by Addison Wiggin & Ian Mathias

• Dollar disaster: National debt, 60 Minutes, NY Times and credit default swaps all team up against the greenback
• Chris Mayer & Germany’s Finance Minister lay out more reasons to own some gold
• Dan Amoss’ short target for the next leg of the faux recovery
• Retailers pinning hopes on Black Friday… will shoppers show up?

  Whoever coined the phrase, “there’s no such thing as bad publicity,” didn’t have the poor U.S. dollar in mind.

Since this time last week, the old greenback has suffered headline after headline. The U.S. national debt officially crested $12 trillion. The dollar index hit 74.6, its lowest level in over a year. 60 Minutes ran a story last night on the “Cost of Dying,” where David Walker, a protagonist in our own documentary on American deficits, reminded the mainstream media that “the one thing that could bankrupt America is out-of-control healthcare costs.” (We also found it pitifully ironic that CBS’s webcast of this 60 Minutes bit was sponsored exclusively by Pfizer. No shame!)

And this morning we picked up the New York Times to see this headline on the front page: Wave of Debt Payments Facing U.S. Government. It turns out that the money our government borrows via Treasury bonds has to be repaid one day -- with interest, no less. Breaking news!

According to the rag, the government will have to cough up $1.6 trillion just by the end of March. Ten years from now, the mere cost of servicing the debt is expected to reach $700 billion annually, more than three times the current burden.

  So in spite of what Dick Cheney might have you believe, deficits do matter. Here’s further proof:

In short, traders buy credit default swaps to insure against bond default. Hmmm… what could have possibly happened to these four countries -- of all the developed nations, the ones to experience the most rapid CDS purchase growth in the last 12 months. Here’s a hint: Brazil’s CDS volume shrank 16% over the same period.

  Strangely, the growing lack of faith in the United States and its dollar is strengthening stocks today. The S&P opened up over 1%. Stocks are also getting a hand from the latest existing home sales report, which showed a surprise 10% boom in sales last month. We’ll follow up on that one tomorrow.

  But it’s no surprise at all to see gold find another record high this morning. The spot price zoomed up to $1,173 an ounce on the news above, and also thanks to James Bullard, president of the St. Louis Fed. He told reporters Sunday that he would like to see the Fed’s manipulation of the mortgage-backed security market continue beyond the first quarter of 2010… since it’s done us so much good thus far. 

  “The usual case for gold starts with some shot at the shaky dollar itself,” notes Chris Mayer. “Gold is a better (and older) store of wealth than paper dollars, goes the argument. As investment strategist Kenneth Gerbino once quipped: ‘If you don’t trust gold, do you trust the logic of taking a pine tree worth $5,000, turning it into paper, putting some ink on it and calling it $1 billion?’

“It’s clever, sure. But you could’ve said the same thing in 1980, and that fact didn’t save gold from being a lousy investment for some two decades after it peaked in 1980.

“What’s different this time is that the money creation is unprecedented. The Federal Reserve has expanded its balance sheet at a pace and level never seen before. The federal government bleeds red ink with gaping deficits and mounting debts. What’s different this time is that people around the world are publicly starting to wonder if holding so many dollars is a good idea.”

  "That low interest rate currencies such as the U.S. dollar are increasingly being used as a basis for currency carry trades should give pause for thought,” Wolfgang Schauble, Germany’s finance minister, publically pontificated this weekend. “If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets."

Schauble, who is new to his post, must need some time to gather a more traditional perspective… there’s just no way the most rapid expansion of money supply in history could “create a new sort of asset market bubble.”

  Just one bank failure to report from the weekend. The FDIC took control of Commerce Bank of Southwest Florida late Friday, at a cost of $23 million to the deposit insurance fund. That’s the 124th bank to fail this year.

Here’s something to chew on: Having taken over so many banks this year, each with a bucket-full-o-bad-assets, the FDIC has inadvertently become the owner of some $1.8 billion in real estate. That’s a lot of vacation homes and bad mortgages it will have to rid itself of some day, at the expense of local real estate values. Heh, or could this bring Section 8 housing to a whole new level?

  “When you consider that an excessive amount of restaurants were built during the real estate bubble,” Dan Amoss adds, “the restaurant business is tougher than usual right now. With the hoped-for prospect of 20–30% returns on capital invested in new restaurants, many restaurateurs expanded their footprint. The problem, however, is that too many restaurants followed this strategy, thereby laying the foundation for disappointing returns.

“The restaurant business has never been easy. Guests are demanding and not very loyal. If they have a bad experience, many do not return. Store-level sales and expenses like rent, employees, food and utilities can be hard to manage. Higher costs cannot easily be passed on to customers. Profit margins are unattractive and uncertain.

“Restaurant chains must now fight aggressively for lower levels of foot traffic -- traffic that’s no longer artificially inflated, as it was during the days of easy consumer credit and loose discretionary spending. Households are tightening budgets. This is a trend that will last beyond the official end of the recession. At the top of most budget plans is cutting the number of meals out.

“This long-term trend -- the supply/demand imbalance in restaurants -- is working against the shareholders of mediocre restaurant businesses, particularly those caught between quick, casual restaurant concepts on the high end and fast-food joints on the low end.”

Dan just shared a new short play with his Strategic Short Report readers that will capitalize on a struggling restaurant business, one he says “could easily make 150%.” There’s a way you can get this pick (and the entire SSR portfolio) for a low one-time fee… see today’s P.S. for details.

  But hey, it’s the beginning of the biggest shopping season in the world, right? Surely the American “consumer,” wherever he is, can shop us out of trouble on Black Friday.

“The U.S. consumer is bound to play only a lackluster role in this recovery,” forecasts our resident economist, Rob Parenteau. “But this has not mattered to buyers of consumer discretionary stocks who are intent on using the typical business cycle recovery playbook in a recovery that is anything but typical.

“The year-over-year growth rate of October retail sales ex-gas is nearly flat from a year ago, while the overall retail sales momentum is still just shy of closing that gap. With comparisons so easy against a year ago, when the global economy was in free fall, this is not a terribly inspiring result. Excluding autos, the sequential gain in October came up short of expectations, with only a 0.2% advance… Caution is still ruling, and for good reason.

“Perhaps the dollar levels of retail sales tell the story more clearly. So far, we at best have a shallow recovery in overall retail sales, while furniture and electrical appliance stores are barely scraping out a trough.

“The latter categories are highly discretionary purchases, and it is these durable goods items that typically provide some of the largest thrust behind economic recoveries. So far, they have not been able to get back up off the mat. From the December 2008 lows in retail sales, the leading categories have been gas, general merchandise, motor vehicles, Internet, jewelry and health and personal care sales -- not a very robust mix excluding cash for clunkers, gas price hikes and trinkets for the more discreet mistresses of Goldman partners.”

  Last, another retail saga: Just six months out of government-nurtured bankruptcy, Chrysler announced on Sunday a huge 0% financing or $4,000 cash back year-end sale. THIS ONE will be the sale that gets Chrysler back on track, they must be thinking. Just clear out those ‘09s, balance sheet be damned, so they can wow us with new colors and extra cup holders in 2010.  

  “You write that the banks were NOT forced into making defective loans,” a reader writes. “Well, in Baltimore you are not too far from Washington, D.C. Here in D.C. I very clearly remember the Washington Post articles about local banks being threatened for not making such loans -- clear back to Carter era. 'Affordable housing' is one of the three central entitlements that the radicals have been pushing for years -- the others are college education (as near free for the 'deserving’ minorities as possible) and free health care. And in all three the more the liberals subsidize the 'poor' to buy into it the higher the price goes.”

The 5: We actually wrote that American banks were not forced “to make all those loans.” We even underlined “all” back then for emphasis, which evidently wasn’t emphatic enough. Those well-intentioned “radicals” may have gotten the ball rolling, but to blame them for the whole thing is weak.

  “You neglected to point out,” another reader writes, “the biggest (although not ethical or
legal) way to multiply your investment in tungsten -- gold plate it and use it to replace gold bars.  Apparently there are a few people around who have experience with this.  Any big orders of tungsten by the Treasury department lately?”

The 5: Heh, we’ve heard a lot of stories lately about “tungsten-salted” gold bars… ranging from smalltime consumer rip-offs to a recent rumor that Hong Kong officials found 60 metric tons of the stuff. Be careful out there.

Don’t forget – you can still send in questions for the webinar we’re hosting soon with Nick Bruyer of First Federal Coin Corp. We couldn’t think of a better guy to ask about spotting phony gold. Send your questions and sign up soon.

Cheers,

Ian Mathias
The 5 Min. Forecast

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