Debt Solutions for Dummies

by Addison Wiggin & Ian Mathias

  • N.Y. discovers amazing debt crisis solution: Put it off till next week

  • One coming fiscal calamity almost as massive as subprime

  • Will BP file Chapter 11? Matt Simmons, Byron King weigh in

  • Chris Mayer presents a no-brainer investment argument for global agriculture


  At long last, we’ve figured out how to solve the U.S. debt crisis. Get ready for it…

Weekly emergency legislation.

Ta-da! (Confetti drops, crowd cheers. The band strikes up John Phillip Sousa.)

  Yesterday marked the 11th week in a row the New York State government postponed closing their $8 billion budget gap with emergency legislation.

It’s a great scheme. You see, they can make big speeches and debate on the bills due next month… which budgets to cut, who to fire, who to tax, etc. But bills due tonight? Next week? The one thing the whole state can get behind is keeping the lights on for the next few days. So once a week, the legislature gets together and passes an “emergency spending bill” to stave off disaster… the same disaster they encountered the week before, and before that, and last month… last year.

And so it goes. “I think we’ll have to do it again next week,” Gov. Paterson warned yesterday after the latest “emergency” bill.

Bravo, we say. If we can live in a state of perpetual emergency for the rest of our lives, we’ll be set!

  Similar shenanigans in the Golden State: 

“In all likelihood, we’re not going to have a budget plan forwarded on to the governor by the constitutional deadline,” California Controller John Chiang lamented yesterday. He and CA legislators have a $19 billion budget gap to close by July 1… no way, Jose.

But just like New York, it’s no big deal. The California governor has delivered an on-deadline budget only 10 times in the last 30 years, according to Bloomberg data.

  “Municipalities are struggling to cut spending in line with lost revenue,” reads our latest issue of Apogee Advisory, which hit virtual newsstands yesterday. “But their biggest expense of all is untouchable — pension plans.

“California offers a great example. A recent Stanford study concluded that the state pension fund program is underfunded by roughly $500 billion. The researchers urged Gov. Schwarzenegger to inject $360 billion into its public benefit systems — right now — to have an 80% chance of meeting 80% of obligations over the next 16 years.

“Facing a $19 billion state budget gap, what can he possibly do?

“The problem, just like with subprime, is an irrational form of leverage. In essence, municipalities borrow current earnings of public employees in exchange for some of the most favorable retirement plans in the world. That borrowed money is invested aggressively, just like a private-sector employee would in his 401(k).

“Except if the fund loses money, which they all have over the last 10 years, pension funds don’t adjust payouts. The social and political pressure to maintain the status quo — keeping our public employees comfortably retired — is just too strong. So municipalities kick the can down the road. New employees buy into the funds. Fund managers maintain their projections of endless 8% annual returns. Retirees keep taking out the funds they were promised… and no one pays the tab.

“And it’s not just California. Orin Kramer, chairman of New Jersey’s pension program, estimates a national funding gap around $2 trillion.”

There’s a way to shield yourself — even profit — from this dark trend. Get the details in the latest Apogee Advisory, available here.

  Just this year, U.S. state budget shortfalls will likely exceed $140 billion, says The Center on Budget and Policy Priorities.

The logical conclusion: “Close attention needs to be paid to the potential sovereign risks of some countries and regions,” reads the China Banking Regulatory Commission’s annual report, “as their sovereign debt ratings have been or will be downgraded.”

 Russia announced today it intends to sell more of its dollar reserves. It held 50% of FX reserves in dollars back in 2006. Now it’s sold down to 41%… and the central bank announced today it’s going to sell more, in favor of Australian and Canadian dollars.

  That’s no help to the dollar’s downtrend this week. The dollar index is down about half a point since Monday, to 86.1 as we write.

  Good for gold, which has risen to the higher side of its recent trading range. The spot price is at $1,235 today.

 The stock market staged another rebound yesterday, with the major American indexes rising over 2%. We noticed a better-than-expected reading from the N.Y. Fed’s economic activity index, but not much else to support such a gain.

Stocks are selling off this morning, as the latest housing starts numbers report a 10% decline in May, to the lowest level this year.

  Another chapter in the slow deaths of Fannie Mae and Freddie Mac: Both stocks were finally delisted from the NYSE this morning. They have been vanquished to the realms of over-the-counter trading.

   Both oil spill rhetoric and oil spill flow rates increased dramatically overnight. As you’ve no doubt seen or heard, President Obama addressed the country from the Oval Office last night. There will be meetings, he assured, and new appointments… some regulatory shake-ups and a fiscal shakedown of BP.

But the only thing to have actually changed over the last 24 hours was the party line over just how much oil is gushing into the Gulf. The new estimate is 60,000 barrels a day — 12 times larger than the 5,000 estimated when this all started two months ago. Crazy…

What will the bill be for this mess? Who knows… we’ve heard guesses of $5-20 billion. Either way, BP is on the hook for “whatever resources are required,” the president made clear last night.

   BP’s in even hotter water… Fitch downgraded them again this week, this time to BBB, two notches above junk. If BP needs to raise capital to pay for this, it’ll be a lot harder now.

  Thus, oil industry watchdog and Peak Oil guru Matt Simmons forecasts BP has “about a month before they declare Chapter 11. They’re going to run out of cash from lawsuits, cleanup and other expenses… there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this, my guess is that they’ll panic and go into Chapter 11.”

That was from last week, we should note.

  “What DOES Matt Simmons know?” asks Byron King. “Because at the same time that Matt Simmons is saying that BP will file for Chapter 11 bankruptcy, his namesake firm, Simmons & Co., is recommending that people buy BP stock!

“So Matt is saying one thing and the firm he founded is recommending something exactly opposite. Here's the exact wording from Simmons & Co.:

"‘The kitchen sink of headlines have been thrown at BP shares over the past two weeks, thereby partially desensitizing the shares to the news. Meanwhile, the brewing debate of BP pensioners versus Macondo [Note: Macondo is the name of the blown-out oil well] victims is generally supportive of BP shares, in our view.’

“So according to Simmons & Co., all the bad news is ‘generally supportive of BP shares’? Let's rephrase our first question. What does Simmons & Co. know that its founder, Matt Simmons, doesn't?”

  A spell of very bad weather has created the bull market of the week: oats!

After an 11% leap yesterday, oats have been on their best six day run in five years thanks to exceptionally wet weather in Canada. Our northern neighbors are the world’s second largest producer of the stuff, and the Canadian Wheat Board announced last week the weather could put the kibosh on 12.5 million acres of oats… and suddenly, prices go up 44%.

Don’t we go through this every year? We can’t remember the last early spring/summer when the world wasn’t counting on record harvests.

 “It all starts with one basic premise,” Chris Mayer notes. “The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

“Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

“First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the U.S., Brazil and Argentina!

“That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person — which includes both land under cultivation and land that could be farmed — is a dwindling resource, as the nearby chart shows…

“All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain — from irrigation equipment to fertilizers.”


For the very best stocks for such a trend, check out Chris’ Special Situations portfolio. You can gain short-term access today for just $1. Details here.

In the meantime, here’s a chap doing his best to stave off the global food shortage… sort of.

(Thanks to Reuters for the photo)

That’s Yang Youde, a Chinese farmer. He’s not carting around a wheelbarrow of pipes… but a mobile arsenal of homemade rocket launchers!

Reuters and China Daily found this guy last week, literally waging armed resistance against encroaching state property developers. Like everywhere else in China, the state is offering Yang a forced payout for his land, where they intend to build some New Age attraction (department stores, in this case). He’s not handling it too well. Using farm equipment and materials from a local fireworks store, he’s taken up arms… firing rockets and a homemade cannon at eviction squads coming to claim his property. Best of luck, sir.

That’s interesting on two levels:

1) That China really is on a nonstop campaign to “modernize” rural areas and bring farmers into the urban environment, where they will likely serve as unskilled substitutes for the growing masses of jilted city factory workers.

2) China’s come a long way in terms of human rights – even if it has a long way to go, still. Ten years ago, this guy would be hunched over in shackles, mowing grass with a pair of dull scissors at some Chinese prison, at best… not portrayed in smiling dissent in international news.

“Along with your discussion of China,” a reader writes, “what is the effect of these worker strikes I read about and the 100% raise in pay? That has got to have an effect on exports. If Chinese workers get pay parity with USA workers, the trade advantage will be gone.”

The 5: Well, there’s certainly a long way from parity. We read that at Foxconn, where those workers have gotten such huge raises lately (in percentage terms), the typical factory worker is still taking home about $200 a month.

But you’re right — so right — that one of these days this Chinese cheap labor model is going to stop working. Addison and Bill Bonner wrote about it in Financial Reckoning Day, and we’ll all be revisiting again over the next few months (at least). It’ll be discussed in our conference call on Thursday, for which invitations have just been sent out. If you got one, be sure to reply soon.

  “How shrewd of China!” a reader reacts to their purchase of Greek ports yesterday. “It seems they’re divesting away from their U.S. dollar stash in the best possible way. In a way, it’s not unlike the U.S. after World War II, when they were the largest wallet on the block of countries ravaged by war. Now China is the largest wallet on the block of countries drowned in their own hubris.

“Interesting times, indeed!”

The 5: Hope you’re enjoying them,

Ian Mathias

The 5 Min. Forecast

P.S. These volatile, choppy markets we’ve been suffering lately are perfect for trading options — especially if you have a savvy guide. Check out the incredible hot streak our Options Hotline readers have enjoyed this year, right here.

If you like what you see, there’s a way to hop on board this week at a very low cost. Details here.


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