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by Addison Wiggin & Ian Mathias

• Last word on Lehman: “Repo 105” and the man who looked the other way
• Numbers confirm massive government debt is crowding out private investment… Doug Casey on a coming “cataclysm”
• And just who’s buying all that government debt anyway?
• Byron King on those late-night “sell your gold” TV ads… and a smarter approach
• Foreclosures “en masse” -- a reader’s forecast based on painful personal experience

  Sifting through the day’s developments -- a postmortem on Lehman, a routine Fed report, an item on Fannie and Freddie -- we detect a commonality. No longer is “TurboTax Timmy” a suitable moniker for our Treasury secretary.

Na, it’s more like “Titanic Timmy,” the captain of an enormous sinking luxury liner.

Timothy Geithner breaks out the Jedi mind trick… again

  Let’s begin. A court-appointed investigator looking into the collapse of Lehman has just released his report.

Lehman used an accounting trick known as “Repo 105.” The trick made $50 billion in debt vanish from the balance sheet during the two quarters leading up to Lehman’s collapse... with no notice to shareholders. The report labels the move “inherently improper.” Ouch. In officialese, that’s pretty strong language. The suits who occupied Lehman corner offices at the time probably feel really bad about themselves now.

The New York Fed, then under Tim Geithner, ran three “stress tests” on Lehman during this period… and it flunked all three times. In the end Lehman was allowed to design its own stress test, which it miraculously passed.

And that was the end of it. No corrective action required on Lehman’s part. Until the market handed it the high hard one. Good on the market. But you have to search far and wide this morning to find someone in the business press who’s asking what this means for the banks still standing after the panic of ’08.

Why should they? Citi’s back above $4 now. Buy!

  Meanwhile, the Federal Reserve is trash talking the Treasury Secretary too. Two days ago, Geithner insisted on Capitol Hill that his department’s massive borrowing was not -- repeat, not -- crowding out private investment and crippling recovery.

Cue the Fed’s quarterly flow of funds report yesterday…

The report confirmed everything common sense would tell you: The crowding-out effect is in full force:

· Business debt in 2009 fell 1.8%. The figure is now its lowest since the 1991 recession… good
· Household debt fell 1.7% -- the only annual decline in the data, which go back to 1946… even gooder
· State and local government debt grew 4.8%… umn… not so good
· Federal government debt grew 22.7%… yikes.

  As we explained to our friends at Odyssey Marine on Monday, the predominant theory requires government to step in, borrow and spend where consumers and corporations no longer think it’s prudent.

When the economy returns to health, tax receipts will go up, and the government will then have the resources to repair its dismal balance sheet. Unfortunately, since the ‘supply side revolution’ of the early ’80s, this second part of the equation never gets attended to. Since the Panic of ’08, debt accumulation has gone stratospheric – as this chart drawn from the flow of funds data demonstrates…

Not only is there “crowding out” going on… but it’s not simply current tense anymore. We’re “crowding out” future economic activity at a rate never seen in U.S. history before.

  Geithner, predictably, backed up his assertion that “crowding out” is not happening by gleefully noting the government can still borrow at rates that are “really remarkably low.”

Well, yes, banks can borrow at “really remarkably low” rates too -- next to nothing, in fact. As can mortgage seekers… and small businesses… they just aren’t of a mind to borrow much right now. But that’s another story.

  “It’s clear that the government is stretched too thin,” writes Dan Amoss this morning. “The illusion that it has unlimited resources will soon wear off. Its continued access to cheap financing won’t last for more than a few years. This is why the 2008 bailouts should have taken a much more ‘triage’-style approach, rather than bailout everyone and everything and worry about the consequences later.

“Greek politicians wish they’d thought about the consequences of runaway deficits five years ago. It would be nice if we’d learn from their experience.

“But alas, most political systems don’t respond to crises until it’s too late, choosing instead to maintain the delusion that the current policy path is sustainable. Politicians as a group are incapable of voting to take manageable pain today in return for avoiding a huge collapse at some point in the future.

“Either you control your debt, or it eventually controls you.”

  While we wait, however, the U.S. Treasury auctioned $13 billion in 30-year bonds yesterday, and it went much better than last time out. After climbing to 4.72% before the auction, yields fell back to 4.68% after. The bid-to-cover ratio looked positively perky at 2.89, the highest level in six months.

But who’s buying? “Indirect bidders,” a category including foreign central banks, accounted for just 24% of the purchases, compared with 40% in January. Meanwhile, “direct bidders” hit a record high of 30%. Which wouldn’t be troubling except the identity of these direct bidders is largely shrouded in mystery. Is it bond funds? Pension funds? The Fed? Who really wants to finance a piece of the national debt from now until 2040? The mind reels.

  Ah, well, Geithner probably means well. After all, he’s been promising to outline the “principles” to “reform” Fannie Mae and Freddie Mac in the weeks ahead. “We want to take a careful look,” Titanic Tim said Wednesday “at the entire set of government agencies that act in the housing market now."

Gosh, we can hardly wait.

The reforms may result in Fannie and Freddie owning outright as many as 2 million foreclosed properties. Dan Amoss’ expose on the Treasury’s move toward tackling the “shadow inventory” of houses under water -- entitled “Shady Bailouts and Implications for the National Debt” -- is a must-read. You can do so in your Apogee “beta” issue this weekend. If you haven’t already, you can find details on registering for this free offer, here.

  “The national debt?” muses our friend Doug Casey. “When was the last time you heard any average person worry about the national debt? Americans have become so used to carrying huge loads of debt around -- right out of college with student loans -- that it doesn't even occur to them that there could be any reason for concern over the national debt. It's an abstraction, like the number of light-years to the Andromeda Galaxy.

“Now it's even more dangerous, because the U.S. government owes it mostly to foreigners: the Chinese, the Japanese, the Taiwanese and so forth. And they won't like it if they are left holding a bunch of worthless IOUs at the end of this experiment.

“It's not just the Chinese and Japanese governments that are going to be unhappy. But hundreds of millions of individuals around the world -- in places from Russia to the Congo, to Mexico, to Thailand -- that have a trillion of the things under their mattresses, because they justifiably don't trust their own government's paper are going to be even more unhappy with the U.S.

“This is big trouble. It's not just another economic downturn when scores of millions find their life savings go ‘poof.’ What we're looking at is a cataclysm at some point soon.”

Doug, as usual, doesn’t mince words, which is why he’s a favorite each year at the Agora Financial Investment Symposium. July isn’t all that far away -- and you can register now.

  U.S. stocks opened up slightly this morning on news from the Commerce Department that retail sales rose last month by 0.3%.

The same news sent gold on a minor slide below $1,110.

  "What's with all these ads to sell my gold jewelry?” writes a reader. “Will I get a good deal on that?"

The short answer: No.

“In general,” offers Byron King by way of explanation, “the mail-order gold people are paying about 10-25 cents on the dollar.” Bad deal.

“We're seeing monetary psychology at work here,” Byron explains. “It's the feel of cash in hand. We have relatively unsophisticated people sending in ‘old’ jewelry, and they don't know what they have. The mail-order gold buyers are sending back a check, and the crinkle of that check makes people think they got a good deal.”

Even at 100 cents on the dollar, this looks like a lousy trade to us

“Don't sell your goods to the mail-order crowd, unless you want to get taken to the cleaners. If you sell your old disco chains at a reputable jewelry store, you're likely to get a reasonable deal for the gold content [up to 75 cents on the dollar], as well as for any precious stones.

”We're living in tough economic times. There are a lot of people who are desperate for immediate cash. So they send in their ‘old’ gold and such. But the process we're seeing is a classic case of valuable goods flowing from weak hands to strong ones.”

You want to be a strong hand, especially now. You can learn how by reading the shocking "untold story" of gold that Byron reveals in his brand-new book, The Curse of the Incas. We've just mailed out about 100,000 copies, but you can read the whole thing free online.

  “I think we're about to go into a unpredicted phase that hasn't been on the radar,” writes a Reserve Member responding to our item about Bank of America’s wrong-house repossessions, detecting a more sinister trend, “real estate holders being forced prematurely into foreclosure en masse.

“I have witnessed over the past couple of months a severe turnaround in my bank's attitude in pursuing the ‘team’ concept in working out my real estate situation. My plan is very doable at severely discounted prices; I may not have anything left, but the bank will be totally 100% whole when it's all said and done. Well, recently (this week), it has backed off being my ‘team partner’ in executing my plan, and has moved into ‘alpha’ male mode, i.e., ‘Give us the money or we're taking the real estate and disposing of it. You will be liable for the deficiency and that will be put into a deficiency note for payment.’

“I thought to myself, What the hell just happened here? Why the change in direction? I can get you all of your money I just need time to work the plan. They don't care anymore.
 
“This is what I've come to surmise: The banks have had access to 0-0.25% money now for over a year and have made a ton of money that has allowed them to fund their loss reserves (this may have been “Helicopter” Ben's plan from the beginning). They are now feeling that it is more important to ‘clean up’ their balance sheets in favor of using the loss reserves and just liquidating the real estate on the books.

“I think this attitude is going to turn viral and all the major banks will likely follow suit, not caring how much the asset sells for -- that's what the loss reserve is for -- in favor of a clean balance sheet, which is much more important than a loyal client.

“But hey, I'm just a small-business man who once employed over 100 people in seven different businesses; now I employ only 30 people in four businesses that are hanging on by our fingernails. So what the hell do I know?”

  “I enjoy your ‘tell it like it is, brother’ approach to everything,” writes another, “but I really like it when it comes to government. I, for one, appreciate your willingness to share your views, to put the trappings of government and Wall Street and Big Business in plain view for all to see. They seem to have moved away from black and white. Now they operate in the gray zone, as well as the red zone.

“It is very difficult to have faith in a ‘do as we say, not as we do’ government. It reminds me of the Frost/Nixon interview, when Nixon said, ‘When the president does it, that means that it is not illegal.’ Anyone hear the bells ringing?”

The 5: Only for thee. And we.

Glad you brought it up, too. After more than a decade daily e-letters, books and movies, we’ve decided to take this “tell it like it is” approach to a new level. We’re annotating the final edits on our “beta” issue of the new Apogee Advisory as we speak.

A select group of serious readers have agreed to review the service for three months free and give us the kind of feedback and direction that so often makes our advisories successful. If you’d like to be a part of this test group, please read the following.

When we’re done with the beta period, there will be nothing like this service on the market… we’ll be transforming our exploration of the Wall Street-Washington nexus into moneymaking ideas and strategies. And, hopefully, bringing you along for an enjoyable ride…

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Even if Tim Geithner helped try to hide the rot at Lehman, our own Dan Amoss saw through it anyway -- generating 462% gains on Lehman puts in just a four-month span during 2008. That’s the kind of analysis -- and results -- readers have come to expect from Strategic Short Report. Membership is still available at a substantial discount -- but not for long.

P.P.S.  Hmnn… against this backdrop, we learn 43% of American workers have less than $10,000 saved for retirement. Oh, but it’s not as bad as it seems, we’re told, because that figure excludes home equity and traditional pension plans. (Actually, that makes us feel worse.)

If your retirement plans already have you looking for reliable income, Jim Nelson just e-mailed that he’s working on “a brand-new play set to take advantage of an enormous growth opportunity. Already, it pays a solid, safe 4% dividend. In coming months and years, we could be looking at a massive double-digit yielder.”

If you want dibs on Jim’s report when it’s ready, sign up for Lifetime Income Report.

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

• 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

• 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.