Coming Trade Wars, Jobs Preview, Gold $1,500, Jingle Mail and More!Published: February 04, 2010 by RssFeed The 5 min. Forecast
February 04, 2010 11:20 AM by Addison Wiggin & Ian Mathias
 We write today’s edition with the ghosts of Smoot and Hawley are lurking over our shoulder. And Winston Churchill whispering “jaw-jaw” is better than “war-war.”Jawing is what United States and China have been doing for the last 24 hours. Very indirect, beating-around-the-bush jawing, but jawing nonetheless. Yesterday, President Obama told Senate Democrats he hoped to pressure China to abide by trade agreements, without specifying what agreements China was breaking or how. And then he implied the U.S.-China trade balance is out of whack because the yuan is overvalued relative to the dollar, without mentioning China by name.  “One of the challenges that we've got to address internationally is currency rates,” said the president, “and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price.”  Today, China hit back, with equally glancing blows. A spokesman for the foreign ministry said the value of the yuan is not the main reason for China’s trade surplus with the U.S., without specifying what that main reason is. He’d only say, "At the moment... the level of the yuan is close to reasonable and balanced."Ordinarily, we’d blow this off. A year ago, not-yet Treasury Secretary Tim Geithner dropped the incendiary term “currency manipulation” during his Senate confirmation hearings. He then backed off. And Chinese students laughed at him. You remember all that. Back then, the Obamanians were high. They were going to rescue millions of homeowners from foreclosure. Thought they’d already whipped unemployment. And had a supermajority to cram health insurance reform through. What a difference a year makes. Now the electorate is looking surly. Nothing like picking a fight with your largest creditor to get voters riled up again. Couple this latest exchange with the tension-building factors we cited on Tuesday -- especially the sale of U.S. military equipment to Taiwan -- and we appear to sit at a more delicate juncture than we did a year ago. What a mess. But, oh, so much fun, too!  First-time jobless claims grew last week -- not what mainstream analysts were expecting. 480,000 Americans filed initial claims for unemployment, the most in seven weeks. U.S. stocks are sliding in reaction. The major indexes opened down about 1%.This is the last employment data point the market gets to digest before tomorrow’s release of the January jobs report. What should we expect? “Generally, I still look for weaker-than-expected numbers,” says statistical watchdog John Williams, “with a rising unemployment rate and a negative payroll change, although revisions pending to both series in Friday’s release allow for unusual variability and volatility in the headline numbers.” As we mentioned yesterday, one of those revisions is to the “birth-death model,” which invariably undercounts job cuts by small businesses during a contraction. Last year, that meant a huge downward revision. This year? Bloomberg News foresees an even bigger one -- 824,000 jobs being revised out of existence during the April 2008-March 2009 period. John’s not so sure. “Anything is possible in this volatile political environment,” Williams cautions. And what happens after the dust settles from tomorrow’s report? “As the economy turns increasingly to a new downside in the months ahead, monthly payroll changes can be expected to show a pattern of deepening contraction, and the unemployment rate can be expected to rise sharply.”  Also dragging down the market -- worries about the euro PIGS. Credit default swaps are looking shaky in Greece and beyond today… in Portugal and, to a lesser extent, in Spain.Thus, the dollar index is within spitting distance of 80, a level last seen back in July.  Dollar strength means gold weakness this morning. Traders have whacked gold a good $25 an ounce, back to around $1,085.“Back when gold was selling at $900 per ounce,” says Byron King, “I was pretty confident we'd see $1,200 (and I said so). Now we've been there and done that. Even with the recent pullback, could we still get to gold at $1,500? Yes, but we have to keep a close eye on what's driving the price. “My best point to support the gold price is the anemic trend in overall world mine supply. That is, mine output is falling, not rising, despite all the investment going into exploration and development. I'm convinced that within 24 months, we'll start to see distressing declines in overall South African gold output because some of the deepest mines just cannot deliver the goods. “In the face of falling gold output, we still see ballooning global foreign exchange reserves held in U.S. dollars. The politicians seem to think that the world's big problem is that the U.S. government isn't spending enough dollars. The investors of the world seem to think that the world's big problem is too much U.S. deficit spending and a bonfire of national debt. Something has to give.” In an alert sent yesterday to readers of Outstanding Investments, Byron identified his two favorite precious metals stocks of the moment. For access, go here.  Today, we introduce a new measure of health or sickness in the housing market. We’ll call it the “jingle mail threshold.”According to new research by First American CoreLogic, when a home’s value falls below 75% of the mortgage on that home, chances are the homeowner will at least think about mailing the bank the keys -- even if the owner can keep up the payments. As of the third quarter of 2009, 4.5 million homeowners fall under the “jingle mail threshold.” And that number is forecast to peak at 5.1 million come June. That’s about 10% of all American mortgage holders. Hmmnn…. is it immoral to execute a “strategic default,” to use the new in vogue terminology? Even if the homeowner can shore up his finances by renting an equivalent home for far less? Or is it just desserts? A “rebate” on the bank bailouts, perhaps… or sauce for the goose? Morgan Stanley bought five San Francisco office buildings at the top of the market and handed back the keys to the lender in December. We expect a vigorous debate. Here’s where you can take part: 5minforecast@agorafinancial.com  “Vancouver is buzzing with Olympic activity,” reports our Symposium czar Bruce Robertson as he scouts out venues this week to make July’s Agora Financial Investment Symposium even more exotic and memorable than the 10-year anniversary celebration we endured last year.“So many changes since we were last here in July for the Symposium, its hard even know where to begin. There seems to be little evidence of an economic slowdown around here, at least until the post-Olympic hangover begins next month. “There are a ton of projects that had been under construction during our past few visits to town, and to see them completed is impressive. As with most past Olympics, the government (at all levels) has spent billions of dollars in a (recently) tough economy, and many locals are bitterly critical of this. But having seen the largely positive long-term impact that Olympics had on the cities of Montreal, Atlanta and Salt Lake City, many of these investments will enhance our favorite city even further for decades. It’s only borrowed money, right?”  The new Vancouver Convention Centre, world media HQ during the Olympics Among the newly built sights Bruce has seen this week -- a “turtleback-shaped ice rink,” a new train line, a new convention center… It’s truly staggering. You can read Bruce’s firsthand account right here. And if you’ve been thinking about making it up for this year’s Symposium, there’s still time to catch the early bird discount.  “The ‘scientific consensus’ that has held sway for four decades regarding both exposure to the sun and vitamin D has collapsed,” says Patrick Cox, hopping back and forth from heated political exchanges to his bread and butter in the biotech world. Patrick sang the praises of Vitamin D in this space last October. Since then, he’s become even more convinced.“What has emerged in place of the old ‘settled science’ is the knowledge that most people in America are seriously vitamin D deficient or insufficient. The same is true for Canada and Europe, and the implications are staggering.” Patrick reviews reams of scientific research in the course of his work for Breakthrough Technology Alert, and he says the evidence is now overwhelming: ”Simply put, unless you are one of the few people with optimal serum D levels, such as a lifeguard or roofer in south Florida, you can cut your risks from most major diseases by 50-80%. All you have to do is get enough D.” The downside? “As a financial writer, I bemoan the fact that no one can patent sunshine. I’d buy stock in any company that did. Biotechs with therapies supported by far less evidence have exploded in value. GlaxoSmithKline, for example, bought Sirtris for $720 million to acquire IP for certain resveratrol-like substances. If you compare the evidence supporting the benefits of resveratrol versus sunshine, sunshine leaves resveratrol in the dust.” In lieu of a sunshine play, Patrick has word from his extensive contacts in the biotech world about a small company set to break some big news tomorrow. Here’s where to learn about it in advance.  “I think Patrick Cox is way too optimistic in his predictions of the future and way off the mark in assessing the situation,” a reader writes. He was especially taken aback by Patrick’s remark that U.S. prospects could be even better than in the years right after World War II because of a huge international market that didn’t exist then.”Nothing could be farther from the truth. After World War II, the U.S. economy was the only one left standing. It is easy to grow exports with no competition and lots of demand driven by postwar reconstruction everywhere else in the world. Contrary to his opinion, the U.S. now has lots of competition on the international market. Not to mention that it has moved its manufacturing base to China, so it is now a huge importer. What will it export? Goldman Sachs scheming executives? Government Motors cars?”  “I was surprised to read the almost giddy prospects for our future written by Patrick Cox,” another reader writes. “I had to make sure I was reading The 5. Your comments on his comments would be interesting.”The 5: Don’t forget the qualifier he included: “America is going to suffer the consequences of an unnecessary excursion into California-style liberalism” before the tide turns. Patrick is exceedingly intelligent and connected. And he’s one of those guys with a perspective even longer term than ours. As with Juan Enriquez, a notable speaker at last year’s Symposium, Patrick is adamant that during credit bubble downturns, the innovation cycle kicks in. Many of the breakthrough technologies of the latter part of the 20th century got their start in the creative research fomented by the Depression in the ’30s and the drag-ass war of the 1940s. With that lens on, Patrick sees many good things in that distant future, things that will radically alter the way you and your kids will live, and he’s preparing for it now. He makes a convincing case. Don’t get him started on Obama, though.  “You left off a few zeros!” one reader writes to another, “on the $240,000 Paulson saved in taxes. He sold $600 million of Goldman Sachs stock and avoided all capital gains taxes since the sale was precipitated by his confirmation to secretary of Treasury and the need to avoid conflict of interest issues.“There is a special IRS law/code passed in 1991 that says when someone appointed to a government position needs to sell stock to avoid such a conflict of interest, then the sale will not be taxed. I wonder how many former Goldman employees working in government have used this tax loophole.” The 5: As you know, we put Ian on the case. In the meantime, here’s a little back-of-the-envelope math turned out by CNNMoney. Paulson owned $480 million in GS stock with a cost basis anywhere between $50-240 million. At the time of his nomination in 2006, the capital gains tax break would have amounted to somewhere between $3-8 million over three years, depending on the cumulative rate of return on his investments. Nice work if you can get it.  “Have I misread your comments on Japan? At one point, you seemed very bullish on Japan this year --now negative?”The 5: Patience, patience. It’s the “Trade of the Decade,” after all. The previous Trade of the Decade -- sell stocks on rallies, buy gold on dips -- looked mighty foolish at this time in 2000; the Nasdaq was still reaching for a record, and gold was still a year away from bouncing off a secular low. It even looked shaky seven years later, in 2007, when, despite gold having risen for the better part of the decade, the Dow was hitting all-time highs. Indeed, the high ended up being one mother of a rally to sell on. Japanese stocks will have their day. Even if they don’t, they’re near 26-year lows… lower on the trough than gold was in 2000. And equally despised. They can’t go much lower. Regards, Addison Wiggin The 5 Min. Forecast P.S. If you share Patrick’s enthusiasm, we’ve arranged for you to check out his wares for four months -- free. That offer, however, expires tomorrow. Get on it, here. P.P.S. We’re checking with our friends at First Federal Coin to see if they have any sets of the Vancouver Olympic commemorative coins left. If so, and you’re interested, shoot us an e-mail.
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