Role Reversals Across the Globe, The Euro Crisis Unfolds, An Oil Spill Outlook and More!

by Addison Wiggin & Ian Mathias

  • Finally, U.S. and Chinese markets decouple… but not in the way you’d expect

  • Global stocks slump, euro gets slammed… Chuck Butler on the currency’s coming crisis

  • While some nations fall, others stand tall… a major milestone in Russia’s economic recovery

  • Plus, an oil spill update from Byron King… why deep-water drilling is down, but not out


  By now, the relationship is so established it’s nearly cliche: China is the great driver of global growth, the mother of all emerging stock markets. The lowly U.S. is the laggard, hanging on China’s every word, unlikely to outpace Chinese stocks over any period of time.

Wait… what’s this?

With a notable lack of media attention, the Shanghai Composite has suffered a technical correction, falling 11% over the last three weeks. At around 2,800, the index is at a seven-month low.

What’s more, China’s April purchasing managers index just dropped to a score of 55, a six-month low. A very similar index for the U.S. (the ISM’s manufacturing index) printed yesterday at a score of 60.

The Chinese government hiked bank reserve requirements again overnight, and thus still appear to be more concerned with slowing down the Chinese economy than pumping it up. So we must ask… if China’s demand for worldly goods helped rescue American stocks all through 2009 and the first quarter of 2010, how long until U.S. equities follow Chinese stocks back down?

  Maybe soon. Last week was the first losing week for the S&P 500 in over two months. The index jumped over 1.3% yesterday on word of the latest Greek bailout plan, but gave all of those gains back at the opening bell this morning.

  Sooner or later, the American stock market will be judged not by the actions of other nations, super-sized banks or oil spills, but by the merits of American companies that make exciting new things that people want. It’s a crazy scheme, we know, but one day…

That’s why Addison is up in Boston today. We were able to score a last-minute interview with Juan Enriquez for our new documentary. You might remember him from last year’s Investment Symposium in Vancouver, where he delivered a presentation on the future of life sciences that was as inspiring as it was mind-boggling. He was also part of the team that first sequenced the human genome, and lately he’s been one of the driving forces behind Exxon’s much-hyped algae-to-biofuel program. Pretty interesting dude.

Addison’s interested in getting the finer details of his story, along with his take on innovation during times of economic downturn, creative destruction and succeeding in spite of the current political environment. We’ll give you the details in tomorrow’s 5, along with some great stories to back up the argument.

  But in the meantime, the European stock market is still quite affected by the Greek — soon to be eurowide — debt crisis. Markets there are a sea of red… just about every major index is down well over 2%.

  As you’d expect, the euro is hurtin’, too. It’s at a one-year low of $1.31 as we write. Of course, Greece is a problem, but it’s the whole euro scene that has traders rightfully worried. As Wolfgang Munchau wrote recently in the Financial Times, “The EU is thus about to confront a historic choice between integration and disintegration.” Yesterday’s 5 should have driven home the point… it’s all or nothing time for the European Central Bank.

“I'm reminded of March 2008,” writes the venerable Chuck Butler, “when Bear Stearns hit the skids and had to be rescued. This followed what was a liquidity crunch here in the U.S. that began in August 2007. And from there, the walls came crumbling down, as we all know too well…

“I'm reminded of this because of the problems the European Central Bank (ECB) is going to have to face, if they want to ‘save’ the euro. The ECB is going to have to provide liquidity so that the likes of Greece and Spain (among others) do not, ever, feel the strains of a liquidity crunch like we saw here in the U.S.

“This will be a really difficult thing for the ECB to do, and not because they don't know how. The reason it will be difficult is that it's really against the ECB's rules to deal with country by country… But better to have broken a rule or two than to lose the currency.

“I don't like any of this, folks… I personally do not believe the ECB will stand idly by while the euro gets punished. The single unit's loss to the dollar this year has been 9%. That's a long way from the 50%-plus the euro gained versus the dollar in the last eight years, but 9% is significant, there's no two ways about it.”

  But as always, some nations rise while others fall. “For the first time since it defaulted on its $40 billion domestic debt in 1998, Russia issued $5.5 billion worth of eurobonds last week,” fund manager and Investment Symposium favorite Frank Holmes writes. “Investors embraced the five-year bond, purchasing $5.5 billion of Russian debt with The Wall Street Journal dubbing the offering Russia’s ‘triumphant return.’

“Bloomberg published this interesting chart last week comparing Russia’s credit-default swaps to the PIIGS (Portugal, Italy, Ireland, Greece and Spain). A credit default swap is the cost of insuring debt against default. The riskier the debt, the higher premium the market requires to insure it.

“Despite carrying a lower credit rating, this chart shows that investors are valuing Russia’s debt as less risky then these countries’. While this reflects the well-publicized debt problems these countries are having, it also shows how far Russia has worked to rebuild its credit the past 12 years.

“With foreign exchange reserves of $400 billion, Russia remains a net creditor to the world but the five-year bond issuance is part of a grander strategy. Russia is looking to establish a benchmark yield so its corporations have access to cheaper credit and stimulate business growth.

“Is Russia becoming a bastion of safety in a turbulent world? Bond investors seem to think so.”

If you want to see Frank at this year’s Investment Symposium, along with the rest of our stacked list of speakers, the time to act is right about now. July will be here sooner than you know it, and you don’t want to miss out on Vancouver, B.C., that time of year. Book ahead and save a few bucks.

  The U.S. Treasury Department jacked up its planned second-quarter borrowing 27% today. Three months ago, the government planned on issuing $268 billion in bonds from April-June. Today, $340 billion in quarterly borrowing… the amount “required” to meet the Obama administration’s projected $1.6 trillion budget gap for the fiscal 2010.

Interestingly, the Fed is behind the majority of the 27% alteration: $200 billion worth of U.S. bonds are for a special program the Fed — and this is public knowledge — uses to manipulate interest rates. As Bloomberg put it: “When the Treasury sells bills at the Fed’s behest through the Supplementary Financing Program it drains reserves from the banking system and makes the central bank’s job of controlling interest rates easier.”

Ha! What if, God forbid, the Fed's job is getting harder for a reason?

  “What we need is more saving, more industrial investment and a stronger trade position,” Former Fed chief Paul Volcker said during a speech at Washington University this week. “Our expansive and expensive program of entitlements simply must be brought under control. Our mortgage market must be rebuilt from the ground up.”

  Gold’s up again today. We can hardly fault anyone for building their position, even at $1,180 an ounce.

  Crude oil got a nice, 2% haircut this morning on mere expectations of some better-than-expected U.S. inventory data. The stronger dollar (really, a weaker euro) isn’t helping prices either. And of course, the elephant in the room: There’s 5,000 barrels of the stuff leaking into the Gulf of Mexico every day.

  Gov. Schwarzenegger has nixed California’s offshore drilling plans in light of the Gulf disaster. Heh, that oughta help with the budget gap.

  “Things are bad in the Gulf of Mexico,” Byron King plainly states. “Oil is gushing out of the ill-fated BP well. The spill is out of control, despite the best — even heroic — efforts of many industry and government players. There’s no quick solution on the horizon. In my view, things are likely to get worse before they get better.

“So where do we, at Outstanding Investments, go from here? What does the Gulf of Mexico disaster mean to the many offshore deep-water-related companies in the OI portfolio?

“Don’t Panic. Don’t succumb to screaming headlines. For as bad as the Gulf of Mexico disaster is — yes, it’s bad — I’m not recommending that you sell out.

“I’m convinced that offshore development will continue, and it will continue in deep water… It’s just a scientific, geologic fact that much of the world’s future oil supply is offshore, under deep water. Despite the offshore Gulf disaster, there is still a global push for oil from deep water.

“Right now — and there’s no nice way to say it — the situation is truly ugly. There’s a major oil spill to control and clean up. In the U.S., we’re certain to see much tighter regulation and higher costs for working offshore. And d’you know what? That’s fine.

“There’s no such thing as being ‘too safe’ in an ultra-dangerous environment. But danger or no, offshore energy development is NOT going away. In fact, there are new investment opportunities in the disaster, which I’ve detailed in the latest issue of Outstanding Investments. See for yourself, here.”

  Last today, a sign of the times. The recently arrested suspect in the attempted Times Square bombing defaulted on his $200,000 mortgage late last year. We don’t have the firm details yet, but it looks like Chase Home Finance sued to foreclose on the guy’s house back in September 2009… a case that is, of course, still pending. (Proof that even terrorists can’t escape the credit crunch, but can hustle a mortgage lender.)

Did the foreclosure push him over the edge? Or were house payments irrelevant… since he was likely planning on being dead or out of the country by now? Is he even guilty?


Hell if we know… but it seems like all paths lead back to the housing bust. This might also give a whole new twisted meaning to the idea of a “strategic default."

  “Why don't these sorry sod nations do what everyone else does when we hit the brick wall?” a reader asks of the Greek crisis.


“Sell your assets. Huh?


“No biggie. We Canadians do it all the time to raise cash. A crown corporation here, some crown land there, etc. What I am talking about is, of course, what would have everyone puke on their spiffy patent leathers — sell LARGE amount of assets! In the U.S. — trillions of dollars worth — maybe California or… who the hell needs Puerto Rico anyway other than MLB. Greece, U.K., whatever it takes — an island here or there — who would miss it (who would even know?!?). Of course there would be a buy-back provisions, first rights etc. — blah, blah, blah — once things get rosy again to soothe the bruised egos.


“Eh, just a thought, that's all.”

The 5: Heh, considering the amount of Greek debt outstanding and the Greeks’ serious inclination to evade taxes, we’re not sure they have enough land to raise that $150 billion, or that anyone would want to buy. That being said… bet the UAE could do something fun with it.


Ian Mathias

The 5 Min. Forecast

P.S. Don’t forget to sign up for our latest online event: The Untapped Gold Market No One’s Talking About.

Here’s the scoop: China’s annual gold consumption has “the potential to double in the next 10 years,” says the World Gold Council. We’ve seen ample concurring arguments and forecasts lately, so we’re putting together an exclusive web event that will help you get in front of this trend. 

Addison will interview First Federal’s CEO Nick Bruyer along with reps from both of the two major independent coin grading companies — NGC’s vice president of sales and marketing, Scott Schechter, and PCGS’ senior grader, Miles Standish. These experts will give you the full scoop — the ins and outs of the China market, what you should look to avoid and the best way to take advantage of the exploding demand for Chinese coins.

All you have to do is sign up and watch. Don’t forget — it’s free. Details here.

P.P.S. And be sure to check out tomorrow’s 5. We’ll share the juicy bits from Addison’s interview with Juan Enriquez and shine some light the innovations emerging during this global recession. Should be good… stay tuned.


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