by Addison Wiggin & Ian Mathias
- Nukes in Russia, nukes in Korea, nukes in Iran… And $220 oil?
- China feeling pressure to let yuan rise… But does it really matter?
- U.S. “recovery” about to level off? The chart that gives us pause
- Main Street investors fleeing stocks… How to prepare for a correction
- “Partnoy’s complaint”… another wrinkle to the Lehman disaster
Some days, while perusing news and e-mail from our contacts ’round the globe, we detect an underlying theme. Some days, the emergence of the theme makes little sense on the surface… but we proceed on the assumption nothing happens by chance.
Today, the theme is, unexpectedly, nukes.
Nuclear weapons, nuclear power… and go figure, each thread leads to Washington. Grrr. Let’s dig in…
Today marks the start of no less than four diplomatic efforts to cut the number of nuclear weapons across the planet. We’ll spare you the mind-numbing details of each one, but Secretary of State Clinton is in Moscow to get the ball rolling. She’s talking with the Russian foreign minister about a successor to the 1991 START treaty.
In theory, both sides have agreed to cut a total of 1,500 more warheads from their arsenals. In practice, the Russians are prickly about this… because the U.S. still plans to install a missile defense system in Central Europe. (What if Russia wanted to put a missile-defense system in Cuba? Just asking.) If these talks stumble, all other bets are off.
But that’s not the only nuclear jawboning Washington is carrying on…
- South Korea is angling to revise its own nuclear power deal with the United States. Washington wants assurances that Seoul’s spent fuel can’t be turned into a weapon. Yes, the North Koreans have nukes now, but the U.S. doesn’t much care for the South to do the same as long as tens of thousands of U.S. troops are still stationed there
- The South Koreans have won contracts to build nuclear power reactors in the United Arab Emirates, shutting out U.S. firms. The U.S. ambassador to the UAE says he’s confident the Americans will get a piece of the action in the next round of bidding.
Looming over all of this assorted nuclear news is the nagging prospect of the United States or Israel launching a war with Iran over that country’s nuclear program.
Scotland’s Herald newspaper trumpeted an exclusive this week about the United States shipping 387 bunker buster bombs to the Indian Ocean island of Diego Garcia. That would be a plausible staging area for an aerial attack. Adding to the tension: comments to Congress by Gen. David Petraeus, who oversees all U.S. military operations in the Middle East. He said Iran is giving aid and comfort to al-Qaida.
Thing is, Iran’s designs are much more complex than just sticking it to Israel or the United States. Byron King makes that point in his latest expose… weaving a tapestry of threads that add up to oil reaching as high as $220 a barrel. See how it could happen, here.
April 15 is exactly four weeks away. And it’s not just the deadline for Americans to demonstrate fealty to the IRS. It’s also the day the U.S. Treasury issues its twice-yearly report naming which countries, if any, are currency “manipulators.”
We’re hearing growing buzz from Washington that Tim Geithner will take the fateful step his predecessors have hesitated to take and slap Treasury’s scarlet “M” on China. Unless, of course, China depegs the yuan from the dollar between now and then, which the White House would no doubt prefer.
Thus, the following pressure has been applied in the last 24 hours…
- The U.S. ambassador to China told students at a Chinese university the situation is “a real concern to people in my country”
- Sens. Chuck Schumer and Lindsey Graham, the 21st century’s answer to Smoot and Hawley, have revived a bill that would clear the way for higher import duties if Washington finds a trading partner is manipulating its currency
- Even the World Bank and the IMF are getting in on the act. The former just raised its growth forecast for China and thus recommended allowing a stronger yuan. The latter declared upfront the yuan is “undervalued.”
Put it together, and it reinforces the suspicion we shared last month that the Obama White House is aiming to boost jobs domestically by boosting exports — which means a weaker dollar against the yuan, whatever it takes.
Beneath all of this is an underlying assumption that China’s economy is an unstoppable juggernaut.
“The problem is, China has a bubble,” says our forex specialist Bill Jenkins. “It is inflating even as we speak, although the government is trying very hard to keep a lid on it. The bubble is similar to what ours was… real estate and housing” — driven by Beijing’s own stimulus program.
Can China’s economy afford it? Bill says no. “And there has already been some evidence of it. China used its last round of stimulus to build the largest shopping mall in entire world. It now sits 99% vacant. The Chinese are not very proficient in allocating capital.”
“So they may be able to manipulate it for some years yet. But NO central bank, dealing with a FIAT CURRENCY, has ever won at this game.”
“In other words, while China may be able to keep the illusion of growth going for some time yet, it has bought into the same failed model of Keynesianism that the West has used. It is already combating bubbles, even though its official inflation rate is not in the red zone.
“If it continues to put the brakes on its red-hot economy, we can certainly look for a second dip into recession.”
Judging by this morning’s report on leading economic indicators from the Conference Board, we may be headed that way already. The index has now risen 11 straight months. But the trajectory of the increase leveled off in February…
The (heavily massaged) consumer price index (CPI) was flat last month, too. Over the last year, it had risen 2.1% — a tenth of a point above Big Ben Bernanke’s sweet spot.
The number of first-time jobless claims fell a teensy bit last week — 5,000. That’s right in line with the forecast of outside analysts. Put that together with the CPI numbers and…
U.S. stocks opened mixed this morning, with the Dow industrials up a bit and the S&P 500 down a bit.
Yesterday, the Dow exceeded the post-crash high it set on Jan. 19. The index now stands at its highest point in nearly 18 months.
But if you’re keen to put your money in the pot, you should consider this fact first. Mutual fund managers yanked $3.7 billion out of stock funds during February — more than canceling out the $2.7 billion inflow in January… and resumes 2009’s downward trend.
More and more, the word among high-power money guys is that a broad rally can’t go on for more than a couple months… at most.
Meaning, it’s time to get choosy about your stocks.
That’s why we recently had our editors record a series of exclusive videos… naming seven of their favorite picks for the rest of 2010. These videos go live on Monday, and you can secure your exclusive access via an offer we’ve never made before — and, depending on results, we may never make again. Watch this space for details.
The Canadian dollar is rapidly approaching parity with the greenback. The loonie trades this morning at just over 99 cents. Meanwhile the dollar index has fallen a bit below the 80 level, while gold is steady at $1125.
(Side note: Alan Knuckman’s Resource Trader Alert readers could have booked $1,100 this week on a gold call spread. Not bad for a little over four months. How about you? Want in on his next play? Here’s where to start. )
Uh-oh. Congress is finally ready to hold hearings on the Lehman bankruptcy. Recall last week, an examiner appointed by a federal bankruptcy court found that Lehman engaged in accounting tricks to cover up its insolvency.
But in this case, we hold out a glimmer of hope the House Financial Services Committee will ask the right questions. "Either the SEC and the New York Federal Reserve failed to discover the ongoing accounting fraud at Lehman," says the committee’s senior Republican, Spencer Bachus, “or they turned a blind eye to the ongoing fraud.” The optimistically named Bachus even wants “Titanic” Tim Geithner to testify.
Another dimension to the Lehman revelations is what’s becoming known as “Partnoy’s complaint.” A finance professor at the University of San Diego’s law school named Frank Partnoy first raised the issue this week. And now Jim Chanos, the hedge fund manager who made his name calling out Enron’s accounting tricks nearly a decade ago, is spreading the word.
It’s more than just a matter of Lehman making $50 billion in debt vanish from its balance sheet. “Lehman also couldn’t reliably and consistently confirm the value of its holdings,” Chanos explains. “The company lacked any internal check on prices set by its numerous trading desks, each with its own methodology and the incentive to set optimistic prices on securities to be traded or held.”
Oy. It’s pretty hard for markets to function properly when the pricing mechanism isn’t allowed to do its job.
“I can one up the Minnesota reader whose tax refund is being delayed,” writes a reader. “The IRS audited one of my partnerships, and after four years determined I was due a refund. When I submitted the amended return to New York for my state taxes, the bandits said I was beyond the statute of limitations and they wouldn’t honor it.
“So I asked if they would have swept it under a rug if I had owed them money, and predictably the answer was no. Keep in mind I did not voluntarily file this return; it was instigated by their audit of me. So in New York, we have a one-way system in which you can be audited at any time with a one-way outcome favoring the government.
“If Thomas Jefferson were alive, he would challenge these crooks to a duel. ‘When the people fear their government, there is tyranny,’ he said. Kin Hubbard summed it up best: ‘Now an’ then an innocent man is sent t’ th’ legislature’."
The 5: Amen. Whatever happened to the citizen representative? That was a good idea, too.
“Just this afternoon I had to cancel my subscription to Penny Sleuth out of disgust for Patrick Cox’s defense of deadly drugs,” writes another one, apparently from a place we don’t often go. “Admittedly, I am proudly not in the mainstream regarding the use of poison, er, drugs in general. In my opinion, I believe 100% of ALL synthetic drugs should be banned. Then I have to read his crap in The 5 Min. Forecast too. Is there any escape?”
The 5: Genius… should we ban electricity, too?
“Thanks for the thoughts in today’s 5 about the FDA,” writes a third, just a tad more sane. “Very interesting, indeed.
“It is difficult for one who has not engaged in clinical research to comprehend how difficult it is to develop meaningful data. The inherent variability of individual responses to medications requires rigorous statistical analysis to obtain any answers that are significant. Even with great care, the chronically understaffed FDA occasionally approves a new medication that later must be recalled because of serious unexpected side effects.
“Having spent some years at NIH in clinical cancer research, I have seen the problems firsthand and appreciate the FDA’s caution. Mr. Cox has not had the benefit of that experience, making it easy for him to be critical of what he does not understand. In this instant gratification society, he would like to see results instantly, if not sooner.”
The 5: That’s probably true. But as Mr. Cox has said himself, he doesn’t mind dying — “it just sucks getting old.” Time is of the essence, for some.
“I’d like to know more about what is wrong with the FDA,” writes a fourth, “I can’t figure it out.
“Right now I’m writing to you from a hotel room in Germany waiting for neck surgery that will take place tomorrow. I’m an American getting a U.S.-developed artificial disc put in, but I have to go to Germany to get it done (at my own expense, of course). The excellent Stenum orthopedic hospital has been using this particular artificial disc (Spinal Kinetics M6) for five years with tremendous success, but our trusty FDA is years from an approval. Seems the FDA doesn’t allow consideration of data from outside the U.S., no matter how conclusive or compelling.
“The FDA recently approved two devices that are better than the procedure used before, but are quite inferior (old designs) for my circumstance, but even these approved devices are not covered by United Healthcare. That’s because the government doesn’t require insurance companies to cover approved procedures if they don’t feel like doing so. Therefore, I’m in Germany, where they have the most experience and the best technology.
“Is it possible that our wonderful, all-knowing government is beginning to seriously retard the wheels of progress in I.O.U.S.A? My particular situation is not of direct concern to the overwhelming majority; however, my strong feeling is there are many other such hidden, self-inflicted cracks developing in the foundations of our country. And yes (gasp!), the media are too busy to report such issues to us. Sandra Bullock’s latest dress deserves to be front-page news, after all, and is far more interesting than the slow-motion crumbling of the American Republic.
“The waiting room here is full of Americans who have come to Germany to get a treatment that should be available in the States, but is not. The cost is the same as the 50-plus-year-old treatment that is the standard procedure covered by insurance in the U.S., so cost is not the issue. I’m sure somewhere there is either a story of ‘follow the money’ or FDA = CYA. Any theories on what is going on here?
“I’d like to understand.”
The 5: We would, too. This move toward collectivism and centralized control is troubling. And counterproductive. Sounds like you already know what is going on.
The 5 Min. Forecast
P.S. “I feel that your whole message,” writes a fifth, commenting on our latest quixotic adventure, “not only of the Apogee, but of The Daily Reckoning or The 5 Min. Forecast, is very negative and worrying.
“I realize that the ‘state of the world’ is NOT good, but often after reading one of your publications I have to suppress the urge to build a bunker and lock the door behind me. I also realize that you have to be very ‘graphic’ to get through to some people, but would it hurt if you threw in some constructive tips and such between all your (justified) pessimism?
“If you are so displeased with the way your government handles the situation, you could, e.g., join forces with David Walker and the Peterson Foundation and organize some demonstrations in the style of the anti-war marches of the ’60s.
“Just an idea, but if you use your whole subscriber base as an instrument to ‘get the word out,’ you might have a shot to wake enough people up.”
The 5: You’d think, right? We’ve recently been invited to address students in the MBA program at Towson University here in Baltimore and the communications directors of the “Blue Dog Democrats” on Capitol Hill. We bitch and complain a lot. But it doesn’t seem to have any effect. For the most part, we’re dismissed as pessimistic. Thanks for pointing it out, though.
If you’d like to comment on Apogee and aren’t part of the program, here’s how to get involved.
P.P.S. In the meantime, check this out: Yesterday, Greg Guenthner suggested to readers of his Bulletin Board Elite service that they sell their position in ticker AFOP for a 50% gain. That’s on top of the 65% gain (in just two weeks) that came the day before.
Clearly, Gunner’s revamped strategy for 2010 is paying off. To celebrate, we’re offering 5 Min. readers an exclusive deal on Bulletin Board Elite for the next 24 hours. We won’t go into the details right here, but you can call my friend John Wilkinson for all the details at (866) 361-7662. Fair warning: We have a strict membership cap… and only 27 spots remain right now. If you’re number 28, you’ll have to go on a waiting list. And if you’re an existing BBE subscriber, we have a special offer for you too. Call John for the details. But this deal’s only good for another 24 hours.
Also… if you have questions about the over-the-counter market or bulletin board stocks, by all means fire them at us… we’ll be broadcasting our answers and questions of our own in a couple of weeks. Climb on board.
P.P.P.S. One last item… easily the most important of the day. Our office away from the office is a swanky little Irish joint known as Mick O’Shea’s located on Charles Street in lovely downtown Baltimore. They serve up the Pinot upon entry and always have the best specials on offer. We don’t think we’d survive the office commute without them.
A couple of years ago we managed to get Trish, our favorite lunchtime bartendress, voted in as Baltimore’s Best Bartender. The vote is on again. If you appreciate the words you read in the 5 Min. Forecast, please do us a big one and vote here for Trish from Mick’s. She has a mere 126 votes, and the leader has nearly 600. Voting ends tomorrow… at 5 pm. So get on it. Please.