Major American Milestone, Government Pay, Watch Tungsten, Audrey Hepburn and More!

by Addison Wiggin & Ian Mathias

  • Major milestone for post-American planet: China now world’s largest auto market
  • Never fear, U.S. is still No. 1… at least when it comes to government salaries
  • Rob Parenteau highlights one lesser-known data point… that will be key to dodging double-dip recession
  • Byron King on a critical material “facing looming supply shortages”
  • Plus, signs of the times… patent filings fall, markets for bandwidth and famous fashion soar

  Henry Ford. Motor City. Cadillac. The drive-thru window. “Happy motoring,” as J.H. Kunstler likes to say. They will always have their roots in America, but today it is official — China is their new home.

12.7 million cars and trucks will be sold in China in 2009, says a report today from J.D. Power and Associates. That’s an incredible 44% growth from 2008 and — perhaps more notably — far larger than the 10.3 million sales forecast for the U.S.

It’s not entirely America’s fault… of course, the U.S. is mired in the Great Recession while China is booming (bubbling, if you ask some). China’s got about a billion more people over there too, which might help. But it’s time to face the music: The future of the auto industry — and many others — is in China. We represent its aging past.

  Along the same lines, U.S. patent filings fell in 2009 for the first time in 13 years, says a preliminary report from the U.S. Patent and Trademark Office. Filings fell 2.3% this year, the first downturn since 1996. The really interesting part: In 2009, the United States issued 6.3% more patents to inventors and businesses in foreign nations.

  So where is the new focus of the U.S.? Where are we devoting our resources? Here’s the scoop straight from USA Today… if you think you might throw up, stop reading:

“The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA Today analysis of federal salary data.

“Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession’s first 18 months — and that’s before overtime pay and bonuses are counted.

“Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector.

“The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

“When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.”

At college, your editor took a few law classes (it was a phase). We remember a phrase judges threw around a lot, especially in situations of gross injustice or patent obscenity: As they would say, this “shocks the conscience.”

  The U.S. government enjoyed its 14th straight month of budget deficit in November, the Treasury announced yesterday. The budget shortfall for the month came in at $120 billion. We’re supposed to take comfort in the fact that this is less than October’s record $176 billion deficit, and that it’s $5 billion less than November of last year. But we can’t help but notice that November’s budget deficit is about a quarter of the worst ANNUAL deficit President Bush ever conjured… a man we teased mercilessly for his total lack of fiscal restraint.

Just for old times’ sake… couldn’t resist.

  Never mind all these problems for tomorrow… stocks are up today thanks to a better-than-expected retail sales report. Sales rose 1.3% in November, the Commerce Department announced, more than double Wall Street expectations. Thus most indexes opened up around 0.5%.

  Also in the data bin, wholesaler inventories perked up in October for the first time in over a year, the Commerce Department announced. Stockpiles rose 0.3%, the first gain since last August — a sign that’s caught the attention of more than one macroeconomist.

“We are looking for signs that businesses are willing to raise production enough to halt and reverse the inventory drawdown,” acknowledges Rob Parenteau, our macro advisor.

“They have to demonstrate they are willing to reinvest profits in tangible capital equipment that can either assist in improving efficiency or in opening up new product lines. Without managers and entrepreneurs being willing to take on the risk and uncertainty involved in inventory rebuilding and capital improvements, 2010 will be a year in which the fiscal injections fade and economic growth will wind back down again. Should that scenario unfold, household debt distress will see no relief in 2010, and the fiscal deficit will keep ballooning as tax revenues fall short.

“Comparing the ISM inventory index to a year-over-year growth rate in manufacturing inventories indicates this is a worthy tool for anticipating inventory cycles. Judging by the sharp reversal in the ISM inventory index, the U.S. economy should be just about to enter a major inventory accumulation cycle. A reading above 43 or 44 on the inventory index has tended to be sufficient to indicate that positive year-over-year manufacturing inventory growth is right around the corner.”

  The dollar is inching up again today, in spite of the stock rally. The dollar index, now at 76.5, has had a remarkable 2-point-rise over the last week and change, setting daily volume records twice in the last six trading days.

“Virtually every risk currency across the board has been spanked so hard that they don’t want to come out of the corner,” notes our currency trader, Bill Jenkins.

“The euro has been slammed nearly 500 pips, or 5 cents. The sterling (which is also battling new worries from news on the downgrade front) is down 800 pips, or 8 cents. Aussie dollar, 350 pips, or 3.5 cents. The Swiss, 350 pips, or 3.5 cents. These are fantastic moves — especially in just a few days.

“But make no mistake about it: the present downtrend is not likely to be a game changer. A pullback, yes. But Fed Chairman Ben Bernanke came out strong and sure on Monday to reiterate that this recovery is on tenuous footing. It does not have a full head of steam, nor is there any guarantee that it is more likely to continue than to reverse. As a matter of fact, he went on to say that deflation may still be ahead of us for a while longer.

“In short, what he was saying is that no rate hikes will be forthcoming from the Fed for the foreseeable future. Over the weekend, I heard people talking about rates going up in the second quarter of 2010. Well, I’ll believe it when I see it!

“Certainly don’t bet the bank (or the farm) on it.”

So how should you place your currency bets? Ask Bill Jenkins, right here.

  Those dollar gains are really putting the hurt on gold today. As we write, the spot price is headed straight down, from $1,140 to $1,115, with no signs of slowing. We’ll follow up on this one Monday once the dust has settled.

  “Keep an eye on tungsten,” Byron King urges, just back from London, where he met with some notable names in the energy and mining industries. “As I’ve mentioned before, tungsten is critical to machine tools and numerous other high-tech applications.

“What we’re seeing globally — and what several top-level experts confirmed to me this week in London — is that there are some metals facing looming supply shortages. The days of a user just calling up the supply house and ordering off the shelf are ending. Tungsten is in one of those scenarios just now.

“Several of the world’s largest non-Chinese tungsten mines got bought outright this year by tungsten users. The users understand that their supply chain is only as strong as the weakest link. And that weak link is the supply of ore in the ground plus the mine, mill and upgrading facility to obtain the basic raw material.

“It’s not like there are a slew of other mines out there waiting for the price to go up so they can open the workings and push product out the door. In the West, there is only LEGACY tungsten mining — mines and mills from years ago. There’s NOTHING new in the pipeline.

“If you want to have some exposure to a critical, strategic metal with virtually NO substitute, you need to own some shares of one miner in my Energy & Scarcity portfolio. “I’ve met the CEO, and he’s a solid player. He has a working mine, he’s selling product, he has cash flow and he has ANOTHER mine that he’s working to develop. It’s a rock-solid story.”

  Another resource becoming increasingly scarce: Bandwidth.

In 2009, Americans consumed a record 3.6 zettabytes of data via our TVs, phones, computers and the like. That’s 34 gigs per person, per day, or about seven DVDs worth of data for each of us every day. According to the University of San Diego, which conducted this study, if you were to convert all that data to paper, there’d be enough books to cover every inch of theUnited States — seven feet deep.

  Last today, a raging — albeit odd — bull market: Audrey Hepburn.

Not Ms. Hepburn herself, RIP, but a collection of her clothes. About 40 items from her wardrobe fetched $437,800 at auction on Wednesday, double the presale estimate and God-only-knows what multiple higher than their original price. The little number pictured above – from Breakfast at Tiffany’s – was sold back in 2006 for almost a million bucks. No one will be getting rich from either sale — most of the proceeds went to charity. But there’s still an investment lesson in here somewhere. Such as: If you happen to come across any verifiable possessions of an iconic sex symbol, take care of ‘em… there will always be some creep (sorry, aficionado) willing to pay top dollar.

  “Thank you for bringing the water issue to people’s attention,” a reader writes, referring to yesterday’s 5.

“I am an environmental planner for a large state agency in California, and I can tell you that water (not enough potable water and/or too much waste water) is the biggest problem on virtually every one of my projects. I knew there was a problem but didn’t realize how huge and universal it was until seeing firsthand in my current position. For historical reasons, yes, water is completely mispriced, and I can’t see how the price cannot go up. But how to profit from this financially is a very tricky thing due to water’s special status as the most important utility, and the myriad regulations and agencies involved. This issue is worthy of (and will require) a lot of study.”

Cheers,

Ian Mathias

The 5 Min. Forecast

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