The Real U.S. Growth Story, Bernanke Confirmed, Bets on the Dollar, The Trillion Dollar War and More!

by Addison Wiggin & Ian Mathias

  • Market celebrates 4Q GDP… The 5 finds cause for caution, naturally
  • One measure of economic growth still in the dumps
  • Big moves into U.S. dollar ETF… Bill Jenkins on the alert for a market shock
  • War fighting costs top $1 trillion… Where expenses are growing fastest
  • The Ron Paul legend shattered? Readers write on this and more (including Apple, oy)…


  “And there was much rejoicing through the land…”

The Commerce Department has given us its first read on GDP for the fourth quarter of 2009. Conventional wisdom said it would be strong, an annualized 4.7%. In the event, it was even stronger — 5.7%, the best showing in six years.

That’s the headline. Now come the caveats…

  • These numbers are subject to revision both next month and the month after that. Last quarter’s report got revised downward by 40% when all was said and done.
  • About two-thirds of this increase is attributed to businesses rebuilding depleted inventories. Which is fine, but…
  • …with consumer spending making up some 70% of GDP, the real test comes next quarter. Will all this new inventory be headed out of the warehouse, or will it be piling up because consumers are still too worried about their jobs and their debt burdens? 

Alas, for calendar year 2009, the U.S. economy shrank 2.4% — the worst showing since 1946.

  The GDP numbers have brought a little bit of “risk appetite” back into the U.S. stock market. After a weak of steady downward drift, the Dow and the S&P are up about 0.8% as we write this morning. Adding to the cautious optimism is this…

  Consumer sentiment as measured by Reuters and the University of Michigan continues to perk up. This morning’s reading of 74.4 compares with 72.5 a month ago.

  You’ll have to pardon us for not sharing in the celebratory mood. That’s because around here, we have a fondness for data points that governments can’t massage — like sales tax revenue, income tax revenue… and rail traffic.

What do we see in the latest weekly rail traffic data? Yikes…

Rail traffic plummeted in the fourth quarter and now sits very near the low it set around a year ago. It would be much worse were it not for a 71% year-over-year increase in auto shipments. And the trend going forward is anything but certain.

  Well, that wasn’t even close. The Senate confirmed Fed Chairman Ben Bernanke for a second term yesterday. The critical juncture was the “cloture” vote to close off debate, which required 60 senators voting “yea.” It got 77. The nomination itself got 70 votes. That’s actually the lowest vote total of any Fed chairman up for reappointment ever.

The most ominous sentence we encountered in mainstream coverage of the story was in The Wall Street Journal: “Bernanke backers… said the Fed chairman deserved an opportunity to finish what he started.” Which is exactly what we fear most.

  As a consequence of the vote, the “Audit the Fed” Alamo has fallen. As we reported yesterday, several senators had placed a “hold” on Bernanke’s nomination. They insisted a vote first be held on S. 604, the Senate version of Ron Paul-Alan Grayson Federal Reserve Transparency Act. But with the cloture vote, the hold became a moot point.

It’s not a fatal blow for prospects of a Fed audit, but audit supporters have one less arrow in their quiver today.

  In another act of wanton dollar destruction, the Senate voted to raise the national debt ceiling by $1.9 trillion, to a total of $14.3 trillion. The House votes next week.

In our opinion, it’s constructive to have the vote come up more often. A smaller extension would catch the media’s attention more often. Each time the debt ceiling debate comes around … it’s annoying, at best. That’s what the Senate wants to avoid. If the House agrees to this increase, that money’s already spent. The debt already piled on… and this train wreck just picks up speed.

  But don’t count the dollar out yet. “The next flight to dollar safety may very well be faster and more violent than the first” in 2008, says our currency trader Bill Jenkins.

Along with a handful of other farseeing folks in the forex world, Bill’s noticing institutional investors and hedge funds piling into UUP, the PowerShares ETF that bets on a rising U.S. dollar index.

“It doesn’t make any sense — unless the buyers ‘know’ something that the rest of the investing public doesn’t. If we are on the verge of another collapse, the dollar, as bad a shape as it’s in and crazy as it seems, will be the beneficiary.

“Here’s why: When the dollar began its meteoric rise late in the summer of 2008, nearly everyone believed it was a countertrend. But as it grew in both intensity and volatility, and as it became clear there were mounting troubles coming to the surface, then the real rush began. Folks were flocking to the dollar. But it was the Johnny-come-latelies who really accelerated the move.

“This time around, nobody wants to be the Johnny-come-lately. Standing with their fingers on the button, folks are trying to squeeze every last bit of profit from the stock rebound, but I think most of them know that it can’t last. Fundamentally, nothing has improved or changed. Actually, many things are much worse. And the buyers of PowerShares know it.”

How to play it? Bill’s plotting a strategy right now. To join him when he’s ready to pull the trigger, go here.

  For the record, the dollar index has vaulted over the 79 mark today for the first time since last August. That’s put a hurt on gold, which clings to $1,080.

  We haven’t written about it till today, but rest assured we’re keeping tabs on the annual meeting of the world’s rich and powerful this week at the World Economic Forum in Davos, Switzerland. Amid the mostly meaningless jawboning emerged these nuggets:

  • International Monetary Fund chief Dominique Strauss-Kahn said banks need to do more to shore up their balance sheets because they’re still vulnerable to a number of potential shocks. That’s not exactly news, but it’s also not what you expect to hear the IMF talking about openly
  • George Soros declared gold is in bubble territory. Or in his words, “"When interest rates are low, we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."

We’re not sure what to make of this cryptic remark. Does Soros think gold is set for a fall now? Or will low interest rates drive gold higher for quite some time?

We think we’ll stick with the less-ambiguous outlook of his former partner in the legendary Quantum Fund, Jim Rogers. He sees gold reaching $2,000 this decade. We see it happening sooner. In fact, we’ll even make you a guarantee on that score. Details here.

  Now for some new numbers that illustrate an old lesson: Empire doesn’t come cheap. We chronicled some of this last month — picking apart a record-high defense budget and noting how the actual cost of maintaining a globe-spanning military presence tops $1 trillion a year.

But here’s another way to slice and dice the figures: Last month, direct war fighting costs since Sept. 11 topped the $1 trillion mark.

To date, nearly two-thirds of that spending has been for Iraq. But going forward, Afghanistan will take up a bigger piece of the pie. And the biggest growth will likely come in that sliver devoted to special forces operating in Somalia, Yemen and God knows where else in the Islamic world.

  From the “forecast fulfilled” file, we note that voters in Oregon agreed this week to jack up income taxes on individuals earning more than $125,000 a year. They also raised business taxes, which ought to do wonders for job growth in a state where unemployment tops the national average.

When we noted Oregon’s inclusion on the list of states most likely to become “the next California,” we figured tax increases were the most likely response to cratering state and local tax revenue. Oregon’s just the beginning.

  Elsewhere on that list of troubled states, we see more trouble brewing in government-worker pension funds:

  • The gap between assets and future payouts in the California State Teachers’ Retirement System has doubled in 18 months, to $42.6 billion. The fund will ask lawmakers to boost state and local contributions to the system by 14%. Blood from a stone, anyone?
  • The State of Wisconsin Investment Board plans to borrow up to 20% of its own assets over the next three years to overcome pitiful yields in the bond market. Yes, the fund is levering up right on the heels of a credit crisis fed by too much leverage. What could possibly go wrong?

Then again, when you’re assuming a 7.8% annual rate of return, what else is a pension fund to do? The infamous words of former Citigroup chief Chuck Prince come to mind: “As long as the music is playing, you’ve got to get up and dance.” On, Wisconsin!

  “Yeah, it’s a conspiracy theory,” a reader writes after we wondered aloud why the White House is only now getting around to worrying about jobs, “but any possibility that the thought might have been if people remained jobless without health care benefits, there might be overwhelming citizen support for that health care bill that was being pushed so ridiculously hard by this administration? If so, it didn’t work!”

The 5: You might be onto something. We noticed the administration trying to make the case last year that health care reform was key to reducing to the national debt. That didn’t fly either.

  “Your small essay on Greece and its sale of bonds neglected to reveal who the buyer of record was," another writes. "The business sources in New York say it was China. That cannot be reassuring to Americans or Europe, despite the collective sigh of relief.

“Greece has only one thing that the world is interested in, and that is tons of shipping bottoms that deliver oil around the world. China is selling cars to all its former peasants at a rate to make American car salesmen swoon, and guess what is going to happen to oil, where it will be going soon!

“There is a growing fear among those who follow such things that we, THE WEST, are on the brink of disaster and we have a leader, newly elected, who is not with the USA, but owned by our enemies! There is a backlash forming, but it is late.”

  “Is he really that big of a p***k?” a reader inquires of Ron Paul after Ian shook hands with the congressman. “He comes across as a fun grandfatherly sort of a guy — warm and friendly — man, you blew that image of him for me — hope he is more successful auditing or stopping the Fed than he is in dealing with his supporters.”

  In contrast, another reader believes the encounter “clearly shows that Congressman Paul is more focused on the heart of the problems in this nation than he is on politics for political correctness. Paul is not running for reelection as much as he is running to correct our system’s ills. Congressman Ron Paul has my devoted support, whether he knows who I am or not.”

  “Many naysayers exist about anything Apple does pre- or post-iPad,” writes a reader still outraged about our Wednesday edition. “I didn’t think it’s appropriate or professional for Agora to sink to that level of sarcasm too. It is not your job as a valid financial advisory service to be so childish or ignorant. That is why we subscribe to you, not regular news and financial services or sources.

“It is amazing to me that the only qualitative firm in America, Apple, the only technological breakthrough company at least, which is not ashamed of the label ‘Made in the USA’" is constantly being bombarded, mocked, derided, complained about, put down… esp. when it’s the best American company, the only one to be proud of consistently, the only one worthy of praise… the one that keeps employment or doesn’t render jobs redundant…”

The 5: Uh, you’d think we mocked your children. One thing about you Apple fans… you’re very sensitive.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. A quick tally of the computers used to write and broadcast this e-mail:

Dell: 2

Apple: 3

iPhones on the crew: 3


Apple wins!

P.P.S. Only a few hours remain in which you can grab six months of free service on the most expensive investment advisory we offer. You can secure your exclusive discount and assure access to the next alert going out this weekend by signing up here.



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