by Addison Wiggin & Ian Mathias
- "We’re in a real pickle"… Empire of Debt catching on after 5 years
- The new rising power eyes American rails, gold
- Lipstick on a pig, reprise: Major banks shuffling debt at quarter’s end, five quarters in a row
- Canadian housing: Who says you can’t reflate an old bubble?
- Readers dump all over critic who says we should do our part for the recovery by lowering prices…
"American Debt Threatens Status as World Power," read a headline on the CBS Web site this morning. "Can America Still Be the World’s Greatest Power, as the World’s Greatest Borrower?" asks CBS’ foreign correspondent Lara Logan.
What a difference a financial crisis makes, eh? When we published Empire of Debt in 2005, well before the crisis reached headlines, reporters, investors, consumers, politicians, sportscasters and insurance purveyors were all asking very different questions than they are today.
Logan interviews James Baker, former secretary of State, secretary of the Treasury and all-around Bush family confidante. "We’re in a real pickle," he says. "We will not be as important on the world scene if we continue to be a tremendously large debtor nation."
"It’s not so much we’re declining," Baker continues in the Logan interview, "other countries are coming up."
China of course, leads the pack.
"China is now the largest holder of U.S. debt," Logan reports. "It’s also the largest exporter, and within the next five-seven years, it’s expected to surpass the U.S. as the largest manufacturer in the world."
This story is not remarkable for its content. Rather, it’s interesting because of who’s saying it. Sumner Redstone must be getting nervous himself. Last year, Redstone, chairman of CBS, was crowing that SpongeBob SquarePants was his most successful global brand. Wonder how it’s doing today?
The World Gold Council predicts gold consumption in China will double in the next decade. Jewelry demand, investment demand, even industrial demand… they all factor in.
"This forecast seems reasonable," says Frank Holmes, "and it lines up with what I’ve long been saying about the profound evolution in China’s economy — domestic consumption is replacing exports as the growth engine as more poor Chinese move up into the middle class and from there into the ranks of the wealthy.
"China has a centuries-long cultural affinity for gold, so it makes sense that more middle class and wealthy would mean more gold sales.
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"The line on the WGC chart above shows how investment demand for gold has rocketed up from next to nothing in 2001 to 80 tonnes (2.6 million troy ounces) last year, with the sharpest upswing coming after trading rules were liberalized in mid-2007.
"Over the same period, China’s GDP roughly tripled. The Chinese are famous for their high savings rate, and the chart shows how important gold has become as a store of their growing wealth."
Frank is making a return appearance to this year’s Agora Financial Investment Symposium, along with favorites like Doug Casey, Bill Bonner, Rick Rule and Marc Faber. Check out the full list of speakers right here.
(Our friend David Walker will also be in Vancouver. Meanwhile, this weekend, you can watch him and other panelists in I.O.U.S.A.: Solutions, a follow-up to the documentary the Peterson Foundation bought from us. CNN will carry it at 1 p.m. EDT tomorrow and 3 p.m. EDT Sunday. If you want to see what has one writer at Huffington Post in a tizzy, by all means check it out. We note that Arianna Huffington herself approved of the film’s message when she screened it during the Republican National Convention in St. Paul in 2008.)
The Chinese are taking a cue from Warren Buffett, too. They’re staking a claim on American railroads. Chinese officials have signed tentative deals with the state of California and General Electric to build high-speed rail lines.
Given the fact the White House is keen to print and spend $8 billion on high-speed rail over the next few years, why the heck not?
Seriously, though. How interesting is global finance these days? We have to borrow the money from China… in order to pay the Chinese to build rail lines for us. Uh… are we missing something? Don’t we have to produce something somewhere along the line?
Seems like as good a place as any to mention that gold is trading this morning above $1,155. It stands at a three-month high.
While China seeks out tangible wealth, the paper shufflers back in the Empire of Debt have been, well, papering over their debts. Data from the New York Fed reveals that for the last five quarters, 18 major banks have been cleverly masking their risk levels.
According to The Wall Street Journal, each of these 18 banks "understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters."
"This temporarily added leverage," explains Dan Amoss, "juices the banks’ returns on equity. Of course, all of this would be very dangerous for these banks if not for all of the generous taxpayer-financed guarantees and subsidies."
Sounds an awful lot like Repo 105, the trick that Lehman used to move $50 billion off its balance sheet before everything went kerflooey.
"The Lehman trades," says Dan, "were fraudulent because it reported them as ‘sales,’ which misled its creditors and shareholders about its true financial condition. The other banks argue that they’re not doing the same thing as Lehman because they’re taking back the credit risk of their securities once the repo trades are closed."
Don’t feel bad if the distinction is lost on you. Because the practical result is the same… No banker is feeling any legal heat.
Dan, of course, saw Lehman for what it was long before the mainstream and delivered 462% gains to his readers. More recently, they could have picked up 92% in less than a month on a sickly trucking stock. If you’d like to be in on his next play, you can access Strategic Short Report for a limited time for just $1.
Major U.S. stock indexes opened up ever so slightly this morning, carrying on the party atmosphere from yesterday. Traders were overjoyed with buoyant retail numbers. Same-store sales jumped 9.1% in March across 28 major retailers tracked by Reuters.
Careful readers will notice this does not mesh with the news yesterday about contracting consumer credit. If folks are using plastic less, and many of those folks have no jobs, where’s the money coming from?
We know a lot of people are skipping out on their mortgage payments but staying in their homes because the banks don’t want to foreclose and book a loss. Maybe they’re more numerous than we thought. Tax refunds will last only so long, too.
Meanwhile, across our northern border, Canada is experiencing a full-blown revival of its housing bubble. The average single-family detached home in the Vancouver metro area is now fetching $1 million. Prices have climbed 23% in a year and now sit 3% higher than they were at the height of the previous bubble.
Toronto is looking nearly as ridiculous, but those are just the extremes of a nationwide phenomenon. The Royal LePage research firm says all key types of housing across Canada rose by an average 10% in the first quarter. Another firm, Variant Perception, says by any sensible metric, Canadian homes are overvalued by 20-30%.
As for the housing bubble stateside, consider this sign of the times: The recession has trimmed the number of U.S. households by 1.2 million. Unemployed college grads moving back in with the folks, retirees who can’t get by on 1.4% CD yields moving in with the kids… suddenly, you have fewer households, and the ones that remain are bigger.
The numbers, compiled by USC professor Gary Painter, are almost certainly low. His study covers 2005-2008. But his findings do jibe with our recent report about the growing number of multigenerational households.
Both trends add to the glut of foreclosed properties already on the market. Hmmn…
The recent rise in the 10-year Treasury note is doing a number on mortgage rates, too. A 30-year fixed rose in just the last week from 5.08% to 5.21%, according to Freddie Mac.
We don’t expect the housing market in the U.S. to recover for many years.
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The 5. Well said. Our inbox had more comments this morning than any other day in the three years we’ve been writing and publishing The 5. Thanks for your support. Thanks for spending money with us. Thanks for letting us remain free and independent thinkers.
As it happens, long before that original reader wrote in, as part of our regular promotional cycle, we planned to temporarily cut the price of one of our most expensive services. Watch your inbox for details this weekend. As always, if you’d like to discuss any of our offers and see which Reserve discounts apply to your account specifically, please feel free to contact John Wilkinson at (866) 361-7662.
Enjoy the spring weather,
Addison Wiggin
The 5 Min. Forecast
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P.P.S. Our resource trader Alan Knuckman shared his latest take on Treasuries and commodities this morning with Bloomberg TV. Watch here.