Inside the First Fiscal Summit, How to Spot the Debt Crisis Coming, The Trend of 2010 and More!

by Addison Wiggin & Ian Mathias

  • “Losing control of our own destiny” — the sovereign debt crisis as seen from D.C.

  • How Washington works, and how it doesn’t: Scenes from the Fiscal Summit

  • What Greece crisis? Factors behind some unlikely rallies

  • The Trend of 2010: Two asset classes trading in tandem

  While we were seated in the auditorium of the Reagan International Trade Building for the 2010 Fiscal Summit yesterday, fear and loathing swept the globe.

Today? Not so much. The scare from Greece’s downgrade? It’s so yesterday. The euro has bounced off its one-year low of $1.31. European stocks are up, too.

Phew.

An index measuring executive and consumer confidence in the 16 euro nations reached its highest level in two years. Right.

  Far be it from us to spoil the party, but Greece retains its role as the proverbial “canary in the coal mine” this morning.

The head of the Organization for Economic Cooperation and Development — a body of all of the world’s developed countries – warns sovereign debt is "threatening the stability of the financial system” in the same way Bear Stearns and Lehman did.

  “Here I think there is a real problem,” the Richebacher Society’s Rob Parenteau observed back in February, “it’s a problem related to some of the corruption and the tax collection in the Greek system.

“And the issue that is brought to bear here is whether individual governments could possibly default on their public debt and whether that would lead to a breakdown in the eurozone. They’ll actually go to default, but I think there’s going to be an awful lot of brinksmanship in 2010 in the eurozone.”

Sure enough.

  “The thing I worry about is the buildup of sovereign debt,” adds celebrity gloomster Nouriel Roubini. He’s warning that sovereign debt everywhere from Greece to Japan to the United States will lead to either defaults or higher inflation.

  “Ultimately, it’s a national sovereignty issue,” former president Bill Clinton said yesterday at the Fiscal Summit. He was referring to the U.S.’ sovereign debt being largely held by oversees banks and investors. “We’re talking about losing control of our own destiny.”

  The Fiscal Summit was a perfect example of how Washington works… and doesn’t.

David Walker played host to a well-choreographed media event that included Erskine Bowles and Alan Simpson, the co-chairs of the suicidal National Commission on Fiscal Responsibility and Reform. A keynote discussion with former President Clinton. And conversations with Robert Rubin; Peter Orszag, director of the Office of Management and Budget; Paul Volcker and Alan Greenspan. As well as a number of panel discussions with policy wonks from all over the political spectrum and members of both the House and the Senate.

For a time, we believe we were on C-SPAN sitting a seat behind and two to the left of Alan Greenspan. The camera guy kept getting in our line of sight to the podium because he was so intent on getting the Maestro on film.

  Before we get too far into comments made by these guys, a few points. First, we have enough material from the six-hour event to fill a 16-page issue of Apogee, let alone a scant 5 Min. Forecast, so we’re going to keep things light… and spread them out over the news cycle for the next couple of days.

Second, before you write your kind reply to this effect: “Why should we listen to these bozos, they created the crisis… and are presiding over the deficits and debt, the bailouts and the stimulus?”

Let’s just say that like it or not, the deficit is real. The debt is real. These guys exist. Further, what they say moves markets. As an investor, you have to be aware of what they’re saying, thinking, planning. You won’t get it from the evening news… as we sadly discovered yesterday (more below).

While we may share your view, we’re taking a “keep your friends close…” attitude on this one. The devil you know, is better than the one you don’t. Capice?

Third and last comment, we honestly believe David Walker is genuinely trying to implement viable policy solutions BEFORE the train wreck. Paul Ryan (R-WI), who also sits on the National Commission, said it best: “We’re in the grips of the most predictable financial crisis in human history.”

Granted our beat is personal investment advice. But think of it this way: If David’s successful, our job gets a lot easier. We’ll just need to find the best companies with the bright ideas and flip them to you.

On the other hand, if you think a sovereign debt crisis in Greece is bad, wait until foreign central banks lose confidence in U.S. Treasuries.

Robert Rubin told the audience yesterday he's more afraid of that possibility than any other thing in his adult life.

   “The canary in the coal mine for U.S. Treasuries” is the 10-year note and 30-year bond, Alan Greenspan suggested to the summiteers yesterday. He claims it’s the first thing he checks in the morning when he wakes up. History shows, we paraphrase the bespectacled octogenarian, that when inflation returns to the system, it will happen in a very dramatic fashion.

“Long-term interest rates remain low because the global economy is still emerging from a deep and protracted recession which has caused deflation. That’s going to change eventually. Short-term rates remain depressed because credit risk fear remains. But that’s going to change — it will happen quickly.”

Greenspan went on to say he doesn’t think it will happen until next year, but admitted he doesn’t trust our ability to forecast anything. “Our” being humans.

  “From the dawn of history,” Clinton offered by way of an explanation for what’s happening to the United States, and much of the Western World, “once you become successful, you become rigid, more concerned with the present than the future. The constituency of the future is always less than that of the present. We need to get back in the ‘future” business, if we’re going to make it through this mess.

“Older societies are obsessed with security,” he goes on, which makes addressing defense, retirement, health care and energy very difficult and politically untenable tasks, especially in a democracy of 306 million people.  

Clinton covered a wide range of subjects: Haiti, Mexican border and drug wars, immigration, state budget deficits, Goldman, financialization of the economy, housing, the VAT tax and more.

When we got back to our humble digs in Baltimore last night following the Summit, we turned on the network news to see how they’d cover it. Not a peep, except for one mention from Diane Sawyer on ABC. She wondered if Clinton was losing weight!

They the station showed a brief clip from the Summit where Clinton was discussing how he’s preparing for Chelsea’s wedding. Clearly, that was the most important take-away from the six hours.

  The Conservative Party candidate who could be Britain’s next prime minister is warning of a Greek crisis for the U.K. — a notion dismissed by the Labour Party’s sitting secretary of business, who says the U.K. has “very, very, very different situation” because it has a AAA credit rating.

Uh-huh. That’s what the muckety-mucks said about the U.S. debt yesterday.

  Say this much about the crisis at Club Med. It’s reinforces our thesis that we no longer need a falling dollar to have rising gold. Or vice versa.

Fear over the PIIGS countries drove traders into the dollar yesterday. The dollar index pushed past 82, an 11-month high. Gold, meanwhile, touched his high for the year, near $1,175.

Gold and the dollar have been moving up in tandem almost to the day we first made this call on Feb. 3.

Today, we’ll go a step further and suggest the following timeline:

  • 2009: Fear drives people primarily into the dollar

  • 2010: Fear drives people into both dollars and gold

  • 2011: Fear drives people primarily into gold.

Of this outcome, we’re nearly certain. The timing, not so much.

  Gold set record highs yesterday measured in euros, pounds and Swiss francs. Gold priced in yen hasn’t looked this good since 1983.

  The “what-me-worry” attitude in Europe is evident stateside, too. After Tuesday’s Greek-driven plunge, the Dow rose 0.5% and the S&P nearly 0.7% yesterday.

Credit goes in part to the Federal Reserve, which decided to leave the fed funds rate alone. The statement issued by the Fed was everything traders wanted to hear: A recovery is on track, but nonetheless, conditions will require rates that are… come on, you know it by heart, all together now… “exceptionally low” for an “extended period.”

  Today, the major indexes opened up sharply — with the S&P back above 1,200, buoyed by the news that first-time jobless claims fell again last week.

  More cause for U.S. optimism: Junk bond prices are once again trading at or near face value. That hasn’t happened since June 2007. Of course, that was just weeks before the credit markets seized up.

You want something that actually might put a shudder through U.S. markets for longer than a day? How about civil or even criminal indictments against the New York Fed?

That’s what Neil Barofsky, the inspector general of TARP, is hinting at. At issue: Was anything covered up about the rescue of AIG? You’ll recall Tim Geithner was running the New York Fed at the time.

We’ll believe it when we see it. In any event, it’s out there.

  “OK, Wednesday's 5 was by far one of the most sadly hilarious issues you guys have done!” a reader writes. “Sadly, as it demonstrates exactly what a huge burgeoning debt can do to a country and hilarious for the Goldman hearings pictures and captions.

“I do think, though, that the picture with Sen. McCain should have said, "I don't know how you can get those bastards to confess, they've got Geithner, Paulson and bunch of politicians in their back pocket. What can you do?"

  “Just a note to say bravo,” a reader writes about the second beta issue of our new project, Apogee Advisory. “The second issue is exponentially better than the first. I believe you might have found the right combination, so it is hard to offer suggestions for improvement.

“If anything, perhaps a short table of the five or seven or whatever number of indicators that you regularly watch to form your opinions, as opposed to sprinkling them throughout. I think it could have more impact in support of your conclusions. Keep it up, and thanks.”

  “If we were to compare the Apogee project with an athlete in training, Beta No. 1 would be the slightly paunchy and overweight rookie, just starting out on a serious training regimen — showing lots of promise, but carrying a lot of excess weight.

 

“Beta No. 2 shows LOTS of impressive improvement — much more trim and muscular, with loads of good useful information, and a minimum of flapdoodle.”

 

The 5: Hmmn… oddly similar to our own physique.

  “Well done! I say,” says a third. “Apogee has already morphed into an advisory letter that I will look forward to reading. Thank you for the useful overviews. Keep it up.”

The 5: If you haven’t already checked out the second issue — complete with four investment recommendations — you can still give Apogee Advisory a trial run and offer your own feedback.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. There are still a few more hours to respond to our coin survey if you haven’t done so already: 2,568 of you have responded already as we try to gauge what sort of offers you’d like to see.

“I took the survey,” writes a reader, “as I am a coin collector and have been a very long time. I hope the firm you have chosen, which I do not know much about, is fair and has competitive prices.

“I also hope their idea of rare is not the common bullion coins spewed out by various mints whether proof or uncirculated. Rare means low mintage, hard to find and in collecting demand. IT does not mean mintages of several hundred thousand or over a million or so.

“I will be interested to see if you have done your subscribers a service or a disservice. You can also do your subscribers a disservice by having a supplier who charges too much — a favorite among some dealers who prey on those who are less than in the know numismatically.

“This is simple enough to keep tabs on — one just needs to check Coin World, Numismatic News and results of auctions to have some idea of what the prices should be.”

The 5: We’ve done our homework. Nick Bruyer and the crew at First Federal know the meaning of the word “rare” — frequently, the offers they make are simply unavailable anywhere else.

We’re arranging for another Web event featuring Nick next month, which includes exclusive excerpts from the independent rating agencies on what you should be looking for, to ensure you’re getting a high-grade coin for a decent market price. Watch this space for details.

rspertzel

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