From the “Unresolved Issues” File

Addison Wiggin – August 22, 2011

  • Stock market celebrates the fall of Gaddafi (briefly)… oil market begs to differ… The 5 tallies a list of “unresolved issues” affecting markets…
  • Scope of “secret” bank bailouts revealed… the White House works overtime to suppress new scandal…
  • Reliable recession indicator sends out a new signal… what it might mean for “QE3” and unemployment…
  • The “$700 million signal” that has Chris Mayer jumping into stocks with both feet … plus, Byron King’s outlook on oil and rising demand…
  • “Selling lemonade is not a crime!” and other updates from the front lines… Tea Party waters tested… revelations from a car pool… “Politics, the real blood sport!”… and more!

   Libyan rebels, we are told this morning, have captured Col. Muammar Gaddafi’s stronghold in the Libyan capital, Tripoli.

On the news this morning, the Dow rallied 125 points and is close to 11,000 again after Friday’s late-day sell-off.

Nothing like a little regime change to take our minds off the prospect of total economic collapse this morning, eh?

   So far the undeclared Libyan war has cost the U.S. alone an estimated $6.6 billion — a drop in the bucket of a $3.8 trillion annual budget.

But the oil market is sniffing a rat.

With two drawn-out, unaffordable, imperial wars already under way… in addition to the three covert wars in Yemen, Somalia and Pakistan… how long’s it going to take and how expensive will it be to “wage the peace” in Libya now?

Getting Libya’s 1.3 million barrels a day of light sweet crude production back online will be no small task, either.

As a result, a barrel of West Texas Intermediate is $83.40 this morning — up nearly 1.5% from Friday.

File Libya under “unresolved issues.” We’re kicking Monday off with a bunch of them this week.

   Israel and Egypt, at peace since 1979, are tiptoeing closer to conflict this morning too.

Last week, while Israel was mixing it up with Hamas in the Gaza Strip, Israeli troops shot and killed five Egyptian soldiers just across the Gaza-Egypt border. Israel says it “regrets” killing the Egyptians. Egypt calls the matter “unacceptable” and is threatening to withdraw its ambassador to Israel.

As we’ve pointed out before, the new military government in Egypt is trying to stay on the good side of the Egyptian people in part by taking a tougher line with Israel. Well worth keeping an eye on.

Especially if you’re invested in Israel’s bid for energy independence, as we’ve outlined here.

   Secret loans from the Fed to Wall Street totaled $1.2 trillion at the height of the 2008 panic.

That’s the conclusion of Bloomberg after analyzing 29,346 pages of documents released by the Fed only because Bloomberg went all the way to the U.S. Supreme Court to obtain them.

The top 10 recipients alone account for 56% of the total. The $669 billion these 10 borrowed is, um, rather larger than the “official bailout figure” of $160 billion represented by the TARP program.

“These are all whopping numbers,” according to former Justice Department official Robert Litan, who served on a commission that looked into the savings-and-loan scandal of the 1990s.

“You’re talking about the aristocracy of American finance going down the tubes without the federal money.” To say nothing of the European banks that make up nearly half of the top 30 borrowers.

Under new Fed rules, the banks are to keep a minimum amount of operating funds on hand every day to prevent this from happening again. But the rule doesn’t come into effect until 2015.

In other words, the banks will sober up after one last drink.

   Elsewhere, we see the Obama administration is leaning on New York Attorney General Eric Schneiderman. He’s being told to lay off his opposition to a settlement between the feds and the banks over a host of mortgage scandals.

“In recent weeks,” according to New York Times reporter Gretchen Morgenson, “Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.”

It appears Mr. Schneiderman holds the heretical belief that there should be some sort of accountability when banks forge paperwork to speed along a foreclosure… or when they lie about the quality of the mortgages they bundle into securities and sell to unsuspecting investors.

In the smoking ruin of the savings-and-loan crisis 20 years ago, the feds secured more than 1,000 felony convictions of senior banking executives. This time, in the aftermath of a crisis far more severe? Bupkis.

   Another unresolved issue: Whether the “double dip” recession is under way in earnest.

We believe the recession never really ended… but we’re also tuned into “official” indicators to which the market pays heed. One of the most reliable is out this morning: It’s flashing yellow, but not red.

The Chicago Fed National Activity Index crunches 85 indicators. Whenever its three-month moving average reaches -0.7, it’s as surefire a recession indicator as any. It came dangerously close to that level last month at -0.6.

But this month, it’s recovered a bit to -0.29.

No doubt Ben Bernanke will pore over this report as he prepares his big speech in Jackson Hole, Wyo., on Friday. Last year’s speech was when he dropped some not-so-subtle hints about QE2.

   “It’s clear that Bernanke wants a ‘QE3’ program,” says Strategic Short Report’s Dan Amoss, “yet probably feels the need to wait until deflation fears reach a crescendo.”

At least one “insider” believes QE3 is a sure thing, sooner or later. “Count on it,” said Dartmouth professor David Blanchflower to newsletter editor Fred Hickey back in June. Blanchflower is tight with many Fed members, including Bernanke and New York Fed chief William Dudley. Asked about the Fed trying to pump up the economy by buying more assets with newly created money, “The only answer is more,” he said.

But judging by the Chicago Fed numbers today, those deflation fears just aren’t there yet. Another highly reliable recession indicator comes from the Philadelphia Fed tomorrow. Maybe that’ll give Bernanke what he wants. We’ll check it out for you.

   Twice since the spot market reopened last night the gold price has touched $1,890. As we write, it’s still at $1,183, up $30 from last Friday. Silver’s move has been just as powerful, up 66 cents, to $43.56.

   Currency markets are quiet, at least for the moment. The dollar index is off slightly to begin the week, but clinging to the 74 level. The euro is at $1.438, within the range where it’s traded for several weeks now.

   The halo from Libya is already wearing off as we continue to write.

The Dow, up 125 points on the open, is now up only 45. The S&P’s gains are even more modest; it’s currently at 1,125. Small caps are already in the red for the day, the Russell 2000 off a point, to 651.

   Ordinary investors are bailing the stock market at a record pace.

“The Investment Company Institute reports that people sold $30 billion worth of stock mutual funds just last week,” our managing editor Chris Mayer writes with a curious observation about who’s buying and who’s selling stocks right now.

“We haven’t seen this much selling since fall 2008.”

By contrast, “in the first half of August, insiders spent nearly $700 million buying their own stocks. These are insiders who are officers and directors of the companies they are buying.”

“Meanwhile, investors who own more than 10% of a company but are not officers or directors also bought stock. They bought $1 billion worth.”

The last time we saw a similar pace of insider buying was March 2009, which turned out to be a great time to buy stocks.

“Something tells me the insiders are making the better decision. It might not be apparent right away, but over the next year, I think they’ll do well. The odds favor a good outcome for insiders.”

[Ed note. In his latest update for Capital & Crisis readers, Chris cites four decades of academic research showing that by following the insiders and buying the stocks they buy, you can outperform the market by up to 10.2% per year.

“As bad as things seem to be,” Chris concludes, “I’ll throw my lot with the insiders.”]

   “It’s hard to say this during a market meltdown,” advises our resident oil field geologist Byron King, “but don’t fear investing in the energy sector.”

The August sell-off in oil is a short-term phenomenon, thanks to “massive liquidations of positions by traders and speculators (especially hedge funds) that are caught in a price downdraft. The traders and hedgers have to fire sell positions just to raise cash to cover margin calls.”

But supply hasn’t changed. Nor has demand. So Byron remains bullish.

“Most of the world’s daily oil output comes from legacy fields — some of which are decades old, and ‘not getting younger,’” Byron points out.

“On the demand side, there’s also no significant negative change. The general economy may stink, and people may even be rioting in the streets — as in London and other places. Yet one of the last things people do anywhere is cut back on fuel usage.

“I believe that oil prices, and share prices within the energy sector, will recover sooner than most other parts of the economy and stock market.”

[Ed. Note: You don’t need us to tell you this is a difficult environment in which to invest.

  • The end of the Gaddafi regime — if that’s what’s happening — won’t spell the end of expensive oil
  • Insiders are buying stocks as if it were March 2009 and an epic rally were getting under way. But this time, the broad market may not respond
  • Fed policy appears clueless — even more than usual
  • U.S. banks are still hiding loads of bad “assets” on their balance sheets. Any crisis, maybe one originating in Europe, could quickly backfire on them… forcing them to run to the Fed and triggering another 2008-style panic

These are among the reasons we’re convening our editors in Baltimore in a few weeks. And now, for the first time ever, we’re making it possible for an exclusive list of readers to sit in.

Recent volatility in the market, the political environment and uncertainty in the economy make this year’s “emergency summit” all the more urgent.”

So urgent, in fact, if you qualify we’ll help pick up your expenses when you decide to join us. It’s worth noting, we’ve never done anything like this before. And there’s only a limited amount of room… if you’re interested, we’ll have an invitation ready for you tomorrow.

   Did you catch Lemonade Freedom Day on Saturday?


The event was apparently organized by folks outraged over local cops shutting down kids’ lemonade stands — a phenomenon we’ve chronicled here and which has even found its way into our documentary film, Risk!

The organizers’ homepage encouraged as many families as possible to set up lemonade stands on Saturday.

“We need to stand up for our kids,” the site declares. “We need to send a message to the world. Selling lemonade is not a crime!”

Alas, there’s no update on the homepage today about how many people might have done so… although 5,000 people registered via Facebook promising to take part.

We do know, however, some adults set up a lemonade stand on the grounds of the U.S. Capitol — where, by one account, there are more cops per acre than any other patch of territory in the United States.

The results were predictable…

According to The Daily Caller, three people were arrested and charged with failure to obey a police officer, unlawful conduct and vending without a permit.

The attempt by the cops to intimidate the child customers was an extra nice touch, we thought.

   “The zombie who made the decision to save money by removing the streetlights is an example of how stupid they can be,” writes a reader who caught our laundry list of ridiculous revenue-raising items on Friday.

“The same amount of money can be saved by (cheaply) removing the light bulbs, and thereby keeping the street lights for when the economy picks up. (Or would it make work to remove and then replace the poles?) Sounds like a union job, and ‘union rules.’”

“Honk (at your risk) if you love irony.”

   “I was traveling home along with five other co-workers and was passing the time catching up reading The 5 Min. Forecast on my droid.”

“We are a diverse group: two Republicans, two Democrats, one middle of the road and one that really didn’t give a hoot. Also we ranged from far left to far right and have many different ideas.”

“After reading Bill Bonner’s ‘presidential’ speech, I read it out loud to the rest of the clan, and everyone got a good laugh, but everyone agreed to the solutions.”

“Afterward, we all talked about whom we’d like to see as president, and we all would vote for Ron Paul. The Republican Party is scared to death to have him running… too bad!”

“Keep up the good work.”

   “It is not entirely out of the realm of possibility that we could elect a president with strong ‘cut, cap and balance’ sentiment,” writes a reader who still sees hope in more conventional political action.”

“Along with that sort of presidential election would come some Senate and House seats with the same sentiment. What would be the impact on our investment planning under that scenario?”

“With the rest of the world having great pain with true reform, what would be the impact if we actually had a momentum change toward logical fiscal policy? When would you set the go/no-go point for considering that sentiment mounting to be a realistic possibility?

“Or have you already written that possibility off entirely?”

The 5: The only thing that would make “cut, cap and balance” even remotely workable long term is the third part — a balanced budget amendment. And we have little faith in any process that requires a two-thirds majority vote in both houses of Congress and a three-quarters majority of the state legislatures.

   “Awhile back, I attended a few Tea Party meetings,” adds a reader who saw our Tea Party musings, “and they all seemed pretty pissed off about budgets and economics, as they should be.

“We had some discussions, and by and large, they were what I would call the typical conservative: ready to push their morals on you, generally pro-empire and concerned about fiscal issues, but not at the expense of the first two things. At that time, the group did seem primarily concerned with fiscal matters, though.

“Anyway, tonight, they are conducting a pro-life march on the local Planned Parenthood. In my estimation, they just jumped the shark.”

   “At this point in time,” chimes in another, “the only way that the system will be improved is for the current system to collapse.”

“As you all have advised everyone that will listen to invest in such a way as to survive the collapse, you have done your jobs well and everyone that has paid attention should be well ready for the inevitable.”

“We are about to enter a time when politics becomes a real blood sport.”

   “I read your forecast with enthusiasm every day and enjoy every line…and that’s the truth.”

“BUT…as arguments about Republicans, Tea Party, Democrats and others go on I can’t help but let you know that from afar (Malaysia), they are just selfish politicians who screw up on a regular basis, regardless of their ‘loyalties.’”

”What a sad state of affairs for what was the pre-eminent nation of the world.”

   “Your daily newsletter is my favorite of the dozen or so I receive,” a reader writes.

“I appreciate your mix of tongue-in-cheek sarcasm along with the necessary reporting of the facts. We all take ourselves too seriously in today’s financial world. Keep up the good work.”

   “Just a note to say I really appreciate good writing,” adds one more, “and yours is good.”

The 5: We always get nervous when we see these letters of praise with no “yes, but” amendments… but we welcome them all the same.


Addison Wiggin
The 5 Min. Forecast

P.S. One last check of the charts, and we see gold has punched through $1,890 for a third time. Kitco cites “continued safe-haven investment demand.” We’ll buy that.

But a safe haven is not an investment strategy. It’s one thing to dollar-cost average into bullion to preserve your purchasing power. It’s another thing to try to grow your nest egg in an environment like this.

Tough business. That’s why we’re inviting our editors to Baltimore for an “emergency summit” very soon. And an elite circle of readers can join them. Details coming tomorrow.


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