Holiday Disaster?

December 26, 2013

  • Awful holiday retail? Blogosphere hype laid bare by a UPS/FedEx “glitch”
  • What happens when cybercriminals hack into a 3-D printer?
  • What’s behind the cash crunch in China?
  • How the Japanese prime minister just assured a continued rare earth supply squeeze
  • Money from nowhere: Mayer again unravels the mystery of banking

“Demand was much greater than our forecast,” said the sheepish spokeswoman for UPS.

Seems both UPS and FedEx were caught flatfooted with holiday deliveries. “Package was delayed in transit & not received as guaranteed,” tweeted a woman named Jennifer Marten. “Disappointed 9 year old.”

Amazon is refunding shipping charges and giving $20 gift cards to aggrieved customers. Wal-Mart and Kohl’s are also in the doghouse.

The surge in late shipments is one more reason we’ve paid little heed to the endless crepe hanging about the “retail outlook” during the holidays. “The annual fabrication of seasonal retail sales data is an American holiday tradition,” money manager and uber-blogger Barry Ritholtz said in this space on Black Friday.

The financial blogosphere upheld the tradition in grand style this past Monday when ShopperTrak reported traffic at brick-and-mortar stores the week of Dec. 16-22 was down 21.2% from a year ago. “Fourth-quarter earnings will be terrible!” “The double-dip recession is just around the corner!” “The sun will be blotted out from view forever!”

That, or the weather was lousy and people clicked to buy instead of trudging out to the stores.Never underestimate the capacity of Americans to buy junk they don’t need with money they don’t have.

With that in mind, we see U.S. households are actually taking on more credit for the first time since the Panic of 2008…

Indeed, Wal-Mart was busy this month pushing a new credit card. Layaway? Not so much.

It’s not 2008 anymore, even if the issues of 2008 remain unresolved…

[Ed. Note: While UPS and FedEx scramble to catch up, we want to alert you to another kind of holiday deadline — one you can ill afford to miss.

If events break the way we expect them to, a handful of investors stand to make $295,500 — or even more — due in a series of five fixed cash payouts. It’s not a stock… but you can buy and sell it like one. And it’s astoundingly cheap — at least right now. After tomorrow, it might not be. We urge you to investigate this opportunity while there’s still time.]

The holiday “melt-up” on Wall Street hardly missed a beat with traders taking part of Tuesday and all of yesterday off.

As we write, the Dow is punching further into record territory at 15,424. Ditto the S&P, now 1,839. Small caps are strongest of all; the Russell 2000 is up a half-percent, to 1,167.

Bonds, meanwhile, are selling off. The yield on a 10-year Treasury note is inching up toward 3%, territory last seen around Labor Day.

Crude is hovering just below three figures at $99.33 for a barrel of West Texas Intermediate.

Yesterday, Libya’s prime minister sounded hopeful about bringing a peaceful end to a blockade at many of the country’s oil terminals. Security guards have been on strike since July, and production has crashed from 1.5 million barrels a day to only 250,000.

The strike is an outgrowth of growing civil war in post-Gaddafi Libya. Although the prime minister hopes mediation will work, he says he’s willing to use force. Stay tuned…

The year 2014 promises to mash up two of the big themes we’ve covered during 2013 — 3-D printing and cybersecurity.

“New technologies will pose new security risks,” according to the Security Watch column at PC Magazine. “The popularity for 3-D printing means it will become easier to create physical objects to use in attacks, said TK Keanini, CTO of Lancope. Consider the kind of damage a smooth-talking scammer with an access badge can do. Social engineering and 3-D printing can be a dangerous combination in 2014.”

Old technologies, meanwhile, will pose a risk of a different sort. Bad actors in cyberspace “will step up attacks against unsupported software, such as Java 6 and Windows XP,” the column says.

April 8, 2014, marks the date Microsoft will stop supporting Windows XP. But according to one reliable estimate, 7% of large business users will still be running XP come next April — and 22% of individuals and small-business users. Growing attacks on XP systems? “This isn’t really a prediction, but rather a certainty,” says the magazine.

As you might know, we’ve been on the trail of another certainty in the cyberspace realm, one we’ve taken to calling “Obama’s secret war.” It takes in everything from the NSA’s surveillance schemes… to covert action by China… to a $9 billion shake-up in the darling of the cybersecurity sector.

We’ve convened an “emergency summit” — an exclusive online briefing featuring two highly connected government insiders — to help you unlock a unique opportunity to quadruple your money or even better. It’s scheduled for this next Monday, Dec. 30, at 5:00 p.m. EST. It costs nothing for you to look in on this briefing; you can sign up for access at this link.

The worst appears over in China after another banking scare — the second this year.

On Monday, the People’s Bank of China pumped $50 billion into the system to avert a cash crunch. Ironically, says Chris Gaffney at EverBank World Markets, “The liquidity squeeze was actually triggered by the same central bank as they try to force banks to curb risky lending practices in the shadow banking system.

“The central bank has let the renminbi stall a bit in its steady climb higher versus the U.S. dollar, but there is a lot of upward pressure on the currency due to the rising interest rates. While I don’t agree with China’s system of government, one advantage they have over the ‘free markets’ of the Western economies is that they can more easily control their markets and financial institutions. They have avoided the quick appreciation of the renminbi which could have accompanied the spike in interest rates due to the liquidity squeeze; a spike in the currency could have made things much worse.

“But now the markets have a holiday week to settle down and I would expect the money markets to return to more normal interest levels as we enter the new year.”

Precious metals are catching a bid this morning in the proverbial “thin holiday trade.” At last check, the spot gold price has pushed its way up to $1,212. And just like that, silver is up more than 2%, only a few pennies away from $20 again.

“Definitely ‘musta been someone else’!!!” an amused Byron King emails us after Monday’s episode of The 5… in which a reader inquired whether we or someone else suggested the worldwide squeeze in rare earth supplies could be fixed by mining rare earths under the ocean floor off the coast of Japan.

“I have never stated, even in jest, that the world’s RE issue is ‘solved.’ The U.S. faces a terrible chain supply problem for RE now, as well as into the medium term and likely long into the future.” That is, the Chinese still control a vast amount of worldwide production. If it’s not 95%, as it was a few years ago, it’s still staggeringly high.

“As to the Japanese hype about deep-sea RE? Ha! Just promotional propaganda uttered in 2011 in the face of a then-lingering Chinese RE embargo against Japan. Recall that the unpleasantness began in the fall of 2010 over a dispute about fishing rights in the East China Sea.”

Indeed, it did: Now it’s blown up into a dispute over airspace between the two countries, and today Japan’s prime minister is stirring the pot further with a visit to a shrine honoring Japan’s dead from World War II — including hundreds of war criminals whose victims were Chinese.

“I foresee things getting worse in the China-Japan arena,” says Byron. “And RE are one part of the tool kit for shaping the political-economic debate.”

Byron’s been tracking rare earths for several years — all through the bubble of 2010-11 and continuing through the junior resource meltdown of the last 24 months. “Looking ahead into 2014, I have a handful of investment ideas that have survived the meltdown — and they’re actually in solid shape in terms of assets, metallurgy, management and even money in the bank, not to mention a business plan for the future.” Stay tuned…

Wood smoke doesn’t discriminate against rich or poor — or so we must conclude after seeing two stories this week.

Maybe you saw the first: The yule log was temporarily banned in San Francisco and environs yesterday. Yes, it was Christmas Day, but it was also a “Winter Spare the Air” day as declared by the Bay Area Air Quality Management District.

First-time violators faced a fine of $100… although they can get out of it by taking a “wood-smoke awareness class.” We can only imagine what that’s like…

The smog from wood smoke is also thick in Athens, Greece. But there wood burning is no trifle of the prosperous; it’s a cheaper source of heat.

“Greek authorities on Monday offered free electricity to low-income families on certain days,” reports the AFP newswire, “after smog rose sharply as hard-hit residents increasingly shun fuel for cheaper firewood to heat their homes.”

Seems energy prices in Greece have soared in the last two years: Terms of the EU-IMF bailout of the Greek government include higher energy taxes. But now on days that smog hits the “alarm” level, low-income customers can get their electricity free rather than resort to firewood. Go figure…

Truth be told, we’re hearing tales from our own colleagues about people they know burning wood to save money — cheap American natural gas notwithstanding. What’s the story in your neck of the woods?

“When Chris Mayer took us into the weeds,” a reader writes, “that’s where I stayed.”

Understandable. Last week, Chris busted a myth about how banks make their money: “Banks do not lend out deposits,” he explained a succinctly as possible. “Loans create deposits.”

“Here’s my understanding,” the reader goes on, “of what Chris said: ‘The Bank of David’ (me) is brand-new and has nothing on its balance sheets. I need deposits, so I make a million-dollar mortgage loan. Cool! Now I have a million dollars in deposits, and the homebuilder has a million dollars with which he can pay for labor, materials and overhead.

“Wait a minute… where did that money come from? I wrote him a check out of thin air that he deposited in his operating account. Chris said loans create deposits. But if loans are not backed by deposits, what are they backed by? Where does the actual cash come from? Maybe you could explain this in a way that a simpleton like myself can understand?”

The 5: “I’ll try to keep it even simpler,” says Chris, “but this stuff is not simple.

“The money comes from nowhere. It’s just created with keystrokes and electronically deposited in your borrower’s account. The Bank of David does not need to have the cash. The bank does not lend anything. It creates new money (bank deposits). This is why it’s called ‘credit creation.’ What stands behind it? The bank. The deposit is really an IOU from the Bank of David. The Bank of David promises to redeem it for cash on demand and accept the IOU in payment of loans.

“One analogy I’ve read: Think of bank deposits like pizza coupons from a pizzeria. The pizzeria does not make the pizzas ahead of time. And imagine people are content to hold and swap pizza coupons. The pizzeria only has to make a pizza when someone demands a pizza. Likewise, banks only have to produce the cash if people present the demand deposit and withdraw the cash. In which case, it is easy for a bank to get cash.

“How? Well, let’s think of step two in your example. Your borrower now writes a check to the seller of the home, who deposits it in his bank. Now things get more complicated. And it would take me a page to go through the transactions with you. But at the end of the day, Bank of David can easily get any needed funds by borrowing from other banks or the Federal Reserve. Bank of David makes money on the spread between what it earns on the loan and what it pays on funds borrowed. Cash withdrawals destroy deposits (like pizza coupons), but otherwise it’s all done electronically between banks and the Federal Reserve.”

Of course, David doesn’t have a federal banking charter or an account at the Fed, and neither do you. Don’t try this at home.


Dave Gonigam
The 5 Min. Forecast

P.S. The FDA convenes a meeting tomorrow that could make a few investors a great deal of money — as in a $5 return for every $1 invested. And that’s only the beginning.

But this opportunity isn’t about buying a drug stock ahead of a regulatory review. It’s a little complex… but even more lucrative. You’ll find the full explanation in plain English right here.


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