St. Patty vs The Fed, Crowding Out BioTech, Midwest Flooding, Facebook and More!

by Addison Wiggin & Ian Mathias

• Fed keeps rates ultra low… Dan Denning forecasts the FOMC’s next "underhanded" move
• How the seemingly benevolent FDA hurts you every day… and crowds out growth in U.S. health care
• Resource traders take note: Another “once in a generation” flood threatens the U.S.
• Plus, your thoughts on our latest venture: Apogee Advisory

  As the legend goes, some 1,600 years ago a Celtic missionary banished the serpents from Ireland, using little more than divine assistance and his walking stick. It’s in fancy paintings, so it must be true:

Were they really snakes, or rather an unpopular religious sect? Was St. Patty even Irish?

We don’t care. It’s a good excuse for a drink… and inspiration to chase out some modern-day slithering here in I.O.U.S.A.:

The Fed did a whole lot of nothing yesterday at the FOMC meeting. Rates stayed the same, and one year after coining the phrase, the Fed insisted rates will stay “exceptionally low” for “an extended period.” In short, it was a snoozer.

“What in the shillelagh is the Fed actually thinking?” Dan Denning asked in response in this morning’s Australian Daily Reckoning.

“To be clear, a shillelagh is an Irish cudgel, used to beat things or threaten drunken bar patrons on St. Patrick's Day. Ben Bernanke is not Irish, as far as we know. But the Fed has used its digital printing press to beat 10-year interest rates into submission. That's kept a lid on U.S. 30-year mortgage rates and prevented a further implosion in the American housing market…

“But do you really think the Fed can afford to withdraw its support of the U.S. mortgage market? The Fed's $1.75 trillion quantitative easing program has kept the U.S. housing market from totally imploding. A spike in mortgage rates would dry up already anemic U.S. housing sales. Prices would fall. Millions more who are hanging on for grim death would see their mortgages go under water. And they would begin to walk away.

“Putting aside the implications for bank collateral, we're talking a serious systemic collapse of the U.S. housing market…

“We think the Fed will find a way to fund, in some underhanded fashion, a new entity to centralize the risk of the U.S. mortgage market. Risk has been concentrating in fewer and larger institutions over the last few years. But the mortgage debt is still too toxic to be borne by any institution that wants to appear healthy and well capitalized in the market.”

  And just in time to support the Fed’s thesis, producer price inflation (PPI) declined in February, the Labor Department reports today. Lower energy costs helped push the PPI down 0.6%, roughly double analyst expectations. That’s also the biggest fall, the government claims, since July.

Year over year though, it’s clear prices are rising again. Producer prices are up 4.4% in the last 12 months.

  Both the short-term absence of inflation and the Fed’s absence of judgment are helping bump stocks a little higher. Over the last 24 hours, the S&P has managed to climb about 1%. These are familiar bubble-era trends…

  The “crowding out” effect we mentioned last week is a serious problem for breakthrough technologies, too, says our tech adviser Patrick Cox.

“When, as is the case now,” Cox asserts, “government uses its coercive powers of taxation and financial regulation to control capital, there is far less available to markets for sustainable economic growth. As a result, the economy suffers.”

Exhibit A: the FDA and its regulation of American drugs.

“The problem is this: Regulators impose costs that are extremely difficult to measure. We hear about birth defects caused by thalidomide when pregnant women ignored warning labels and used the anti-nausea drug to self-treat morning sickness. We don't hear about the people who died of malnutrition because thalidomide, the only drug that let them eat normally, was yanked off the market. We hear about side effects caused by approved drugs. We almost never hear about the suffering and death caused by not approving drugs. The pro-government mainstream media, of course, inevitably fail to present regulatory issues fairly.

“In addition, economists have long pointed out that regulatory agencies tend to be ‘captured’ by those they regulate. Over time, due to various factors, regulators tend to protect the established interests of the industries they regulate. This was clearly the case with the home mortgage industry.

“In the case of drugs, the same dynamic exists. The barriers that must be vaulted by new drug makers are enormous. These barriers are both time-consuming and expensive, which is often the same thing. The best way to understand FDA rules, in my opinion, is to realize that the imposed costs are just high enough to keep Big Pharma safe from most upstart innovators.”

Despite it all, Patrick has done a fine job helping his readers thrive in such an environment. Just this week, one of his core holdings in the Breakthrough Technology Alert portfolio soared so high so fast that other regulators -- this time the SEC -- had to halt trading. Suffice to say, it feels good to own a stock with such a “problem.” Have Patrick help you with your tech investments, here.

  Tech milestone: For the first time last week, Facebook beat out Google for the most visited site in the U.S. The social networking site attracted a mighty 7.07% of all web traffic, edging out Google by a few hundredths of a percent.

Year over year, Facebook visitors have skyrocketed 185%, while Google traffic has increased just 9%.

Oy. We’ve about had it with people talking about Facebook. Are we alone? Or just cranky…

  Attention resource investors: Another flood is now forecast to hit the nation’s breadbasket. Last year, the Dakotas and Minnesota had to fight record-setting high water. Now the National Weather Service forecasts the Red River to rise 38 feet in Fargo by the week’s end -- that’s 20 feet over the flood level and 3 feet short of last year’s record.

“This ‘once in a generation’ flooding two years in a row has our attention,” notes our resource investor Alan Knuckman. “It reminds us that the upside risks for price pressure often outweigh the chances of ideal crop conditions. Though last week’s USDA numbers gave grains a downward slap to add to the January punch -- if history is a guide -- prices will move higher similar to this critical time last year. Beans are holding above $9.00 for now, with corn finding support at $3.60 almost precisely following 2009. If history is destined to repeat itself, we could see corn another dollar higher and soybeans pushing into the low teens by June.”

  Rising stocks and a slightly weaker dollar are helping commodities of every stripe this week. Oil is back up to $82 and change. The front-month contract got a little bump this morning from OPEC too, which announced it is quite content with current prices and won’t be altering the world’s supply of oil.

  Gold is doing well, too, up as high as $1,133 an ounce this morning. All the pieces are in place for the yellow metal today… rising long-term inflation, crazy-low interest rates, etc.

  “I enjoyed reading your latest Apogee,” a reader writes, referring to Apogee Advisory -- our newest publication, which was released Monday. “I thought I would share a comment that my daughter (16-year-old) stated in the middle of last night.

“She had just finished reading an article online at The New Yorker about Tim Geithner. Her comment was a summary that suggested Mr. Geithner’s, and, therefore, President Obama's, policies are working, but they (critics?) aren't giving the administration credit.

“I made the analogy that if we, her parents, took a million-dollar loan on a $350,000 house and she brought her fiends over, it would give the impression that our family is financially doing great. I asked her if she would like the idea that she had to start help making payments on the loan in two years when she was 18, just so that we could keep up appearances that we were doing well to her friends and neighbors. Somehow, she seemed to then grasp a whole different perspective.

“I also told her that Mr. Obama made us feel dirty just because we worked long hours for a good living and don't want to pay higher taxes. We would like to think that we are willing to look after our own finances, instead of the government thinking it can do it better. Also, we would like to let you know that we have been living in our SAME house since 1989.

“I apologize for being long-winded, but I was made to feel stupid by all of the individuals who ‘flipped’ real estate during the boom while we didn't participate.”

  “Thanks for sending along the first issue of Addison's new publication,” another writes. “It was thought provoking, a little terrifying and, overall, an interesting read.”

  “Last night, I read through the maiden issue of the Apogee Advisory letter,” the last writes. “While I thought the material was important and timely, my primary reaction was that most of it was a rehash of stuff I had read from Chris Mayer, Bill Bonner or Joel of Taiwan within the last few days. I also felt that this 13-page tome was pushing at the borders of prolixity; long on word flow, but short on specific action-oriented ideas.
 
“Don’t get me wrong: I still love the concept. I just didn’t feel that this first issue has really ‘gotten on its feet’ yet. I am hoping that as Apogee gains momentum and gets its bearings, we will be reading more insightful ideas about how to cope with this nutty and often scary world (by way of short, specific nuggets from various and unexpected sages around the world), and less broad-brush rehash of geopolitics.
 
“Go get ’em, Addison! “

The 5: If you’d like to help us get Apogee on its feet, please register your comments and complaints, here.

Slainte,

Addison Wiggin
The 5 Min. Forecast

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P.P.S. When all our editors and analysts were in town earlier this month, we asked them for their No. 1 stock pick for 2010… and captured their answers on video. If you want to see it, stay tuned.