Bi-Polar Traders, China’s New Bear Market, The Fed’s Latest Scheme and More!

by Addison Wiggin & Ian Mathias

  • U.S. traders go bi-polar… the overseas market you should really be watching instead

  • EU bailout sneakier than advertised (of course)… details on a new Fed/ECB manipulation plan

  • Did Bill Clinton just call for a return to the gold standard?

  • Byron King on where deepwater drilling will likely slow down… and where it won’t


  Anyone else having a good laugh at this?

We know several hormone-stricken teenagers with greater emotional stability than U.S. “investors.” Just two days after “the biggest point fall in history” the Dow enjoyed its biggest point and percentage daily gain in 14 months.

Quite naturally, the Dow opened down about 100 points this morning. Heh.

  Traders can’t make up their minds on Europe or manage their computer trading systems. They were suckered into buying the EU’s “shock and awe” bailout yesterday, but today, there’s this pesky question… how is a debt crisis solved by more debt?

And the troublesome answer: It isn’t.

  “The crisis came from debt and you don’t escape it with more debt,” Black Swan author, and Investment Symposium alum, Nassim Taleb told Bloomberg yesterday.

“We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable…

“That’s immoral.”

Wait… are we still talking about Greece?

 “Every heavily indebted sovereign borrower in the world is starting to wonder if they might be next,” forecasts Eric Fry in the Daily Reckoning. “This situation is very serious, very pervasive and very unlikely to be cured by any sort of ’rescue plan.’

“The chart above places the Greek crisis in a global context. As expected, countries like Italy and Greece are high on the list. But surprisingly, the US is on par with Spain and Portugal. America's three-year funding requirement seems much more ominous when viewed in absolute dollars.

“Most central bankers of the world realize this fact. That's why they all wish to support Greece — not because they care about Greece, but because they care about avoiding close scrutiny of their own finances.

“Runaway government borrowing creates a frightening context for any would-be buyer of government bonds. That's why long-dated bonds may be some of the riskiest assets on the planet at the moment.”

That would be a core component of our new “Trade of the Decade”: Buy Japan, Short U.S. debt. We spelled out both sides of the trade specifically, including funds and ETFs worth buying, in the latest issue of Apogee Advisory. We’re still in the “beta testing” phase of Apogee, our newest service, which means you can still get a trial subscription on the cheap. Details here.

  Oy… this should sound familiar:

“The European Central Bank has no plans to publish a regular tally of its new government bond buying program,” Reuters reports today. “Details of the plan remain vague. There is still no hint of how much the ECB is prepared to spend, what maturities or bonds it will target, if it has specific aims for yields or how long it expects the process to take.”

Mr. Bernanke must be so proud.

  The Federal Reserve has reopened currency swap lines with the European Central Bank. A quiet footnote to yesterday’s EU bailout announcement, the Fed and ECB said – without the support a single voter or representative – that they would restart a market manipulation program that ended February 1st, 2010.

“This is a ready source of liquidity,” The 5’s Dave Gonigam explains, “for the ECB to follow through on its promises to buy up both sovereign and private debt as part of this ridiculous rescue package.  How much liquidity?  We don't know, since the linchpin of the whole thing is an utterly opaque off-balance sheet entity totaling 440 billion euros.”


There’s plenty more little mundane details neither central bank will be sharing, like:

• How greatly will this program expand the Fed’s $2.3 trillion balance sheet?

• Will the Fed demand collateral?

• If so, what kind? (They accepted mortgage backed securities here… what’s next, Greek bonds?)

• Will the U.S. money supply increase? By how much?

• What lending rates will the Fed charge?

• How will the proceeds be allocated?

“This is all designed to prevent a Soros '92/Bank of England style showdown,” Rob Parenteau explains. “ECB cannot print the foreign currency it will need to sell in order to keep the euro from free fall. Hence they are trying to present a credible threat by enlisting foreign central bank assistance via swaps.

“However, by preventing further euro depreciation, eurozone exporters will not get as much benefit. There’s only been a 15% decline from euro highs so far. They need more like 30% or more to regain global market share. And so the odds that swings in the current account balance will offset fiscal retrenchment enough to generate a return to economic growth over the next 2 years are slim to none.”

Rob’s been right on during his analysis of the crisis. Join the Richebächer Society now and get four ways to play the spreading debt debacle in Europe, free.

  Not surprisingly, gold is now just a hair short of an all-time high in U.S. dollars. Our preferred metal has already hit record highs in most other major currencies over the last two months. At $1,220 an ounce at the opening of the U.S. market today, it’s about six bucks short of its December 2009 record.

Bill Clinton shocked us the other day when he came out and suggested the financial crisis would never have happened if the dollar was still tethered to gold. It’s remarkable, isn’t it, how candid Clinton, Rubin and Greenspan are now that they’re out of office… and selling books.

  While American stock traders are chasing their tails day in and day out, here’s a market really worth watching:

After hardly participating in Monday’s global market rebound and falling 1.9% overnight, Chinese stocks have entered a technical bear market – down over 20% from a November peak.

Of the 93 national benchmark stock indexes tracked by Bloomberg, China’s market is the second worst performer so far in 2010. Only Greece has faired worse.

Heh, what a lovely time for a visit! Addison, Chris Mayer, Bill Bonner and Joel Bowman, are going to be in Beijing this coming weekend to evaluate a business proposition. Looks like they’ll get a glimpse of the bust first-hand, too. This will be more fun than Dubai.

Details and comments forthcoming.

  Like gold, oil prices are firming up today despite the stock selloff. A barrel goes for $77, as write.

  “I believe that the U.S. will tie itself into political knots over the BP disaster in the Gulf of Mexico,” forecasts Byron King, having just returned from the annual Offshore Technology Conference in Texas.

“We'll see drilling moratoria in the U.S., and endless lawsuits over much of the new energy development pipeline. The bottom line is that the U.S. political and environmental issues will make other good projects, across the world, all that much more valuable.”

While in Houston, Byron met with a senior official from Petrobras. "We'll study this very carefully,” the official said of the Deepwater Horizon accident. “We'll learn everything we can possibly find out. It will make us even more careful about what we're planning to do.

"But it won't stop us from moving forward.” Petrobras is pursuing new projects in the waters off Africa, particularly Angola. Further, there's some "very prospective" acreage in the southern Namibian waters.

“The official was candid,” writes Byron “he said that Petrobras is ‘working on several options’ for the hydrocarbon potential offshore Namibia.”

That should be a clue. As part of the strategy that placed Byron on one of those offshore rigs in the past several weeks, Byron’s been hot on the prospects in Namibia. His Energy & Scarcity Investors are more than prepared for an oil boom off the coast of Africa. You could be, too… find out how here.

  Last today, our favorite South American dictator, Hugo Chavez, is stretching even our limits of imagination. Señor Chavez has apparently set up a special office of 200 employees to manage his new, much hyped Twitter account. It’s hard to believe this guy can limit himself to 140-character messages… good thing there’s more than one person per letter on his staff to take care of it.

It get’s better. His account name is Chavezcandanga. Depending on your Spanish dialect, that can mean: “Relentless Chavez,” “Naughty Chavez” or “Chavez the Devil.” Seriously.

The AFP reports the whole operation is financed with state funds.

  “Amazing,” a reader writes, “that Goldman Sachs reported in an SEC filing that they made profits trading each and every day last quarter. They made more than $25 million on each of the 63 trading days in the first quarter and over $100 million on 35 of those days. Talk about making money every which way!”

The 5: That’s what people said about Bernie Madoff, too.

  “Your reporting on the monthly employment number,” another adds, “reminded me that I hadn't seen anyone within the Agora circle talk about the possible unemployment disaster that may occur when the government sector hands out the pink slips in concert (i.e. June 30th) that were budgeted back in June 2009 after the entire financial calamity occurred. 

“I'm sure many of these jobs have been eliminated via natural attrition, but I think we could possibly see a 1-month loss of over a million jobs reported in August (for July first timers). I may be off in La La Land with this assertion, but I can only assume that the numbers will be somewhat skewed to the upside no matter what has happened in the past year.”

The 5: We’ll be watching that number. The unemployed are going to be the bane of the government’s reflation efforts.


Ian Mathias

The 5 Min. Forecast

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