Lessons Learned, Lessons Ignored

by Addison Wiggin – February 11, 2011

  • Mubarak learns his lesson, but the U.S. Treasury forges on in ignorant defiance: The 5 picks apart Fannie/Freddie “reform”

  • Chris Mayer squares the perky quarterly earnings reports with the lousy jobs picture

  • Dutch court orders pension fund to sell most of its gold holdings… while China looks to bulk up to Fort Knox proportions

  • Is Glenn Beck following our work? Striking visual evidence

  • “Watch the earnings in 2012” and other sage advice from your fellow readers

When it comes to clinging to an outmoded paradigm in the face of public anger and all evidence to the contrary… Hosni Mubarak has nothing on the U.S. Treasury. At least he had the good sense to step down.

For their part, the U.S. Treasury is out this morning with a grand plan to “reform” Fannie Mae and Freddie Mac. Indeed, they plans to phase out the infamous government-sponsored enterprises (GSEs) and give the private sector a greater role in mortgage finance.

The problem at present is best captured in this chart:

Whether it’s Fannie, Freddie or federal agencies, Uncle Sam is the housing market… accounting for nine out of 10 mortgage originations in the past year.

When we forecast in 2004-2005 “the total destruction of the U.S. housing market”, the suggestion was met with more than a snicker. Yet as this chart reveals… without government-sponsored activity, we were dead-on.

Now, Mr. Geithner and his minions are mulling over three options to wind down Fannie and Freddie over a period of five-seven years. We’ll spare you the details, because the details are rendered more or less irrelevant by this passage in their 32-page report:

“Our commitment to ensuring Fannie Mae and Freddie Mac have sufficient capital to honor any guarantees issued now or in the future and meet any of their debt obligations remains unchanged. Ensuring these institutions have the financial capacity to meet their obligations is essential to continued stability, and the administration will not waver from its commitment.

“Given Fannie Mae and Freddie Mac’s current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery.”

Translation: The blank check the Treasury gave Fannie and Freddie (on Christmas Eve 2009, when no one was supposed to notice) remains in force. No one — certainly not the lenders who knowingly fobbed their crappy mortgage paper onto Fannie and Freddie — will be allowed to feel any pain.

Well, no one except taxpayers, who remain on the hook for $134 billion.

The major U.S. stock indexes are down about 0.2% after another flat day yesterday. The December trade deficit came in about where the Street expected, up 6%, to $40.6 billion, owing largely to the rising price of imported oil.

“For now, anyway, the earnings narrative dominates the market,” says Chris Mayer. “All the big-picture items seem not to matter. Unemployment? Who cares? Debt and deficits at every level of government? Whatever. Companies are turning in good profits, and the market is uncorking the champagne.”

“The S&P 500’s fourth-quarter earnings, at the halfway mark, were 17% ahead of last year’s mark,” Mr. Mayer explains. “Sales were up 9%. So this is no longer a story of cost cutting.

“The media don’t get how this earnings picture squares with stubbornly high unemployment. I talked to one reporter recently about this very thing. One simple reason for the disconnect is that some of the best sources of profits for many of these firms has been from overseas operations.

“Many U.S. firms are still cutting jobs, like Boeing and Lowe’s. Profits from emerging markets, meanwhile, grow apace.”

Chris has his eye on an unusual emerging market opportunity this week — a massive oil find that effectively lets you “steal” Iran’s oil right from underneath the mullahs. Check out his write-up… and get half off a membership in his premium service Mayer’s Special Situationsright here.

Gold is nearly ruler-flat from where it was yesterday at this time — $1,364. But beneath the calm surface lie some fascinating… and potentially turbulent… developments.

From the Netherlands comes a “head scratcher” of court case that will undoubtedly impact the price of gold over the short term.

In 2008, Vereenigde Glasfabrieken, a Dutch pension fund for glassworkers, started accumulating gold as its managers worried about inflation and the euro. It’s performed very nicely, up 70% in euro terms. Too nicely for the Dutch Central Bank, which apparently has oversight of these things.

Gold has swelled to 13% of the fund’s total assets. And in the judgment of the Netherlands’ monetary authorities, that’s too much exposure to a “risky” and “volatile” instrument. Thus, they ordered the fund to unload enough gold holdings so it’d be back down to a “reasonable” 3% of assets.

The fund fought in court… and finally lost yesterday. That’s more than 40,000 ounces of gold coming on the market. In the meantime, the glassworkers pensioners have to cough up the gold they hold in an effort to preserve their clients’ wealth and exchange it for something they perceive to have less value.


China may eventually build up its gold reserves to Fort Knox proportions, Chicago-based economist David Hale suggested to an audience assembled in South Africa yesterday.

Hale noted China’s gold reserves are currently 1,054 metric tons. But Chinese central bankers are talking seriously of expanding that stash nearly 10-fold, to 10,000 metric tons.

That would top the U.S. holdings of 8,966 metric tons. And “would be a huge development for the gold market,” Hale said, pointing out global mining output is just 2,500 metric tons per year.

Don’t expect to learn about every Chinese purchase as it happens. As of 2004, its gold holdings totaled 600 metric tons… and it stayed there until April 2009, when the Chinese up and announced they had 1,054.

“China will probably start to buy gold in the near future,” Hale predicts, “but they won’t report it for two or three years, The odds very much favor China making, over five years, very large gold purchases, and this in turn makes me bullish on the gold price.”

Indeed. We’ve invited a “who’s who” list of resource, energy and precious metals speakers to join us this year in Vancouver at our annual Agora Financial Investment Symposium, July 26-29, 2011. If you’re at all interested in making money in the resource markets, you cannot miss the event. Call Barb Perriello at (800) 926-6575… and grab your early bird discount today.

Silver is steady-Eddie this morning, the spot price at $30.16 — about where it’s been the last 48 hours. Here again, interesting developments are taking place below the surface.

“There is a huge story that is brewing,” says James Turk of GoldMoney. “Silver is in backwardation to 2015, which is 13 cents cheaper than spot.”

We’ll pause here to explain that “backwardation” is commodity-speak for when the spot price of something is higher than the price for future delivery. “This is unbelievable. Money does not go into backwardation except ‘in extremis’! The demand for physical silver is not abating.

“Look for a short squeeze in silver already under way — as evidenced by the backwardation — to intensify as we move toward silver option expiry at the end of this month, and silver delivery on March futures contracts in early March.”

[Ed. Note: As an Agora Financial reader, your window of exclusivity on an extraordinary new silver issue from the U.S. Mint expires tonight. “It’s taking the collector world by storm,” says Nick Bruyer from First Federal. But he’s still reserving these massive 5-ounce coins — just for you — for the rest of the day. Best move on this now.

[As you know, we may be compensated if you buy because of the advertising relationship we maintain with First Federal.]

Crude is off a few more pennies today, to $86.59 a barrel, at least as measured by West Texas Intermediate on the Nymex. In the real world, Brent Crude is up to $101.62. The spread has reached more than $15.

To recap the reason: Oil from Canada’s tar sands is flooding into the terminal at Cushing, Okla., and swelling inventories there. It’s an interesting development, but it has little bearing on the rest of the world.

In November, we poked a hornet’s nest when we said some not entirely kind things about Glenn Beck. A reader wrote in at that point to suggest Beck might be taking some of his cues from us… as if maybe he read Financial Reckoning Day.

We had our doubts… but this morning, we wonder. Witness a map we show in Byron King’s presentation on The New Oil War we’ve been prompting readers to for several years.

And then check out what Beck was showing during one of his extended bits on Wednesday:

Hmmm… it does give one pause, doesn’t it? And another reason to give Byron’s presentation a look if you haven’t before… or even if you have.

“How much in taxes is the U.S. losing by not supporting Odyssey Marine?” a reader inquires rhetorically after reading yesterday’s issue. “Mr. Obama should consider that when trying to give away the fruits of Odyssey’s work to Spain or other nations.”

The 5: Indeed, for a nation facing an employment and financing crisis, you’d think these questions would be more pressing.

“Why is there $2 trillion in cash on the sidelines?” asks a reader, also following up from yesterday. “Because there is no place to put it to get growth and a return on your investment.

“I am a steel processor. The only money in the game right now is government. I am charging my customers 29% more starting tomorrow than I was four months ago. I am about to get screwed on my inventory, as the steel mills have fallen behind or created a shortage. It has nothing to do with lack of raw materials. I planned ahead and laid in inventory, but I may run out of material before I can get more.

“And what is the cause?

“This government’s misdirection and allocation of money. This artificial economy, this printing of money, this drive to inflate away the debt is going to crash this market and recovery. I don’t see it any other way. Wild commodity prices will shut down an already feeble recovery.

“Watch the earnings in 2012. The high-priced inventories that companies are laying in to offset future inflation will come back to bite them in the butt when input prices go to heck.

“Why would I want to invest without a market? If the governments don’t get out of the way — and they won’t — this market will not clear. People and nations are going to suffer dearly.”

“Once again, Americans are demonstrating their resistance to the idea that living within or — gasp — below their means is, or at least should be, sound financial wisdom,” writes a reader reacting to the news that credit card debt is back on the rise.

“Clearly, the saying ‘God protects drunks and fools’ applies when talking about the financial mind-set, or the lack thereof, of Americans today. Obviously, there is little, if anything, that will wake us from our drunken slumber. We mock the Lindsay Lohans of the world even as we behave the same way.

“This foolishness would be laughable if not so incredibly pathetic. We wax poetic about the debt we’re passing down to future generations as we greedily guzzle the intoxicating elixir that Uncle Ben mixes up for us in the form of QE.

“No worries, though. After all, we’ve become so loose with our moral compass that it’s possible many of these children weren’t planned events, but rather the result of the same irresponsible behavior we exercise with our finances. So in the end, who cares? That seems to be our apathetic battle cry of the new century.

“Could someone please explain to me how a nation that knows more about the teams playing in the Super Bowl than they do their own finances can remain strong for any length of time, save for the forbearance of our creditors?”

“I can sympathize with the barber who forgot to renew his license after five years,” writes a fellow traveler in the West. “The same thing happened to me in California. To renew your license is not exactly forefront in your memory when you have five years to go before it expires. They don’t send renewal notices like with your driver’s license or car tags.

“So if you forget to renew, you have to go back through 1,400 more hours of school and retest at the state board. I declined. They’re just another government agency that exists for no real purpose. The school should be able to send their certification that you passed all the requirements and you send your money in for the license and that should be the end of it.”

“Funny how they’ll arrest witches whose predictions don’t come true,” writes our last reader, who saw our item from Romania, “but they don’t arrest economists who get it horribly wrong, affecting many more people.”

The 5: Umnn… we’re not sure we like where you’re going with that thought.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S: “[Your recommendation] made me $10,000 in such a short time my head spun,” writes a dizzy reader of Patrick Cox.

“You clearly have your finger on the pulse” of technological breakthroughs, writes another. “I’ve made about $12,000.”

“Last year, I took $10,000 and invested it solely in Breakthrough Technology Alert,” writes a third. “My account now stands at $23,000-plus. And I have taken some money out along the way. Quite frankly, we are not even close to the top side of these stocks.”

“Despite having repeatedly predicted accelerating innovation,” Patrick responds, “I’m still surprised by the actual number of true transformational companies that have emerged in the last few months.

“Even better, increasingly, people with the really great science and companies are seeking us out.

“The company we’re covering this month is a biotech that exploits the remarkable and recently discovered properties of a molecule that has been in use medically for over a century.

“The same molecule is being investigated by nanotechnologists for its electronic properties, and this is no coincidence. The more we learn about molecular biology, the more similar it appears to nanotech electronics and robotics. I really think you’re going to be as amazed and pleased by this story as I am.”

If you’re not already on Patrick’s list of readers, but you’d like to be, follow this epic presentation, right here.


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