Credit Card Realities, Debt Untruths, Euro and Gold Forecasts, Miss Universe and More!

by Addison Wiggin & Ian Mathias

  • Credit card defaults come back with a vengeance… is this what a recovery looks like?
  • FHA on the verge of financial ruin… Bill Gross on why housing can’t save us this time
  • Our currency man reveals his contrarian dollar/euro play
  • Is gold going up or down? Bill Bonner provides a simple answer
  • Plus, credit crisis claims more victims: World’s greatest pageant models at risk


  The demise of the credit card crisis has been greatly exaggerated… here’s one for those recovery cheerleaders:

Bank of America and Citigroup — which comprise 35% of the entire credit card industry — announced this week that customers are defaulting on their credit cards at the highest rates since the recession began. Bank of America’s charge-off rate registered a whopping 14.5% in August. In other words, for every $7 in credit card debt on BoA’s books, they expect  to lose $1. 

Other mega-banks and creditors like JP Morgan, Discover, Amex and Capital One revealed similar August numbers. It’s an extra-harsh dose of reality for the Street, which enjoyed improving credit default rates this summer, especially in July. We’re a bit less surprised… nearly every measure of loan losses at U.S. banks are still soaring into record territory:

This is a component of our thesis at Agora Financial — that while the credit fallout has been cruel, it has yet to equal the size and scope of the credit bubble that preceded it. We still have quite a mess ahead of us.

If you tend to agree, check your e-mail later tonight. Addison has brewed up a very special letter, based on ideas that he’s reported to the Financial Times, InvestmentNews, Worth, Registered Rep., The Wall Street Journal, The New York Times and BusinessWeek — and that’s just in the last 36 hours. You will be among the first to read it… watch that inbox.

  Speaking of too much easy money, the Federal Housing Administration may have just lent itself into ruin. The FHA admitted today that its cash cushion has probably fallen below 2% for the first time — a mandated bare minimum. We’re just scratching our heads as to why this has happened, as the FHA insures loans mostly to first-time homebuyers and those unable to afford a reasonable down payment. Who cares if 17% of FHA borrowers are at least one payment overdue?

The FHA assured Congress it will not need taxpayer assistance to restore is meager cushion. Heh, right… they’ll lend their way out of this one, just like Fannie Mae and Freddie Mac.

  “Housing cannot lead us out of this big-R recession,” writes bond king Bill Gross, “no matter what the recent Case-Shiller home price numbers may suggest.

“Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households, as shown in this chart. Subsidized and tax-deductible mortgage interest rates as well as a ‘see no evil — speak no evil’ regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust…

“The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65%, as opposed to 69%, of American households.”

  But of course, for every argument, there is a counter: The U.S. has too little debt, not too much, Ken Fisher of Fisher Investments told Yahoo Finance yesterday. “People have a hard time envisioning that you can in fact be underindebted when we have more debt than we used to have… Our return on assets is high compared to after-tax borrowing costs. The way you would know you are overlevered is when your after-tax borrowing costs would start to approximate your return on assets.”

Awesome idea… lever up while those interest rates are low and count on infinitely attractive rates of return. That’s worked brilliantly in the past. 

  Rates are so low in the U.S., the dollar has become the carry trade currency of choice. “The dollar is the new yen,” Simon Derrick of Bank of New York Mellon told the FT. Indeed, three-month dollar Libor (the rate at which banks can borrow dollars) has fallen below that of the yen and Swiss franc for the first time since November. Thus, any trader looking to sell a low-yielding currency in exchange for a high yielder will be most drawn to the good ’ol greenback.

  The dollar index finally paused its recent decline yesterday. The bleeding stopped just above 76, a one-year low. In more tangible terms, that puts the euro at $1.47, the pound at $1.62 and yen around 91.

“Is the euro energizing for a new run? Or is it running out of steam?” asks our currency trader Bill Jenkins. “We are pushing up against the highs from last December and September. It is hard to argue against its present uptrend (because it certainly has gone up). The question remains, will it continue to rise?

“I must confess, it feels every bit like a euro top to me. But even gasping tops can continue to rise a long way.

“From a technical perspective, which is what I think we are really trading on, euro sentiment has really, really reached an elastic extreme. At the end of last week alone, futures open interest was up a monstrous 75% in just three days! That is extreme sentiment. And you know how I often say that 95% of the people who enter the forex game end up broke? It’s a reasonably predictable, bankable phenomenon that the ‘crowd is almost always wrong.’ That being the case, sentiment extremes often provide good opportunities for reversals.

“Add that to the fact that nearly every grocer checker and bag boy knows that the dollar is doomed, and you have a nice scenario for dollar strength as the big boys take advantage of the ‘weak longs’ in the market… those who bought in at the top. If the rise is to continue, I would look for a pullback to the 1.44 area for a new entry.”

If you’re looking to play these currency swings, you have two choices. Borrow a couple hundred thousand dollars and ride these penny moves up and down. Or you could check out currency options — in our opinion, a lower-cost, safer way to trade with equally large profit potential. For the nitty-gritty on FX options, read this special how-to report from Bill.

  Dollar stabilization has put just a little hurtin’ on gold. The spot price fell from yesterday’s high of $1,024 to about $1,013 as we write

  “Is gold going up or down?” asks Bill Bonner, one of his favorite questions of late.

“The answer to that is simple: Gold is going up… then down… then up again. It is going up because the feds — including the feds in China — are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up… much farther and faster… when the Fed becomes desperate and finally throws caution — and dollars — to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation… but it soars in a period of inflation. That period could be a long way off.

“The feds can’t revive the consumer economy. Despite all you read… the consumer economy is probably going to limp along for many years. No boom in consumer spending = no inflation.”

  The stock market is a bit of a yawn lately. The S&P started off with a 2% rise by Wednesday, but has been pretty flat ever since. As we write, the market is hovering around break-even.

  Last today, one of the few good things coming out of Venezuela has fallen victim to the credit crunch: champion pageant models.

Gratuitous racy photo opportunity… nice

Venezuela pumps a hefty amount of its statist funds into producing ridiculously good-looking models. With only 0.3% of the world’s population, Venezuela has actually won more international beauty competitions than any other country, including six Miss Universe titles (like Stefania Fernandez above).

But late yesterday, the national Miss Venezuela organization announced that hot streak might be coming to an end. Low national revenues and constricted budgets have forced the state-supported beauty factory to cut its national competition team from 30 to 20. This way, national “beauty czar” Osmel Sousa explained to Reuters, they’ll have enough money to give the remaining 20 proper outfits and surgical enhancements — seriously. In spite of Hugo Chavez sucking money out of seemingly every private enterprise, Venezuelans can still afford to have one of the highest per capita rates for cosmetic surgery on earth.

It’s a mad world…

  “Processed sugar has done more emotional and physical damage to our civilization than any other legal or illegal substance, period,” a reader declares in response to the tax on sugary drinks the government is currently mulling.

“A 1 cent per ounce tax hike? Make 2 or 3 cents per ounce! Get rid of processed sugar all together; there is absolutely no positive side to it. Without sugar in their lives, people would be calmer, clearer, less obese, healthier in mind and body, less prone to aggression and/or depression, the list goes on. The result would be a significant load off the overstrained medical system.

“Of course, the sugar daddies, the mega-pop execs, feel threatened: A 12-ounce can of cola typically contains 40.5 grams of sugar, or about 8-9 teaspoons equivalent of the white drug. Why would anyone consume 8-9 teaspoons of sugar in one sitting? Fantastic marketing, addictive substance. I say tax the hell out of it, and use the money to educate the common folk about proper nutrition.”

The 5: Easy there, comrade. If we taxed all that was emotionally and physically damaging, the U.S. would be pretty damn boring. We’d rather take our chances.

Have a nice weekend,

Ian Mathias

The 5 Min. Forecast

P.S. “One CEO’s news release just changed the future,” reports our tech analyst Patrick Cox. What “breakthrough tipping point” has he discovered? Find out here.


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