$50 Billion? Try $5 Trillion

Addison Wiggin – November 17, 2011

  • Fitch’s “$50 billion” call sends markets reeling… what if traders paid any heed to a $5 trillion threat?
  • National debt surpasses $15 trillion… Fed surpasses China as biggest debt holder: Our call on the “supercommittee” negotiations
  • Why oil could easily hold the line on $100 a barrel — both near and long term
  • 7 out of 10 sons of gazillionaires agree: Nepotism pays
  • Readers join the “rabble”… slam U.S. customs… question the propriety of our “booksafe” gold storage… and more!

   We woke up this morning with a question running through our minds.

What if no one showed up for work today at the New York Stock Exchange, and the day’s activity was taken over by all the high-frequency trading robots?

It’s not an entirely academic way to start your day.

High-frequency trading (HFT) accounts for 50-70% of New York Stock Exchange (NYSE) volume, depending on whom you want to believe, every trading day.

   The question arose as the Occupy Wall Street (OWS) crowd, allowed to return to Zuccotti Park, but shorn of their tents and other camping-out gear, began marching this morning with the intent of shutting down the market for the day.

Alas, we’re still wondering.

“Thursday’s protest remained peaceful,” according to CBS News, “and the demonstrators and police were still allowing workers to get to their offices.”

   With that, U.S. stocks resumed the high-frequency drop that had gotten under way in earnest yesterday afternoon… just after Fitch, the least maligned of the rating agencies, released a report on the debt crisis in Europe.

“Unless the eurozone debt crisis is resolved in a timely and orderly manner,” reads the conclusion of said report, “the broad credit outlook for the U.S. banking industry could worsen.”

The report pegged the exposure of the Big Six U.S. banks to the PIIGS countries at $50 billion. We’re not buying it… not because the rating agencies are in bed with the banks, but because they’re irrelevant.

In their third-quarter SEC filings, J.P. Morgan and Goldman alone fessed up to selling credit default swaps totaling more than $5 trillion worldwide. They did not, however, break out how much of those CDSs were sold on the debt of PIIGS countries.

Five trillion dollars is 20 times the combined market caps of the two firms… and five times their combined balance sheets. It’s also one-third of the entire U.S. economy (projected) in 2012.

   But what’s $5 trillion among friends?

As we write, the Dow and the S&P have leveled off from yesterday’s close. And the KBW Bank Index is up nearly 1%.


   The short-term trend in stocks this morning is driven in part by still more numbers that point to a sluggish, but not appreciably slowing, economy…

  • First-time jobless claims: Down to 388,000 last week — a seven-month low
  • Housing starts: Down, but less than expected — 0.3% last month. Even better, the number of permits grew 10.9%
  • Mid-Atlantic manufacturing: The Philadelphia Fed index slowed down last month, but remains in positive territory for the second-straight month.

   The national debt topped $15 trillion yesterday. If it matters to you, the precise figure is $15,033,607,255,920.32.

That puts us about $161 billion away from bumping up against the debt ceiling… yet again.

At the present rate of spending, that should occur, oh, in about a month… well after the bipartisan “supercommittee” of six representatives and six senators will have failed in their mission to devise a 10-year budget plan fit for future congresses to ignore.

“Signs of strain emerge in supercommittee negotiations,” read a headline on Google News this morning that we didn’t even bother clicking on.

   It’s a common finger-pointing game in Washington to point out that the president’s approval rating is poor… and then point out Congress’ is even poorer.

But only a chart like this puts the contempt Americans have for their elected representatives into proper perspective…

Yes, more Americans approve of becoming a communist country than they do of Congress. Awesome.

At least Congress’ popularity is equal with our favorite South American dictator’s.

(One question: How on Earth did the IRS gain such high marks…?)

   We almost wonder if there’s a correlation between the aforementioned phenomenon and the increasing appearance of the word “wonk” in books.

For reasons we can’t quite discern, it grew 50% between the 2004 and 2008 elections.

That’s the most recent data available. Surely use of the word “wonk” must be off the charts by now.

Last month, when we were down in D.C. for the Heritage Foundation’s Stable Dollar conference, there were two competing ad campaigns in the Metro selling “wonk” as a fashion look. One was by Swedish hipster store H&M.

The deadline for the “supercommittee” agreement is next Wednesday. In the new issue of Apogee Advisory, we explain “why” that deadline will not be met, and suggest an investment idea that results from it. (Not a subscriber yet? What are you waiting for?)

   Coincidental to the crossing of the $15 trillion mark is another milestone: The Federal Reserve has now surpassed China as the largest holder of that debt.

The Fed’s holdings of $1.665 trillion are double the year-ago figure. And they exceed China’s $1.148 trillion, even though China has added to its stash over the last 12 months.

We expect this gap to widen as the mother of all financial bubbles begins to pop… cratering the dollar’s value. If you haven’t formulated a defense yet, we suggest you get started here.

   For the moment, however, the dollar is where “risk capital” is flowing this week. The dollar index is holding above 78.

   Gold, meanwhile, is retreating to its lowest level so far this month. But at $1,735, that’s still not too shabby.

Silver is down more sharply, to $32.46.

   Central banks can’t get enough gold right now. New figures from the World Gold Council reveal central bank gold purchases in the third quarter doubled the second-quarter figure.

The total is 148.4 metric tons — by far the highest quarterly total since central banks became net buyers of gold in the second quarter of 2009.

   Like gold, oil is in retreat. But even at a 2% loss on the day, a barrel of West Texas Intermediate is above $100 a barrel.

Yesterday’s big bump up marked a significant shift in the flows of oil — literally. Enbridge, half-owner of a major pipeline called Seaway, announced it would reverse the pipeline’s flow.

This will allow surplus barrels of oil from Canada that have been sloshing around for months at the Cushing, Okla., terminal to finally reach refineries on the Gulf Coast.

For much of this year, the backwash of oil at Cushing created an insane spread between West Texas Intermediate crude — the Cushing price commonly reported in the media — and Brent crude, which is the price the rest of the world pays.

Last month, Brent traded for a ridiculous $28 a barrel more than WTI. This morning, the spread is down to a more reasonable $9. Whatever direction oil prices in general go from here, that spread is likely to tighten even more.

   “Brent oil prices remain stubbornly high,” notes our short strategist Dan Amoss. “I haven’t seen this mentioned in many outlets, but the average international oil price in 2011 far exceeds the average price in 2008.”

“This applies brakes to the global economy,” Dan says. And with most of the world’s oil reserves under the control of government-run oil companies, “the industry doesn’t give confidence that investment has been sufficient to keep up with demand growth.”

Will projects coming online in the Bakken fields of North Dakota make a difference?

“Using the historical production data,” Dan explains, “Bakken wells typically produce 300-1,000 barrels per day over their first month of production, and then rapidly decline to just 100 barrels per day within five years.”

“Drilling and completion efficiency gains can certainly improve these averages, but there’s no getting around the fact that shale oil production requires much more labor, steel, water and rig input than conventional oil projects.”

“This is high marginal-cost oil, and as such, will pull the average cost of global oil production up over time.”

   “The most popular way to find a job,” says a new study by the University of Ottawa responding to the rising joblessness of recent grads, “is through family and friends. That holds true for all of us, but it is immensely more likely for the kids of the very rich.”

After crunching a boatload of Canadian data in the Journal of Labor Economics, Miles Corak, the study’s author comes to the following conclusions…

“About 40% of us have at some point worked for exactly the same firm that at some point also employed our fathers,” Corak says. “But if dad’s earnings put him in the top 25%, these chances are above average. They start taking off if dad was in the top 5%, and reach the stratosphere for top earners.

“Almost seven out of 10 sons of top-earning dads had a job with his employer.”

Corak did not analyze how well the sons performed… but in announcing the study on his blog, he kicked off the discussion by citing the testimony of James and Rupert Murdoch before the British Parliament this summer…

“Never mind, son, I’ll take care of this…”

By crunching the numbers, Corak has now safely concluded, “the James Murdochs of the world are more common than we might think.”

   “Your photo on Tuesday,” writes an aggrieved reader, “has the caption that Zuccotti Park has been cleared of ‘rabble.’ Your words or someone else’s words?”

“This ‘rabble’ is contesting the transfer of wealth — rather than the accumulation of wealth — from our capitalistic system that you so elegantly discussed a day or so ago.”

The 5: Our word. Facetiously expressed.

   “My last three holidays have ‘been anywhere but the U.S.,’” writes a Canadian reader who caught our item about how the United States captures much less of the world’s tourist trade than it did a decade ago.

“My three holidays before that were to the U.S. I am very tired of being interrogated by belligerent customs officers who treat you like you are a criminal. This comes from a Caucasian early 50s professional business owner with no criminal record. I get fewer problems from the federales in Mexico.”

“The last three business conferences I attended were also in Canada, and I used to travel to Houston every year to the Offshore Technology Conference with colleagues and spouses. No more, thanks.”

   “I was recently in France,” writes an American reader, “and as is my habit in foreign countries, I like to watch their television a bit, if for no other reason than for the weather forecasts.”

“But I also stay attuned to what their newscasts consider important. What struck me this past September and October, with so very much going on in the world (Libya, the EU financial crisis, etc.) as the reporters and pundits weighed in from here and there about the globe was the near-complete absence of news about the U.S. or the U.S.’s opinion of this or that topic.”

“I was left with the impression — if the French, German and British news media are any sort of indicator — that the U-S-of-by-God-A is at present nearly completely irrelevant to Europeans. That goes for President Obama, whose opinions and actions vis-a-vis the topics were also apparently not regarded as worthy of airtime.”

“The only American-centric television I saw was from a Fox channel that was wall-to-wall coverage of… the trial of Michael Jackson’s doctor. No wonder the Europeans find us dismissible.”

   “I had to look at your picture twice,” writes a reader who saw our “booksafe” precious metals solution yesterday, “to make sure it was not my house. It seems I have the same glass head.”

“I guess great empty minds think alike.”

The 5: We have a blue-and-green one as well. They’re old mannequin heads as far as we can tell. They sure don’t make ’em like they used to, eh?

   “I’m disgusted,” writes another reader who saw our books hollowed out, “that such fine words are lost to future readers, even on a single copy.”

The 5: Heh. Thank you?

“If you must do this,” the reader goes on, “use books whose words are of substantially less value, like Keynes’ General Theory. That book is already metaphorically hollowed out; rending it physically so is a benefit to humanity.”

The 5: Hmmm… stashing gold in a copy of Keynes’ insomniac remedy does have a certain subversive character we like. Maybe we could bundle it with Paul Samuelson’s economics textbook.

Until then, we have only 14 of our own desecrated book safes left — along with the Gold Buffalo and stack of 10 Silver Eagles you can stuff inside. If you want one, you can get it here.

   “For those who have physical gold in walls and ceilings,” writes a reader continuing our discussion of other storage solutions, “that may work well in an all concrete/brick homes (and do try to make a hole in a concrete wall), but in a case where the wall is studded, or, worse, in an all-wood home (with bookshelves), what happens when there is a fire?”

“Just asking. Maybe an in-floor safe in the basement under Aunt Beth’s old bird cage collection should be considered.”

   “Speaking as a dentist,” writes our final correspondent, “and admittedly self-serving, I recommend hiding your gold in your mouth, i.e., gold crowns.

“That way you’ll always have it with you, even when you’re dead. If the mortician’s honest, that is.”

The 5: Now there’s an incentive not to floss…


Addison Wiggin
The 5 Min. Forecast

P.S. “I can’t recall any other time when things were as crazy as they appear to be now,” writes Byron King in the current issue of Outstanding Investments — which was noticed by Peter Brimelow in his latest MarketWatch column.

“Still the boom in energy development,” Byron continues, “is a bright light on the investment horizon. It’s as if we here at OI are in the crow’s-nest of the lookout mast and can see that light. But the question still remains, how do we navigate this choppy sea?

“At the end of the day, people across the world still need and want oil, gas, electricity, copper, gold, silver and more. If you’re going to be in the market — to whatever degree — you may as well invest where the money is, which is in the arena of high-tech natural-resource plays.”

If you’re not a current subscriber, Brimelow managed to reveal two stocks Byron says are “deeply discounted” right now. You can read the column here. Or for those ideas not co-opted by the mainstream media, you can subscribe to Outstanding Investments — ranked as the No. 1 performing newsletter over the last 10 years — right here.

P.P.S. Another really quick reminder: If you registered to learn more about our Project X, the deadline for your discounted Charter Membership in the program ends tonight at midnight. Watch your inbox for final instructions. Thank you.


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