The Next Mega-Bubble, The Biggest Financial Reform Ever, Investing in India and More!

by Addison Wiggin & Ian Mathias

  • The next mega-bubble: “Dubai times 1,000,” says famous short seller
  • Senate moves to clip the Fed, set up three new agencies… The 5 boils down the biggest financial reform in U.S. history
  • Chris Mayer seeks out the “Warren Buffett of India”
  • Dollar makes another low, gold a new high… one resource that’s still “sharply undervalued”


  Could the new Empire of Debt be… China?

The People’s Bank of China extended $37 billion in domestic loans in September, the bank reported today, bringing the total to $1.27 trillion in new loans in the first nine months of 2009. That’s a 136% increase from the same period last year. Total lending in China climbed to 140% of GDP by midyear, says a study by Pivot Capital Management.

It’s hard for us to tell what that really means for the Chinese. But generally speaking, doubling the amount of easy money in just one year tends to inflate a bubble or two. In the same report, the Chinese government said M2, a measure of money supply, rose a record 29% year over year in September.

“China has embarked on a capital-spending bubble the likes of which the world has never seen,” famed short seller Jim Chanos claimed recently. “Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned.”

Heh, here comes the money shot: “China is Dubai times 1,000, if not a million,” he said. “At some point, all of this (ill-advised) investment will come home to roost.”

  Back in the States, Congress is trying to clean up the mess from our own easy money fiasco. Grab your galoshes… some serious slop to wade through today.

Sen. Chris Dodd unveiled a whopper of a bill, one that might cause the biggest financial and monetary shakeup… umm… ever. Like most of Congress, we’ve barely cracked the 1,136-page affair… but here’s what we’re picking up thus far:

  • Under the proposed bill, the Fed gets stripped of almost all its banking oversight and consumer protection powers. Bernanke and company will be used only to determine monetary policy.
  • The bill would create three new government agencies:
    • One would be designed to regulate banks, essentially combining the current powers of the Fed, the Federal Deposit Insurance Corporation, the Comptroller and the Office of Thrift Supervision
    • The second new agency — the Agency for Financial Stability — would be a “council of regulators” that would monitor systemic risk, enforce capital standards, limit leverage and even break up companies if Congress sees fit
    • The third agency would be called the Consumer Financial Protection Agency, which will save us from ourselves by regulating consumer mortgage, credit and investment products
  • The SEC, for all its glory, gets more power and more money.
  • Hedge funds with more than $100 million will have to register with the SEC and disclose more information. Investment advisors and ratings agencies will also be targets for stricter oversight.

Looks like the most complicated regulatory system in the world is about to get much more complicated. Well keep an eye on it.

  The real question: Who will benefit from these proposals? Follow the money…

Shameful. How’s this for reform… the world’s biggest banks should not be allowed to buy a campaign for the chairman of the Senate Banking Committee.

  But the inflation of easy money bubbles and the messy aftermaths are of no consequence to the markets today. Stocks of the world are rising thanks to some other data from China, specifically its latest industrial output and retail sales numbers. The Statistics Bureau in Beijing reports today that industrial production rose 16.1% year over year in October (thanks largely to all those cheap loans) and retail sales rose 16.2%. Coupled with a nearly doubled trade surplus from September to October, China is once again at the center of the global recovery trade.

This vibe helped the Dow and S&P up to a 1% gain in morning trading.

  “The market in general has edged back somewhat,” notes our tech analyst Patrick Cox. “Index and other broad financial instruments are no longer the bargains they were when the market was on its knees and whimpering. No one has real faith that this uptick will last, though, so most investors are still ‘playing it safe.’ This means they are avoiding emerging technologies, which are, in turn, underpriced.

“This is always the case in uncertain markets. When markets are shaky, the vast majority of individual and institutional investors flee risk in favor of ‘proven’ investment opportunities. This is clearly the case today, and we may never see another time like this.

“But scientific and technological progress cannot be stopped. It is, in fact, accelerating. If you need evidence, check out the new Motorola Droid.  Moreover, globalization has expanded the scientific and financial playing fields dramatically. Top American researchers are being wooed by Asian and Eastern European companies. If the U.S. legal/legislative oligarchy hobbles our pharm industry, research and development will shift offshore. So will our portfolios.”

  Today’s sign of the times: Behold, the world’s new market leaders:

India, the only BRIC nation that didn’t make the top 10, was just behind with a 70% year-to-date gain. Not a single G-7 nation is even in the top half. (Addison Wiggin just finished a report on this trend – and how you can continue to profit from it. Details here.)

  “As in early 20th-century America, the Indian stock market is still finding its sea legs,” notes Chris Mayer, a long time India bull. “When we were in Mumbai a few weeks ago, I asked a local analyst who are the Warren Buffetts and Peter Lynches of India. He said there really aren’t any. The leading stock market speculators are men of ill repute. They have shady reputations for manipulating markets, just as early U.S. speculators did.

“And there are lots of speculators. Optimism prevails. In this, it’s no different from the early U.S. ‘bucket shops’ written about famously by Edwin Lefèvre and others, where the working Joe would gamble on stocks, hoping to get rich.

“There are also few dividend payers of any significance in the Indian stock market. A 4% yield is a lot. It makes sense, though, given that India is a rapidly growing market. Reinvesting the money is often a better choice than paying a dividend.

“The most frustrating thing is that the market is still mostly closed to U.S. investors. We simply can’t buy the stocks on the Bombay Stock Exchange, for example. There are some that list in the United States and are easy to buy. Beyond specific stocks, the best way to invest in India is through a fund that can own all these stocks that you otherwise can’t buy. I’d expect this to be an up-and-down idea, but over the long haul, such a fund ought to beat U.S. market returns by a solid margin.

“Finally, there are indirect plays on what India — and the rest of the emerging markets — need. We are invested in energy and fertilizers, for instance, two things such markets will need in abundance. I’m also looking again at various infrastructure plays — companies building stuff the world needs — here and everywhere.”

Chris has a specific array of Indian stocks and funds in his Capital & Crisis portfolio… gain access to it here.

  The U.S. dollar briefly touched another 2009 low this morning. The dollar index struck 74.7 but quickly rebounded back to support around 75.

  That’s good enough for yet another record high for gold: $1,118 an ounce this morning.

  Interestingly, silver is standing still. Around $17.50 an ounce, the silver spot price hasn’t even beaten its October high of $18, let alone 2008 levels of $21 a pop.

“Continued dollar weakness combined with gold making ALL-TIME highs once again leaves silver sharply undervalued at these prices,” opines our resource trader Alan Knuckman.

“A move above $18 an ounce sends silver on a quick run to test the modest 2008 highs at $21. That target is over 15% above current silver prices and very attainable in this bullish metal market environment.”

  “To the people who are out of work and wrote into the 5 Min. Forecast whining,” a reader writes of our debate on extending unemployment benefits, “I wonder… How many of you SAVED some money for a rainy day when you were working? How many of you went out to eat several times a week, or spent money on things you did not need?

“I was raised during the 1930s Depression. You still do not have it as hard as we had it back then — no help from anywhere or from anybody. Most poor people today have it much better than most people had it back then… In the ’30s, our family took our baths in the kitchen in front of the coal stove with the oven door open, the water heated on the stove for the bath, taking turns, first my brother then me, my Mom & then my dad. At times I burned my fanny because I had gotten too close to the oven door.

“That is why my family can now ride out this serious crisis, because we saved and only bought the things we needed. Now it is your turn to learn the lessons that we learned in the 1930s and early 1940s. Your government cannot help you. It is bankrupt.”

The 5: For better or worse, we’ll let this gentleman end our conversation on extending unemployment benefits. If you care to continue, take it to the blog. No doubt we’ll visit this topic again in a few more months.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast


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