by Addison Wiggin & Ian Mathias

• Ron Paul’s HR 1207 dead in its tracks… but “audit the Fed” seems more likely than ever
• So much for the housing recovery… new research shows 1 in 7 mortgages in hot water
• Bill Gross with a sector to buy in these uncertain times
• China looks to corner more worldly markets: Red nation gobbles up tungsten… and Namibia?
• Plus, why your safe-deposit box is perfectly safe… but only if you live forever 

  It’s another sunny day of Indian summer here in Baltimore… let’s start with some fitting news: The “audit the Fed” bill is alive and kicking.

As we reported earlier this month, Ron Paul’s popular proposal of HR 1207 was gutted by Mel Watt, a congressman firmly tucked in the pocket of the American banking industry. In typical political form, Paul and Congressman Alan Grayson took the language of the original “audit the Fed” bill, turned it into an amendment of a different bill about to come to vote and managed to get the thing approved yesterday by the House Financial Services Committee. Heh… not even an honest bill can get through without some sneaky politics.

Should it be passed by the full House and Senate, Paul’s people say the amendment:
· “Removes the blanket restrictions on GAO audits of the Fed
· Allows audit of every item on the Fed’s balance sheet, all credit facilities, all securities purchase programs, etc.
· Retains limited audit exemption on unreleased transcripts and minutes
· Sets 180-day time lag before details of Fed’s market actions may be released
· States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO.”

Bravo.

  But just like Indian summer, in the back of our minds, we fear some dark, cold days might be around the corner. The new Paul/Grayson amendment is attached to Barney Frank’s HR 3996, what he calls the “Financial Stability Improvement Act of 2009.” That’s the “too big to fail” legislation we mentioned last month that would, among other things, allocate $200 billion to help the government to seize companies they feel have too much systemic risk.

And even if Paul’s amendment still becomes law -- and if the evils in Barney Frank’s bill don’t manage to completely negate it -- there’s no guarantee whatsoever that our government won’t find a way to screw it up. We’re all for lifting the Fed’s veil of secrecy, but as Sen. Jim DeMint put it, “If there's anything worse than a secret Federal Reserve, it's Congress controlling it.”

  Here’s another observation from our Charm City HQ: If the housing market has bottomed, it hasn’t happened here.

Nearly one in 10 prime Maryland homeowners are behind on monthly payments, the Baltimore Sun reports this morning. That’s about 77,000 homes in our tiny state and a 70% year over year increase. Souring subprime loans -- despite all the scenes from The Wire you might have in mind -- total “only” 48,000.

  All of the U.S. is mired in a similar muck, the Mortgage Bankers Association reported yesterday. The national delinquency rate for private single-family and multiunit homes was a record 9.6% in the third quarter. Add in the loans that are already in the process of foreclosure and that rate goes up to 14.4% -- another record. Think about that… one in seven of all U.S. home loans was past due or in foreclosure as of Sept. 30, 2009.

“Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP," said MBA's chief economist, Jay Brinkmann. (Amen!) Following that logic, Brinkmann told the press he does not expect this trend to recede until the unemployment rate peaks.

  Thus we can’t blame traders for selling their stocks again today. After yesterday’s 1.3% slide, the S&P opened down 0.5%, with the help of an earnings disappointment from Dell and some downgrades in the semiconductor sector.

  The average individual investor is “damned if you do, damned if you don’t,” laments Bill Gross in his latest monthly letter to PIMCO clients. “Do you buy the investment-grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high-yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2%-yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis?

“The New Normal is likely to be a significantly lower-returning world. Diminished growth, deleveraging and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less…

“Let me tell you what I’m doing. I don’t have the long-term investment objectives of Berkshire Hathaway, so I’m sort of closer to an average investor in that regard. If that’s the case, I figure, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble. Pricewise, they’re only halfway between their 2007 peaks and 2008 lows -- 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6%, not .01%! In a low-growth environment, it seems to me that a company’s stock should yield more than its less-risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5-6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor.”

  The stock market malaise is still good news for the dollar. The dollar index is up a few tenths of a point from yesterday, to 75.9.

  So you won’t see any new record highs for gold today. An ounce still goes for a respectable $1,140 as we write.

  “It’s pretty clear that without tungsten, a lot of things in this world will -- literally -- grind to a halt,” notes Byron King. Tungsten is one of a few “technology metals” Byron’s been particularly hot about lately. From airplane windows, to drill bits, to jet engines, to incandescent lamps -- the stuff is everywhere.

“Now let’s ask, where’s the world’s tungsten? Here’s a recent pie chart of world tungsten reserves.

“In addition to its large reserve base (57%), China presently controls about 75% of the world’s output of tungsten. Characteristically, China’s national resource policy is to ensure that the long-term needs of its own industrial base are satisfied. In the past three years, the Chinese have begun to reduce export volumes, while at the same time diverting more and more tungsten output to domestic industry or to foreign companies that locate plants in China.

“Does that sound familiar? It’s the same thing that the Chinese are doing with rare earths and other elements, like indium.

“Here’s where things stand. According to the U.S. Geological Survey, China dominates world tungsten mining and primary processing. Tungsten availability to non-Chinese markets is tightening, and will doubtless continue to decline. Equally important, China is now becoming a major importer of tungsten concentrates and scrap materials.

“Ongoing rapid growth in demand within China will ensure that competition for raw materials between Chinese and non-Chinese processors will continue and intensify. So it’s clear that there’s now an urgent need for increased tungsten output outside China.”

Fortunately, Byron’s put together a shiny new portfolio he calls St. Barbara’s List. Named after the patron saint of miners, it’s full of the few, little-known diggers that maintain the technological status quo -- including a company he thinks is the “best tungsten play on God’s green earth.”

  Speaking of China looking to corner markets, Chinese officials have been extending huge fiscal favors to certain members of Namibia’s government. The story today is that, evidently, the Chinese government has been handing out full scholarships to the young relatives of Namibian higher-ups.

Just about every U.S. paper is boohooing the whole affair this morning, as if that level of corruption doesn’t already exist in every corner of the world. We’re a bit more interested in China’s booming interest in the tiny African nation. This is the third time they’ve gotten busted doing dirty deals with Namibia. (There was a botched back-scratching security technology deal that involved Hu Jintao’s son back in July. Before that, a Chinese weapons company got caught stuffing a Namibian general’s bank account with $700,000.)

Could it be that China is not after Namibia, but Namibia’s coast?

  “Do you think our government will ever confiscate gold bullion?” a reader writes, adding to our flood of recent gold and gold coin questions. “If the government decided to confiscate gold, how would they know how much a person has in their possession? If a person bought gold from an individual, how would the government know what you had in your private stash? Do you recommend safe-deposit box storage?”

The 5: We just finished some preliminary talks with Nick Bruyer, CEO of First Federal Coin Corp., who will be hosting our upcoming webinar to help answer these questions. Here’s what he had to say (our paraphrase): The law they passed in 1934 is still on the books. So yes, they could confiscate monetary coins or bullion. But collectible and rare coins have always been exempt from that law. So if you want to own coins and use them as an investment, but fear the government's wrath, collectibles have been and still are a good vehicle.

Of course, that’s a very short answer to a complicated question… for his full response, be sure to sign up for the webinar.

  “If you hold bullion or coins in a bank safe-deposit box, beware dying,” Byron King adds. “As the saying goes, ‘You can't take it with you.’

“When (not if) you die, the bank will almost surely NOT let anyone else into the safe-deposit box unless they're already an authorized user of the box and listed on the signatory card. In many states, after you die, only an authorized representative of the state department of revenue (or whatever they call it in any given state) and/or a court appointed executor may enter the box. And then they can only open the safe-deposit box to make a court-reviewed inventory that is reportable to the revenue department, and in some circumstances to the federal IRS

“So clearly, the ‘privacy’ of holding gold in a safe box goes away when you die. If your gold is in a box, it'll become knowledge to the revenue'ers, and possibly subject to inheritance or estate taxes.
 
“Of course, I'd never counsel anyone to evade paying their lawful taxes and just debts. I just want readers to be aware of the pitfalls of keeping gold in a bank safe-deposit box, unless you're VERY comfortable with your partner who has access and trust that person to do the right thing post mortem.”

On that cheery note, have a nice weekend.

Ian Mathias
The 5 Min. Forecast

P.S. Don’t forget, we’re hosting a whole other online event next week – this one with the legendary Dr. Marc Faber. He shared with us his views on the real intrinsic value to the U.S. dollar, the truth behind Bernanke’s reign at the Fed and what he thinks is the single best place to invest in the future. He’ll tell you too – for free. All you have to do is sign up and tune in.

by Addison Wiggin & Ian Mathias

• Obama warns of debt, “double-dip recession”… how China has turned the tables on Washington
• Byron King issues sell recommendation on this legendary U.S. blue chip
• Are gold ETFs taxed like stocks or collectibles? Frank Holmes on the surprising answer
• Sign of the times: Famous Detroit mega-stadium sells for less than a luxury condo

  Wow, don’t hear this every day…

“If we keep on adding to the debt, even in the midst of this recovery, at some point, people could lose confidence in the U.S. economy,” President Obama told reporters in China yesterday. His administration is offering no solutions to this coming crisis (quite the contrary, as you’ll read below), but we’re a bit taken aback nevertheless… can’t remember the last time any president offered this stern a warning over our debts. He even went as far as to say that this lack of confidence could lead to a “double-dip recession.” Gasp!

  “Now the tables are turned,” our currency man Bill Jenkins wrote to his readers yesterday. “And the president’s trip to Beijing has proven it.

“The American president will make his scout’s pledge to take our debt seriously and not to spend too much more. He will also reiterate that we believe in a strong dollar policy. The Chinese president will smile and nod and promise to continue buying our debt. He allows us to save a little face and does not reprimand us publicly for our self-indulgence.

“They will pretend to believe us, and in gratitude, we (ignoring the beads of sweat accumulating on our brow) will not force any of the other issues.

“First, America wants China’s help with a laundry list of adversarial relations from North Korea to Iran. Second, we (and the rest of the world) would like a renminbi that floats, instead of being pegged to the dollar. Third, we want to pontificate on the issues of human rights, of which Tibet is the universal poster child. Fourth and last (but NOT least), we would like the Chinese to continue purchasing American Treasuries (our debt).

“I am certain President Obama will get us the last of the requests. He will pay for that by caving on the first three.”

  “The credit crunch is not over,” Treasury Secretary Geithner told a small business financing forum last night. Do we detect a change in rhetoric from the Obama administration? "It may feel dramatically better for large companies, but it is not over for small businesses across the country."

  Heh, and just as Mr. Obama and his Cabinet begin sounding the alarms over rising debts, the Senate has introduced an $849 billion health care bill. Initial projections from the Congressional Budget Office claim the legislation is budget neutral… they estimate it would actually cut the deficit by $127 billion. But given the bill’s 2,047-page count, we’re hard-pressed to believe anyone knows much about it yet. (Think about that the next time you go to change your office printer. One of those big packaged reams of copy paper is just 500 pages. This bill is four of those.)

So much for green initiatives in Washington… c’mon, get a Kindle already.

  “Sell General Electric,” Bryon King told his Outstanding Investments readers yesterday. We usually reserve buy and sell recommendations for paid subscribers, but we thought it newsworthy that Byron is selling the most popular stock in the world.

“We've had GE in the OI portfolio for almost four years, predating my tenure as editor… Frankly, I don't think GE is going to give us much more from here. It's time to sell General Electric.

“Deep down, it pains me to part from GE. This is an iconic old American firm, now grown into a world technology powerhouse (no pun intended). I honestly LOVE the GE business divisions that deal with ‘real’ things, like jet engines and locomotives and power generators and windmills and subsea equipment. I get misty-eyed thinking of all the wonderful GE people who work in those metal-bending divisions, toiling at their workbenches and making the world a better place.

“Then there's GE management, which apparently has not learned its lessons from the world monetary crash of the past couple years. The money side of GE still has too much bad commercial paper. A lot of borrowers owe GE more than they'll ever repay. And GE owes a lot of lenders more than the company can afford. There's a looming crash in commercial real estate, and it's set to kick in during the winter of 2010. It'll shred GE's capital position and rip a big hole in the bottom line.

“I've often asked whether the GE industrial side can earn profits for the company faster than GE Capital can lose money. I'm not going to wait around to find out.”

So what is Byron having his Outstanding Investments readers buy? Find out here.

  After some dull trading over the last few days, the stock market staged a notable sell-off this morning. The S&P suffered a nearly 2% loss within the first half hour of trading. Between the economic hedging from White House and another not-so-hot jobless claims report, we can hardly blame ’em. Also, The FCC had some sort of computer snafu this morning that grounded a whole bunch of planes around the U.S.… another issue contributing to a sour mood on the Street.

  This trepidation is good news for the dollar. The dollar index is back up about half a point from yesterday’s low, to 75.5.

  Thus, commodities are taking a breather today. Oil’s down a buck and change as we write, to $78 a barrel. At $1,135 an ounce, gold is around $17 off yesterday’s record high.

  “Many investors in precious metals ETFs have to deal with an unwelcome surprise come April 15,” warns Frank Holmes, a staple speaker of our annual Investment Symposium.

“The issue is that gold and silver fall under the heading of ‘collectibles’ in the eyes of the Internal Revenue Service, making these metals similar to artworks, antiques, vintage wine and rare baseball cards.

“This status means that profits from gold and silver investments do not qualify for the 15% maximum on long-term capital gains that pertain to stock and mutual fund investments. These profits are instead taxed at a 28% maximum if held for more than a year, and at ordinary income rates if held for less than a year.

“With the rapid appreciation of gold in recent years -- the current price is nearly double where it was in early 2007 -- many investors who cashed out their gains in gold ETFs may be hit with unexpectedly big tax bills.

“The same liability may hold true for investors who didn’t sell a single share of their gold ETF. That’s because when the ETF itself sells physical gold or silver, any gains or losses are passed along to investors, who then face the maximum 28% tax liability even if they didn't actually realize the gain.

“Not all gold–related ETFs are considered collectibles, but for those that are, investors should be aware of the rules so they can weigh the advantages and disadvantages of their investment options.”

We've gotten a slew of questions from you lately about taxes on your gold gains -- particularly the tricky matter of taxes on gold coins. We're moving full speed ahead on our webinar with Nick Bruyer of First Federal Coin Corp., and we'll be sure to address this issue with him. If you have questions of your own or want to be among the first to sign up for the webinar, look here.

  Fund manager John Paulson, perhaps the greatest profiteer of the credit crunch, is launching a gold fund, on Jan. 1, 2010. Paulson said in an investor meeting on Tuesday that he’ll be starting the fund with $250 million of his own cash, which will be used to buy up his favorite miners and gold derivatives.

  Last today, a sign of the times: The Silverdome -- a gigantic stadium that used to house the Detroit Lions and Pistons -- just sold for less than the average luxury home. A yet-to-be identified Canadian real estate organization bought the stadium for $583,000.

No kidding… just over half a million bucks.

From just a numerical standpoint, this might be as sweet a deal as it gets. The 80,000-seat stadium cost $55.7 million to build in 1975. WrestleMania III -- the most-attended live indoor sporting event in U.S. history -- was held there in 1987. Pope John Paul II delivered mass there. Now its been picked up at a 1% of its original construction cost by a Toronto-based family firm that intends to turn it into a soccer arena. It’s a mad world.

  “Is there any depth that gold can be buried at which it is not detectable by metal detectors?” a reader asks.

The 5: Heh, that’s a first. We’ll have to do some homework.

  “When gold is sold BACK to the dealer,” a reader asks, “is there some type of tax form they have you fill out to submit to the IRS? Also, is there a special tax rate on gold profits?”

  “Does the IRS treat gold differently than normal investment capital gains? My gold portfolio is mostly in miners and ETFs, but I'm sure your readers would appreciate information regarding the IRS and gold if capital gains are different for gold.”

The 5: Great questions. We hope the bit we included today from Frank Holmes helps. Collectable coins -- even some ETFs -- are subject to different taxes.

As we mentioned above, we’re bringing in the most-experienced guy we know in this field to give you some articulate answers. The best thing you can do is continue sending us your questions and sign up for this exclusive webinar in advance.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. Have you heard Resource Trader Alert is currently half off? A deal like that on a trading service as popular as RTA doesn’t come around very often… check it out soon, while the offer is still on the table.

P.P.S. It’s been nearly a year since we’ve accepted new members into the Agora Financial Reserve. If you’re looking to join these exclusive ranks -- and save a boatload on subscription fees -- stay tuned… our doors are about to creak open again.

by Addison Wiggin & Ian Mathias

• Incredible White House admission: “Sorry, we lost track of $100 billion”
• Bill Bonner on gold’s quiet decoupling from the U.S. dollar
• Goldman Sachs goes Mother Teresa… The 5 and Doug Casey comment on their latest charity
• Patrick Cox on how Net convergence is causing one industry to rise, another to fall
• Plus, blame Democrats for housing fiasco, a reader writes… our response, below

  Read business news long enough, and you think you’ve seen it all… government deficits, corporate scandals, sneaky deals, management fiascos and market manipulations.

Au contraire, says the White House Office of Management and Budget today. You ain’t seen nothin’ yet.

In the fiscal year 2009, which just ended Oct. 1, the U.S. government wasted $98 billion on “improper payments.” That’s their euphemism for money flushed down the toilet due to fraud, misdirected reimbursements, duplicate payments or money that was simply lost — not lost as in, “I lost money on that stock,” but lost as in, “I had a million dollars and now I don’t know where it is.”

Say again — $98 billion. That’s a 36% increase from 2008. It’s enough money to replace the annual GDP of Washington, DC… wait a second, there might be a good idea in there.

  “Who wants to support a government that loses track of $100 billion a year?” currency investors might be asking themselves this morning. The dollar index is just a few tenths of a point above 74.7, yesterday’s fresh 15-month low.

  Gold, despite no real further decline in the dollar, has found itself yet another record high today. The spot price has poked through $1,152 as we write.

  “Most reporters say gold is going up simply because the dollar is going down,” Bill Bonner noted in yesterday’s Daily Reckoning. “In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15-month low... and, coincidentally, gold has just hit an all-time high.

“There's something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn't the whole story.

“Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level... was it a year ago... more...? And it's been at that same level, more or less, all the while gold has gone up more than 10%.

“It's not the fall of the dollar that is driving the gold market, in other words, it's something else... it's the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them — more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world's biggest spenders. They spend dollars... not rubles... not euros... not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs — in local currency — go up while its sales — in dollars — go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose... thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

“Since all the world's central banks, more or less, are doing this, all paper currencies are going down together — compared to gold.”

(By the way, some of our readers just cashed in 148%, 214% and 89% gains trading options on gold and silver. Learn about their strategy here.)

  Consumer prices rose 0.3% in October, the Labor Department claims today. That’s more than the Street expected and an unwelcome development for the Federal Reserve, whose easy money policies depend on subdued inflation. A 6.3% monthly jump in gas prices led the way.

On an annual basis, the government’s CPI is now down just 0.2%, the smallest rate of consumer price deflation since February.

  Yet there is even bigger news from the data patch today: Housing starts plummeted 10.6% in October, the biggest monthly plunge since January. New construction is now beginning at an annual clip of 529,000 homes, the lowest level since April. Of course these numbers can be all over the place — up one month and down another, not to mention that the margin of error for this particular report is nearly two percentage points. But still… not a terrific sign for a sector already on heavy government life support.

  Thus the stock market quickly fell over 0.5% this morning.

  Wouldn’t this be classic… Fannie and Freddie could topple the fragile commercial real estate market, a Wall Street Journal expose reveals today. From the article:

“One-quarter of the $180 billion of apartment-building loans on Fannie’s books were originated near the top of the market in 2007 and those loans account for nearly half of all its commercial-loan delinquencies. Fannie increased to $1.2 billion its reserves for losses on multifamily loans at the end of September, up from $104 million at the end of 2008. In a statement, Fannie Mae said market fundamentals ‘will remain under pressure in the near term’ and that the company is taking steps ‘to mitigate risks associated with weak rental demand.’”

The two firms accounted for 84% of all lending for multi-family homes last year. What would happen to the market if for some reason they had to stop insuring these loans? And what happens to Fannie and Freddie a few years from now when those $45 billion in top-of-the-market loans start to mature?

  “Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates and falling rents,” Ben Bernanke said in a speech the other day. The mainstream missed this sound bite thanks to his dollar cheerleading… but it’s a good one:

“These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks' books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans… With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans.”

Translation: Commercial real estate has not dodged the bullet. For more, talk to Dan Amoss.

  Goldman Sachs, at perhaps the peak of its unpopularity, has announced the biggest charitable donation in the firm’s history. Goldman is grabbing headlines this morning with their new $500 million small-business assistance program, which over the next five years will pump money into various charities, investor education programs and grants.

Since $500 million over the next five years accounts for 3% of Goldman’s 2009 bonus pool… well… no one will confuse them for the March of Dimes anytime soon.

We’ve got an idea for Goldman. It’s complicated and a bit revolutionary, so stick with us: Double that sum to $1 billion and dump it in a new LLC. Instead of handing out free money, this company will borrow from the Fed at 0.25% and then lend money at 1.25%. With a billion in the vault, it’d be no sweat to extend around $10 billion in loans, all of which would be the cheapest in history. Borrowers would have money to invest and Goldman (thank heavens) would make up to $100 million… which they can then give to charity if they still can’t wash the blood off their fingertips.

We’ll call this new LLC a “bank.”

  “Most charities aren’t worth the cost of the gunpowder it would take to blow them to hell,” Doug Casey, a favorite at our annual Investment Symposium, wrote earlier this month in his typically delicate manner.

“Your moral obligation to the rest of humanity –— insofar as you have such an obligation — is to keep your capital intact. First, that means to deny it to the state, which will very likely use it in a destructive way. Second, direct it to those who will use it to produce more — not to unproductive consumers. Third, take some personal responsibility and do it yourself — don’t devolve it upon some unknown board of worthies who will have their own ideas about what to do with your money.”

  “In the last few weeks, we've seen real breakthroughs in the convergence — the integration of computing devices and functions,” notes our tech analyst Patrick Cox, who has made tech convergence a major theme of his Breakthrough Technology Alert.

“Not the least was the announcement by Google's YouTube that it is adding full high-definition 1080p streaming. This is higher quality than cable companies provide. So what does it mean? It means, among other things, that the networks are now in full panic mode. Already, the trickle of cable television cancellations has begun as users hook computers and media players to HD screens. Up to now, however, the trend has been limited largely to the more technically sophisticated. That's changing.

“True HD streaming and downloading have been available for some time on sites less well known than YouTube. My kids, for example, watch their favorite programs online at sites like Hulu.com, even though they could watch them on our rarely used television. When a feature comes to an important well-known site like YouTube, however, it has become mainstream…

“You, as an investor, need to be aware of what's going on. And frankly, most of my friends my age simply aren't. Moreover, you shouldn't be so naïve as to think that it is only hackers who are putting these alternative distribution channels in place. If you think Google founders Larry Page and Sergey Brin don't know that they're helping consumers circumvent the old distribution channels, I'd like to talk to you about some swampland in Florida…

“Companies and institutions once thought to be permanent parts of the financial landscape are disintegrating. Others are arising. The entertainment and news industries are reeling from the impact of ’the network’ while the entire functioning of marketing and advertising is mutating as the Net displaces obsolete communications industries.”

  “Indeed, loans have continued to contract,” a reader writes. “But I don't think it's because they prefer to accumulate securities over making new loans. The problem is that bank examiners have made it nearly impossible to quality for a new loan.

“Collateral in the form of equity no longer matters. Income is the primary, if not only, consideration. The economy runs off of credit, and I'm not talking about frivolous consumer credit. I'm talking about legitimate and profitable businesses who simply need credit to satisfy their cash flow requirements. No loans equals no cash flow, which means an economy that will not recover…

“For the most part, this mess all started under Bill Clinton, whose policies forced the banks to make loans to people who didn't qualify and also loosened the leveraging requirements to an unreasonable level. And when the people couldn't pay back these loans, the house fell. So we've got to fix the house, but the bank examiners won't let us. It's those bank examiners, Bubba. Those pesky bank examiners.”

The 5: A lot of folks want to blame the Democrats for the mess… most of them are fools, just like the Democrats they’re blaming. We'd love Barney Frank and Nancy Pelosi to shut up about "free market failures" etc., but it's a huge stretch to suggest the banks were “forced” — as if at gunpoint — to make all those loans. They were loving it up like everyone else… and thought they had the cover of government to get away with sneaky fees and aggressive marketing to increasingly desperate customers.

Best,

Ian Mathias
The 5 Min. Forecast

P.S. Attention all ye who seek out gloom, boom and doom: Dr. Marc Faber, the keynote speaker at this year’s Investment Symposium and legendary economic commentator, just sat down for an exclusive interview for The Daily Reckoning. If you want to hear the good doctor’s latest thoughts, including the “single best place to invest in the future,” be sure to check it out.

by Addison Wiggin & Ian Mathias

• One spark that could set Wall Street ablaze: Dan Amoss on FAS 167
• Gold soars, but not all gold miners follow… Chris Mayer’s harsh truth for the gold diggin’ industry
• Bernanke defies convention, talks up dollar… Chuck Butler on why the market isn’t buying it
• Plus, quick hits on affording the wars abroad and how American banking is still clueless

  Here’s a new abbreviation to add to our crisis vernacular: FAS 167

That’s short for Federal Accounting Standards revision 167, effective Jan. 1, 2010. In essence, it’s a new accounting rule that will force financials to bring bad, off-balance sheet assets onto their books… thus a potential trigger for more Wall Street carnage.

“FAS 167 will be a larger and larger issue for the financial markets in the coming months,” explains Dan Amoss, our resident CFA, “and an emerging story in the financial media.
 
“In short, the banks with large off-balance sheet variable interest rate entity (VIE) exposures will have to hold more capital against these exposures. So they're actively going to shrink the potential size of these VIEs, which are used to house things like credit card receivables.

“This coming consolidation of VIEs is likely one reason that banks have been hoarding cash and jacking rates on business credit cards -- for creditworthy customers -- up to 30% with no advance warning.
 
“This ultimately means slower formation of new credit, and in many cases -- i.e., Citigroup -- the outright shrinking of its balance sheet to a degree that starves a credit-addicted U.S. economy.”

Rest assured, Dan will have his Strategic Short Report readers well prepared for FAS 167… here’s how.

  And lest you think we’re making too big a fuss over FAS 167, check out these sound bites. The first is from Freddie Mac’s Q3 earnings report, the second from a Wells Fargo Q3 conference call.

“Under these accounting standards [SFAS 166 & 167], the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of Sept. 30, 2009… While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth.”

“I want to update you on our most recent analysis of the impact of the application of FAS 166 and 167, which is expected to result in the consolidation of certain off-balance sheet assets currently not included in our financial statements. We provided a preliminary analysis in our second-quarter 10-Q. Based on our continued refinement of this analysis, we now expect approximately $55 billion in incremental GAAP assets to be brought on balance sheet, representing approximately $28 billion in incremental risk-weighted assets… we continue to explore the sale of certain interests we hold in securitized residential mortgage loans, which would further reduce the amount of incremental GAAP assets and incremental risk-weighted assets.”

  Just one of 11.9 trillion reasons to own some gold. The spot price climbed to another record high of $1,143 an ounce in after-hours trading yesterday and sells for about $10 less as we write.

  “A rising gold price, however, is no guarantee that gold stocks will rise,” notes Chris Mayer, highlighting a bitter reality to many long-term gold investors.

“If you look at the Amex Gold Bugs Index, for example, it’s pretty much where it was two years ago, even though gold has recently made a new all-time high. Gold miners as a group struggled with rapidly rising costs. So even though gold prices rose, they didn’t make much money. This only serves to highlight that there are other reasons to like gold stocks that have more to do with the economics of the businesses themselves and the price paid for them.

“Here’s one pictures that tells an important tale: A rising gold price means we should see more gold produced. That’s basic economics. In fact, miners have invested increasing amounts to gold exploration. But importantly, the number of new discoveries continues to fall, and is rather anemic.

 “This a familiar pattern in the resource world in recent years. It’s no different in the gold market. Big discoveries are rare — and more expensive. According to data from Sandfire Securities, a typical gold mine development might go like this:

“Exploration, three-seven years and $15-50 million. Evaluation may take another three-five years and another $20-30 million. Development could take another two-four years and from $50 million to over $1 billion in costs. Finally, you’re ready to operate the mine.”

Chris’ point: Nothing beats proven resources and existing gold production, especially when you can find ’em on the cheap. There are two such stocks in his Mayer’s Special Situations portfolio… currently accessible for just $1.

  Much of gold’s rise yesterday came on the heels of a falling dollar. And what put the ol’ greenback at another yearly low yesterday? Heh, this is a good one:

  “We are attentive to the implications of changes in the value of the dollar,” Ben Bernanke said yesterday in front of the Economic Club of New York, “and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability.”

This was supposed to be a big deal. It is not the role of the Fed to talk up the dollar (that’s the Treasury’s job), but pundits thought Mr. Bernanke needed to “say something” in light of the recent attacks from his Chinese counterparts. So “say something” he did:

“Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong…” How exactly? Ummm… the Fed will “continue to monitor these developments closely.”

  “Now, when he first uttered those words, the dollar got bought and the nondollar currencies were sold,” notes Chuck Butler, a veteran currency trader and Fed watcher. “But then, a few of us had this feeling... It was a feeling that we had heard all this before... And there... In the archives, circa June 2008... Bernanke said, ‘In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.’ Wait! We won't get fooled again!

“In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar. But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008. I mean... What has the Fed done in the past 1 1/2 years to ‘bolster the dollar’? Near zero interest rates that will remain in place for longer than they should... quantitative easing... A bloated balance sheet of toxic bonds.

“You could see the V-8 moments on traders' faces when they realized, yesterday, that all this had been said before and nothing came of it, so... Meet the new boss... Same as the old boss... We won't get fooled again! No, no!”

  With the recession/debt/dollar madness grabbing all the headlines at home, anyone recall that war on two fronts we’re fighting abroad? The latest Defense Department numbers suggest that adding 40,000 troops to Afghanistan -- the latest “solution” to ending the war on terror -- will require $40-54 billion more funds annually. That would bump the American military budget to $734 billion in 2010 -- a 10% increase from the previous Bush administration peak. Seriously?

  A few new items in the data cupboard today. Here’s the quick and dirty:

• Producer price inflation rose 0.3% in October, the Labor Department reports. Despite coming short of Wall Street expectations and falling 1.9% over the last year, it’s worth noting… prices are slowly inflating
• Industrial production rose just 0.1% last month, also lower than anticipated. Year over year, production was down 7.1% in October
• And one of our favorites, capacity utilization, edged up from 70.5% in September to 70.7% in October. As we’ve noted before, this continued rise -- like it or not -- is a classic sign that a recession has ended… for now, anyway.

  Last, further proof American banking is still clueless: Michael Carpenter was just named the new CEO of GMAC, the desperate financial arm of GM. When we read that headline this morning, we started optimistic -- this company needs nothing more than a fresh set of eyes and an aggressive refocusing. Then we saw this guy’s rap sheet… another Harvard MBA, chairman and CEO of Citigroup Alternative Investments from 2002-2006 (that’s the branch that invests in real estate) and a board member of CIT Group right up until its demise. Oy… sounds like he’ll fit right in. 

  “The Bureau of the Public Debt (BPD) is one of the best places to work in the federal government,” reads a human resources page on the BPD Web site, which was brought to our attention by a reader on The 5 Min. blog.

“When you work for BPD, you’re a part of one of the federal government’s most dynamic agencies. When you work for BPD, you’ll be a part of a specialized agency within the Department of the Treasury. You will focus on one of the most important government functions: how the federal government borrows the money it needs to operate, and how it accounts for the resulting debt.”

The 5: Heh, could there be a more important function in keeping this empire afloat? If you’re looking for job security, this looks like the place to be!

  “Is the gold market a gigantic Ponzi scheme?” another reader asks. “At what price may gold find its tipping point -- the point at which people with gold certificates ‘demand’ redemption and physical delivery? Will the certificate issuers have the physical gold and be able to deliver? What happens if we find out that there is no gold for certificates? At what point is it no longer profitable to mine gold, thus making stocks in gold mining companies worthless? If I have only food and you have only gold, do you think I’m going to swap?”

The 5: Maybe a bit extreme, but those are worthy questions. As we mentioned yesterday, our colleague and longtime numismatic Nick Bruyer is going to field a whole truckload of gold-related questions in an upcoming webinar -- an exclusive for Agora Financial readers. Today will be the last day we’re taking questions for Nick, so if you haven’t sent yours yet, do it now.

Best,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• China and Obama square off… Dan Amoss on “the forefront of concern” for the world’s superpowers
• Paulson, Cramer, Greenspan occupy “Worst of 2000-2010” lists… so why are we all still listening?
• More banks fail, FDIC scrambles for cash… Rob Parenteau examines the bitter reality of modern banking
• The one chart for the third quarter of 2009… dissecting the market’s straw man, below

  President Obama vs. China. Touch gloves and come out swingin’!

“The continuous depreciation in the dollar,” said Liu Mingkang, chairman of the China Banking Regulatory Commission, “and the U.S. government’s indication that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.”

Mr. Obama’s counterpunch: “I can tell you that in the United States, the fact that we have free Internet — or unrestricted Internet access is a source of strength, and I think should be encouraged.”

First round: China.

  That’s unfair, we admit… the two men were never even in the same room over the weekend, and surely Mr. Obama said something more important to the Chinese than an implicit wag of the finger towards censorship. But those are the headline quotes this morning, the first day of President Obama’s pivotal trip to Asia, and they speak volumes. The Chinese are taking big swings… they’ve got our debt, they’ve got our imports, they recognize their major reserve currency is becoming a carry trade whipping boy… and they are not happy. America, as usual, is jabbing back with human rights pleas and the never-ending quest to spread democracy.

“With President Obama embarking on his first official visit to China this week,” Dan Amoss explains, “the issue of the dollar/renminbi peg is at the forefront of concern. As the U.S. dollar index weakens, so does the exchange rate of the Chinese renminbi versus floating currencies like the euro and the Japanese yen. This translates into an effective price cut for American and Chinese exporters, without the typical hit to profit margins. European and Japanese exporters are suffering from what they consider to be an unfair playing field.

“Debasing the value of a currency is an old-fashioned way for politicians and central banks to subsidize politically powerful exporters. Cheap currency policies are widely popular among the bureaucrats and central planners that populate the halls of academia and policymaking. But over long periods of time, the quality, efficiency and productivity of an export sector will determine its success — not whether it’s located in a nation with a weak currency.

“Like doping in sports, a weak currency gives exporters a price advantage against its competitors. But once too many countries get involved in this ’mercantilist’ type of policy, it transforms into an ugly race to the bottom. In the end, the average citizen is impoverished by diluted purchasing power.”

  But at least the average Joe is starting to “get it.” Alan Greenspan’s interest rate policies garnered the number six spot in Newsweek’s recently released “Top Ten Tactical Blunders” of the last decade. “Let’s blame Alan Greenspan,” the paper joked. Seriously, let’s!

We’ll give Newsweek more credit than usual this week. In another list, “Top Ten Worst Predictions,” they assigned Hank Paulson number five for his Feb. 14, 2008, call that “The worst is likely to be behind us.” Jim Cramer found himself at number two with the always entertaining, “Bear Stearns is fine!” clip.

(Doesn’t this make the present all the more insane? Ben Bernanke has taken Greenspan’s easy money policies to a whole new level. Hank Paulson’s protégée at Goldman Sachs and former Fed insider is the new secretary of the Treasury. And, as the station proudly boasts, more people get their investment news from CNBC than anywhere else in the world. Fool me once…)

  Three banks failed on Friday, bringing the annual headcount to 123. Two in Florida and one in California will cost the FDIC roughly a billion dollars… money they haven’t had for months.

  To pull their deposit insurance fund out of the red, the FDIC made official Thursday its new fee structure. The 8,100 insured banks in the United States will have to pay certain FDIC premiums in advance… a move the FDIC thinks will raise about $45 billion. Tax the successful to pay for the failures… quite a plan.
 

  “The motivating idea behind the various U.S. bank rescue measures,” notes our macro-man Rob Parenteau, “was to do whatever it would take to get bank loans to the private sector growing again. That mission remains distinctly unaccomplished.

“Despite all the policy machinations — from TARP capital infusions to outright asset purchases, temporary lending facilities, a near-zero fed funds rate and various guarantees on bank liabilities — loans outstanding in the commercial banking system have continued to contract. Instead, banks have preferred to accumulate securities rather than make new loans. Even those purchases have flattened in recent months as banks are back to hoarding more excess reserves.

“We won’t argue with the counterfactual — without these measures, the contraction in bank loans outstanding would no doubt have been much more dramatic, as an Austrian-style simplification of balance sheets would have naturally gathered momentum following the Lehman Bros. bankruptcy. But the reality is neither the household nor business sector is eager to add to its debt, and bank loan officers are still battling rising loan loss recognition from the last private credit bulge. This is much as we anticipated — the private sector has hunkered down, is spending less money than it is earning and is paying down or liquidating existing debt loads.”

  Consumer sentiment fell to a three-month low in early November, says the latest reading from Reuters/University of Michigan. They surprised the Street on Friday with a sentiment index score of 66 — worse than expected and the second month in a row of falling confidence.

  Retail sales inched up in October after a hefty fall in September, the Commerce Department says today. Uncle Sam took a page from David Copperfield this morning… the government offered a measly 1.4% October rise as misdirection for a massive September revision, moving a 1.5% drop to a 2.3% decline.

  Today’s market activity: Dollar down, everything else up.

The lowly dollar index is right on its 2009 low this morning at 74.8, aided much by the rising tension in China that we noted above. The low dollar is pushing just about everything else up… the S&P rose 1.5% within the first hour of trading, oil rose over $2 to $78 a barrel and gold found another record high of $1,134 an ounce.

  Two more CEOs of major gold companies have sounded the “peak gold” alarm. Any near-term increase in gold supply would be “artificial” Randgold exec Mark Bristow told the Financial Times. “We will see little corrections that keep capacity alive, but the fundamental reserve base is in decline in terms of both quality and ounces.”

“It costs more to get the ore up,” added Mark Cutifani of Anglogold. “It takes longer for workers to get to the job. Costs are going up and grades are going down.”

 
  Here’s some good perspective on the recovery that wasn’t:

With the majority of publicly traded companies done reporting third quarter earnings, the trend is clear: Profits were way better than expected, revenue was flat at best.

Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can’t be any questions left as to how the market pulled off this quarter… companies are simply trimming the fat at an incredible clip. Not exactly a long-term plan for growth.

  The contrarian trade of the day: Famous foreseer of the 2008 crash John Paulson picked up 300 million shares of beaten-down Citigroup in the third quarter, regulatory filings show today. The fund manager also sold his entire stake in Goldman Sachs and a big chunk of JPMorgan Chase — widely believed to be the only two “safe” blue-chip banks.

  As the U.S. economy “recovers,” our trade deficit has expanded by the greatest margin since 1999. September deficit came in at $36 billion, the Commerce Department reported Friday. That ‘s an 18% jump from the month before, the biggest in 10 years. Imports rose 5.8%, the biggest jump in 16 years.

  “I think you guys missed commenting on the real point,” a reader writes referring to Friday’s issue. “So the Treasury says now it will not SPEND as much on TARP as initially allocated. And by NOT spending this it will pay down the debt. This is typical government nonsense — like when they say that not increasing a future payment for something in the budget amounts to a cut.

“But not spending funds allocated for TARP at best can reduce the annual deficit by that amount — presuming it is not spent on something else. Not spending on something will NOT reduce the debt — at best it will result that the debt is not INCREASED by quite so much.

“OK — so say the Treasury puts the unspent funds from TARP into the box called debt reduction — meaning reducing the current total debt. The result will be that the future increase in total debt will be the same and the end result will be the same. Spending it would increase the debt, but not spending it will not decrease the debt; it will simply not increase the debt as much as if it were spent.”

   “When and if the gold frenzy tapers off, how does one sell gold coins?” a reader asks. “Can they be sold for market value or will they have to be sold at a discount?”

“Wouldn't it be wiser to buy gold bullion just for its weight in gold rather than pay a higher price for graded coins?” another reader asks. “And if you do buy bullion for its weight, must it be circulated, or does it matter?”

The 5: We got a slew of great questions from you about investing in gold and silver coins. Thanks for writing in.

We got so many questions, in fact, we're going to bring in our friend Nick Bruyer to answer them for you. Nick, you'll recall, is one of the worlds leading experts in rare coins and collectibles. Back when Odyssey Marine found $500 million worth of coins off the coast of Gibraltar, it was Nick who was flown in to their ship to assess the value.  Now we're going to bring him in to assess your questions first hand. 

We're just about done compiling the best and most popular questions for him... but if you have a last minute submission send it now. Stay tuned on this one. There's much more to come.

Best,

Ian Mathias
The 5 Min. Forecast

P.S. “Cattle Farmer Makes $140k Watching T.V.” reads a headline that just got tossed on our 5 Min. desk. Read this odd story here… and find out how you could do the same.

by Addison Wiggin & Ian Mathias

• Government issues Friday the 13th scare… 2010 fiscal year on track for ANOTHER record deficit
• Who’s buying our debt? Chris Mayer offers a surprising chart and sober forecast
• FHA spills the beans… audit reveals leverage that would make Fannie Mae blush
• Jim Nelson on a man you need to know: The saga of Richard Norris Williams II
• Wall Street delusion his new level: Goldman Sachs and their mission from God, below

  Friday the 13th… let’s start spooky: Just one month into the 2010 fiscal year, the U.S. government is on track for a record $2 trillion annual budget deficit.

That’s the word from the Treasury Department, which quietly announced a $176.4 billion October budget deficit yesterday. Oh, let us count the records… record-high deficit for all Octobers, record 13th straight month of budget deficit and the fifth largest monthly shortfall on the books. Should we maintain this trajectory for the rest of the fiscal year, Uncle Sam will have accrued a $2.11 trillion tab -- a record deficit even compared with last year’s $1.4 trillion mess. The Congressional Budget Office currently projects a $1.4 billion deficit for 2010… wouldn’t that be nice?

“We’re seeing deficits projected for the next 10 years of over a trillion dollars a year,” said Sen. Judd Gregg of New Hampshire, implicitly explaining why he was pseudo-fired as Commerce secretary. “It’s not sustainable. It’s not fair and it’s not right.”

  Nevertheless, the White House will soon begin petitioning Congress to raise the national debt ceiling yet again. On track to punch our public debt through the current “limit” of $12.1 trillion sometime in December, the Obama administration is rumored to be lobbying for a $1-1.5 trillion increase.

  And get this… in a weak effort to placate increasing public ire, the Treasury has promised to pay off some of the national debt with TARP leftovers.

“We are likely to have to borrow substantially less than we initially anticipated to help repair the damage for our financial system,” Treasury Secretary Geithner admitted this week. “That is going to allow us to devote greater resources to debt reduction. That is a fundamentally good thing. It justifies the basic judgments the president made…”

Heh, forgive us for not feeling justified just yet, Mr. Geithner.

Current estimates from the Office of Management and Budget say the Treasury could use as much as 210 billion TARP bucks to pay down some debt. A drop in the bucket… but we’ll take what we can get.

  Would you be willing to help pay down our national debt?

  “As I write, you can buy a 10-year Treasury note and get a 3.45% yield,” Chris Mayer notes. “Or you can tie up your money for 30 years for the grand reward of 4.39%. To me, those look like really bad deals. Investors who buy those things are bound to lose money. Yet there those yields sit… and people are buying. It makes me feel like the only sober hand in a poker game.

“The government, I probably don’t need to tell you, is running huge deficits and has a massive pile of debt and obligations. There is no way to make it work as is. The most likely way out for the U.S. government is to devalue the dollar by printing all it needs. Given that, I just don’t see how government paper is at all attractive at those puny rates.

“Eric Sprott, who runs a successful hedge fund in Canada, presented a chart at the last Value Investing Congress that solves some of the mystery. It answers the question who bought government debt:

“Economic buyers are people like you and me. We buy things because we think they are cheap and will go higher in value. As you can see, economic buyers were net sellers of government debt. No surprise.

“So that leaves the so-called official buyers. These are the Federal Reserve and foreign officials. These guys buy things for political reasons. The Fed buys paper to keep interest rates low. A foreign government might buy it to, say, keep its currency peg with the dollar. In any event, it is not sitting there thinking primarily about how to make a profit.

“And how can the Federal Reserve buy government debt? Isn’t this a little like taking your spouse’s debt? Yes, yes it is. It’s a very strange world we live in.

“All is to say that the yields we are seeing in the Treasury market are manipulated. I don’t know how long this game goes on. I do know that it’s not sustainable. Whatever happens, it’s bad for the value of the U.S. dollar.”

Here’s some value for your U.S. dollar: One month of Chris’ investment advice and four of his favorite natural gas stocks for just one single greenback. There is simply no better deal being offered in our industry at the moment… get your $1 Mayer’s Special Situations trial before this offer expires.

  The dollar index goes for 75.4 today, right around yesterday’s score.

Gold is taking a breather too. The spot price is at $1,115 an ounce as we write, $8 off yesterday’s record high.

  Just as we forecast, the Federal Housing Administration revealed yesterday that it will likely need a government bailout. The results of an external audit (after being suddenly delayed for a week) showed the FHA’s capital cushion to be just 0.53% of its portfolio of insured mortgages. That’s way below the 2% mandated by Congress.

In other words, the FHA has just $3.6 billion in reserves to back up a $679 billion book. That’s into the Fannie Mae stratosphere of leverage insanity, worse than anyone expected, and way, way beyond the Wall Street risk taking our government has so publicly vilified.

Of course, a huge portion of these loans are easy-money, 3.5%-down mortgages designed to replace the subprime market and keep housing afloat during the last few years… and we’ve chronicled before their alarming rates of delinquency. The FHA’s auditors said that under adverse housing conditions, the administration could be out of money by 2011 and require a $1.6 billion injection. We hasten to add last year’s audit forecast the FHA would have a $15.8 capital cushion today… only off the actual reserves by about fivefold.

But when the FHA comes to Capitol Hill with their tin cup, don’t call it a bailout. “There is no extraordinary action that Congress or anyone else needs to take,” said HUD Secretary Shaun Donovan. He’s right… long ago, Congress granted the FHA to borrow from the Treasury with relative impunity.

The FHA is also quick to point out that it has about $26 billion in a “financing fund” -- a pool of money used to pay claims on defaulted loans. Coupled with reserves, they claim it’ll be enough because -- of course -- it’ll be different this time: “The story of FHA's financial status at the end of FY 2009 is, then, the tale of two portfolios," Donovan told Congress. "The older portfolio has high rates of delinquencies and is expected to have high rates of insurance claims in the future. The new portfolio, which soon will be larger than the older portfolio, is expected to have more modest claim rates over the life of the loan guarantees."

  These are all problems for the stock market of the future. Despite yesterday’s pullback, major stock indexes will likely finish the week up about 1.5-2%.

  “The name Richard Norris Williams II might not ring a bell to you,” Jim Nelson wrote to his Lifetime Income Report readers yesterday. “But in the 1920s, everyone knew who he was. In 1912, 21-year-old Williams gained fame as a survivor of the sinking of the RMS Titanic. Later that year, he went on to earn his first U.S. mixed tennis championship. Now a member of the International Tennis Hall of Fame, there wasn’t much Williams didn’t win. He was a 1924 Olympic gold medalist, Wimbledon champion and a five-time U.S. tennis champion.

“On top of all his accomplishments, he was also a highly successful investment broker. He became a partner in an investment firm called C. Clothier Jones & Co. in 1929. His business partners in the small $5 million ($61.5 million today) firm were some of the brightest, most successful investors in the world.

“Of course, after the stock market hit the skids in 1929, the company took a hit. But thanks to the rally in first half of 1930, C. Clothier Jones & Co. was in better shape than ever. He was on top of the world in the spring of 1930. But just like the year before, market speculators pushed stocks higher than they were worth. By late summer, the rally turned into another massive sell-off.

“When October came around, Williams and his partners were doing everything they could to stay in business. Their investments turned to dust, and they were so incredibly overleveraged the only course for them was to fudge some numbers and blatantly lie to shareholders. Williams left the country in mid-October to get married in Europe. By the time he returned, he was a wanted man, for market manipulation. Four of his colleagues and large investors in the company had ended their own lives in that single week…

“We’re fortunate to have history lessons when trying to figure out the market. But there are certain aspects of today’s market that just weren’t there in 1930. Some, like emerging economies, give us a serious advantage over our forefathers. Even if the average investor of 1930 were aware of a possible second downturn, his options would be incredibly limited. Only a millionaire in 1930 could invest in other, safer economies.

“Today, it’s as effortless as buying an ADR through your online broker. We’ve ramped up our portfolio to reflect our favorites: Asia, Africa and Latin America.” For these emerging market income opportunities, read Jim’s Lifetime Income Report.

  Another Depression-era theme reborn: The middle class has turned to shoplifting to keep up the appearance of financial stability. Check out this report from the U.K. Times Online and retail security firm Checkpoint Systems:

“Quality cuts of meat, fresh fish and high-priced cheeses are being taken by mostly middle-class women from speciality food and convenience shops, where thefts have risen sharply in the past year. Thousands of retailers have found that luxury foods are being stolen for individual use, rather than to be sold on.”

The duo claims that shoplifting in the U.K. has increased 20% in the past year, led by theft in clothing, fashion accessory and home improvement stores.

  Last today, more proof that Wall Street has learned little or nothing from the credit crisis: Two Goldman Sachs executives have recently suggested that GS is “doing God’s work.” That first quote comes from CEO Lloyd Blankfein himself. He told The Sunday Times, "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle."

“The injunction of Jesus to love others as ourselves is an endorsement of self-interest," pontificated Brian Griffiths of Goldman Sachs Intl. inside London’s St Paul’s Cathedral a few weeks ago. For some reason, we just can’t hear Christ saying this one: “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all."

Incredible, right? This is definitive proof to us that “Old Testament God” is no longer around, lest it would be raining sulfur both here and in foggy London town. Rolling Stone’s gonzo journalist Matt Taibbi had another worthy retort to this truly amazing level of delusion. We share his final conclusion… “What a bunch of a$%holes!”

Have a good weekend,

Ian Mathias
The 5 Min. Forecast

P.S. With gold at new all time highs every day, our inbox has been getting more than the usual amount of questions concerning gold and silver coins. Unfortunately, we can’t respond with anything useful… since we are not licensed brokers (thank heavens), the SEC insists that we never offer any kind of personalized investment advice.

So here’s the deal: If you have questions about investing in coins, fire ‘em over to this address. We’ll pool the most popular and figure out a way to respond in a way that doesn’t get us in trouble with Uncle Sam.

by Addison Wiggin & Ian Mathias

November 12, 2009

• Stalled stimulus: New housing market data shows what’s in store for “recovery”
• Marc Faber on the “precarious position” that now plagues ALL investors
• Tim Geithner cheers for “strong dollar” policy… Dan Amoss analyzes the market’s reaction
• Byron King on taking profits in these uncertain times

  Can the American recovery persist without government support? Today the market gave us a hint:

Heh, it didn’t even take actual removal of government intervention to sack mortgage applications, the MBA confirms today. As we noted earlier this week, the tax credit was extended and expanded into the spring of 2010. Just the anxiety of its Nov. 30 expiration alone (or perhaps savvy homebuyers waiting to see if they were going to get a better government deal) plunged the mortgage applications index to 220 last week, its lowest score since 2000.

And what a coincidence, too… the previous low was in early February of this year, right before our government enacted the homebuyer credit.

  A few more quick hits on the housing front today:

The median home price in the U.S. fell 11% in the third quarter, year over year, said a report from the National Association of Realtors. The median price came in at $177,900 after recorded sale prices fell in 123 out of 153 metropolitan areas in the U.S. during the quarter. The NAR also said that 30% of sales were distressed.

And speaking of distressed sales, a total of 332,292 properties suffered foreclosure in October, RealtyTrac says today. That’s a 19% annual jump and the eighth month in row in which foreclosures exceeded 300,000. According to the firm, one in every 385 U.S. households was in some form of foreclosure in October.

So… prices still plummeting and foreclosures still soaring, despite waves of distressed sales and government manipulation (tax credits, fed purchases, etc)? Not our image of recovery.

  “Central bankers and pundits seem to believe that they have averted the second Great Depression,” Marc Faber wrote in yesterday’s Daily Reckoning, “while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

“For now, though, the low 10-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap -- not by the volition of a cooperative private sector, rather induced by a U.S. government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

“Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

“Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much, in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.”

Keeping watching The Daily Reckoning for more from Dr. Faber, including an exclusive interview we’re just wrapping up today… details soon.

  The dollar index is a bit higher today after Wednesday’s 15-month low. It scores 75.2 as we write. Amazingly, this BS is helping its rise today:

“I believe deeply that it's very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar," Treasury Secretary Tim Geithner told reporters in Japan yesterday. Mr. Geithner is buttering up the Asian population before President Obama’s visit with tear-jerkers like, “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors… and savers, but investors around the world.”

Heh, we’re sure the Japanese took that one to heart. They’ve seen the “confidence” created by years of easy-money policies.

  The U.S. government will finish its historic streak of debt sales today with a record $16 billion offering of 30-year bonds. This will pile on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly -- so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question. If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast. The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

“The market may force the Fed to defend the dollar with interest rate hikes. This is type of currency crisis, in which Fed tightening comes earlier than expected, is totally outside of consensus expectations. An imminent financial crisis was also far outside of consensus expectations in early 2007.”

And if the Fed is forced to tighten before the stock market desires – or if the Treasury suddenly fails to find enough demand for its debt -- you better be one of Dan’s Strategic Short Report subscribers. Learn how he can help you conquer the next crash, right here.

  Our government’s “strong dollar” policies and record bond auctions have pushed gold to yet another record high today. The spot price hit $1,123 in Hong Kong trading early this morning.

  "1,100 per ounce at the moment is probably more a U.S. dollar story," said AngloGold Ashanti CEO Mark Cutifani. Cutifani, who manages the world’s third largest gold producer, said the spot price could trade down to $900 an ounce in the next few months.

  On the other hand, “There is a strong case to be made that we are already at 'peak gold,’" CEO of Barrick Gold (the world’s biggest producer) Aaron Regent said yesterday. “Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore.” Regent says Barrick is still committed to breaking down its 3 million ounce hedge book, an explicit bet on higher gold prices in the future.

  “If you need cash in the next year or two,” Byron King wrote to his readers yesterday, “say, for tuition or a major purchase or to care for a relative in a nursing home -- then now's a good time to benefit from the recent appreciation in gold stocks. The rising tide lifted your boat. Don't let a falling tide smack your hull onto the rocks. Book the cash and set it aside in an insured bank account.

“Just to be clear -- I'm NOT issuing any sell recommendations for the official Outstanding Investments portfolio.

“I'm just discussing what to do now that we've benefited from rising prices for gold and silver. If you've been following the OI portfolio for more than a year or so, you've probably got some nice gains. I still like all the companies whose stocks we own. I just don't like or trust the stock market, let alone what's happening to the U.S. economy.”

  502,000 Americans filed for unemployment benefits for the first time last week, the Labor Department says today. You’re supposed to find comfort in this data, as that’s the lowest level sine January and less than the 510,000 the market expected. So yeah… “only” half a million people sought unemployment insurance last week… feel better.

  Last today, some multilayered irony: The global art market has proved its resiliency by selling a painting of U.S. dollars.

It’s not a painting, actually, but a silk screen of "200 One Dollar Bills" carefully selected and arranged by Andy Warhol. The 1962 piece is worth $43 million to at least one collector -- a yet-to-be named buyer who scored the winning bid at a Sotheby’s auction yesterday. That was four times the estimated sale price, the second most expensive Warhol bid ever, and ipso facto evidence that while most of the world is cutting back, very rich people are still inclined to pay through the teeth for fine art. The entire auction sold all but two of 54 lots for $134 million, about 38% bigger than pre-sale estimates.

  “I do not consider myself conspiracy theorist,” a reader writes with, you guessed it, a conspiracy theory in tow, “but this has to be the most manipulated market of all time.

“I am a small-business man, and there is no recovery on the horizon. It smells like something on the ‘margin’ is about to trigger a crash of all crashes. I not know when, but sure wish I did. If the market were still wallowing in the 6,500-7,000 (Dow) range, there might be some hope going forward, because it would mean that business and Americans were retrenching for a REAL move forward. Right now, it is a smoke-and-mirrors economy. When the crash occurs, the only people standing are going to be those on Mr. Dodd’s donation list, and we will all be subservient to the great corporatists and Uncle $am. I sincerely hope I am delusional and wrong, but I know I am not!”

  “Please help!” another reader exclaims. “I don't get how this China data could cause our market to go up. Their industrial production surged. OK. Their internal consumption is up sharply. Gotcha. Are WE the ones selling them the stuff for this production? Are OUR exports to China increasing? Is the balance of trade actually coming into balance? Or is this all Chinese internal consumption? The Dow's increase on this news gives me the impression of starving people in the street outside an expensive restaurant partying because people inside are enjoying a good meal.”

The 5: And if you read yesterday’s 5, it looks like that great meal is getting paid with American AND Chinese debt. Getting interesting, eh?

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. For every $1 that gold goes up, you could make $3. Find out how in Byron King’s latest special report: Triple Your Gold Gains With "Slingshot Options" 
 
 

by Addison Wiggin & Ian Mathias

• The next mega-bubble: “Dubai times 1,000,” says famous short seller
• Senate moves to clip the Fed, set up three new agencies… The 5 boils down the biggest financial reform in U.S. history
• Chris Mayer seeks out the “Warren Buffett of India”
• Dollar makes another low, gold a new high… one resource that’s still “sharply undervalued”

  Could the new Empire of Debt be… China?

The People’s Bank of China extended $37 billion in domestic loans in September, the bank reported today, bringing the total to $1.27 trillion in new loans in the first nine months of 2009. That’s a 136% increase from the same period last year. Total lending in China climbed to 140% of GDP by midyear, says a study by Pivot Capital Management.

It’s hard for us to tell what that really means for the Chinese. But generally speaking, doubling the amount of easy money in just one year tends to inflate a bubble or two. In the same report, the Chinese government said M2, a measure of money supply, rose a record 29% year over year in September.

“China has embarked on a capital-spending bubble the likes of which the world has never seen,” famed short seller Jim Chanos claimed recently. “Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned.”

Heh, here comes the money shot: “China is Dubai times 1,000, if not a million,” he said. “At some point, all of this (ill-advised) investment will come home to roost.”

  Back in the States, Congress is trying to clean up the mess from our own easy money fiasco. Grab your galoshes… some serious slop to wade through today.

Sen. Chris Dodd unveiled a whopper of a bill, one that might cause the biggest financial and monetary shakeup… umm… ever. Like most of Congress, we’ve barely cracked the 1,136-page affair… but here’s what we’re picking up thus far:

• Under the proposed bill, the Fed gets stripped of almost all its banking oversight and consumer protection powers. Bernanke and company will be used only to determine monetary policy.
• The bill would create three new government agencies:
  • One would be designed to regulate banks, essentially combining the current powers of the Fed, the Federal Deposit Insurance Corporation, the Comptroller and the Office of Thrift Supervision
  • The second new agency -- the Agency for Financial Stability -- would be a “council of regulators” that would monitor systemic risk, enforce capital standards, limit leverage and even break up companies if Congress sees fit
  • The third agency would be called the Consumer Financial Protection Agency, which will save us from ourselves by regulating consumer mortgage, credit and investment products
• The SEC, for all its glory, gets more power and more money.
• Hedge funds with more than $100 million will have to register with the SEC and disclose more information. Investment advisors and ratings agencies will also be targets for stricter oversight.

Looks like the most complicated regulatory system in the world is about to get much more complicated. Well keep an eye on it.

  The real question: Who will benefit from these proposals? Follow the money…

Shameful. How’s this for reform… the world’s biggest banks should not be allowed to buy a campaign for the chairman of the Senate Banking Committee.

  But the inflation of easy money bubbles and the messy aftermaths are of no consequence to the markets today. Stocks of the world are rising thanks to some other data from China, specifically its latest industrial output and retail sales numbers. The Statistics Bureau in Beijing reports today that industrial production rose 16.1% year over year in October (thanks largely to all those cheap loans) and retail sales rose 16.2%. Coupled with a nearly doubled trade surplus from September to October, China is once again at the center of the global recovery trade.

This vibe helped the Dow and S&P up to a 1% gain in morning trading.

  “The market in general has edged back somewhat,” notes our tech analyst Patrick Cox. “Index and other broad financial instruments are no longer the bargains they were when the market was on its knees and whimpering. No one has real faith that this uptick will last, though, so most investors are still ‘playing it safe.’ This means they are avoiding emerging technologies, which are, in turn, underpriced.

“This is always the case in uncertain markets. When markets are shaky, the vast majority of individual and institutional investors flee risk in favor of ‘proven’ investment opportunities. This is clearly the case today, and we may never see another time like this.

“But scientific and technological progress cannot be stopped. It is, in fact, accelerating. If you need evidence, check out the new Motorola Droid.  Moreover, globalization has expanded the scientific and financial playing fields dramatically. Top American researchers are being wooed by Asian and Eastern European companies. If the U.S. legal/legislative oligarchy hobbles our pharm industry, research and development will shift offshore. So will our portfolios.”

  Today’s sign of the times: Behold, the world’s new market leaders:

India, the only BRIC nation that didn’t make the top 10, was just behind with a 70% year-to-date gain. Not a single G-7 nation is even in the top half. (Addison Wiggin just finished a report on this trend – and how you can continue to profit from it. Details here.)

  “As in early 20th-century America, the Indian stock market is still finding its sea legs,” notes Chris Mayer, a long time India bull. “When we were in Mumbai a few weeks ago, I asked a local analyst who are the Warren Buffetts and Peter Lynches of India. He said there really aren’t any. The leading stock market speculators are men of ill repute. They have shady reputations for manipulating markets, just as early U.S. speculators did.

“And there are lots of speculators. Optimism prevails. In this, it’s no different from the early U.S. ‘bucket shops’ written about famously by Edwin Lefèvre and others, where the working Joe would gamble on stocks, hoping to get rich.

“There are also few dividend payers of any significance in the Indian stock market. A 4% yield is a lot. It makes sense, though, given that India is a rapidly growing market. Reinvesting the money is often a better choice than paying a dividend.

“The most frustrating thing is that the market is still mostly closed to U.S. investors. We simply can’t buy the stocks on the Bombay Stock Exchange, for example. There are some that list in the United States and are easy to buy. Beyond specific stocks, the best way to invest in India is through a fund that can own all these stocks that you otherwise can’t buy. I’d expect this to be an up-and-down idea, but over the long haul, such a fund ought to beat U.S. market returns by a solid margin.

“Finally, there are indirect plays on what India — and the rest of the emerging markets — need. We are invested in energy and fertilizers, for instance, two things such markets will need in abundance. I’m also looking again at various infrastructure plays — companies building stuff the world needs — here and everywhere.”

Chris has a specific array of Indian stocks and funds in his Capital & Crisis portfolio… gain access to it here.

  The U.S. dollar briefly touched another 2009 low this morning. The dollar index struck 74.7 but quickly rebounded back to support around 75.

  That’s good enough for yet another record high for gold: $1,118 an ounce this morning.

  Interestingly, silver is standing still. Around $17.50 an ounce, the silver spot price hasn’t even beaten its October high of $18, let alone 2008 levels of $21 a pop.

“Continued dollar weakness combined with gold making ALL-TIME highs once again leaves silver sharply undervalued at these prices,” opines our resource trader Alan Knuckman.

“A move above $18 an ounce sends silver on a quick run to test the modest 2008 highs at $21. That target is over 15% above current silver prices and very attainable in this bullish metal market environment.”

  “To the people who are out of work and wrote into the 5 Min. Forecast whining,” a reader writes of our debate on extending unemployment benefits, “I wonder… How many of you SAVED some money for a rainy day when you were working? How many of you went out to eat several times a week, or spent money on things you did not need?

“I was raised during the 1930s Depression. You still do not have it as hard as we had it back then -- no help from anywhere or from anybody. Most poor people today have it much better than most people had it back then… In the ’30s, our family took our baths in the kitchen in front of the coal stove with the oven door open, the water heated on the stove for the bath, taking turns, first my brother then me, my Mom & then my dad. At times I burned my fanny because I had gotten too close to the oven door.

“That is why my family can now ride out this serious crisis, because we saved and only bought the things we needed. Now it is your turn to learn the lessons that we learned in the 1930s and early 1940s. Your government cannot help you. It is bankrupt.”

The 5: For better or worse, we’ll let this gentleman end our conversation on extending unemployment benefits. If you care to continue, take it to the blog. No doubt we’ll visit this topic again in a few more months.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• Stocks rise, but not on good news… Dan Amoss explains the new driver for U.S. shares
• American productivity soars, signals recession’s end… why Rob Parenteau isn’t celebrating yet
• One of the most rational charts we’ve seen in a long time
• Frank Holmes on how India’s gold buy could send the spot price up 30%
• Plus, the debate rages on… more of your thoughts (and a solution!) on extending unemployment benefits

  Stocks rose yesterday -- a lot. With a 2% jump, the Dow reached 10,226, its highest level of 2009. The S&P 500 fared even better.

As we briefly mentioned Monday, it wasn’t earnings or economic data that sent stocks to new highs. Instead traders got the nod from the G-20, whose members hinted that they will likely keep ultra-low global interest rates for the foreseeable future.

  “Rather than a rebound in jobs and household income,” writes Dan Amoss, “the stock market seems to be pinning its hopes on limitless free money from the Federal Reserve. But with an undercapitalized banking system, most of this zero-interest-rate money is not working its way out into the economy.

“Instead, this zero-interest rate policy is prompting rational investors -- including foreign creditors who hold trillions in U.S. Treasuries and agency bonds -- to accelerate their moves into inflation hedges like gold and commodities. The Fed may think it has ultimate control over its monetary policy, but those who already hold dollar-denominated assets play an important role. And many of them, after putting up with lots of abuse, and the promise of zero rates of interest on their savings, are voting with their feet.”

  Thus, perversely, the “American rebound” stock trade is more and more dependent on a steadily weakening dollar. As stocks soared yesterday, the dollar index found its own 2009 benchmark… a yearly low of 74.9. Looking at both together… hmmm… something is wrong with this picture.

  “There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” reads an IMF report from the weekend, confirming a suspicion we shared back in September. The IMF report was meant as a warning to its clients and colleagues… the group noted that distorted dollar values here have contributed to “upward pressure on the euro and some emerging-economy currencies.”

As Nouriel Roubini has recently hinted, we suspect cheap dollars are contributing to a rise in nearly everything.

(If you are looking to profit from the dollar’s decline, you should check out Master FX Options Trader right now. Today is the last day we’re offering a hefty discount this elite currency trading service.)

  “Productivity growth is one of the keys to escaping a recession,” writes Rob Parenteau in response to last week’s productivity report from the Labor Department. If you didn’t hear, it was a doozy. Their measure of worker productivity soared at an annual rate of 9.5% in the third quarter… the product of slashing labor forces and cracking the whips on those still employed.

“As you can see from the chart below, it is usually only in the first year of recovery that year-over-year labor productivity growth breaks through 4%, as it just did in Q3. When combined with hourly labor compensation growth now screwed all the way down to a 0.5% pace, falling unit labor costs are the result.

“Unquestionably, labor productivity gains are one key driver of long-term growth. But here is the hitch we see developing: Small businesses appear to be on the ropes. Large businesses have cut to the bone. Both GDP and S&P 500 profit results indicate companies that are achieving high labor productivity and lower unit labor costs have, so far, been able to hold onto these gains through higher profit margins. However, if U.S. firms do not step up the reinvestment of these profits into the real economy, by lifting production up enough to first end the inventory contraction and begin inventory rebuilding, and then also stepping up their reinvestment of profits in more efficient technology or new products, then the nascent U.S. recovery will sputter out…

“To put it in the extreme, labor productivity gains will not get us very far if the profits generated from them do not start getting ploughed back into voluntary inventory rebuilding and reinvestment in capital equipment.”

  The British pound is one of the few global assets worse off than the U.S. dollar this week. The U.K. currency is plunging this morning on yet another threat of sovereign credit downgrade. It’s Fitch’s turn to threaten Britain’s AAA. The ratings agency said the U.K. is, of all AAA countries, the one in need of “the largest budget adjustment.” While not as bold as the “credit watch negative” outlook S&P cast on Britain in May, it’s certainly not helping matters for the ol’ pound. It’s down 2 cents from yesterday’s high, to $1.66.

Shame the U.K. doesn’t do more business with Fitch… maybe they could have bought their way out of this report.

  Gold found another record high yesterday -- $1,110 an ounce. Why? Allow us to share the most fundamentally rational gold chart we’ve seen in a long time, courtesy of a perennial favorite at our annual Investment Symposium, Frank Holmes:

“Annual gold production is on a downward trend,” Mr. Holmes notes, “while the growth in money supply in both the United States and the eurozone is bent almost straight up. Economics 101 -- more money competing for a declining resource tends to drive up the price of that resource…

“The presence of a big bullish buyer [India] tends to create a big bullish buzz for gold. We’re seeing it now -- gold on Friday surpassing $1,100 an ounce -- and history suggests it may last a while.

“Around this time in 2005, for example, Russia announced that it was doubling its gold holdings from 5% to 10% of its reserves. At that time, gold was selling for about $490 an ounce. A year later, the price was up 30%.

“Of course, Russian purchases weren’t the only thing that drove up gold -- back then, the dollar was dropping, federal deficits were colossal, markets were volatile and investors faced negative real interest rates.

“We have the same conditions now, but on an even greater scale following the credit crisis, steep recession and the massive economic stimulus programs created around the world… Our consistent suggestion is that investors consider a maximum 10% allocation to gold -- half of the exposure in bullion and the other half in gold equities.”

   At $79 a barrel, oil’s been sitting still so far this week. But we’re barraged with crude oil forecasts today… here’s the quick and dirty:

· Global oil demand will grow 700,000 barrels per day next year, OPEC forecast today. The group cited China and India as the main drivers behind the improved forecast
· Goldman Sachs maintained its forecast for $85 a barrel by year-end and $95 a barrel by then end of 2010
· Global oil consumption will average 86.1 million bpd in 2010, the International Energy Agency offered in a report this morning. That’s the third month in a row it’s increased their forecast.

  The U.S. Treasury easily pulled off a record huge sale of 3-year debt yesterday. Despite all the global talk of “bond vigilantes” and foreign disgust with U.S. debt issuance, these huge auctions are always a hit. The Treasury moved $40 billion in 3-year paper at a 1.4% yield yesterday -- even less than the going rate, thanks to an amazing $133 billion in bids. That’s actually the highest bid to cover ratio (3.3) for 3-year notes since 1990.

   We bet some of that fresh Treasury financing will end up with the Federal Housing Administration. We’ve been over the FHA’s woes before. Today we hear that the group has suddenly delayed the release of the long-awaited results of an independent audit. Due out late last week, the new release date was bumped to an indefinite day sometime this month, with FHA officials citing the “modeling accuracy” of their auditor. Fishy…

Whenever the audit does come out, we expect to see FHA reserves have fallen below the federally mandated 2% of outstanding loans… and a Treasury handout to follow.

  Speaking of the FHA, President Obama officially extended and expanded homebuyer handouts on Friday. Due to lapse Dec. 1, the new legislation will bump the $8,000 first-time buyer tax credit back to April 30, and now existing homeowners can get a $6,500 credit toward another home (under certain conditions). Income caps on program eligibility are up too.

  Mr. Obama also put his seal on the extension of unemployment benefits. This marks the fourth such extension in the last 18 months. We’ve hit the details already. See below for more opinions on the matter.

  “It’s amazing how quickly social power erodes,” a reader writes on our blog in response to the ongoing debate we’re having over extending unemployment benefits.

“Our government has become the ‘last resort’ for so many things, the association becomes implicit. If the government is helping me, there must truly be no one else I could turn to, for why else would the ‘last resort’ intrude? With government at hand to help, there is no need for any other safety net -- what, competition? There was once an idea called charity, and people whom we knew as family, but it must go by another name now, as no one seems to have heard of it.

“And lest we forget. People who are ‘in trouble’ now are not the ones who prudently saved for years. Are the spenders too proud to ask for help now? And why should I help, giving what I’ve scrupulously saved; are they now wise and thrifty?”

  “Why not give those who maxed the unemployment benefits,” a reader writes, “a government loan at the same monthly amount, and at the same interest rate the government is charging the banks? Such an arrangement can go for a long time and save people livelihood, while not being a gift.”

  “Why not provide a set number of weeks of benefits,” another suggests, “set daily based on market data of current unemployment rates and other data. After that is exhausted, provide a deferred loan up to X dollars that gets paid back automatically out of an individual’s check once they get a job. The loan must be paid back with an interest rate of CPI + 1% (where the 1% will be put back into the benefits system). Folks who don't work (like many of my family) will pay back such loans through the loss of tax credits (e.g., child tax credit).”

The 5: Well… why not?

Ian Mathias
The 5 Min. Forecast

P.S. Last call for a big discount on our most popular currency trading service. Master FX Options Trader remains on sale until midnight tonight… get in on the cheap before it’s too late.

by Addison Wiggin & Ian Mathias

• NYT, LA Times, Drudge Report all extol gold’s virtues… and our editors take profits
• John Williams on why Friday’s jobs report was even more fishy than usual
• Chris Mayer solves a worthy puzzle… how does one export potable water to China?
• Plus, readers rise against The 5… our thoughts and theirs on expanding unemployment benefits

  When two of the world’s biggest newspapers write big Sunday pieces on one of your favorite investments, is it time to cash out?

Heh, if you answered yes, sell some gold today.

Both the New York Times and the Los Angeles Times are making our contrarian bone ache with weekend edition titles like “Inside the Global Frenzy for Gold” and “Why Gold Is Shining Brighter.” They’ve helped push the spot price to $1,110 an ounce early this morning, yet another record high. Addison Wiggin and Bill Bonner have repeatedly said that the “trade of the decade” is still on, but the media is making it hard on us today. Geesh… Matt Drudge’s big, bold headline this morning -- even bigger and bolder than the healthcare reform news -- “Gold Hits Record High as Dollar Wanes.”

  Let the record show that both Chris Mayer and Dan Amoss told their readers to sell some of their gold stocks Friday, but neither left the market entirely. Chris’ Capital & Crisis readers took 112% profits by selling half their stake in one of his favorite gold miners. Meanwhile, Dan’s Strategic Short Report readers bagged a quick 68% trading options on a gold miner ETF that were set to expire in January.

“At the risk of stating the obvious,” Dan wrote to his subscribers, “we don’t want to lose sight of the fact that gold stocks are ’stocks.’ Aside from the movement in gold bullion prices, gold stocks are sensitive to the overall level of the stock market. My lack of confidence in the broad market holding up tells me that now is a good time to take profits on our Jan. $40 GDX calls.”

(By the way, if you want to get in on Dan’s next trade, we just started offering a monthly billing option for Strategic Short Report… nice way to try your hand in that game o’ poker.)

  The stock market remains resilient today. Friday saw a meager 0.3% gain for the S&P 500, surprisingly good given the lousy jobs report. GE was the hero of the day, rising over 6% after a few analyst upgrades and word that it was close to jettisoning its share of NBC.

Traders bid the S&P up 1.5% by lunchtime today after a wink and nod from the G-20… if the weekend G-20 meeting revealed anything, it was that member economies intend to keep rates low and bailouts around for a while longer.

  Friday’s jobs report was even more statistically screwed up than usual, reports John Williams of ShadowStats fame.

“Last month, the BLS found it had a flaw in its payroll surveying that was going to require a very large annual benchmark revision. Current underestimation of monthly jobs loss likely exceeds 200,000. In October, employment was down by 589,000 per the household survey [an alternative employment measure], versus a 190,000 jobs loss reported in the payroll survey [the headline jobs report]. Underlying employment series are more consistent with the reported household survey than the payroll survey, which is known to be flawed at the moment.

“While the payroll survey is more broadly based, the BLS never knows what it really is receiving in data (did a company just not get its report in on time, or did it go out of business?), and revisions over the last year or two have been well outside the bounds of the estimated confidence intervals.”

  Five more banks failed over the weekend, including the fifth-largest banking death of 2009. California’s United Commercial Bank’s $7.5 billion in assets makes it one of the bigger busts in recent history. Atop the four other failures this weekend, the FDIC has now shuttered 120 banks in 2009. All told, it’ll be another $1.5 billion out of the FDIC’s deposit insurance fund, which is rumored to be around $9-10 billion in the red. Kudos to The Journal for keeping tabs on this mess.

  Like Fannie Mae last week, Freddie Mac posted a multibillion-dollar loss late Friday. The company lost over $5 billion last quarter but swears it will be able to keep afloat without more government aid… like they said last quarter, and the one before, and the one before. So far Freddie has tapped Uncle Sam for over $50 billion.

  American reliance on credit fell for the eighth month in a row in September, the Fed reported Friday. Consumer borrowing fell at an annual rate of 7.2%, or $14.8 billion in September -- another month in the longest stint of deleverageing on records that date back to 1943. Still, the mighty U.S. consumer has $2.46 trillion in debt outstanding, excluding mortgages. That could buy every stock on the Brazilian Bovespa -- twice -- or replace the entire British economic output for one year.

  The U.S. dollar is flirting with another 2009 low this morning. At 75 on the dot, the dollar index is just a tenth of a point from a fresh yearly low.

  Don’t mind us, just whistlin’ past the graveyard… the U.S. government will sell (mostly to China) $40 billion in three-year notes, $25 billion in 10-years and $16 billion worth of 30-year bonds this week – all record-sized debt auctions.

  “China resolutely opposes such protectionist practices and will take steps to protect the interests of our domestic industries,” read a statement -- a pretty harsh one for Chinese standards -- from China’s Commerce Ministry this morning. The Red Nation is reacting to a recent U.S. tarrif on steel pipes… just another line in a long list of Sino-American trade disputes lately. In response, China is readying a similar policy on U.S. poultry (again).

Sooner or later, someone’s feelings are going to get hurt. Should be interesting next week when Presidnet Obama makes his first official visit to Beijing. 

  “China is the largest importer of soybeans and has been since 2000,” notes Chris Mayer, always searching for investment opportunities amid the rubble. “China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska.

“That looks impossible against China’s arable land base, which has been in decline since 1988 — this despite the fact that China’s subsidizes agriculture. Another reason is the low level of water resources in China. (See the nearby chart ’Who Has Water… And Who Doesn’t.’) Soybeans require a lot of water — 1,500 tonnes of water for one tonne of soybeans.

“This chart is telling. Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second-largest exporter of soybeans in the world, behind the United States and ahead of Argentina and Paraguay.)

“The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs…

“So now we are in a position to connect some dots. China’s increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot of potash and phosphate. What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. We’ll need more of all of them. And all of them face the same challenges for water and land. All of them require lots of fertilizer.”

How should you specifically invest in this trend? Subscribe to Capital & Crisis to find out… do it today and we’ll throw in a fresh copy of our updated bestseller, Financial Reckoning Day: Fallout.

  Last today, we almost forgot to mention -- the House passed one of the most expansive and expensive bills in U.S. history over the weekend.

  “You are upset over 99 weeks of unemployment benefits,” a reader writes. “What you forgot is that these are regular folks who are beating down doors looking for work they will not yet find for at least six months, with families and children and rent to pay, food to buy and heating bills come winter. There's nothing between them and a mattress in a homeless shelter for their families except their unemployment benefits. The same people who get their guns off their gun racks to preserve a cross in state park seem to forget what their cross stands for. At least think of it this way -- we don't want tens of millions maxing out their credit cards to buy a loaded 9mm Glock so they can take their cash from off your body on the street. The situation is dire out there, and we need to stretch further than ever for their sake and our own.”

  “So what are the folks who are unemployed and have lost their unemployment benefits supposed to do?” another writes. “Start living in tent cities or slums like in India or Brazil? Would you want one of those in your community? It's tempting to say they don't deserve these extended benefits, but what's the alternative? And don't say ’job retraining,’ cause I know people who are in the areas more in demand (healthcare, education, IT) who are out of work.

The 5: The day Barack Obama was sworn in, we ran a picture of the millions who gathered at the National Mall  and noted, “Two million people don’t gather in one place unless things are really good or really bad. We’re having trouble telling the difference these days.”

It’s the same kind of strange fine line that has us scratching our heads on this one. We've made peace with the national safety net of which unemployment insurance is part… but when does a hand-up become a handout? Where do we draw the line between encouraging "rugged individualism" and providing "bread and circuses"... 50 weeks? 99 weeks? 150 weeks? The Great Depression lasted 10 years… how about 520 weeks of “benefits”?
 
Looks like we’re going to find out.

Best,

Ian Mathias
The 5 Min. Forecast

P.S. “I think our work now is more urgent than it has ever been,” Addison told CNN Radio on Friday. How? Why? Listen to the interview for answers… give it a minute to load up.

P.P.S. Just 48 hours remain on our big discount for Master FX Options Trader. At midnight tomorrow the price goes back up… check out this opportunity here before it’s too late.