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Thursday, June 4, 2009 Geithner's Beijing trip a draw at best... The tough habit of getting something for nothing... GM as a canary in the US economic coal mine... Chris Mayer on the Waxman-Markey fallout...and more! ----------------------- Special Offer ------------------------- The Anti-Stock Market Made 71% in 2008... Did You? How would you like to bank triple-digit gains every six weeks without buying or selling a single stock? Get on board by midnight, Wednesday, June 10th and these gains are yours for the taking - guaranteed! --------------------------------------------------------------- Our Heroine, Angela Merkel by Bill Bonner London, England Angela is a genius. Tim is a schmuck. That's what we took away from yesterday's news. As near as we can make out, Tim Geithner's trip to Beijing was, at best, a draw. He told his soothing lies. China listened. The markets reacted favorably. Stocks fell...with the Dow down 99 points. Gold was down too - $18. And oil lost $2, to close at $66. But the dollar went up - to $1.41 per euro. His goal was to bluff and bamboozle the world's investors - notably China - into believing that the US had its finances under control. Once we're out of this mess, he told China's top man, we're going straight. No more binges of EZ credit and wild government spending. We just need a little more of that old time medicine...just one more time...to get us through this dark night of economic downturn. But once the sun comes up and the economy is back on the road to recovery, trust me on this, America is going to balance its budget, foreswear Quantitative Easing forever, and join AA. No kidding. Cross your heart and hope to die. But some habits are hard to break. The habit of getting something for nothing is one of them. Spending money someone else earned is like eating a big slice of Black Forest cake and watching someone across the table get fat. You're likely to ask for seconds. Americans are in the habit of spending huge amounts of money...with no intention of ever paying it back. Consumers did it in the '09s and '00s. Now the feds are doing it. The federal deficit for this year alone is four times last year's record. The official US debt is exploding. Bill Gross says it will be 100% of US GDP within 5 years. Our guess is that it will reach that level even sooner. At 100% of GDP...even mainstream economists believe the situation will be irreversible...interest payments will be more than the US can afford. At that point, forced to borrow more and more just to keep up with the interest, the system will go into a Ponzi-scheme endgame. You can protect your investments from the inevitable fallout with seven super shields, available here. "Our expectation is the government won't be able to exit" from its deficit spending positions, said Gross in an interview on Bloomberg Radio. The programs "will be semi-permanent positions on their balance sheets." Once you go down that road, it's hard - maybe impossible - to come back. The US won't be able to pay off its debt...and it won't be able to unload GM. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market - without causing yields to rise. Even Ben Bernanke says that "long-term deficits threaten the financial stability" of the nation. As we've pointed out many times, the problem is more political than financial. The bums in Washington could still straighten up - if they wanted to. We've already told them how they could bring the deficits...and the economic downturn...under control. But they're not about to take our suggestions. Instead, they're "gonna have fun, fun, fun until Daddy takes the T-bird away..." Daddy China, that is. The Middle Kingdom. The Red Menace. Now, the leader of the bond vigilantes. Remember the bond vigilantes? They are supposed to keep a lookout for inflation. And when they see it increasing, they come riding into town guns ablazing...they sell bonds and force up yields, thus bringing inflation back under control. Inflation rates and bond yields have generally been going downhill for the last 26 years...so the old vigilantes have retired. But now China seems to be strapping on its six guns. Are you prepared for when this bubble gets shot out? If not, learn how to profit during the burst by participating in the anti-stock market, available here. According to the press reports of the showdown in Beijing, it sounds as though Geithner diverted attention from the main issue - at least for a while. There's some blah blah about China paying a bigger role in the IMF, for example, and more blah blah about cooperation between the US and China on financial matters. Someone actually asked the Treasury Secretary why he was talking about involving China in the IMF. His answer: "I just see it as the necessary evolution." We won't stop to wonder what a 'necessary evolution' is. Because the whole IMF discussion was irrelevant and pointless blah blah. The real story is the last thing Geithner wanted to talk about. Partly because he doesn't understand it. And partly because he can't say anything about it that would help. China has a lot of money with pictures of dead US presidents on it. It's worried that those green presidents may soon by not only dead, but worthless. "If the US can find a way to protect China's assets," said Yu Yongding, going right to the bottom line, "America's standing here will increase." If not...well...that's what we're going to find out. But first, a quick briefing on the latest news from Ian in Baltimore... "Washington is on track to issue more than $5 trillion in new debt over the next 18 months," begins Ian Mathias in today's issue of The 5 Min. Forecast. "Total interest payments on government debt are plotted to exceed $800 billion in the next 10 years, up almost five-fold from 2009. That's if long bond yields stay under 5%, as the Congressional Budget Office forecasts. Every one percentage point higher, says Harvard economist Kenneth Rogoff, will cost the U.S. government an extra $170 billion annually. "Perhaps our only saving grace; the whole western world has bought into America's economic school of thought. "'The Fed can only manipulate interest rates so far,' notes our currency trader Bill Jenkins. 'Then the market takes over. Our Treasury bonds are becoming a greater and greater risk to people who buy and hold them. Of course, basic market theory holds that to assume greater risk going forward, one must have a higher rate of return. So no matter what the Fed "dictates" by lowering rates, they are on their way up!'" Ian's entire daily email brief is free to subscribers to our paid publications, including Byron King's elite service Energy & Scarcity Investor, available here. And now, we return to Bill in Big Ben's hometown... How much of what goes on is just blah...blah...blah...just people talking? Probably 90%. People come to think what they must think when they must think it. Then they blah...blah...blah to convince each other that they're right. But what really matters are the deep, long patterns...patterns of history that no one can control and few take the trouble to try to understand. Bill Gross: "I think it is important to recognize that General Motors is a canary in this country's economic coal mine; a forerunner for what's to come for the broader economy. Their mistakes have resembled this nation's mistakes; their problems will be our future problems. If the US and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the US economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all US citizens can be measured in the tens of trillions." Our heroine, Angela Merkel, made the front-page news yesterday. She stood up against almost every mainstream economist, politician, and central banker in the world - and gave them all hell. "What other central banks have been doing must be reversed. I am very skeptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe," she said at a conference in Berlin. "Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. "We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time." You go girl! "This lady is currently the only person among all of our mighty and famous whom ordinary taxpayers in the western world can look to in order to hope for any protection of their interests," says a letter writer to the Financial Times. Of course, the professional economists and the earnest press all replied with the typical blah, blah, blah... "Ms. Merkel's intervention may be a political ploy and will probably come to nothing," says the Financial Times editorial page. "But it is, nonetheless, harmful..." Bloomberg reports: "Ben Bernanke, the chairman of the United States Federal Reserve, said Wednesday that he "respectfully disagreed" with Angela Merkel, the German chancellor, about her recent criticism of efforts by the Fed and other central banks to stabilize Wall Street and the banking system. "The US and the global economies, including Germany, have faced an extraordinary combination of a financial crisis not seen since the Great Depression, plus a very serious downturn," Mr. Bernanke told lawmakers Wednesday morning at a House Budget Committee hearing, after being asked to respond to the chancellor's remarks. "In that context, I think that strong action on both the fiscal and monetary sides is justified." "I am comfortable with the policy action the Federal Reserve has taken," Mr. Bernanke said Wednesday. "We are comfortable we can exit from those policies at the appropriate time without inflationary consequences." Ha! That's the question. Like Bill Gross, we don't think the US can get out of its inflation-causing positions. It won't want to act too soon - that's the lesson Bernanke thinks he learned from the Japanese. And then, when it finally does act, it will be too late. It may want to unwind its positions by then, but the market winds will be against it. Bond prices will be falling - inflation will be responsible for that. The feds won't want to dump more bonds onto a falling market. Then, traders - especially the same Wall Street institutions that they are subsidizing - will take advantage of them. In effect, the feds will have a massive short position in bond yields. When yields rise, they will have to cover...and shrewd traders all over the world will know it. They'll stick it to them...selling bonds ahead of the feds' massive selling. Finally, the feds will be hung out to dry...like Long Term Capital Management, but with no one to bail them out. Until tomorrow, Bill Bonner The Daily Reckoning ----------------------- Special Offer ------------------------- 63 People Know Why Six Tiny Companies Will Change the World... You can become #64 - and Ultra-Wealthy. This will go down in history as the "story of our era..." - and you'll be rich because you took decisive action now. See the full report here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: The Waxman-Markey bill that has been making its rounds on the Hill appears to be the most expensive proposal to hit Congress since the financial crisis. Chris Mayer points out who he thinks will be the winners and losers in this legislation. Read on... Waxman-Markey Whacks Industry by Chris Mayer Gaithersburg, MD The so-called Waxman-Markey bill snaking its way through the greasy halls of Congress looks likes the most expensive thing to hit the economy since the financial crisis began. Even the normally mild- mannered Wall Street Journal called it "one of the most ambitious efforts to re-engineer American social and economic behavior in decades, presenting risks and opportunities for a wide array of businesses from Silicon Valley to the coal fields of the Appalachians." First off, the stated objective of cutting carbon emissions by 83% by 2050 will go down in history as outrageous - akin to when Who drummer Keith Moon drove his Lincoln Continental into the pool at the Holiday Inn. I think members of Congress must be smoking the same thing Moon was. To show you how patently ridiculous such a goal is, I turn to Questar's CEO - a man with the unfortunate name of Keith Rattie. Questar is an oil and gas company. Rattie is an engineer. He has been in the business since the 1970s. He walks us through the basic math in a speech he made at Utah Valley University on April 2 called "Energy Myths and Realities." Rattie uses Utah as an example: "Utah's carbon footprint today is about 66 million tons per year. Our population is 2.6 million. You divide those two numbers and the average Utahan today has a carbon footprint of about 25 tons per year. An 80% reduction in Utah's carbon footprint by 2050 implies 66 million tons today to about 13 million tons per year by 2050. If Utah's population continues to grow at 2% per year, by 2050, there will be about 6 million people living in our state. So 13 million tons divided by 6 million people equals 2.2 tons per person per year. "Question: When was the last time Utah's carbon footprint was as low as 2.2 tons per person? Answer: Not since Brigham Young and the Mormon pioneers first entered the Wasatch Valley and declared, 'This is the place.'" "The worst-case scenario here is that the U.S. simply won’t be making steel at some point in the future. The plants will all go to Brazil. China is already the biggest steel producer in the world." You can extend this math over the whole country - a growing mass of 300 million people. To meet the Waxman-Markey bill's goals would mean we have to go back to a carbon footprint about as big as the Pilgrims' at Plymouth Rock circa 1620. So I think the bill is absurd. I think it is also a great blow to what is left of American industry. But who cares what I think? As the great Jeffers wrote, "Be angry at the sun for setting/ If these things anger you." This is the way the world works. Politicians do dumb things. We have to play the ball where it is. And that means we have to figure out who wins and who loses. Here are some thoughts along those lines... Agriculture. Agriculture, for whatever reasons, is exempt from the new rules. So farmers don't have to worry about those manure pools out back or the flatulent cows emitting methane all over God's green meadows. Those big tractors? Burn up that diesel! Agriculture is a winner by virtue of not losing, like a hockey team that skates to a tie. Steel. Big loser. U.S Steel, AK Steel and even foreign steel companies with US operations all get a big kick in the family jewels on this one. Steelmaking emits all kinds of carbon dioxide. The worst-case scenario here is that the US simply won't be making steel at some point in the future. The plants will all go to Brazil. China is already the biggest steel producer in the world. Now we just handed the country a bunch of new business. Avoid big steel in the US. Utilities. Mostly losers. Under the bill, utilities will have to get 12% of their electricity from renewable sources. That means they are going to spend money buying windmills and solar panels. For some of the coal utilities, this is bad news - even though they caught a break when the government made a change to let coal have carbon permits for free to start off with. Gas utilities are better off, as they emit less carbon, but since coal gets some free carbon allowances upfront, their advantage will not be as big as I made out in my letter to you a month ago. (See, the problem with writing about potential legislation is the rules change every week.) Still, I'd avoid coal producers or coal utilities. They wear big targets on their backs and can't do much about it, except spend a lot of money. Bad for shareholders. There may be some very good ideas on the picks-and-shovel angle for coal, though. For example, a number of companies will sell equipment to clean up coal. And of course, the solar and wind guys are big winners. Oil refiners. Losers. This is an industry in which it is hard to make money most of the time as it is. Now, under the new bill, refineries are really screwed. Basically, they are on the hook for about 44% of US carbon emissions. They would be among the biggest buyers of carbon emission allowances. I think with one stroke of the pen, the US government just made the US refining industry that much smaller. Lots of these older refineries will just have to close. US imports for gasoline will rise. I think the refinery industry already sees the writing on the wall. This is one reason why Valero, the biggest US refinery, has been quick to get into the politically favored ethanol business. It's also expanding overseas. Avoid the refineries. Trading desks. Winners. It figures. As if the government doesn't help financial firms enough, it is going to hand them a nice tomato in trading carbon credits. The head of Morgan Stanley's US emission trading desk said: "Carbon, while relatively small, is a critical piece of our commodities offering." So some financial firms with trading desks in carbon get a nice little payday. To sum up, this is only the beginning. At the end of the day, this obsession with carbon footprints means that Americans are going to have to pay a lot more for products that use fossil fuels. It means we are going to pay a lot more for energy. Obama and his crew can draw up whatever fantasies they want, but they can't repeal the laws of economics, which, like forces of nature, win out every time. Regards, Chris Mayer for The Daily Reckoning P.S. I'll keep an eye on all of this. I expect we'll find some ideas that benefit from the ongoing war on greenhouse gases...in the meantime, check out my latest report found here. Editor's Note: Be sure to join Chris Mayer and all your favorite Agora Financial personalities at this year's Investment Symposium in Vancouver, from July 21st through the 24th. Get your tickets now - this event is going to sell out! 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