by Addison Wiggin & Ian Mathias

• Gack! The return of the China Sneeze Play…
• Record U.S. deficits, and how China’s reacting: Watch what it does, not what it says
• Why the weekly oil inventory numbers are useless… and how to invest accordingly
• Foreclosures leveling off, but “wrong house repos” on the rise
• Readers sound off on the Census: Essential service or nefarious plot?

  Here we go again. Markets have caught a chill after signs of inflation fever in China. And that’s not even the half of it. Let’s dive in…

  Consumer price inflation in China hit a 16-month high in February -- a 2.7% year-over-year increase. China’s National Bureau of Statistics was quick to put out a statement reassuring everyone that "price rises this year will be moderate and controllable,” but that’s not enough to calm traders looking for excuses to feel jittery.

And any news that might, possibly, at some point in the future, signal monetary tightening in China… well, that’s enough to put the fear of God in them. Hence, the major U.S. indexes opened down about 0.2% in the first hour of trading. The news is also an excuse for traders to bail out of gold, which clings to $1,105 as we write.

So much for the short-term noise from China. But the Middle Kingdom is also making real news this week. We’ll get to that in a bit, but first, we bring you this item to help put it in context.

Right in line with analysts’ forecasts, Uncle Sam’s budget deficit for the month of February was $220.9 billion -- the largest monthly total in history. For the first five months of fiscal 2010, the total is $651.6 billion, 10% ahead of last year’s blistering $589.9 billion pace.

The details are even fuglier. Total revenues: $107 billion. Total expenditures: $328 billion. Yes, that’s only one dollar of revenue for every three dollars spent.

We have just two words for this: Banana. Republic.

  So what does China make of numbers like this? As it happens, the National People’s Congress is holding its annual session this week. During the festivities, Yi Gang, the head of the Chinese State Administration of Foreign Exchange assured the world that U.S. Treasuries would remain a major component of China’s reserves.

We noticed he said little about whether China would actually add to its positions and soak up some of that additional debt racked up last month.

Yi also pooh-poohed any role for gold in China’s wealth management strategy: “It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves,” he said. “I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30 billion…" barely a drop in the big bucket that contains $2.4 trillion of China’s forex reserves.

  Of course, that’s what face the Chinese government puts on for the public. Yet “the volume of China's gold reserve in terms of its forex reserves only ranks fifth in the world, and is well below the global average,” says Russell Hsiao of the Jamestown Foundation.

Hsiao rounded up some interesting stories from Chinese media that shed additional light…

• The Guangzhou Daily reported in 2008 that China's central bank was considering raising its gold reserve by 4,000 metric tons. (It’s currently 1,054 metric tons.)
• Ji Xiaonan, the chair of the supervisory board for major state-owned companies under the Chinese State Council’s state assets commission, set an even higher bar last year -- 6,000 tons by 2014, and 10,000 tons by 2019
• According to the English-language Web site ChinaStakes, a senior official from the People's Bank of China (PBoC) suggested last year that China should "secretly increase its gold holdings” as part of a long-term plan -- with the central bank buying up as much domestic production as possible.

However it turns out, “the long-term implications of Chinese debates to increase its gold reserves,” Hsiao concludes, “will have far-reaching impact on the stability of China's forex reserves and the yuan's ability to become the next reserve currency of the world. The question for Chinese leaders now appears no longer if, but how, that will come about.”

  So how do you make money from this? Other than buying gold, of course? We return to Chris Mayer’s thesis: Buy what China needs. And we’ll show you just what we mean in a bit, but first, we need to take another roundabout… to the oil market.

  Oil is holding on stubbornly to $82 a barrel this morning. It briefly topped $83 yesterday after OPEC forecast world demand to grow by 900,000 barrels a day in 2010 -- a slight increase from its estimate a month ago.

  Also fueling a rising oil price -- the U.S. government’s weekly oil inventory data. Crude inventory is up, but less than expected. Gasoline inventory is down, more than expected. According to the Energy Information Administration, domestic oil demand is up 3.8% year over year. As if any of this really matters long term…

  “Exactly why oil traders and speculators think the data has anything to do with the state of world oil demand is beyond me,” says Jeff Rubin, who walked away last year from a cushy post as chief economist at CIBC World Markets so he could speak his truth.
 
“While the U.S. oil inventories data pertains to the largest oil-consuming nation on the planet, it is no more indicative of world demand than U.S. oil production numbers are indicative of world supply. Both are in terminal and irreversible decline.

“It certainly wasn’t U.S. fuel demand that took oil prices over $100 in the first place, and it won’t be U.S. fuel demand that will push them back into that range anytime soon. U.S. oil consumption is almost 3 million barrels per day short of its pre-recession peak.” And it will never return to that peak, Rubin asserts.

Result? “As China moves from consuming 8 million barrels a day to 10 million barrels, and OPEC ramps up its own daily consumption from 10.5 million to 12 million barrels, somehow, somewhere else in the world, there must be a corresponding decline in oil consumption. That somewhere else just happens to be the U.S. market and the oil markets of the other OECD economies.”

“That’s why Saudi Aramco is far more interested in securing long-term supply contracts with rapidly expanding domestic oil markets in countries such as China and India than in supplying shrinking oil markets like those in the U.S.”

There’s China again. As we mentioned a month ago, China has now eclipsed the U.S. as Saudi Arabia’s biggest oil customer.
 

  “Last year, China passed the U.S. as the world’s largest market for cars and trucks,” says Chris Mayer. “There are over 40 million vehicles in China now, and the Chinese bought 13.5 million vehicles last year. They are car crazy in China.”

“That means the world will need to boost [oil] refining capacity. In fact, world refining capacity got a big boost from 2006-2008 as it grew from 5 million barrels per day (mbd) to 8.6 mbd. That’s a 72% increase. By 2013, based on what’s in the hopper now, another 68 mbd will come online. Of that, only about 6 mbd is net new capacity, as the rest replaces existing capacity that is closing down. Still, that’s a 70% net increase -- nearly equal to the prior boom.”

Most of this new capacity is coming from Asia, followed by the Middle East, as this next chart shows.

“Over the next few years in China alone, there are five-six big new refineries planned. Each will have the capacity to produce at least 200,000 bpd.”

But refining is a low-margin business. “I’d rather own the businesses that the refineries have to spend all their money on,” says Chris.

Just yesterday, he told readers of Mayer’s Special Situations about a maker of essential refinery equipment he figures is set to triple. You can access this recommendation for just $1… but only through 5 p.m. EST today. That’s then the window closes on trial memberships in Mayer’s Special Situations. For instant access, go here.

  The latest Forbes 400 list of billionaires is topped by Mexican telecom magnate Carlos Slim Helu. At $53.5 billion, his net worth just barely eclipses that of Bill Gates.

Americans make up 40% of the list this year, down from 45% last year. Chinese are the second most-dominant nationality, making up 16% of the list.

  Foreclosure filings dropped for a second straight month in February. That’s the good news. But the monthly total of 309,000 is still 6% higher than a year ago. That’s actually the smallest year-over-year increase since January 2006. Looked at that way, of course, we’ve now had 50 straight months of year-over-year growth in foreclosures.

"This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure,” say the folks who crunched these numbers at RealtyTrac, “but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity -- albeit at a historically high level that will likely continue for an extended period.” Sounds about right.

  As long as we’re on the subject of foreclosures, we’ll wrap up with a curious spate of “wrong house” repossessions at Bank of America.

This week, Angela Iannelli of suburban Pittsburgh sued BofA for repossessing her house, even though she had a near-spotless payment history and never received a notice of default.

Last October, according to the suit, a BofA contractor changed her locks, cut the utilities, poured antifreeze down the drains, and even made off with her pet parrot -- which she later recovered.

No parrots were harmed in the making of today’s 5

BofA has issued a statement that basically says, “Oops, wrong address.” Which sounds plausible enough except BofA did the same thing last summer to a couple north of Tampa -- who paid for their home in cash.

Similar cases are documented in Texas and Kentucky, all with Bank of America. These miscues are so stupid, we’re not even sure we have a comment on them.

  “Some of your readers are such arrogant and ignorant knuckleheads,” writes a reader. “Regarding the complaint about the letter notifying us that a Census form will be arriving, innumerable national advertisers (especially those involving huge giveaway prizes) use this strategy year after year. Their only interest is to increase responses to make more money, so if it did not prove useful to increase response rates, the market place long ago would have told us so. Wise up.

“Another reader’s response only shows his or her abysmal ignorance of the use of the Census. Congressional seats hang on the outcome, as does extensive funding to districts, since the doling out of federal pork is indeed contingent on these numbers. Your reader will later only be complaining about how much pork -- ‘entitlement’ when you receive it -- flowed his way once the numbers are in. Informed taxpayers should care more than a squat. Unfortunately, your reader isn’t one of them.”

The 5: Well, at least you’re a humble genius.

  "Before the income tax, the Census was also used to apportion taxes," writes another. "That it has come down to who will get the most loot is a travesty."

  “I, too, received the worthless ‘pre-Census’ letter,” another writes. “As huge a waste as that was, consider the really terrifying aspect of this Census program -- GPS.

“Every residence’s front-door is now recorded with the latitude and longitude coordinates. Why, you ask? Well, ask any serviceman or -woman why they use GPS coordinates. Those little black boxes the Census folks carry around recorded the precise location of your front door. What might that portend for the future -- especially if you get out of line as might be determined by the powers that be. Paranoid? You bet I am! And you should be too.”

The 5: Hmmmn…

  “Loved Chris Mayer's expose on this great Chinese jobs road program,” writes a third, “but he overlooked one important fact: Nations build roads not just for commerce, but for war!

“China is building to the perimeters of all the southern countries and establishing supply depots along them. India and Pakistan and the neighboring ‘little’ kingdoms should be looking at the situation with alarm. Their commerce is infected even now with Chinese control, and when this network is done... well, I think even myopic ‘capitalists’ should understand!”

The 5: While on the flight back from Tampa yesterday after visiting the Odyssey Marine HQ located there, I read this interesting little tidbit in Vanity Fair magazine:

“While Washington poured billions into propping up the banks that brought the economy to its knees, the Chinese spent their stimulus billions on an epic 19,000 miles of new railroad track.

“Nearly half that total will go toward completing a web of more than 42 interprovince hyper-speed rail lines that will link almost every major city in the country. The fastest of the new trains travels at 220 miles per hour. That’s speedier than both Japan’s bullet and France’s TGV -- and half again faster than the quickest train in America.

“So China comes out of the economic crisis with a rail system that will be the envy of the world, and America soldiers on with an infrastructure that is resolutely last century -- or, worse, the one that preceded it.

“The crisis also crippled pension funds and the endowments of universities and arts institutions and hobbled the fortunes of cities and states, not to mention small and midsized companies. About the only industry that has recovered from the economic calamity is Wall Street itself, which, thanks to government support and a soaring stock market, regained its footing quickly…”

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. The law firm in Washington, D.C., that is representing Spain in the Black Swan case against Odyssey Marine will get 5 million euros (roughly $7.5 million) this year alone for legal services trying to prevent Odyssey from selling the coins it’s recovered from the site. In order to pay them, Spain says if it wins the case, it’s going to sell the coins!

The attorney representing Spain also has his own shipwreck outfit. Coincidence?

More to come…

P.P.S. Time’s running out for half-price access to Options Hotline -- the offer is still good from now through Monday. Steve Sarnoff is now in his 11th year of delivering consistent triple-digit winners. See the evidence for yourself here. 
 

by Addison Wiggin & Ian Mathias

• The bubble expands: China reports booming exports, oil imports and real estate prices
• One chart offers a sobering perspective… what the “recovery” looks like ex-China
• Alan Knuckman & Jim Nelson offer two investment trends gaining momentum
• Plus, David Walker offers simple solutions for fixing Medicare

  Here in the States, they’d call it a bubble. On the other side of the world, it’s “robust growth,” as The New York Times wrote this morning. Check this out:

1) Chinese exports increased 46% over the last year, China’s government reported overnight. 46%! That’s the best rate of annual growth since 2007, before the global crisis began in earnest.

2) China also released annual crude oil imports ending in February -- up 58% year over year, to a near record 4.8 million bpd.

3) Residential and commercial real estate prices in 70 Chinese cities rose 10.7% in February, year over year. In the Hainan province, new home prices suffered a nearly 50% annual rise. (It’s a lovely tropical island, but still… 50%?)

  What happens when the music stops? Bubble or boom, China is the strongest staple of the loosely bound “global recovery.” 

  “The Chinese are laying highways like nobody’s business,” notes Chris Mayer, picking up a piece of the construction boom illustrated above. “By the end of 2008, China had an estimated 60,000 km of highway. The U.S. has 75,000 km. Over the next few years, China plans to have 85,000 km of roads.

“This is having some amazing effects. For instance, China recently built a highway from Lhasa, Tibet, that runs all the way to the Nepali border. Along this road is the city of Shigatse, a formerly sleepy town where tourists may stop to gaze at ancient monasteries on their way to Mount Everest. But today, it is also a place where people get rich running freight services along the 515-mile highway…

“This allows an easy mixing of peoples and the freedom to pursue their own ends leads people to trade. Business expands. The quality of life rises. The roads are doing their work. The cars and trucks are coming. Where are the opportunities?

“I’m more interested in investment ideas that are a step removed from actually building the roads and cars that use them. All those cars will eat up a lot of metals of all kinds, for example. They will also burn a lot of fuel.

“Dig deeper and you’ll find China loves methanol as an alternative fuel to blend with gasoline to lower emissions. China blends more than a billion gallons of methanol in gasoline annually. And its appetite for methanol is growing more than 16% a year. Methanol, made from coal or natural gas, is China’s ethanol.”

  As China dependant as it might be, the great global bear market rally remains intact. Stocks did little yesterday, thus the S&P is still up 2% year to date, and 66% from its crisis low.

“The market momentum looks to carry stock prices to new post-recession highs,” speculates one of our traders, Alan Knuckman. “The S&P has blown through the 1,120 Nov/Dec triple-top resistance. Prices currently sit around 1,140 with the January highs at 1,148 soon to be tested.

”The market is littered with those who have questioned the legitimacy of this run-up, both economically and politically. Price momentum and trends are very powerful forces that are oft best to work with, not against. Eventually, stock prices will top out and fade, but the urge to be the first to pick that turn needs to be repressed for now…
 
“Stocks, gold and oil have assumed leadership positions at different times, but all have tended to move in the same directions. Until those relationships change, we plan to keep doing what we have been doing successfully.”

Alan’s Resource Trader Alert readers have found some remarkable success, indeed. With his trading advice, readers brought in 22 winning trades in 2009, with an average gain – including the losers – of 56%. That’s terrific. If you want to be on board for the rest of 2010, look here.

  Since stocks are little changed from yesterday, gold and oil are right about where we left them. Gold is a bit higher, at $1,125. Ditto with oil, at $81.

  For income investors, the real opportunities are abroad, says Jim Nelson. “One glance at your Lifetime Income Report portfolio will tell you how we feel about international investing. We think you’d be a fool to forget about the rest of the world when it comes to income. Just take a look at this…

“In the 1970s, the U.S. controlled a 70% share of the world’s financial markets. And according to Reuters, that number “could shrink to 30% by 2030.” Yet U.S. investors hold only about 5-10% of their investment wealth in foreign stocks and bonds. That’s a ridiculously low number, considering that soon, seven out of every 10 dollars will be made abroad.

“That’s not even the most enticing stat to switch to a broader international exposure… As income investors, it’s impossible to ignore the massive dividend yields foreign markets offer. The major indexes of many foreign markets are posting yields that are two, and even three, times larger than the S&P 500.

“That’s why we have spent the last year ramping up the Lifetime Income Report portfolio with solid foreign income plays. For tickers, look here.”

  Back in the U.S., the Treasury is expected to release another record-busting budget deficit today. Though not out until 2 p.m. EST, the Street expects around $220 billion in shortfall for February. That would bring the fiscal year total to over $650 billion -- up 10% compared with the same period last year and on course to top last year’s record $1.4 trillion budget gap. Oy.

  “We need to recognize that what threatens this ship of state is the ice that's below the water in the iceberg,” David Walker, the protagonist in our documentary I.O.U.S.A. , told NPR yesterday. “It's not today's $12.4 trillion in debt. It's the $50 trillion in unfunded obligations for Medicare, Social Security, other commitments and contingencies that we don't know how we're going to keep…”

For example, “in Medicare, I think we have to recognize… that there are actually three Medicare programs. There's Medicare Part A, which is hospital insurance, which is funded with a payroll tax, and there are B and D, which are physician and out-payment and prescription drugs, which are voluntary programs funded with a combination of premiums and general revenues and state contributions.

“The first thing we have to do is recognize that under Medicare Part B and Medicare Part D, billionaires receive subsidies for voluntarily signing up for those programs. That makes no sense… we should have more means-tested premiums than we do right now.

“We need to also be able to have more competitive bidding with regard to Medicare. We need to move away from the fee-for-service payment system. We need to move more towards evidence-based medicine. We need to do something with regard to malpractice. We need to move to electronic records, more integrated-care systems, a number of things that not only apply to Medicare, but also have to apply to our overall health care system.

“And last, but certainly not least, we need to learn the lessons of every major industrialized nation. We need a budget for how much taxpayer resources we'll allocate for health care. We're the only major industrialized nation that doesn't do that. Every other country has recognized that it'll bankrupt you if you don't.“

If you like what David has to say, you should join us in Vancouver this year. He was one of the most popular guests at the 2008 event, and we suspect he’ll be a crowd favorite again. We’ve asked him to fill us in on what’s been happening since we finished filming I.O.U.S.A., the effort to get the deficit commission established and -- of course -- some dirt on all those closed-door bailout meetings to which he was privy. There’s only one way to hear what he has to say -- be there. 

  “Yesterday, I received a letter in the mail from the Census Bureau,” a reader writes, “telling me that in a week the census form will be mailed to me. How much did we spend on mailing out the pre-Census letter. What a waste!”

  “I read with interest the note from your reader whose friend landed a modern-day WPA job with the Census Bureau,” another writes. “Perhaps providing temporary jobs is the only viable reason for doing the census. Of course, it does give politicians something to squabble over when it comes time to dole out the federal pork.

“But surely, with all the data and tools at hand in today's federal government, it is no issue to estimate population size and location in this country... if that's even important to do. If there were a good reason for doing the census, it likely would have been spelled out in a recent letter the bureau sent to all citizens. Instead, the letter essentially appealed to us to mail in our forms, or our local communities would not receive all the benefits (pork) to which they are entitled. Sounds like the feds already suspect us folks care squat about counting noses and need a little threat to solicit action. What a sad state of affairs.”

  “Before you get too smarmy about Census activities, you need to consider a few things,” our last reader writes. “I spent some time working with the Census Bureau as a consultant, helping them prepare for the 2000 Census. If you want a crappy, thankless job go run the Census Bureau. It's a political and logistical nightmare.

“While my numbers may be a bit stale (the numbers would actually be larger now), it is interesting to note that the human resources ramp up for enumerators (home visitors) and others is second only in effort to ramping up for war. In 2000, approximately 250,000 people were needed. The success rate on interviewing was about 1 in 4. The people hired had to be people that could survive somewhat of a background check; were presentable; could speak intelligently with people to extract Census data out of them; and would not be afraid to go to rotten parts of town, where most of the follow-up had to occur. And oh yeah, would only want this job for three or four months, starting in April (leaves out most college students).
 
“You may find an undependable deadbeat to work for a nickel an hour. But given the "security" requirements of the job... finding a quarter million workers for a few months, who happen to be situated in the right location, is not an easy (or cheap) task.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. You have just one day left to take us up on a $1 Mayer’s Special Situations trial. Seriously -- just one buck for full access to the MSS portfolio and one month of Chris’ high-end advice. We can’t make a deal much sweeter than that… take advantage here, before the offer expires tomorrow.
 

by Addison Wiggin & Ian Mathias

• Many “signs of the times” in one story: China & Big Oil team up to buy out Aussie LNG
• Frank Holmes explores an emerging economy hidden from mainstream highlight reels
• Fed reportedly preparing surprise rate hike… as soon as next week!
• Chris Mayer on a U.S. boomtown -- maybe boomtowns -- in the most unlikely of places
• Plus, readers chime in on Census Bureau employment and pannin’ for gold

   Big news: Arrow Energy, a modest foreign producer, received a $3 billion takeover bid yesterday. Why is this bench warmer story the leadoff hitter in today’s 5 Min. Forecast? Ahh, the drama’s in the details…some big trends in the making here:

First, Arrow is in the Australian natural gas business. Chris Mayer specifically gave you a heads-up on Aussie LNG just a few weeks ago. It’s the real deal.

Second, the bidders: Royal Dutch Shell and state-owned PetroChina have teamed up for the buyout. Royal, one of the biggest companies in the world, wants the bottomless bank account and political swagger of the world’s most powerful government -- that’s China.

And the Chinese, as evidenced by their failed deals with Rio Tinto and Woodside Petroleum, want access to Aussie resources -- badly. Those two failed ventures -- both with a fair share of controversy -- explain the collaboration with Shell. Lord knows China doesn’t need the money.

Heh, and last: America can still export something. Citigroup was the main financial adviser.

  “Asia’s rapid growth hogs the emerging-markets spotlight,” writes Frank Holmes, a mainstay at our annual Investment Symposium, “but Russia and the other countries of Emerging Europe (EE) also deserve some attention.

“For starters, EE economies have tight fiscal policies and are carrying far less debt than many developed economies, both positives for sustained economic growth.

“In the chart above, the best place to be is in the southeast quadrant, and that’s where EE nations are clumped. Russia’s debt position is minimal and there is ample strength in the consumer sector going forward. In January 2010, wages were up 11% from a year ago, to 19,000 rubles per month. This has kept domestic consumption levels around 65% -- on par with Brazil and above both China (30%) and India (57%).

“In addition, Russia’s oil production -- the country’s main profit center -- came through the crisis more robust than many expected, even surpassing Saudi Arabia in terms of production.

“But Russia is looking beyond oil and gas. In February, Time magazine reported that President Dmitry Medvedev has ambitious plans to create a high-tech haven where geniuses can think up world-changing inventions.

“The intellectual capital is there. Despite years of exodus of scientists and engineers from the Soviet bloc during the 1990s, the combined number of researchers in Russia and its former satellite states in Emerging Europe is not far behind the United States and China and is many times ahead of Brazil and India.”

  Back in the States, “The Federal Reserve is set to raise its key overnight interbank rate by a surprise 25bps next Tuesday,” our friend Peter Cooper wrote for araibianmoney.net, citing an “impeccable source from a top global bank.” This modern world is a trip, isn’t it? We’ve got news of a Sino/Aussie resource grab, details on Eastern European debt from our fund manager friend in Texas, Addison’s in Tampa shooting a documentary and now Peter -- a brit expat living in Dubai -- is scooping us on a U.S. interest rate rumor.

“By raising interest rates at this point in the cycle, the Fed will be both proving its confidence in the tentative economy recovery that chairman Ben Bernanke has proclaimed and underlining its commitment to preserving the value of the U.S. dollar at a time of mounting deficits and bond issuance programs…

“There will also be an inevitable revaluation of financial markets to reflect the higher cost of money. Again there is a risk that if confidence is not as strong as generally held, then financial markets will crash, rather than undergo a healthy correction…

“Reflationists will throw their arms up in horror at this action as imperiling a very fragile recovery. But it is a very fine judgment call, and a lot will depend on how much credibility the markets give the accompanying statements from the Fed about the likely speed of additional rate rises.

“However, the Fed has to keep its street cred and being a part of the gradual global tightening of interest rates -- after a long period of loose monetary policy -- should actually be better for the long-run health of the economy.”

We’ll keep an eye on the FOMC when they meet next Tuesday. Stay tuned…
 

  A sudden rate hike could cause quite a stir in American stocks, which are celebrating the one-year anniversary of the crisis bottom today. No signs of stress yet… markets opened flat this morning.

  Four more banks failed over the weekend, bringing the annual tally to 26. That’s already more than all the 2008 failures, and just a little off the pace of 2009, which saw 140 banks bite the dust. The FDIC currently has 702 lenders on its infamous “problem list.”

For the weekend’s failures, chalk up another $300 million in IOUs for the FDIC’s bankrupt deposit insurance fund.

  The dollar rally continues today, thanks largely to this: “Greece's debt problems could soon spread to the rest of Europe and mean a weaker euro,” said Greece’s PM George Papandreou overnight. Heh, this guy must be SO popular in Germany. The dollar index is up half a point from yesterday, to 80.7.

  More drama still in the euro-space: A stunning 93% of voting Icelanders elected to not pay back Dutch and British creditors that lost their shirts during Iceland’s monetary collapse in 2008. “They do not want to give their own money to rich investors who took the risk of depositing their funds in Iceland for higher interest rates,” The Epoch Times reports.

Did we miss this vote here in I.O.U.S.A.?

  Today’s dollar strength is bad news for gold. The spot price is $20 off yesterday’s high, at $1,115 as we write. Oil is down too, about a buck, to just under $81 a barrel.

  “This is a boomtown, or boomtowns,” Chris Mayer reports from an “exotic” location of his own. We’ll keep you in suspense here… see if you can guess which region has caught Mr. Mayer’s attention.

“You know the labor market is tight when the local McDonald's starts handing out $300 signing bonuses. Workers are coming in from all over, making it tough to find housing. They might sleep in their trucks or pitch tents, but it can get 50 degrees below zero, which makes such a move dangerous.

“There is also a chronic shortage of hotel rooms. I browsed the Web to see if I could find a room. I checked the Super 8 motel -- no rooms available. I checked a few others -- no rooms there either. I used Priceline to search, and there were no rooms available. What's going on here?

“Local ranchers are becoming millionaires overnight. The 4 Bears Casino reported a 60% increase in sales last year. This is a boomtown. Or boomtowns. Even the state government is in surplus.

“The above is a composite of what's going in North Dakota, around the Bakken Shale formation. As The Wall Street Journal put it: ‘A massive oil reserve buried two miles underground has put North Dakota at the center of a revolution in the U.S. oil industry, a shift that has radically altered the fortunes of this remote area.’

“The Bakken Shale could hold more than 4 billion barrels of oil and stretches under North Dakota and Montana (and Canada, but I'm only talking about the U.S. piece here). If that number is correct -- it comes from the U.S. Geological Survey -- then it would be the biggest oil field discovered in the contiguous U.S. in more than 40 years…
 
“In February 2008, we picked up shares of Kodiak Oil & Gas, a small Bakken player, for $1.94 per share. By June, they traded for over $4 per share. So you can make good money speculating on the Bakken.”

There’s a solid Bakken stock nestled inside Chris’ Special Situations portfolio -- which you can still take a peak at for just $1. Come Thursday, this trial offer will be off the table, so don’t wait. Details here.

  “My friend just started her job with the Census Bureau,” a reader writes. “She will have two days of training for her job, which will consist of opening envelopes and removing the documents, straightening the papers as needed to be scanned (not part of her job). Someone else will check the envelopes to make sure they are empty. Can't wait to see what she will learn on day two. And for this, she gets paid $17/hr, only no benefits.

“Gotta love those govt. jobs. Why make productive jobs when you can give someone $17 an hour to check an empty envelope? Yikes.”

  “To your reader who thinks that, as the price of gold rises, people will start panning for gold again,” another reader writes, “check out how crowded the tourist sites in ‘defunct’ gold producing areas are. Many of the ‘panners’ are doing this while trying to find another job or to find a nest egg… you are a little late!”

  “Back in the mid-’90s," the last writes, "while taking a rest from graduate school in upstate South Carolina, I used to spend three days a week panning mountain streams in North Carolina. After expenses and bank fees (my bank handled the shipping of my gold and black sand), I netted about $350 per three-day week. The gold price having risen considerably since then, I'm confident I could easily exceed a UAW weekly salary, the difference being that I'd actually have to get my hands a bit dirty to get paid.”

The 5: Heh, no shortage of sass in the inbox today. Good stuff…

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. Addison sends his best from Tampa, Fla. As he mentioned yesterday, he’s down there for most of the week, capturing the plight of Odyssey Marine on video. Stay tuned for more…

P.P.S. We’ve already put into circulation over 40,000 copies of our new mini-book, The Curse of the Incas. It’s an interesting read -- and a great lesson to be learned about owning gold and protecting your wealth. Check out the online copy, here.
 

by Addison Wiggin & Ian Mathias

• Buried by the government, noticed by The 5: Another $9.7 trillion in deficits
• A “cascade” of private debt default: Rob Parenteau on “the next act” in the Greek tragedy
• China hints about dropping dollar peg… Why the timing may be no accident
• Chris Mayer on “one of the best investments we can make right now”
• Readers write: Package delivery, gold as a “Ponzi scheme”

  One interesting feature of the Internet age, we observed while sitting high atop a cliff overlooking the Pacific frontier in Nicaragua last month, are the many different locales one finds oneself working.

Today, we’re in transit at the Tampa airport on our way to the final shoot of the Odyssey Marine segment of our new documentary film.

Luckily, the Tampa Airport just installed free Wi-Fi throughout. And luckier still, the bones of today’s episode were becoming evident almost as soon as we hit the “send” button on Friday’s “delusional” one. So today, we bring you an all-new “Debts and the Dollar” episode of The 5.

  The latest deficit projection from the Congressional Budget Office was conveniently revealed just prior to the close of business on Friday.

“Why so?” You ask suspiciously.

“Because,” we respond in a hushed tone.

The CBO’s latest numbers reveal that President Obama’s proposed fiscal 2011 budget would add $9.7 trillion to the national debt over the next 10 years. The White House projection is only slightly less staggering -- $8.5 trillion.

Further, the CBO projects the national debt will be 90% of GDP by the end of this decade -- higher than the 83.4% recorded at the end of fiscal 2009 last fall. We’re 100% certain this comment will elicit the customary response: “Look at Japan, its debt is 170% of GDP… and it’s been running massive deficits for years!”

To which we can only sigh and respond: “Exactly.” Then get back to our film in which we hope to illustrate the long-term deleterious effects caused by the “crowding out” effect, when governments spend their citizens’ future wealth… way ahead of schedule.

  “We told you two months ago,” our economist-in-residence Rob Parenteau also revealed late on Friday, “we thought Greece would not default, it would begin to implement government spending cuts and tax hikes and there would be a backup fiscal assistance facility put in place for the region in the event bond auctions began to fail. So far, this is precisely how the scenario has played out.”

So far, so good.

But “the next act gets tougher to predict,” he cautions. “Greece and other countries now face falling private-sector incomes — that is, after all, the direct and immediate result of higher taxes on businesses and households and lower government expenditures. Unless the trade deficits of these nations can swing sharply into surpluses (as lower domestic incomes lead to less import demand and lower costs of production lead to higher exports), private debt defaults will now start to multiply and cascade through the system.

“Last week, Moody’s placed four Greek banks on downgrade watch. This is just the start -- the fiscal retrenchment has only just begun to take effect. By taking these steps to avoid a public debt default, we would suggest these economies are now poised for more private debt defaults.

“We believe private investors do not yet get this connection, but it will be made very clear in the months ahead. Latvia, with a GDP collapse of nearly 25%, will become the next poster child of the region in this regard.”

  “It amazes me how complacent the market remains about the situation in Europe,” Dan Amoss chimed in, likely en route to our annual Agora Financial Inaugural Banquet, which we also hosted late on Friday. “It’s become quite obvious that there are no easy, painless solutions to the crisis in Greece. Economic growth in Europe will disappoint, because governments and banks taxed and borrowed from the productive private sector about as much as they can.

“It’ll be very difficult for Europe to avoid painful reforms to its gold-plated welfare state programs. Government spending will fall. Tax rates will go up, but may, in fact, lead to lower tax revenues. Yet the market is acting as though this huge problem will just be swept under a rug.

“The youth throughout Europe are suffering from chronic levels of high unemployment. This not only includes countries like Greece and Spain, but also includes Germany and France. The powerful influence of unions has limited the opportunities of new entrants into the labor force. And a high youth unemployment rate is not good for social stability.

“The disease that will afflict financial markets in the coming years is unaffordable debt at all levels of society. Greece is just one symptom. More will pop up in 2010.”

Ominous news for the world at large, but for those in the know, the crises yield the very opportunities that can help you protect your own pile from rot. Membership to Strategic Short Report is still available at an extremely reasonable rate.

  As if to underscore Dan’s point about complacency, we see that European leaders hope to fix their problems by establishing a eurozone version of the International Monetary Fund. In theory, it would set up tougher standards of fiscal responsibility to prevent another Greece.

The German and French ministers hatching this scheme say they’ll present concrete proposals “within a few months.” Heh. With luck, the other PIIGS will still be feasting at their trough by then. Or not.

  “Surely, the main mistake Europe made,” writes a reader commenting on the world’s obsession with Greek debt, “was in assuming Wall Street knew what the hell they were doing. When every financial ‘expert’ in the world was exhorting Wim Duisenberg to lower interest rates after the dot-com bubble burst, he valiantly resisted, because he worried more about inflation. Greenspan opened the taps and created a housing bubble.

“Well, it's a funny thing, but Spain also had a housing bubble, but the banks survived OK, because they had managed that risk. It was US junk debt packaged as triple-A investments combined with the bonus culture that screwed the world up -- particularly the U.K., whose only economic policy since Thatcher has been to copy the U.S.

“For my part, I noticed a while ago that the financial markets were being controlled by 25-year-old cocaine addicts with no moral compass.”

  China is floating a trial balloon about possibly letting its currency float against the dollar again. The head of China’s central bank has described the current peg -- in place since July 2008 -- as a “special” policy stemming from the credit crisis. “Sooner or later, we will exit the policies,” he said.

Not what you’d call a firm commitment, but it’s an interesting good-cop counterpoint to the bad-cop act Premier Wen Jiabao delivered three months ago: “We will not yield to any pressure of any form forcing us to appreciate.”

Don’t overlook the timing here. During an extended musing about China a few days ago, we pointed out next month is when the official window opens for the U.S. Treasury to label China a “currency manipulator.” We’re in the process of assembling a specific strategy for you should this trial balloon actually float this time... you can receive it free when you accept this “beta offer” -- three months of my new Apogee Advisory, free… invitation and details here.

  In the meantime, “one of the best investments we can make right now,” says Capital & Crisis legend Chris Mayer, “is to pick up relatively secure, low-cost uranium -- the feedstock for nuclear reactors.

“The demand for uranium is building in intensity like a heap of hot coals. There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below.

“The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs -- which make up 90% of the market -- produced only about 110 million pounds of uranium.”

If you haven’t yet taken advantage of the chance to try out Chris’ premium service, Mayer’s Special Situations, for just $1, time is running out. The deadline for the offer is this Thursday at 5 p.m. EST -- when his new issue and latest recommendation comes out. Here’s where to go to give this service a trial run.

  U.S. stocks opened flat this morning. The dollar index is down a bit, around 80.19. But gold is likewise down a bit, breaking below $1,130.

  Oil prices touched $82 a barrel today. Traders are overlooking the subtleties to the jobs numbers that came out Friday and concluding the U.S. economy -- and, hence, oil consumption -- is on the rebound.

  We’d be remiss to ignore the fact gold reached record highs last week against the euro, the pound and the Swiss franc.

  “Your retired UPS reader is wrong,” writes a reader determined to continue our debate about package and mail delivery. “Things have changed. I'm a rural mail carrier, and UPS drops off packages at post offices for delivery every day, usually by the pallet. There are even new return labels that allow the customer to send merchandise back via either shipper.”
 
The 5: You’re right. A colleague tells us he had some shoes delivered over the weekend and the tracking info from FedEx was very clear -- the final leg of the journey was via the USPS.

Heh. Of all the crises, fraud and political shenanigans going on in the world today, why are we still talking about this?

  “We take exception to the comments about the USPS,” writes an octogenarian with a similar sentiment. “We are pushing 80, and so have mailed countless letters and packages without a problem. Yes, a few pieces were delayed some, and the first-class mail doesn't always get in the box right at noon, but our local post office is manned by knowledgeable, hardworking and courteous staff. There are plenty of other things to be angry about, especially the trillion dollars spent on an unnecessary war.”

 “Gold, the ultimate Ponzi scheme?!?” writes a reader outraged by CNBC’s strange encounter with Marc Faber. “Gold has always been the anti-Ponzi scheme. The way fractional reserve banking works, the last people to receive money in the pyramid have the least purchasing power.

“People view gold as expensive right now, but what's to stop the little guy from buying mining shares, or, hell, maybe even try their hand at gold panning. Sure, right now, maybe a day’s worth of panning will buy you a sandwich, but this is my guess as to why we are not at the top of this bull market in gold. I think at the top of the gold boom, people actually will set out and start panning for flakes again.”

Argh!

Regards,
Addison Wiggin
The 5 Min. Forecast

P.S.: Reserve Members: Time is short, but we had one Canadian couple cancel their reservations for the Rancho Santana Reserve “Chill” Weekend. If you’re footloose and want to join us, we’d be glad to meet you there. Details here.

P.P.S.: Our attorney has warned us that the judge and magistrate have ruled correctly in denying Odyssey’s claim to $500 million in silver and gold off the coast of Gibraltar “IF” -- and this is a big “IF” -- you believe the state has the right to invoke ‘sovereign immunity’ over their vessels hundreds of years after they’ve gone down in the sea. The law was originally meant to cover U.S. military secrets during World War II wartime operations… now it’s being applied to treasure, as well.

We’re willing to admit that at this point in the story we’re not sure what to think. That’s why we’re in Tampa this morning. But more than one of the subjects we talked to in London last week suggested Spain has been known to allow their ships to be salvaged in the past… but never has a sum this great been on the line.

Spain is also a signatory to a UNESCO treaty that claims all ships that have been at the bottom of the ocean for more than 100 years are “World Heritage Sites.” The U.N. needed 20 countries to sign on the treaty to make it international law. They got ’em. Ironically, Spain is the only one of the 20 that has a coastline. Hmmmn…

by Addison Wiggin & Ian Mathias

• The 12-million barrel delusion: What’s up in Iraq
• Citi chief goes to Capitol Hill, blames short sellers, hilarity ensues
• Faber on whether gold is a “Ponzi scheme,” Casey on the future of the euro
• Unpacking the Census’ impact on February job numbers
• Enron memories, yours for a mere $11,900,000

  Iraq will pump up oil production from 2.4 million barrels a day now to 12 million barrels by 2017. That’s the promise of Prime Minister Nouri al-Maliki, who’d like to hold onto his job after elections on Sunday.

Welcome to the Delusional Friday edition of The 5.

  It’s not 2004 anymore. And it’s no longer in Washington’s interest to play up purple fingers in Iraqi elections. So let’s bring you up to speed on what’s been happening there since the “surge” was deemed a success:

• A bevy of suicide bombings this week went underreported in the U.S. press. Three explosions just today killed 12 people. Chances are it’s the work of the Sunni minority, who’ve stayed quiet the last couple years because U.S. troops paid them off to lie low -- a key reason “the surge” has kept the fighting to a dull roar
• The Sunnis are restless because the Shiite majority maneuvered recently to keep hundreds of Sunni candidates for parliament and local offices off the ballot. Of course, we were told the whole idea of “the surge” was to give Iraq’s factions breathing room to settle their differences. So much for that.

 
We still have 100,000 American troops in Babylon trying to make sure that non-American oil companies like BP and China National Petroleum Corp. have reasonably secure access to the giant Rumaila oil field. (ExxonMobil got a small consolation prize in the bidding.) We marvel at the spectacle.

  The delusion that “short selling” is what nearly took down Citigroup in 2008 was being peddled on Capitol Hill yesterday. Citi chief Vikram Pandit blames that foul, unpatriotic trading strategy…. but paid no mind to the reams of foolish loans made by his employees.

Even in Congress, the idea didn’t fly. Elizabeth Warren, chairwoman of the Congressional Oversight Panel bird-dogging the TARP program, wondered why Citi was the only bank that needed a second bailout after the first. “I just want to understand why Citi is special,” she quipped.

“His bank has got the highest [credit] loss rate of any of the big four,” Christopher Whalen from Institutional Risk Analytics added. “The shorts were just responding -- the emperor had no clothes.”

Our own stock market vigilante would do the same. For more on Dan Amoss’ Strategic Short Report and a 62% discount, read here.

  Another delusion gaining traction this morning: Gold is “the ultimate Ponzi scheme.” Honestly, the folks at CNBC are starting to become unhinged.

Gold is “an inanimate object that sits in a dark, damp cellar somewhere,” host Simon Hobbs posited to Gloom Boom & Doom Report’s Marc Faber, “that may or may not be in short supply, may or may not glitter in the correct light, but really has no productive power. Isn't gold the ultimate Ponzi scheme?"

Faber was entirely too polite in smacking this down: "No, I don't think it's a Ponzi scheme, and it's not a liability of someone else... its quantity cannot be increased at the same rate as you can print money... I’m not saying that the dollar will go straight away down, because other currencies, apparently, like the euro, are even worse at the present time. But eventually, if you print money, the purchasing power of money will lose."

If you can stand it, watch the whole thing here.

  Faber and our friend Doug Casey agree on the outlook for that delusion in currency collectivism known as the euro. Greece will get an indirect bailout from the European Central Bank, says Faber. And it won’t work. And the rest of the PIIGS countries will follow. Lather, rinse, repeat.

“I think it was inevitable,” says Casey, “that the euro would burst apart at the seams, sooner or later. This isn't the first straw in the wind, by any means, but it's a major, unmistakable sign that the EU currency union is going to break up and the euro itself is on its way out. And the EU itself will meet its inevitable doom not too long after that.

“When you stop to think about it, the EU was really a stupid idea to begin with. It started out as a coal and steel free-trade zone, which made a lot of sense. But as time went on, as people in general often seem to do, and Europeans in particular seem to love to do, they bureaucratized the thing and made it into a pseudo-government.

“They wrote a constitution hundreds of times longer than the one that served the U.S. so well until it was abandoned. They took on micromanaging everything, down to producing huge, phone book-sized regulations on the composition of French cheeses, and so on. There's a burgeoning bureaucracy in Belgium trying to consolidate the 27 member states into one giant country, and it's absolutely not going to work.”

Both Doug and Marc Faber will join your editors and a host of Agora Financial regulars in Vancouver this July at the Agora Financial Investment Symposium in Vancouver. David Walker, Bill Bonner and Petrobras veteran Marcio Mello will be there, too. Our symposium chief Bruce Robertson has outdone himself this year. Register here. Early bird discounts still apply.

  And of course, this morning, it’s time for that ritual exercise in delusion that comes on the first Friday of the month, otherwise known as the Labor Department’s monthly employment report. Let’s go to the tape…

· Payrolls fell about 36,000 -- less than mainstream analysts expected
· The worthless U3 unemployment rate held steady at 9.7%
· The U6 figure that includes discouraged workers and part-timers who want full-time jobs grew from 16.5% to 16.8%.

Amazing how 15,000 temporary Census jobs can take the edge off an otherwise-lousy report, huh? And those temporary government jobs are just starting to ramp up.

  Still, from the stock market’s standpoint, these are Goldilocks jobs numbers -- stronger than expected, but not so strong that anyone expects the Fed to go and do something crazy, like, you know, raise the fed funds rate.

The major U.S. indexes opened up 0.5% in the first few minutes of trading. And the airwaves were filled with fund managers heralding the good news.

  Gold is holding up nicely at $1,133. Oil has perked up a buck, to over $81.

  So much for the delusion that extending the homebuyer tax credit would keep pumping up the housing market. Pending home sales fell 7.6% in January, according to the National Association of Realtors -- which is already trying to lower expectations for the February number by pointing out that people tend not to look at homes when they’re buried under three feet of snow.

  From the “times are tough all around” department comes word that the widow of Enron chief Ken Lay is having trouble shopping her Houston penthouse among private buyers (showings by invitation only) for $12.8 million.

So it’s been publicly listed for $11.9 million.

“Italian Renaissance-inspired,” the listing says. Reminds us of that gag about the Holy Roman Empire: It’s not Italian, it’s not Renaissance and it’s definitely not inspired.

The 12,827-square-foot spread features six elevators, five half-baths, four balconies, three fireplaces and two toilets in the master suite. No partridge in a pear tree, alas.

A spokeswoman for Linda Lay says only she’s looking for a smaller home. It’s also possible she’s trying to come up with some scratch to generate a couple of pennies on the dollar for Enron’s creditors. But if she’s made any sort of deal with the Justice Department, we won’t find out about it -- the court records are sealed.

  “Once again, your unchecked facts are designed to match your preconceptions, instead of reality,” scolds a reader. “In fact, the inauguration date was changed for Roosevelt's second term, in 1936, not his first in 1932. His first term was actually shortened by about six weeks due to this. Here are the particulars from WikiAnswers:

“The date of Jan. 20 for the presidential inauguration was established by the 1933 ratification of the 20th Amendment, which changed the start date of the new presidential term from March 4.

“The reason given was that due to the modern conveniences of better communications, the election results could be confirmed faster than in olden times. They did not want to make our Congress and president wait until almost the end of the first quarter of the year to begin their service.”

The 5: We stand corrected on the dates. Of course, we were merely being flippant. If you choose to believe the unchecked facts are designed to propagate our own delusions, that’s your prerogative. That particular factoid is a matter of pride, actually. March 4 is this Wiggin’s birthday. Thanks for setting us straight on the details.

  “I have to take exception to the comments by the reader about UPS giving the package to the post office,” writes another, “I worked for UPS for 30 years. UPS delivers to every address, while the postal carrier will leave the mail at the mailbox, UPS will take it to the door.

“As a driver in rural Arizona, I delivered to ranches that were 10 or more miles from the mailbox. The postal carrier would leave the package or mail at the mailbox and I would drive to the ranch, leaving the package at the door.”

  “The Postal Service cannot be fixed,” writes another reader, who gets the last word. “It is hopeless. I know, I worked at USPS headquarters in Washington, D.C. They do not even understand how horribly inefficient they are. I could fill an entire Web page and not scratch the surface, but you wouldn’t believe it. Needless to say, I was blown away over at the incompetence.

“By the way, why should we all subsidize mail delivery to people who choose to live in the boonies? They pay more for just about everything else in life (fuel delivery, groceries, etc.), but expect the same mail service, for the same price, we get in densely populated areas.”

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. “It's emerging markets that are driving the bull market in this [commodities] cycle,” comments our managing editor Chris Mayer in a MarketWatch piece out this morning. More of his thoughts here.
 

by Addison Wiggin & Ian Mathias

• Accounting tricks now infect even the “honest” reckoning of U.S. deficit
• Things we can no longer take for granted: 2009’s no-brainer play, market angst over Greece
• Byron King with two good reasons to add to your gold and mining stock positions
• Coming to a strip mall near you? England’s own Potemkin village
• Readers debate Canada’s hot streak, envision the future of mail delivery

  Happy inauguration day! Today we begin with this little known factoid: For the first 143 years of the American Republic, presidents were inaugurated on March 4, the only day of the year that is also a command.

The date was moved up to Jan. 20 in 1932 when the activist president Franklin Delano Roosevelt couldn’t wait to wring his hands around the neck of the U.S. economy. Roosevelt set in motion 78 years of what the economist Friedrich von Hayek called the “fatal conceit” -- the arrogant belief that anyone could know enough at any one time to plan an economy.

  Today, we’re paying the price. A little-noticed Treasury report that’s supposed to provide an honest accounting of the government’s finances is now being manipulated just like everything else.

The Financial Report of the United States Government applies generally accepted accounting principles to arrive at a realistic appraisal of the annual deficit. In a typical year, that’s up to twice the official number. But in fiscal 2009, the “real” number is actually lower than the official record-shattering $1.4 trillion.

  Statistical watchdog John Williams laments this year’s report reflects “accounting that might be considered questionable if it were used in the private sector. The relatively ‘positive’ 2009 results reflected capitalization of much of the government’s bailout efforts, a late ‘profit’ from TARP, questionable handling of some post-fiscal year liabilities and changes in actuarial assumptions.

So hinky are the numbers, the Government Accountability Office refuses to sign off on the report. In a statement, the acting comptroller general invokes “material” questions of how Treasury is valuing bailout-related liabilities and assets. In other words, Treasury under Tim Geithner is employing mark-to-make-believe just like the banks he used to oversee when he ran the New York Fed.

  Curiously, the most reliable trade of 2009 is breaking down as we enter the third month of 2010.

Four weeks ago, we noticed stocks are no longer moving in inverse proportion to the dollar. Even the “gold up-dollar down” play is no longer a lead-pipe cinch.

At the time, this break from trend had been going on for just two days. So we weren’t about to call a turning point. Heck, we’re still not. But look at what’s happened since…

So what’s going on? Hard to say. But we’re noticing some other things we can no longer take for granted. Like how markets hang onto every development in the Greek debt drama from Athens to Berlin to Brussels…

  On the surface, today’s news from Greece should be roiling the markets. “Prime Minister George Papandreou is flying to Berlin to speak with German Chancellor Angela Merkel tomorrow,” explains our forex specialist Bill Jenkins. “It is widely assumed that she holds the golden ticket for any EU assistance.”

But now it appears that ticket won’t get punched. Merkel says the meeting won’t be “about aid commitments.” Her finance minister elaborated by saying a third round of Greek “austerity measures” -- tax increases and cuts to government-worker wages -- should do the trick.

Buyers of Greek debt seem to think so. An auction for 10-year bonds went just dandy today -- heavily oversubscribed. You wouldn’t think protesters were again taking to the streets and seizing the finance ministry in Athens… but they were.

  The rest of the world is reacting with an equal degree of calm. U.S. stocks are up a bit this morning. And the currency markets are sitting tight.

“The market has not been very committed,” continues Bill Jenkins. “The euro free fall has ended, finding support at the 1.3450 area. We are on our 12th day of congestion in a 2-cent range… 1.3450-1.3650. Is this a bottom? It acts like it wants to be, but there’s not very much bounce here… at least not yet. Not many traders willing to take on the risk yet.”

  While the euro and dollar go nowhere, gold is holding onto most of yesterday’s big gain. It sits at $1,135.

  “All of the precious metal miners have pulled back in the past couple months,” reports Byron King. “It's a buying opportunity that's reflective of last year's run-up in the price of gold (and silver). Gold hit $1,230 per ounce in November. Then the gold price started to retreat. This pulled down the share prices for the miners.

“So looking ahead, what's the general direction for precious metal prices?

“You guessed it… upward. Hence, add to your positions in the mining patch.

“When it comes to future trends for gold and silver, it seems clear to me. It's obvious that overall world gold output is falling. I've discussed falling gold output in other updates.

“On the monetary side of things, the political classes across the planet can't control their respective government spending. This is bad for the dollar, and every other currency. It's as if the legislatures of every nation are in an Olympic race to determine who can ruin their currency the fastest. Except there's no gold medal for winning this race. Just the opposite, in fact. It leads to national penury.”

But it’s a lesson that’s been lost on national leaders for at least 476 years… as Byron relates in his latest special report. For the full story, plus the best ways to protect what you have during this race to the bottom, check it out.

  After a day of drifting nowhere, U.S. stock indexes opened up 0.3% this morning on a couple of positive data points…

First-time jobless claims fell by 29,000 last week. And continuing claims now stand at their lowest level in a year. This will be the final data point on jobs before the February employment report from the Labor Department, due tomorrow

Business productivity jumped 6.9% in the fourth quarter of last year. Digging into the numbers, this appears largely a function of companies continuing to cut jobs and the remaining employees working harder out of sheer terror that they’re next… but the market sees this as a positive.

  For the record, the Federal Reserve’s latest Beige Book -- or the Lily White book, as we’d prefer it be called -- delivers no news and no surprises. It found economic activity improved slightly last month in nine of its 12 regions, and it might have been better had it not been for the two big snowstorms. Yawn… stretch.

   We have stayed away from the Toyota witch hunt being conducted by Obama’s emboldened Transportation secretary because it seemed like such a waste of time. But daft we think Toyoda, the unfortunately named CEO, has gone. 

To drum up sales, Toyota just began offering 0% financing for up to five years on its most popular models. And in response, General Motors is doing the same. As if 0% financing circa 2002 made no contribution to GM’s bankruptcy circa 2009.

If they couldn’t “make it up on volume” then, what makes them think they can do it now? Oh, that’s right. They now have a red phone connected directly to Tim Geithner’s office at the U.S. Treasury.

  Next time you hear politicians complain that “the banks aren’t lending,” consider this: Their latest scheme to “protect the consumer” will likely dry up $6.3 billion in short-term consumer credit.

That’s the conclusion of the bank consulting firm Bretton Woods, which figures bank revenue from fees for overdrafts and nonsufficient funds totaled $38 billion in 2009 -- a 10% increase from the year before and a 27% increase from 2005.

Much of that increase results from schemes like “overdraft protection.” If you don’t usually run your bank account near zero, it works like this: You can ring up a $4 latte on a debit card, and if it takes your balance below zero, your card will still be accepted… but you’ll also rack up a fee of something like $34. (And another $34 for every transaction you conduct that day.)

Consumers have always had the choice of opting out of these schemes, but under new regulations that kick in July 1, they’ll instead have to opt in if they want it. Thus, a huge revenue stream for the banks dries up, and Bretton Woods figures that means $6.3 billion less that consumers can borrow this year. Gotta love the law of unintended consequences.

  Behold, Suburbistan:

The town council in North Tyneside, England, is conducting an experiment with phony storefronts.

Just tape these snazzy graphics inside the windows or screw them to the fascia and you too can create the illusion of a bustling commercial district. They’re reusable!

True, there’s advertising encouraging people to set up a real business there, but we wonder about other applications of this concept. Maybe Detroit or Toledo could throw up some cutouts of ranch homes to encourage urban homesteaders?

  Reacting to the Canadian dollar’s hot streak, a reader writes, “The strong economic recovery in Canada, an amazing 5% in Q4 09, shows the country’s economy has significantly decoupled from the U.S.

“This large measure of independence in economic activities (albeit less so in business ownership -- the U.S. still owns a large chunk of big Canadian businesses) means the Bank of Canada can now afford to pursue a strong policy without worrying too much about the U.S. Fed. If it hikes interest rates and further encourage the already high savings, there will be a huge amount of real money available for investments for the future. Canada will take off from the U.S. orbit.”

  “No,” another reader counters, “we’re just enjoying a good commodities run, and lagging the USA on the credit bubble. Consumer debt ratios in Canada are now approaching levels seen in the USA in 2006.”

  In light of the Postal Service’s looming cutbacks, a reader speculates, “The future will be for mail to be handled by companies such as FedEx and UPS and their subsidiaries and by a hundred other wannabees. These companies are already deeply involved in the process of transporting the mails.”

“When the mail is handled by corporations to the maximum extent possible, the mail within the low-operating cost and high-volume areas will be by private companies. All the mail going places where costs are even questionably higher will still be left to USPS. The objective will be to get all the money for the job and do no work. Mail delivery will not be door-to-door, but to the mailbox unit at the nearest major intersection, etc.

“Mail now delivered to the ranch or main farmhouse will be available at the turnoff from the nearest interstate; never mind that it is 120 miles away (in a lot of places in the Midwest or maybe Nevada). More-local delivery might also be available by even more private means: the high school kid who would have been a paperboy once upon a time will now be a mail delivery person.
 
“If all that sounds too outlandish, consider that if you today in the East Coast Megalopolis send a parcel or FedEx message to Aunt Molly in her house out there in that little valley several mountains north of Boise, FedEx proudly takes it to Seattle, turns it over to UPS, which takes it to Boise and gives it to the USPS to cart down those gravel roads to Aunt Molly's place.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “Congratulations to Options Hotline readers,” reads an e-mail we received this morning “they’re up 86% in just nine days playing calls on a major automaker.” Steve Sarnoff’s next recommendation is due Sunday, and right now, because of a promotional offer we’re running, you can snag six months of service free.

P.P.S. If you missed the informal announcement earlier this week, we’ve locked in our friend, money manager, author, U.S. Senate candidate and YouTube sensation Peter Schiff for the 2010 Agora Financial Investment Symposium in Vancouver.

Along with a return appearance by Marc Faber and perennial favorites like Doug Casey, this year’s event is shaping up to be one of our best ever. Here’s where to secure your early-registration discount.
 

by Addison Wiggin & Ian Mathias

• First crisis, now crackdown… U.S. gov contacting “counterproductive” traders
• China grabs another world’s No. 1
• 20,000 more private sector jobs lost… one public industry primed for even larger cuts
• How U.S. debt is a thorn in NASA’s side… and a boon for investors
• Plus, Byron King visits the new epicenter for American nuclear power: Texas

  Every crisis comes with political baggage. This morning, the U.S. Justice Department is said to be “requesting” certain hedge funds reveal their bets against the euro.

Under pressure from their EU counterparts, say rumors making their way around the Internet, the Department of Justice is tracking down fund managers who attended a particular dinner in February hosted by Monness, Crespi, Hardt & Co., a NYC brokerage firm. The managers there supposedly discussed taking short positions in the euro and in U.S. banks while going long the Canadian dollar… all fantastic trading ideas, if you ask us.

But such “counterproductive” trading, as Ben Bernanke put it Monday, is irritating the masters of the universe. The Justice Department wants to investigate whether sharing such information amounts to collusion, and wants to cross-check the trading histories of each firm.

(Hmmmn… we’re having a dinner tonight with several of our Agora Financial colleagues and analysts. We’ll no doubt be discussing gold, the euro, Wall Street banks and the Canadian dollar. Should we too be worried?)

On the blacklist: Greenlight Capital, SAC Capital Advisors, Soros Fund Management and Paulson & Co., all of which have announced large gold positions in the past year.

Last October, we saw Greenlight’s founder David Einhorn give a speech at the Value Investing Congress in NYC. He railed against the Fed and outlined his philosophical position in buying gold as an insurance against financial calamity. It wasn’t notable for what was said, we remember writing at the time, but who was saying it and where.

We also thought Mr. Einhorn was begging for an audit… or worse. Heh. We’ll let you know if these blogosphere horror stories have any merit.

  Last year, China overtook the U.S. as the planet’s most sought-after destination for real estate investments, says a report today from property consultants Cushman & Wakefield. In 2009, property investment in China doubled -- exceeding $152 billion -- while the same measure in the U.S. plunged 64%, to $38 billion.

According to the report, eight of the 20 best performing real estate investment markets last year were in the Asia-Pacific region. They expect the ASEAN region to grow another 20% this year… particularly Japan, half of our Trade of the Decade, citing some “compelling” bargains. 

The group forecasts a strong rebound for the U.S., too. But notes, even if real estate investment doubled in the US in 2010, it would barely equal half of China’s net investments.

  Banks exposed to U.S. commercial real estate are not out of the woods yet. In fact, they may be venturing further in.

“It’s the same old story,” our commercial loan refugee Chris Mayer notes. “Banks made aggressive loans on commercial real estate. The recession came along and vacancies started to appear and rents started to fall. Commercial real estate prices also fell. That quashed the little equity that was in many of these deals and left banks holding properties that were worth less than the loans. Worse, many of them can no longer pay the mortgages.

“So banks are modifying loans, often extending them on an interest-only basis. Most of the troubled properties earn enough to at least pay the interest in this low-interest rate environment. The modification of the loan keeps it from being reported as ‘nonperforming.’ Technically, it hasn’t defaulted under the new modified terms. It’s a bit of financial magic, the kind they teach MBAs at universities. (I know. I’m a holder of the degree.)

“The problem is that modifying a loan is just kicking the problem down the road. Historically, about half of the modified loans wind up defaulting anyway. So though banks may report fewer ‘nonperforming loans,’ because they’ve kept them from defaulting, we see modified loans spiking upward -- a portent of bad things to come.”

Good times.

  Both the service and manufacturing sectors in the U.S. expanded in February, the ISM reports. Their gauge of manufacturing activity fell from 58 to 56, the group reported yesterday, but a score above 50 indicates growth.

Today, they say the service sector index rose from 50 to 53, its fastest rate of growth since late 2007.

  The employment firm ADP took another wild guess this morning and reported the private sector shed another 20,000 jobs in February. That’s “better” than the drop of 50,000 the Street was wagering on, so it was received as good news.

What’s more, the figure is ADP’s best reading since the glory days of 2008, before the Panic. All good. But you have to wonder… ADP also revised January’s number down from the original 22,000 lost jobs to 60,000. If you’re off by a factor of three, why bother counting? 

  You can expect a few thousand mailmen to join the ranks of the newly unemployed: The USPS announced yesterday plans to close more branches and ultimately end Saturday delivery service.

The 5 has bounced this idea around before, but this time it looks like the real deal… mail volume dropped 13% last year, the USPS lost $3.8 billion, it is already $10 billion in debt and expects to hit its $15 billion debt limit in 2011.

At this current pace, the government mail service -- beloved by Ben Franklin and Lance Armstrong fans alike -- is currently projected to lose up to $238 billion over the next 10 years.

The USPS has already reduced its head count 25% over the last 10 years. Time for a more radical approach? Yeah… looks like it.

  Maybe the USPS can borrow some cash from Ron Paul. The Texas congressman returned over $100,000 of his allotted office budget to the Treasury this week. “I have managed my office in a frugal manner,” Paul said, “instructing staff to provide the greatest possible service to the people of the 14th District at the least possible cost to taxpayers.”

God only knows what the Treasury will do with that 100 grand. Frankly, we’d rather see Dr. Paul spend it.

  “Due in part to the ballooning U.S. deficit,” notes our technology analyst Patrick Cox, “America’s replacement for the shuttle program, Constellation, is being canceled.

“Once the last shuttle mission is completed, Americans will be riding on Russian rockets to get to the International Space Station. America will, however, return to space exploration. The reason is simply that space, as my old friend Robert Heinlein pointed out, is the high ground militarily. Americans may be willing to share the high ground. They won’t cede it.

“Using conventional technology, the costs involved in extending space exploration to the moon and Mars are prohibitive. Alternatives to conventional rocket launch must be found if costs are to be significantly reduced to allow real exploration and commercialization.

“For this reason, the cancellation of the Constellation program may be a blessing in disguise. NASA-developed technology has not only served as a vehicle for getting astronauts into space, it has also been an excellent vehicle for delivering pork to congressional districts. In place of rockets designed and built by bureaucratic committee, much of the Constellation funding will now go instead to commercial space companies that will serve up a ‘space taxi’ role.

“This is great news for commercial space enterprises and their investors. We’ve already seen the potential of space-based businesses as wealthy tourists buy multimillion-dollar tickets on Russian ships. We’ve also seen the beginnings of private space access from Burt Rutan’s Scaled Composites’ collaboration with Sir Richard Branson’s Virgin Group company, Virgin Galactic.

“I first interviewed Rutan, by the way, in 1986: before his Voyager craft made history by flying nonstop around the world without in-flight refueling. Today, he is more than able to put passengers safely into orbit.”

  Stocks have been lazing around for the last 24 hours. There’s certainly plenty going on in the world, but the trade is “wait and see what happens” with Greece, the Friday jobs report and so on. Stocks went nowhere yesterday and opened up just a little higher today.
 

  The dollar, however, took a good beating yesterday. Confidence is building in a Greek bailout, and the euro snapped its losing steak, popping up almost 2 full cents, to $1.36. Thus, the dollar index lost nearly a point. It’s at 80.3 as we write.

  Today’s dollar weakness is a boon for gold. The spot price is up about 20 bucks from yesterday, to $1,140 an ounce. The dollar demise is good for oil traders, too. The black goo is back at $80 a barrel.

  Texas could be the epicenter of the nuclear revival, notes the intrepid Byron King, just back from a trip to the Lone Star State.

“Geologically, Texas has immense volumes of uranium in a massive ‘roll front’ trend over 300 miles long. It's more or less parallel to the reddish band in the structural map below.

“Industrially, the companies of old accomplished a lot of work in Texas, so there's old infrastructure. For personnel, a good many old hands still hang their Stetson hats down in Texas, and they know how to mine uranium. And politically, Texas is friendly to energy development.

“Back in the late 1970s and early 1980s, the U.S. produced over 40 million pounds of uranium oxide – ‘yellowcake’ -- per year. A lot of that yellowcake came from the great state of Texas, where there's a world-class uranium trend.

“Compare that old 40 million pound number with the current annual U.S. output of about 3 million pounds or so. Do the math. In the U.S., we've had a long-term decline of about 93% of domestic production. Today, the U.S. is more dependent on imported yellowcake than we are on imported oil.

“But one company in particular is putting the south Texas uranium play back together. After paying a site visit, deep in the heart of Texas, I'm convinced that this company will give us some great returns over the coming months and years.”

The ticker? You’ll have to subscribe to Energy & Scarcity Investor to find out. Details here.

  “I believe we are witnessing the beginning of the elimination of obesity in America and much of the developed world,” a reader writes. This odd discussion started with Patrick Cox, who is urging his Breakthrough Technology Alert investors to buy a company that could produce a paradigm-shifting weight loss drug.

“It's called a depression,” the reader continues. “While I enjoyed the low prices on beef last year, I have noticed that it is getting much more expensive, as is my produce and just about everything else I eat. Within five years, most people will not make enough money to be fat.”

  “I grew up in Israel and think I understand why many Americans are obese,” another writes. “They become addicted to fatty food at school. The big corporations are subsidizing 45% fat cheeses and meats to be served in school meals. The intended consequence is that kids are getting addicted to such foods and continue to consume it all their life.

“When we moved to the U.S., my kids could not eat the school lunch and we prepared for them the food they were used to in sandwiches -- for example, turkey or chicken breast with 1-3% fat. Their taste developed to like such foods. They are now lean and not mean.”

The 5: Ah that old chestnut ‘you are what you eat,’ eh? That concept was just another in a long line of brilliant ideas championed by the FDA that have proved to be a disaster for teaching children about eating well. It’s almost as fallacious as this one:

  Eat like this, and your body will begin resembling the pyramid. 

 
What’s worse, look at any packaged food and you’ll find high-fructose corn syrup among the top ingredients. People like to say Americans have contributed very little to the bounty of world cuisines. Au contraire! We invented high-fructose corn syrup. And it’s everywhere. And kiddies love the stuff.

Listen kiddies, if you sit around all day drinking coke and eating Nutter Butters while glued to your Nintendos… your ass is going to explode. It’s a fact. Eat a carrot. Go kick a ball around.

Heh, ok… enough.

No matter what might be the “right” cure, we’re willing to wager Americans will stuff themselves full of expensive drugs first. Some may even work. Patrick is big on a company that got past one more layer of bureaucracy with the FDA this week… meaning their obesity drug is that much closer to commercial availability. You don’t HAVE to invest along, but if you want to consider getting in on the ground floor of a potentially breakthrough drug, here’s a shot.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “Seven tons of gold, he gave them. And 13 tons of silver. But it came too late. He was about to die. And of course, his mistake would cost more than his life. It would also cost him his entire empire…”
 
So begins an interesting tale we’ve entitled The Curse of the Incas: Gold’s Untold Story. We recommend the read. It’s entertaining.

by Addison Wiggin & Ian Mathias

• O Canada… Olympics, GDP and Aussies send Canadian dollar soaring
• Rob Parenteau with a powerful economic indicator… brace for better-than-expected U.S. GDP
• Stocks rise, but on strange news… Dan Amoss on the perils of buying stocks now
• Plus, Chris Mayer and Alan Knuckman with two commodities worth buying

  Here we go again. The Canadian dollar is rapidly approaching parity with the U.S. variety.

 
In the last five trading days, Canadians have collectively grown almost 4% richer compared with their slovenly southern neighbors. Over the last 12 months, the loonie is up 22% versus the greenback. At this rate, we won’t be able to tell people when we head off for Vancouver: “Canada, it’s just like the U.S… only less.”

Add in the hockey game on Sunday… then the following nugget… Canucks have earned some bragging rights this week. But they won’t. From our experience, they’re always so… friendly.

  The Canadian economy expanded at its fastest pace since 2000 last quarter, its government reported yesterday. As measured by the funny little statistic known as GDP, the economy expanded at an annualized rate of 5%, beating the Bank of Canada’s projections by nearly two full percentage points.

Unlike in the U.S., growth in the great white north was relatively broad. And now with several quarters of expansion under their belt, there’s extra pressure on the Bank of Canada to start (gasp!) raising rates. Can you imagine? Banks willing to pay interest on savings again? What a world.

“Maybe the BOC will even raise rates earlier than it said it would,” notes Chuck Butler in The Daily Pfennig. “Raise them now, or next week or next month? I don't think so. But before the summer sun is hot and the tall colorful cold drinks with umbrellas are prevalent around pools... I do think so!”

  The Reserve Bank of Australia raised its lending rate again this morning. Now at 4%, the rapidly rising Aussie rate is one of several reasons the Aussie dollar is up 42% versus the dollar over the last 12 months -- the best performing major currency in the world.

Given the Aussie has a whole lot in common with the Canadian dollar -- the “comm dolls” if you insist on trading lingo -- this will put even more pressure on Canadian central bankers to hike rates.

  But not right away. As if on queue, this morning the Bank of Canada tossed this bucket of cold water on the trade: “The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity.”

The BoC said its lending rates would remain the same. But as Chuck forecast, it won’t be long. “The target overnight rate [0.25%] can be expected to remain at its current level until the end of the second quarter of 2010,” the statement reads.

  You can expect the U.S. economy to grow faster than forecast over the next few quarters, our resident economist Rob Parenteau wrote in a note this morning.

“If history is any guide,” writes Rob, “the Chicago Fed series is not one you want to miss if you are trying to get a bead on real GDP momentum. Real GDP growth of 3-4% now looks within reach for 2010 on this indicator, while most economists are still predicting barely above 3%.

“Given the lackluster reception of investors to positive Q4 2009 earnings surprises,” Mr. Parenteau concludes, “stock investors appear to doubt what the Chicago Fed series is pointing to, as well.”

  American stocks did rise yesterday, however, thanks mostly to a swarm of international news. Canada did its part. Rumors abound of a Greek bailout. And there were three big merger announcements: Japanese drug maker Astellas Pharma picked up OSI Pharma; German Merck bought Millipore, a biotool maker; and AIG sold its most profitable segment -- Asian life insurance -- to a British bank so it could repay government loans.

Heh… so… umn… this all, umn, makes America a “buy.” Yeah.

  “One of the most important lessons from stock market history is to not buy stocks trading at peak multiples of peak earnings,” Dan Amoss urges, “especially earnings that are driven by cost cutting, rather than revenue growth. Investors should pay high P/E multiples only for stocks that they’re highly confident can grow free cash flow at an impressive rate over the next few decades.

[Sounds like good advice for confidence in governments, too.]

“Yet in case after case, in the fourth-quarter earnings reports I’ve reviewed, investors persist in awarding lofty multiples to earnings driven largely by cost cutting and temporary inventory rebuilding on the part of their customers. This is typical of market tops. Investors are focusing on what happened in 2009 -- which offered an unsustainably good environment for corporate profits -- and not worrying enough what earnings might look like three or five years down the road.”

[Oh, cost cutting. That would never happen in government, never mind.]

  Sign of the times: CNBC’s newest attention getter is “Call the Close” -- a promo in which viewers, with the help of talking faces in various boxes, try to “guess the close for the Dow Jones industrial average.”

What if the Dow starts going down, instead of up? Think they’ll keep this one running? 

  Commodities are rising alongside stocks today. Gold is up about ten bucks, to $1,125. Oil is a breath from regaining $80 a barrel.

“The grain market is trying to mark a bottom,” says our resource trader, Alan Knuckman. “Bearish USDA numbers pushed prices down in January, but we’re already seeing movement back up: Soybeans continue to make new highs weekly as they build strength to attack $10 a bushel. Corn has made a 30 cent move that some are attributing to high snows that may impact spring planting.

“Nearly everyone saw record snowfall this winter, and the late beginning to the 2009 season is still fresh in traders’ minds. The 52 inches of snowfall (here in Chicago) versus the 30-inch average is one bullish fundamental variable that traders cannot ignore. While good crops in South America typically pressure prices around this time of year, the weather has gotten everyone’s attention -- even when you take off your trading cap.

  “The recession took a big bite out of molybdenum pricing,” Chris Mayer reports with another commodity opportunity, “but it is also the rebound.

“There are good reasons to see moly prices rise. First, there is the long-term demand curve:

“That’s roughly a 75% increase in a decade. And that assumes historical demand is the best guide. But there are good reasons why moly demand might rise more. This demand is mainly from energy uses and infrastructure investment. Nuclear reactors need moly. Deep-water wells need moly. Tar sands and heavy oils use moly in their pipelines.

“So these are strong new sources of demand that did not impact demand as much in the past. And then you look at where the moly will come from. The financial crisis halted or delayed the development of new mines. China is a potential source for new supply, but its mines are on the higher-cost side of the scale. They will need higher moly prices to encourage investment and bring the new supply online.

“In the meantime, a cash-strong moly producer has a window to make a lot of money.” Just like the one in Chris’ Special Situations portfolio. Get the ticker here for just $1.

  “I agree with your comments,” a reader writes of our China debate, apparently siding with those who’ve asserted China is more capital friendly than the U.S., “and have been saying the same things to friends and family in the U.S. for the last 14 years that I've been here in Beijing.

“However, you must also mention the enormous risks and variables here in China, such as no rule of law; in-your-face and never-ending corruption; signed contracts that are meaningless to a large extent and are where the negotiations really begin; a totally unethical culture that believes, as one local Beijing partner told me years ago, ‘I screw you before you screw me’; stealing from foreigners being seen as patriotic; two sets of rules, i.e., one for the Chinese and one for everyone else; and on and on...

“Keep in mind, too, that the communists pounded the citizenry so far down that there was only one way to go, and that was up. China is no economic miracle. Neither was Japan, South Korea, Taiwan, Singapore, India, Ireland, et al.

“Miracles are, by definition, very rare. Yet in almost every case, the U.S. included, when government gets out of the way and people are basically left alone, they prosper. That, and a very healthy ongoing dose of foreign direct investment doesn’t hurt.”

  “The cause of obesity IS investment,” another writes, this one referring to Patrick Cox’s bullishness on new obesity-fighting drugs. “We have spent the last 100 years replacing labor with the profitability of technology and business and sitting around staring at glowing screens.

“Meanwhile, food has been relegated to machines, pesticides and the profiteers having the cheapest inputs (corn syrup and flour) at the highest prices (Twinkies and supersized meals), all subsidized by government loans, grants, and tax breaks. To invest in 'curing' obesity, one should be buying garden tools and land. Cheap food doesn't help anyone.”

  “Americans, especially kids,” writes another on The 5 blog site, “don’t need more drugs in order to lose weight and deal with diabetes. People just need to cut way back on sugar and carbs, and also focus on portion control when eating.

“I’m usually not against any type of investment idea. However, making money off getting kids hooked on prescription drugs -- because Americans in general refuse to have a good discussion about the processed crap that’s in a lot of our food -- just seems wrong to me.

“Also, the drugs are not going to make people any smarter or more individually responsible. It will only disable people further. I.O.U.S.A. will never work out its problems if it continues to be a fat, lazy and dependent culture that continues to think that problems can be simply solved with magic pills.”

The 5: Hmmmn… well, what to say? We’re not fans of the cozy relationship between banks in New York and functionaries in Washington, either, but we don’t mind seeking profits from their mistakes.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Futures magazine just released their forecast for U.S. stocks in 2010. They've graciously included my bullish remarks within. Check it out.

by Addison Wiggin & Ian Mathias

• Greece situation looks hostile… but markets say the worst might be over
• Chile suffers, copper soars… commodity repercussions of yet another major earthquake
• Holmes, Guenthner on investing in water -- the world’s most precious resource
• Patrick Cox presents a compelling investment opportunity: Curing American obesity
• Plus, the China boom/bust reader debate rages on… and what about investing in India?

  The Spartans grow restless:

Hector vs. Achilles? More like State vs. Ouzo

On Feb. 12, while reviewing our forecasts for 2010 in a Richebacher Society Round Table, Rob Parenteau suggested social unrest was on tap for the year in Europe. No sooner has March arrived and we’re treated to a “physical expression” of the crisis developing there.

Major trade unions are all on strike. Most public transit -- including flights in and out -- is shut down. The Athenian stock market index is down 21% in the last three months. Petty crime, riots and all other kinds of innocuous items for a tourist-based economy abound.

All of which make the country’s debt problems worse.

  Alas, while it still makes for good TV, markets are tiring of the PIIGS. In fact, there is some light emerging at the end of the debt default tunnel. The price of insurance against Greek default (credit default swaps) fell to the lowest level since late January this morning.

The German government leaked a possible $35 billion EU bailout for Athens. That rumor alone helped lift U.S. markets early this morning.

  Using credit default swaps “in a way that intentionally destabilizes a company or country is counterproductive,” Ben Bernanke asserted late last week, too little, too late -- as usual. Coupled with today’s NYT headline “It’s Time for Swaps to Lose Their Swagger,” it’s safe to say it’s open season on derivatives -- and their purveyors.

  Stocks are also rising today, thanks to latest consumer spending data -- up 0.5% in January. That’s a notable increase from December’s 0.1% crawl, and it beat Wall Street expectations. Buy, buy, buy!

But, oh those darn footnotes! Personal income increased only 0.1% in January, meaning Americans simply spent more money they didn’t have. The savings rate fell to 3.3%, its lowest since October 2008, reconfirming the consumption trend at play before the Panic of ’08. And suggesting another crisis will be required for those habits to die hard.

We recall suggesting the lessons of credit crunch had not yet been learned as far back as November on CBS radio’s Big Money Show. The forecast holds. A “recovery” that gets us back on the wrong track is no recovery at all.

  Copper will be the commodity to watch this week. Chilean infrastructure has prevented human carnage far less severe than in Haiti last month. But from a global economic standpoint, yesterday’s 8.8 doozy of an earthquake could wreak more.

Chile produces more than a third of the world’s copper. Roughly 20% of its capacity has been shut down by the quake. Traders plugged that into their calculators early this morning and got this:

Rising up to $3.48, copper was briefly over a one-month high. We’ll keep an eye on it this week…

  Oil is riding copper’s coattails. It’s back up to $80 a barrel today. Gold is holding its ground at $1,115.

  “The world may be running low on its most precious commodity -- water.” Frank Holmes picks up on a theme that, thanks to our Chris Mayer, is quite familiar to Agora Financial readers.

“This map shows water scarcity projections for the world in 2025. Large chunks of Australia, Asia, Africa and North America are expected to have severe water issues. Credit Suisse estimates that by 2020, 37% of the global population will face severe water stress.

“The problem is unrelenting demand for a finite resource. Since the 1940s, the global population has tripled to more than 6 billion people worldwide. Over the same period, global water use has quadrupled.”

  “Water is quickly becoming one of the most important -- if not overlooked -- commodities on the planet,” our small-cap man Greg Guenthner chimes in. It’s becoming abundantly clear that the developing world is struggling to find sources of clean drinking water for its growing urban populations (China and India come to mind right away). But clean water is required for more than just drinking.

“While water scarcity in the U.S. and abroad has been thoroughly documented in the media recently, the importance of water in industrial applications has gone largely unnoticed. That’s the sector we’re looking into for the Bulletin Board Elite portfolio.

“The company that’s caught my eye develops water recycling services for industrial uses, specifically the natural gas industry. And if you know just how much water is used to drill for natural gas, you’ll realize how big of a deal this type of technology can be.

“When extracting natural gas from shale formations, drillers use a pressurized water-and-sand mixture to fracture the shale and free the gas deposits. It takes literally millions of gallons of water to complete this process, and much of this water returns to the surface. That means it has to be properly disposed of or placed in a holding pond for disposal. This is such an extensive process that it takes up approximately 5% of the energy company’s total revenue.”

[Note: For the ticker – and the rest of Greg’s small cap superstars – check out Bulletin Board Elite.]

  The dollar is rising today along with stocks and commodities. Stress in Europe seems to be overwhelming dollar gravity. Thus, the dollar index is up to 81-even, nearly a full point from Friday’s low.

   Speaking of those little green pieces of paper, Fannie Mae lost 72 billion of them in 2009, the pathetic government-sponsored enterprise (GSE) announced late Friday. That’s about $136,000 a minute.

Here’s Ian’s proposal for a new business plan for Fannie Mae: “Fire everyone except one janitor. Pay him to shovel stacks of $100 bills into the furnace all day, every day, all year. They’d save billions.”

Ian’s plan, of course, will fall on deaf ears. Fannie, in turn, will ask the Treasury for another $15.3 billion this week. Its total bailout tab will thus exceed $76 billion. For the same price, the Treasury could own outright a tiny little energy company like Conoco Phillips.

Fannie’s debt-addict loser of a brother Freddie Mac posted a smaller $21.6 billion loss last week too, if that makes you feel any better. He must be in recovery, too.

”Weight loss is an area we've been looking at for a long time now,” Patrick Cox updates readers Breakthrough Technologies, covering another diseased segment of the American psyche.

We watched the documentary Food, Inc. over the weekend. Among thousands of startling factoids in the film, this one stood out: One in three children born after the year 2000 will develop early-onset diabetes.

“Obesity is a major risk factor in various diseases,” says Patrick, “from arthritis and cancer to diabetes, hypertension and heart disease. Any drug that can help people lose weight safely is, therefore, going to offer true value. Moreover, obesity increases with age. As the baby boom, the wealthiest generation in history, rolls into its senior years, the demand and the need for an obesity treatment is growing dramatically.

“Until now, we haven't chosen a company in this sector, for several reasons. One is simply that the field is crowded. There were a lot of companies and technologies to vet. Many people are working on fat drugs. Normally, this might have kept me out of the sector, but there's room in this market for more than one winner. Buyers of these products often use them in combination.

“Another reason we were particularly careful is that we're going to see brand-new strategies for weight control in coming years. These new approaches, which I expect from several new sciences, including RNA interference, will probably leapfrog anything that comes out in the next year or so.

“Nevertheless, the demand is so great and the FDA is so resistant to new technologies, I expect some serious profits from innovators over the next five years. More importantly, this company has the potential and platform to evolve into a major biotech success story with many other targeted therapies.”

Like it or not, there will be a lot of money to be made treating obesity in the U.S…. for a long, long time. Get Patrick’s answer to this crisis, here.

  “My son lives in China,” a parent writes, continuing our spurious debate: Is China more capitalist than the U.S.? “He has for the past two or three years. For the past year, he worked as an account manger for a firm that makes games for cell phones. He quit that job and just landed a job as art director for a Beijing theater company. He also acts in films, TV shows and commercials.

“The way he explains it, it's like America was in the early 20th century, when opportunity abounded and everything was not sewn up. He's speaking of acting and opportunities in motion pictures in particular, but I think it might be pretty much across the board. I know he'd never be able to do what he does in Hollywood.

“For him, Beijing is very exciting. He's fluent in Chinese, and that makes him somewhat unique. He also mentioned that they hardly took any income tax out of his salary. Anyway, nothing like here in America.

“I visited him twice since he's been in Beijing, and I can tell you the people there really have the entrepreneurial spirit. Everyone has a business, even if it's a piece of cloth spread out on the pavement selling trinkets. Lack of a place of business does not stop them. And no one else does, either.

“On my last visit, I got sick and had to go to a Chinese hospital for blood test, X-rays and antibiotics. I was there for two days getting tests, but did not stay overnight. Total bill: $150.”
 

  “I lived and worked in Shanghai for a few months back in 2001-2002,” writes another. “My conclusions from that time, and my advice to folks considering starting or running a business there:
 

• As long as what you are doing there is seen as a benefit to the Chinese, things are good
• The rules change constantly, and “to the benefit of the Chinese” one day may not be the next
• Do not rely on rule of law. Contracts are almost worthless
• Allowing foreigners to live and work there is NOT so that the foreigners can make money and get ahead. It’s so that China can get ahead. You are a tool of production and will be used as such
• Any intellectual property that you take to China will remain in China to benefit the Chinese. You may make your one sale, but any thoughts of continuing royalties are just silly.

“If you can make personal peace with that situation, you will enjoy your adventure in China.”
 

  “Hey, 5! Did anybody vote for India?” a third reader asks. “My money is riding on them. The U.S. is like England after World War I. It peaked and was heading down and has never really recovered. As to China, it has a severe shortage of young people, due to its one-child policy. Who is going to take care of the elderly -- and at what cost? India has a plethora of young people. Vote for the underdog. China is too obvious a choice.”
 
The 5: We’re entirely agnostic on the debate. We like both India and China and want to have businesses in both. We also suspect that the development prospects in each country will yield greater investment opportunities over the next decade or more than in most developed sectors in the West, energy and technology most notably aside.

(Having said that, we don’t believe the one-child policy has had quite the reach or impact that you’re suggesting. Nor is a plethora of young in any developing country necessarily a good thing. We tackle these very demographic themes in the first “beta” issue of our new investment advisory. If you’d like to receive and comment on the first set of beta issues, we’re offering those issues free. Details here. Serious investors only, please.)

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “The trends we see in archeology are not surprising,” Greg Stemm, CEO of Odyssey Marine, told us before he began his presentation to an audience at the British Museum on Saturday. “They are symptoms of the overall move toward socialism and government intervention in markets that is sweeping the globe right now.”
   
We were in London over the weekend to capture some of Greg’s adventure on film for our new documentary. Greg has been spending an inordinate amount of time debating academic archeologists and defending the commercial model he has proposed to the governments of Spain, the U.K. and the United States, for excavating shipwrecks and salvaging tradable goods like coins that are currently resting in the deep waters of the Atlantic.

Specifically, we’re interested in the legal debate surrounding the “Black Swan” discovery off the coast of Gibraltar. The coins have been assessed at some half a billion dollars. But up to this point, Spain has successfully thwarted Odyssey’s claim to the wreck by invoking an arcane law meant to protect U.S. naval secrets during the Cold War. What happens next is anyone’s guess… Spain lacks the funding or the technology to recover the coins themselves. Stay tuned.

P.P.S. It won’t be long before our latest deal on Options Hotline will be swept off the table. We’re flat out guaranteeing your satisfaction AND the opportunity for big returns… details here.

by Addison Wiggin & Ian Mathias

• Why Eric Fry isn’t surprised economists are calling the recession’s end
• Congress fails to extend unemployment benefits… 1.1 million could be cut loose in March
• Bill Jenkins eyes this currency as the next winning FX buy
• Plus, a sign of times: World’s biggest diamond sold… to Hong Kong

  The U.S. economy grew even faster in the fourth quarter of 2009 than previously calculated, the Commerce Department claims today. The revised figure show a 5.9% increase in GDP, rather than the wimpy 5.7% we all believed in last week.

Take that! The recession is even deader!

  “The economists in Washington have absolutely no reason to doubt that the recession has ended,” Eric Fry reports in yesterday’s Daily Reckoning, “because the recession never arrived in Washington in the first place!

“Government employment in the Greater Washington, D.C., region has jumped more than 10% during the last eight years, while retail employment has gone nowhere. And this divergence has accelerated as the recession has deepened!

”Unfortunately, the employment trends depicted in the nearby chart are not the trends that typically produce national prosperity. If government employment were to continue rising while private sector employment fell, the economy would become less productive... at least that would be our guess. (Picture the post office operating every McDonald's in the land).

“Of course, the economists on Wall Street believe the recession has ended, too. Why wouldn't they? Former Treasury Secretary Hank Paulson shipped enough taxpayer money to Lower Manhattan in 2008 to employ every Wall Street economist for life... along with every Wall Street CEO, proprietary trader, managing director, vice president, secretary, security guard, lunch-runner, limo driver and yoga instructor.”

  In a similar vein, the U.K. announced this morning it too emerged from recession at a faster pace than previously reported. Heh, what a coincidence.

  U.S. existing home sales fell a staggering 7.2% in January -- a continuation of the lousy housing data we’ve been getting lately. Like new home sales on Wednesday, today’s number was way, way below Wall Street expectations, and the second biggest monthly slide since 1999 -- after December, which was the largest.

"It's not good news," said Lawrence Yun, the chief economist for the National Association of Realtors, who -- as we often note -- has a history of being far too rosy on U.S. housing. "There is rising concern about the strength of the housing recovery."

Really.

  The House and Senate attempted to pass a $10 billion bill last night that would have extended unemployment benefits for 1.1 million people. They ran into this:

Tough love from the senator from Kentucky

Jim Bunning (R-Ky.), who says he’s not seeking reelection, and who admittedly gets his news only from Fox News, single-handedly blocked the legislation late Thursday. He vowed to again today -- unless its authors tweak the bill to make it deficit neutral. Until then, “tough s—t,” he muttered.

While we suspect Congress will find a way to borrow and pay out those benefits anyway, the man’s approach was entertaining.

  Every other resident in Washington was camped out at Blair House across the lawn from the White House attending president Obama’s health care summit. Those invited met for seven hours.

Yawn, stretch… nothing happened.

  Neither did investors pay the presidential puffery any mind. Traders wrung their hands instead over the fate of Greece’s sovereign credit rating, pushing the market down 0.2%. The S&P 500 opened flat this morning.

And given the snow -- and that it’s Friday -- we’re not expecting much today either.

  It looks like the end of a long run for Bowne & Co. -- the second oldest company listed on the New York Stock Exchange. What started as a small stationary shop in 1775 evolved into a huge global communications company… and then got bought out in the credit crisis aftermath.

Sotheby’s -- the “Cal Ripken” of the exchange -- was founded in 1744 and now claims the oldest firm status by many years. The Bank of New York remains the oldest listing. The bank was first offered to the public in 1792, roughly about the time the French king Louis XVI’s head was rolling off the guillotine.

Our managing editor, Chris Mayer, sold his stake in Bowne yesterday. Readers following along in Mayer’s Special Situations booked a 74% gain in less than three months. “Just goes to show you there are ALWAYS opportunities out there in the stock market,” Chris noted. For Chris’ latest list of spinoffs, takeover targets and other Special Situations, look here. Access it today for just $1.

  Most commodities are in a relative holding pattern today, too. Gold and oil are drifting up, at $1,110 an ounce and $78 a barrel. The dollar index is slowly falling, down almost half a point from yesterday’s high, at 80.7 as we write.

  “I like the Canadian dollar more and more,” our currency man Bill Jenkins wrote yesterday. “It has some fundamentals that are definitely improving, and some other aspects that are definitely worth considering. Here’s why.

“Traditionally, the loony has been linked with the Australian and New Zealand dollars. Now in the current market, currencies are often linked together by at least one of three elements: They either produce a high yield, they are commodity-based or they are funding currencies for a carry trade.

“However, even though Canada is linked with the commodity currencies because of its rich natural resources, it is not a high yielder, nor is it a funding currency. Thus, up to this point, it has not been a real capital attracter.

“But its strengthening fundamentals are already reflected. We saw a strong Canadian employment figure at the beginning of February, and last week, inflation nearly hit the official target. We may be looking for a rate increase out of the Bank of Canada

“If retail sales continue to rise and we see decent numbers out of its GDP report coming up at the beginning of March, we may be onto a good trade.” If and when Bill fires off a Canadian dollar trade, only his Master FX Options traders will know… Join their ranks here.

  The most expensive rough-cut diamond in history was sold overnight. Petra Diamonds of London sold this 507-carat beast for over $35 million. The buyer, par for the course in the 21st century, was from Hong Kong. Chow Tai Fook Enterprises had the winning bid. They’re a luxury Chinese conglomerate with big stakes in hotels, casinos, jewelry, telecom and transport all over the Far East.

There’s going to be a very happy lady somewhere… in Asia

Some fun layers to this story: Petra named the stone Cullinan Heritage, after the Cullinan mine in South Africa, which also produced the original Cullinan stone -- the world’s largest rough-cut diamond, roughly six times the size of the one pictured above. That giant was sold to the British government in 1905 and was carved into “The Star of Africa,” the prize of the Crown Jewels… and given the sale of its modern cousin, a pretty accurate assessment of the shift in economics over the last century.

What’s more, Petra announced an earnings rebound last week. They made a $37 million profit over the last six months, compared with an $88 million loss in the same period the year before. The company cited a rebound in rough diamond prices and… strong demand from China. By their count, China has eclipsed Japan and the U.S. as the world’s biggest gem market.

  “I always have to laugh when everyone sings the praises of the Chinese economy,” our first reader writes. “Their economy is truly a wonder, we are told. All the same free market dolts that point to the power of the Chinese economy forget that it's a managed economy (managed by whom? The GOVERNMENT) and a dictatorship.

“Hooray for China making the big bucks. But let's get real. Any of the Republicans or free market capitalists that are hollering that Obama is a socialist would poop their pants if they had to live under the Chinese regime. The Chinese market may be something, but Capitalism it ain't.”

  “I think you guys have finally fallen off the edge: admiration for the murdering pilot tax cheat and the Chinese fascists.

“Next, you'll start arguing for a strong leader to take control of America; no need for democracy when a leader really reflects the will of the people. And who needs the rule of law when there are lower tax rates to be gained? Guys, you run money for a living. I bet the Chinese can run money too, and they'll work for a lot less than you do.”

The 5: Hey, how dare you suggest we run money!

  “It would be impossible to answer your question is China more capitalist than the U.S. in less than a dissertation, so I won't try. All I would say is GO. Go there and judge for yourself. I lived and worked in China for a number of years, and from my perspective, China is a far freer and more open society than the U.S., a country whose leadership respects its people and tries to do the very best for the largest number of people, and not just the very, very few that the U.S. leadership tries to placate.

“I often cringe when I read things that ignorant Americans say about China. America is really a barbaric, violent, corrupt country compared with China. I am reminded every day of George Orwell's astute comment in his history of the world that the Chinese had had a high culture and an advanced civilization for thousands of years when Europeans were still living in caves and eating each other.”

  “I am a VP of a biotech company here in the U.S. and married to a Chinese woman. We travel frequently to China. In many ways, it is more capitalist than the U.S. Or at least it is more friendly to capitalists than the U.S. How does a capitalist in America compete with the following: free land for your factory, free building for the factory, labor wages of a few dollars a day, well-educated middle managers for less than US$20,000 per year, tax holiday, no environmental problems...

“On one trip, I talked to an American businessman who has set up a factory with all of the above incentives who told me: ‘I tried to set up a factory in the Midwest, but gave up when I tried to deal with the costs. Then I saw what can be done here... who can compete with me? How could I possibly do this in the States?’ He makes auto parts. He also confessed that there was a moderate amount of corruption in the form of stock to local officials. If you are willing to set up shop in an area of unemployment and commit to hiring a fair amount of people, you can do well. Oh, and the government will build low-cost housing across the street from the factory for the workers.

“By way of contrast, it took us nearly a year just to get a building permit for a building expansion here in Capitalist America. My opinion... they will eat our lunch unless there are some major changes in tax incentives for business expansion or establishment.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. We’re writing from the Marlborough Hotel on Bloomsbury Street in London today. We just arrived, so don’t have anything material to report as yet. Tomorrow, we cross the street to the British Museum with a camera crew. Gregg Stemm, the founder of Odyssey Marine, is going to be debating the merits of “commercial underwater archeology.” We’ll let you know how that goes when we write again from Baltimore on Monday. (Yep, quick trip.)
 
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