Stumbling Into a Trade War?

by Addison Wiggin

  • How Obama hopes to avert a fight with China… but is stumbling into one anyway

  • Dan Amoss on QE2: Bankers as bullies, Bernanke as nerd

  • World Bank chief calls for gold standard… sort of

  • Don’t fight the free market: Chart reveals the utter failure of the homebuyer tax credit

  • Turning skin into blood: Medical news that’s old news to some of our readers

President Obama faces a choice going into the G-20 meetings starting Thursday in Seoul: He can seek ways to avoid a currency and/or trade war with China… or he can purposely seek one out in a bid to stoke up anti-China fervor and boost his re-election chances.

He may be sincerely seeking the former… but this morning, he appears to be stumbling into the latter.

For starters, he stood next to India’s prime minister in New Delhi and declared he supports India getting permanent membership on the U.N. Security Council.

Of course, that’s guaranteed to anger Pakistan, India’s nuclear-armed archrival, whose support the president needs for his war in Afghanistan. But it’s also guaranteed to anger China — which has had a smoldering border dispute with India for some 50 years.

India has long been freaked out by China’s bases high up in Tibet, looming above India’s plains; decades ago, India’s leader Jawaharlal Nehru complained about it to Mao Zedong’s right-hand man, Chou Enlai.

“If I wanted to destroy India,” Chou was said to reply, “I would march 100 million Chinese to the edge of the Tibetan plateau and order them to piss downhill. We would wash you into the Indian Ocean.”

Old hatreds die hard; is anyone in the White House clued in to this?

Probably not, judging by other developments…

“We can’t continue situations,” declared the president, “where some countries maintain massive [trade] surpluses, other countries have massive deficits and never is there an adjustment with respect to currency that would lead to a more balanced growth pattern.”

So… that sounds as if Obama is going to make a full-court press at G-20 for Tim Geithner’s harebrained scheme to have everyone limit their trade surpluses and deficits to 4% of GDP — the scheme the Chinese dismissed last week as a relic of “planned economies.”

But even as the president spoke those words in New Delhi, Geithner was backing down in Tokyo. At a meeting of Asia-Pacific finance ministers, he said the concept is still sound, but “it’s not something that can reduce easily to a single number.”

Is it too much to ask that these guys get on the same page?

The president also went to bat for the Federal Reserve’s latest round of quantitative easing — in a roundabout way, since in theory the Fed and the White House operate independently. (Nixon-era Fed chief Arthur Burns gave away the game when he once said, “If we exerted our ‘independence,’ we’d certainly lose our independence.”)

“The Fed’s mandate, my mandate, is to grow our economy,” said Obama, “and that’s not just good for the U.S. That’s good for the world as a whole.”

The Chinese aren’t buying it. “[The US] does not recognize, as a country that issues one of the world’s major reserve currencies, its obligation to stabilize capital markets,” said vice finance minister Zhu Guangyao. Ouch.

Brazil’s president-elect Dilma Rousseff put it even more bluntly late last week: “The last time there was a competitive devaluation of currencies, it ended up where it did, in the second World War.”

“I don’t know whether it’s corruption, intellectual dishonesty, bureaucratic incompetence or some combination of the three,” says our resident Fed-watcher Dan Amoss, “but something’s driving the Fed to risk total destruction of the U.S. dollar.

“The Fed responds to critics of QE that it has the tools to shrink the money supply when the CPI soars past its absurd ‘informal 2% target.’ It may have the tools to shrink the money supply in the future. But whether it will have the backbone is another issue entirely.

“Here’s an image that illustrates the situation: Wall Street is a group of school-age bullies, and Bernanke is the nerd worrying they’ll steal his lunch money and shove him in a locker. So he gives into their demands, and, as a result, guarantees that they’ll come back to pick on him.”

“Whatever the motives,” Dan continues, “this is simply the next stage of the policy regimen started during the 2008 crisis:

  1. Stop the painful, but necessary restructuring of bad debts;

  2. Subsidize the banks by transferring wealth from savers to borrowers via zero rate policies;

  3. Make it less costly for banks to ‘delay and pray and hold onto overmarked, nonperforming loans;

  4. Finally, hope that the private sector — the one that produces and makes the U.S. work from day to day without asking for subsidies or handouts — will forever tolerate the burden of subsidizing two parasitic forces: the bloated financial system and federal government.”

In his role as our stock market vigilante, Dan has begun assembling a list of “QE2 victims.” These are companies that will have to eat rising prices for raw materials — grains, metals, you name it — and won’t be able to pass along those prices to cash-strapped customers.

Applying Dan’s strategy, you can profit even as these companies’ stocks get hammered. To learn more — and to access an exclusive discounted membership to Strategic Short Reportcheck out this presentation.

Traders appear to be taking profits after last week’s big QE2-driven gains. The S&P is down about 0.5% as we write. Gold has backed off from Friday’s $1,398 record to $1,391.

The dollar index, on the other hand, has rallied above 77.

The head of the World Bank hopes the G-20 leaders will emerge from their meetings this week with a whole new currency regime based in part on gold. “Although textbooks may view gold as the old money,” Robert Zoellick wrote over the weekend in the Financial Times, “markets are using gold as an alternative monetary asset today.”

Thus, the G-20 powers “should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.” Other “reference points” Zoellick sees in the mix include the dollar, euro, pound, yen and renminbi.

While the president is stirring up old hatreds between India and China, Vice President Biden is getting an earful about the Middle East. During a meeting in New Orleans, Israeli Prime Minister Benjamin Netanyahu told Biden that Iran must be made to fear a military strike against its nuclear program.

Israel won’t be the only source of pressure the White House will feel about Iran going forward. With the GOP winning a majority in the U.S. House, the new chairman of the House Foreign Affairs Committee will be an arch Iran hawk, Florida representative Ileana Ros-Lehtinen.

More fuel on the fire that Byron King says could ultimately send oil from this morning’s $86.40 a barrel to $220. He explains exactly how it could happen, here.

“This is one of the most telling charts I’ve seen in a while,” says Ian Mathias. “The moral of the story: Don’t fight the free market.”

Pending sales of existing homes fell in September, according to data released late Friday by the National Association of Realtors — another one of those “unexpected” data points that keep showing up of late.

“After a hefty 4.4% jump in August,” Ian explains, “September fell back down 1.8%, rejecting the Street’s anticipated 3% rise. But if you can take a step back and look at the data… what’s so unexpected about it?

“Since June 2007 — almost to the day when Bear Stearns’ mortgage-backed funds went bust — potential homebuyers have been trying their best to stay out of the market. You can plainly see that steady downward channel in pending home sales. During most of 2009, buyers were lured back into the market with government jawboning and tax credits. The moment those credits expired, the market immediately returned to its old trend.

“If you’re really paying attention, the only ‘unexpected’ September pending home sales number would be one where the market — without government manipulation — broke out of that trend. But lo and behold, that “surprise” 1.8% drop simply kept the range intact.

“We don’t give these chart trends and channels too much credence,” Ian concludes. “But even $16.2 billion worth of homebuyer tax credits couldn’t keep the market from doing what it wanted to do in the first place: deleverage.

“Until pending home sales naturally break out of this trend, I don’t see why we should expect the housing market to go anywhere but down. Just be happy it’s no longer in free fall.”

On the subject of the moribund housing market, Fannie Mae let it drop after the close of business on Friday that it needs another $2.5 billion bailout from the U.S. Treasury.

That’s on top of the $86.6 billion it’s already leeched from taxpayers. Last week, Standard & Poor’s estimated by the time all is said and done, bailing out Fannie and Freddie could cost $685 billion. (QE3, anyone?)

The FDIC swooped in and shuttered four more banks over the weekend — two in California, one in Washington state and one in Maryland. Make that 143 bank failures in 2010; we’ve now exceeded the 2009 total of 140.

The Internet is abuzz this morning with news that Canadian scientists have figured out how to turn a person’s skin… into blood.

It’s a perfect genetic match, and it bypasses the need for embryonic stem cells, according to research published in the scientific journal Nature.

Imagine… No need to rely on the blood bank if you’re going in for surgery.

Of course, this is old hat to readers of Patrick Cox’s Breakthrough Technology Alert. When he first put out his own research on the trend, they had the chance to grab his recommendation for 75 cents a share… and ride it up 600%-plus since.

Patrick says the same potential lies in one of his newest recommendations, which is on the verge of a breakthrough treatment for Alzheimer’s disease — not just the symptoms, but the disease itself.

You can read about this on Drudge two or three years from now or you can learn more right now in Patrick’s latest presentation and secure a 55% discount on membership to Breakthrough Technology Alert. Please note… This offer expires at midnight on Thursday.

“Could you please just post the link to the special offer for Breakthrough Technology Alert?” a reader inquires. “I have banished that abomination known as Flash from my computer, so your presentation link does me no good.”

The 5: We’re happy to accommodate. Here’s a link direct to the order form.

“I am frustrated,” writes another, that your mail gives me more offers to buy, buy, buy. I bought a subscription and would really like to have just your info on stocks to buy and sell.”

The 5: One more time, for newer readers: The 5 comes to you free; our specific recommendations come at a price.

We direct you to the 3:30 time stamp of our Oct. 13 issue for full instructions on how to access the recommendations you’ve already paid for.

“The only reason I pay for a subscription to any of your other issues,” writes our final contributor, “is so that I can continue to receive The 5.

The 5: Thank you. Uh… we think.


Dave Gonigam

The 5 Min. Forecast

P.S.: After a weekend at home in Baltimore, Addison is back in Washington. Today he’s interviewing a Spanish minister asserting his government’s claim to the riches discovered by the private treasure-hunting firm Odyssey Marine. (If you’re new to this, here’s some background.)

No doubt that’ll make for a more complete telling of the whole sordid story in Addison’s documentary project — still on track for a rough cut come January. Stay tuned…


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