“Negative” Outlook? Oh No!

Addison Wiggin – April 18, 2011

  • S&P, kicking and screaming, downgrades U.S. "outlook"… but defends AAA…
  • Dollar defies S&P to rally, as euro-ugly comes back into vogue; Gold zooms to an all-new high as a Texas endowment piles in…
  • Shades of 2008: Rising food prices inspire the Great Tomato Caper… and prompt new warning from World Bank…
  • "Visually grandiose" or "brutally badly done"? Reader reviews of Atlas Shrugged: Part I… the Financial Times weighs in on Bonner's Dice Have No Memory

Sniffing the obvious, Standard & Poor's cut its outlook for U.S. sovereign debt from stable to negative this morning.

"We believe," reads a statement released with the announcement, "there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years."

As we type, the Dow is down more than 200 points. The S&P hangs by its fingernails to 1,300. And the yield on a 10-year Treasury has inched its way to 3.44%

For the record… or, should we say, for what it's worth… S&P still considers U.S. debt AAA.

Given the fact the U.S. government is 28 days away from bumping up against the $14.3 trillion debt ceiling, we suspect the question of Uncle Sam's ability, let alone political will, to pay is too obvious to ignore.

The current White House budget plan requires lifting the ceiling to $20.8 trillion by 2016. Wisconsin Rep. Paul Ryan's plan, passed by the House on Friday, would require a ceiling of $19.5 trillion, according to figures compiled by Bloomberg.

Alas, "we believe there is a material risk," S&P warns, "that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013."

"If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."

Unfortunately, in the world of late, degenerate capitalism, that's about as strongly worded as these statements ever get.

Standard & Poor's continued to rate a host of mortgage-backed securities AAA right up to the point when they detonated in 2007-08.

"A huge part of the reason the U.S. is in its awful financial position," writes our friend Barry Ritholtz, author of Bailout Nation, this morning, "is due to the fine work of S&P. The 'negative outlook' of U.S. debt has come about because of the inability of Standard & Poor's to have performed their jobs rating mortgage-backed securities.

"Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political [squabble] over the debt ceiling."

Of all the AAA-rated subprime MBS issued in 2006, 93% are now junk. Barry will be joining us in Vancouver again this year. Will we be seeing you there?

Of course, on the S&P news this morning, in a move only our Abe Cofnas could pretend to understand, the dollar is rallying. In fact, at 75.4, the dollar index is the strongest it's been for more than a week.

Oy. Chalk it up to an even uglier horse in the glue factory: the euro.

The government in Greece, reports a local paper, has asked the European Union (EU) and International Monetary Fund (IMF) for permission to restructure its debt. Or in language you and I would be forced to use … they want to declare bankruptcy.

Of course, the Greek government denies this. The yield on a 10-year Greek bond has spiked to 13.93%. Examining the credit default swap market, we see traders now peg Greece's likelihood of default in the next five years at 64.6%.

Add to that a peculiar twist: Election results in Finland, of all places, are casting doubt on the prospects for a bailout in Portugal. The True Finns party won 19% of the vote for parliament, up from only 4% in 2007.

The True Finns, not to be confused with the Dudesons, promise to block any Portuguese bailout.

And like that… the euro has been knocked back to $1.41.

At last check, gold is powering to a new high at $1,493. But silver, which pushed past $43 on Friday, has retreated to $42.70.

"There is a mix of fears" Mr. Cofnas portends. "Fear of inflation, fear of a China slowdown, fear of eurozone weakness centered on Greece and Portugal."

Even though he called a rally in the dollar last week, this week Abe says he's more comfortable with an even more solid "risk aversion" trade. "The real market benefiting greatly from these sentiment swings is gold."

Accordingly, this morning, Abe is putting readers of Strategic Currency Trader into a binary gold play this week. Like his other recommendations, you'll know the results of the trade by Friday. And as of this morning, the potential gain is 72%.

To learn more about the unique market Abe recommends trades in, look here.

With respect to the long-term trend in gold, we've been waiting to see a higher percentage of institutional interest… and this morning, we got a smidge.

The nation's second-largest university endowment has plowed 5% of its assets into gold bars. Acting with guidance from hedge fund manager Kyle Bass, the University of Texas Investment Management Co. took delivery of 6,643 gold bars on Friday, worth $987 million.

The Texas endowment totals $19.9 billion, second only to Harvard's.

Notably, Bass encouraged the endowment to keep actual physical gold stashed in a New York vault owned by HSBC, rather than buying shares of GLD. Bass reasons that if the holders of only 5% of the gold contracts traded on the Comex tried to take delivery, there wouldn't be enough supply to meet the demand.
"If you own a paper contract where they can only deliver you 10 cents on the dollar or less, you should probably convert it to physical," Bass tells Bloomberg.

Our own Byron King agrees that there's nothing like owning the real thing. If you haven't checked out his presentation called Nine Simple Ways You Can Still Get Rich With Gold, give it a look.

With the president's signature last week, the infamous 1099 provision of health care reform has been repealed before it could take effect. Small business owners who had been paying attention to the detail are sighing with relief. CPAs for those who weren't… are not.

Grain prices are up this morning, a bushel of wheat fetching $8.09 on the Chicago Board of Trade, as World Bank chief Robert Zoellick is issuing another dire warning about food prices.

The world is "one shock away from a full-blown crisis," he said over the weekend during a gathering in Washington. He estimates 44 million people worldwide have fallen into poverty so far this year, thanks to rising food prices.

It was only a matter of time: If high copper prices inspire people to steal manhole covers, electrical wire, even scalding-hot copper tubing from a broadcast tower… this is pretty much inevitable.

Florida tomato purveyor Bob Spencer, his warehouse a little less full than it used to be…

In a series of swindles, thieves in Florida made off with six tractor-trailer loads of tomatoes last month. And one load of cucumbers.

"I've never experienced people targeting produce loads before," says Shaun Leiker, a trucking broker who was hit three times.

"We've never seen anything like this," says Bob Spencer, the owner of a firm who lost 40,000 pounds of tomatoes worth $42,000.

The thieves went so far as to set up a bogus company and register it with federal trucking regulators. That was in February — just as word was getting out that a hard freeze wiped out much of the tomato crop in Mexico, putting Florida tomatoes at a premium.

A New York Times reporter looking for information called the Florida Department of Law Enforcement… who told him to call Miami-Dade Police. They were leading the investigation, he was told, which was in turn news to Miami-Dade Police.

Presumably by now, the evidence has long since been pureed or paired with mozzarella, basil and a Pinot grigio.

"I am one of those so-called 'evil rich' with the tax target painted on his back right now," writes a business owner who caught "flight" leader Doug Casey's remarks here on Friday.

"For folks like me, a 40-hour week would be called a vacation! I simply wish to express that most in my position are also carrying huge capital investments and usually some fairly large debts as a percentage of income for our businesses. We pay out many multiples of what we make ourselves in payroll."

"It would be helpful if there were at least some distinction made in the tax code (and in political rhetoric) for business owners that actually employ a lot of people as we do. Currently, the tax code treats us mostly the same as someone who is a very successful day trader that employs no one else."

"Businesses that employ dozens of people are already overburdened with regulations, and employing people these days is financially risky in and of itself. How about a tax break on a per employee basis averaged out over a three-year period? We 'evil rich' need to make a living after paying the bank, the government and our employees, you know."

"Many a business has failed solely because they did not see the tax man coming soon enough. He is a big, scary man and carries an even bigger stick. If you make more than $250,000, you are definitely on his list… so heads up!"

"I saw Atlas Shrugged: Part I today," a reader writes, the first of a litany of eyewitness accounts in the inbox." At the end, applause broke out in Knoxville, Tenn. Good crowd for an afternoon showing.

"I agree that it would be confusing to those who have not read the book, but worth seeing for the refresher course."

"I attended the first showing of the film in Tempe, Ariz.," writes another. "The place was packed. We couldn't find six seats together after having arrived fairly early. When we came out after the show, there was a huge line waiting for the second showing."

"The movie was incredible and well-done. The talent and ability of the actors was extremely high. The settings were well-done. The quality of the entire production was outstanding. I can hardly wait for the second half."

"The age group of the audience was 40s to 70s."

"My wife and I caught the very first showing of Atlas yesterday at the Ventura Century 10 in Ventura, Calif.," adds a third, "I was pleasantly surprised by the rather robust turnout."

"The movie did not disappoint! We found it to be visually grandiose, superbly acted and telling a story our hearts longed to see told. Also, the casting was top-notch, in my book — the D.C. types were deliciously unctuous, and Dagny was awesome, while Hank Rearden was perfect in his indignation and resolve."

"Guess I'd go with two big thumbs up for that!"

"Can't wait for Part II," writes a fourth, "Part I did great job in selection of character actors and following the story line, within the constraints of being based on a 1,070-page novel.

"Thanks for the heads-up on places it is being shown in USA."

The 5: De nada.

"While hoping it would be a great flick," offers a critic, "I have to say it was brutally badly done. I had to cringe when Rearden said, 'Is my metal good?' about six times in two minutes. The dialog was choppy, and the sex scene was unwatchable.

"I'm afraid it will be well received only by those who want to hear the message."

"Whoever was responsible for Friday's 5 must have been sleeping with the air traffic controllers. Lots of error in more ways than one."

The 5: Indeed, what you saw on Friday was… er, a work in progress, with "before" and "after" Track Changes. Things don't always go as smoothly as we would rather have them… especially with the amount of traveling we do.

Today, we're on heightened alert for gremlins. Hope you'll bear with us.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. "Gold," Warren Buffett once remarked infamously, "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

"I suspect," writes Merryn Somerset Webb in the Financial Times, "that as long as the Martian grasped the concept of money, he/she/it wouldn't be doing any scratching at all." She recommends anyone still in the Buffett camp give at look at Dice Have No Memory, Bill Bonner's collected essays from 10-plus years of Daily Reckonings.

"Bonner, like me," she writes, "is a great believer in the idea that nothing brings on inflation (and so reduces the value of a currency) like an out-of-control deficit. Governments, says Bonner, 'yield to emergency like dieters to devil's food,' printing money to pay their bills and ignoring the long-term consequences."

The collection is full of such gems. Somerset Webb also gives her opinion of John Mauldin's Endgame: The End of the Debt SuperCycle and How It Changes Everything. You can grab both books with 20% discount at Laissez Faire Books right here — cheaper than at Amazon.

rspertzel

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