don’t see how people get so worked up over a recovery.

“We just saw a huge bubble pop, and it’s not going to be all better with a little spit and a Band-Aid. This is going to take some years to work through.

“As an investor, then, it would seem to be bleak. However, the market is a great creator of opportunity. It’s just that the opportunity doesn’t always come back to the same nest every year.”

We launched Mayer’s Special Situations a few years ago for this exact purpose — for Chris to help our readers capitalize on rare, off the beaten path investment opportunities. If you’re a value investor seeking an edge in a tumultuous market, check out MSS right here.

  How’s the world’s most famous investor handling this market? Warren Buffett is taking profits — especially on energy stocks — and loading up on defensive sectors. According to the 13-F he filed last week, Buffett sold a bunch of ConocoPhillips in the second quarter and all of his Constellation Energy shares. He also jettisoned healthy chunks of CarMax, Home Depot, WellPoint and UnitedHealth Group.

With the proceeds (or lack thereof), Buffett made just two notable buys. The biggest was 4 million shares of Johnson & Johnson. He also established a new position in Becton Dickinson, a medical laboratory equipment maker.

  Anxious traders sold the S&P 500 down 2.4% Monday, for reasons we highlighted in yesterday’s 5. Even after the worst fall since July, investors are cautiously buying the dip today. The S&P opened up about 0.3%.

  Another fall in housing starts has attracted the data spotlight today. Housing starts fell 1% in July, the Commerce Department claims, contrary to the Street’s expectation of a small rise. New construction on multifamily dwellings led the way, with a 13% plunge.

Year over year, housing starts are down a whopping 37%. Coupled with a worse-than-expected earnings report from Home Depot this morning, the “housing rebound” camp is exceptionally quiet today.

  “The downward trend in house prices will not stop,” writes Dan Amoss, “until they reach levels where the median family can afford one with a conforming mortgage with a 20% down payment.

“We’re seeing signs that this is close to happening in the low end of certain regional housing markets. This has the stock market giddy that the first sign of home price recovery is here. But the market is ignoring the deplorable state of middle- to high-end housing markets. In those segments of the housing market, prices and sales volume will be weak for several more years. The ‘move up’ phenomenon, which inflated the middle and high end during the housing bubble, is working in reverse. And demographic trends — the ‘empty nest’ baby boomer phenomenon — will shift demand away from larger, higher-priced houses to smaller, cheaper houses.”

Dan’s Strategic Short Report readers are well prepared for more real estate drama. You can currently get the specifics of his short housing play — along with the rest of the SSR portfolio — for just $1. Time is running out on this rare offer… check it out here before we hike the price back up.

  Producer price deflation is back in full swing. After three straight months of producer price inflation, today’s PPI report from the Commerce Department showed a 0.9% fall in producer costs during July. That’s triple the size Wall Street was expecting. For the last year, the PPI is down a record 6.8%.

  As stocks stabilize, the dollar is backing down a bit. The dollar index has fallen from yesterday’s high of 79.5 to 79.1 as we write.

  Thus, crude oil is snapping its four-day losing streak. The weak housing number is keeping rabid buyers at bay, but a cheaper dollar has helped bump light sweet crude from $66 to $67 a barrel.

  “A hot topic recently has been the vilification of ‘speculators’ in the marketplace,” says our resident resource speculator, Alan Knuckman. “Undereducated politicians are motivated to change the rules and do something about big price movements from the past. The oil spike in 2008 is being used incorrectly as an example of trader’s abuse of power for financial gain.

“The same ‘evil’ forces also drove crude to $33 a barrel earlier this year, but for some unclear moral reason, it is good to push prices lower? This same logic doesn’t apply to stocks because when financial stocks were seen as overvalued, selling restrictions were put in place to prevent downward pressure. We all know that only made the problem worse and delayed the inevitable, dragging out the outcome longer.

“The futures markets need more (not less) speculators to ensure smooth price movement for all participants large and small. These markets exist for hedgers to lock in costs and run a more efficient business. Using futures to fix volatile commodity cost inputs can go far to ensure corporate profit and price stability for end consumers. Without the combined strength of speculators, who will take the other side of the massive Southwest Airlines fuel hedge?


“Oil is the hot-button issue, but people fail to focus on the core issue. OPEC is a cartel. The organization is designed to manipulate the markets and prices for maximum profit. Some in government are attempting to control the tail of this lion, not the man-eating king of the jungle.”

  Last today, the “cash for clunkers” program is creating a small jobs boom — for the government. The Obama administration has vowed to triple the number of government employees processing “cash for clunker” vouchers from U.S. dealerships. The program has been such a “success” that the government can’t keep up with the vouchers coming in, and poor dealers are complaining that they have to sit on big losses while they wait for government reimbursement.

By the end of the week, up to 1,100 people will be working full time to process cash for clunker reimbursements.

“A growth strategy that requires wealth destruction,” writes Rob Parenteau, “in this current case, the scrapping of cars in working order, which are part of the stock of durable assets — is, to our eyes, more an act of policymakers’ desperation to ‘prime the pump’ of GDP growth than a sensible way forward. However, since major wars used to be the ultimate policy expression of this growth strategy, we will accept ‘cash for clunkers’ as a relatively more benign method of government-subsidized wealth destruction…

“There is a deeper problem, though, beyond the ‘growth through wealth destruction’ aspect of this program or the faux green shade of the ‘cash for clunkers’ charade. If the analysis Dr. Richebächer pursued is correct, stimulation of consumption by issuing public debt is not the best solution to an extended period of overconsumption… especially one fueled by household debt, which, in turn, was built up on the back of asset bubbles. Encouraging investment in new industries or new export markets would offer a better route to a more balanced growth path.”

  “I have a small home appliances business,” a reader writes. “An unusual number of advanced-stage deals fell through last month, and the customers simply told me they have changed their plans because they bought a new car. That new kitchen they were going to buy will now have to wait till next year(s).

“Logically, they cannot spend the same money twice. So this ‘cash for clunkers’ program eats in my business, and will continue to do so as long as these people are making monthly payments on this car they just bought. It is very damaging and unfair to everybody who is not in a car-related business. Car sales are pushed forward, but at the expense of other purchases, which are now postponed.

“And that’s why overall retail sales were down.

“And that’s not the only bad news. Now my kids and I will have to cough up more taxes in the future in order to help pay for this program. Thank you very much.

“Well, I have learned my lesson. I was planning on installing a small pool for the kids, but now I will just wait till the government offers some ‘cash for pools’ program.”

  “Wait a minute!” a reader urges in response to yesterday’s 5. “Don’t forget that recessions and depressions are measured in U.S. dollars. If we print enough money, the U.S. dollar will eventually show improvement everywhere, as long as we are measuring everything in dollars. 2025 sounds like a good date if we were measuring the recession’s end in yen; however, that’s not the case, so we’ll end the recession by the middle of 2010, when the Fed is successful at inflating its way into positive dollar-denominated stats.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

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