A “Real Pickle,” China’s Gold, Bank Tricks, Reader Smackdown, and More!

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.

"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.

  "I couldn’t help but marvel," a reader writes, "at the reader who thinks that your services are too ‘pricey.’Your response was excellent. I think you should charge MORE for anyone who thinks they’re ‘entitled’ to ‘cheap’ investment advice! Keep up the good work."

  "This sounds vaguely familiar," writes another. "I am sure the government will soon encourage me to provide your service to my employees. Perhaps charge me a small fine for not providing it. Maybe I could purchase it from a larger pool of publications…"

  "Your disgruntled ‘you’re greedy’ and ‘I want it cheaper’ reader must not have followed many of the very actionable recommendations from the services he receives. As a relatively new investor, my ‘small gains’ for the year more than paid for my lifetime membership to the Agora Financial Reserve.

"I took my fair share of hits learning the ins and outs of option investing and forex options last year, but had I actually followed many of the recommendations my ‘gut’ told me to follow, I would be sitting on hefty pile of cash. Agora Financial services ARE very affordable. Between the entertainment value of the daily missives, the sound bite financial news and the money I’m making using these services… I’d say your services are a steal."

  "Like this guy," chimes in another, "I can’t afford the Reserve. But I do subscribe to Capital and Crisis, and the wealth of information and depth of analysis contained in that publication make the $39 per year I pay a screaming deal.If this guy (and others like him) paid attention to the amazing volume of commentary and analysis contained in your free daily missives, he’d find a boatload of investing ideas he could apply using ETFs. But I guess it’s better to ‘curse the darkness than to light a candle,’ in his case

"Regarding his last little gem of ‘business advice’ vis-a-vis his ‘formula,’ I’m reminded of the old Saturday Night Live skit about the ‘Change Bank.’ This is a bank that does nothing but make change: ‘You can come in with 16 quarters, eight dimes and four nickels — we can give you a $5 bill. Or we can give you five singles. Or two singles, eight quarters and 10 dimes’our customers ask us, ‘How do you make money doing this?’ The answer is simple: Volume. That’s what we do.’

"Thanks for what you do; I’m a huge fan!"

  "I often read about newsletters that seemed to have great potential, but backed off when I saw the price," writes yet another,"Frankly, it doesn’t bother me; it keeps me from possibly risking money I shouldn’t on investments that are often great but might occasionally blow up. You folks charge a lot for what is worth every penny — if I had a larger kitty to invest, I’d jump on some of your ‘package deals.’If you gave it away for free… it would still be worth every penny. 🙂

"You folks at Agora and a host of others are financially better off than I am, partly because people like me pay for your research and insight.I don’t begrudge it a bit. I paid voluntarily.Politicians, executives of bailed-out businesses and political appointees in the government, on the other hand…"

  "To the fellow who can’t seem to find his price point," writes another, "I don’t make a lot of money, either. That’s why I just stick to Capital & Crisis and Outstanding Investments. Both are great deals — one I even got for free by making a donation to Haiti. I don’t get the more-expensive services. Cool how this free market stuff works, huh? Don’t have the money, don’t buy the service.

"By the way, if you look around the Internet a bit, you’ll find that OI in particular has a great track record. You get a good deal there for not much money. If you have $100,000 and you have it managed by some generic firm, it will probably cost you 1%, or $1,000 a year. For that, they’d be happy with making you 8% a year.

"If you subscribe to OI or C&C and place the trades yourself, the subscription and the $7 per trade with your generic Internet broker will cost you less than $1,000 per year and OI and C&C’s average returns are a bit higher than 8%… a fair bit. Plus, you never have to ask, ‘Why did you sell out of this security only to buy in back 31 days later?’"

  "Wealth is power," says a reader who gets the last word today. "Don’t sell the guy an M-16 if he cannot afford a BB gun. If he can hit the target with his BB gun, his BB gun will support his M-16 purchase."

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

P.S. Our friends at EverBank are about to take the wraps off their latest MarketSafe CD. This one is geared toward precious metals — investing in one-third gold, one-third silver and one-third platinum. Like all the MarketSafe CDs, this is principal protected — its value cannot fall below your initial investment — while the upside is all yours.

Agora Financial readers can get first crack at this CD when it becomes available a few days from now. Just take 30 seconds to sign up here and an EverBank representative will call you back to get you started.

Full disclosure: Agora Financial is in a commercial relationship with EverBank and may receive compensation if you open an account. But as with all our services, we wouldn’t offer them to you if we didn’t think they were a good deal for you.

P.P.S. Our resource trader Alan Knuckman shared his latest take on Treasuries and commodities this morning with Bloomberg TV. Watch here.


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