by Addison Wiggin & Ian Mathias

• China and Obama square off… Dan Amoss on “the forefront of concern” for the world’s superpowers
• Paulson, Cramer, Greenspan occupy “Worst of 2000-2010” lists… so why are we all still listening?
• More banks fail, FDIC scrambles for cash… Rob Parenteau examines the bitter reality of modern banking
• The one chart for the third quarter of 2009… dissecting the market’s straw man, below

  President Obama vs. China. Touch gloves and come out swingin’!

“The continuous depreciation in the dollar,” said Liu Mingkang, chairman of the China Banking Regulatory Commission, “and the U.S. government’s indication that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.”

Mr. Obama’s counterpunch: “I can tell you that in the United States, the fact that we have free Internet — or unrestricted Internet access is a source of strength, and I think should be encouraged.”

First round: China.

  That’s unfair, we admit… the two men were never even in the same room over the weekend, and surely Mr. Obama said something more important to the Chinese than an implicit wag of the finger towards censorship. But those are the headline quotes this morning, the first day of President Obama’s pivotal trip to Asia, and they speak volumes. The Chinese are taking big swings… they’ve got our debt, they’ve got our imports, they recognize their major reserve currency is becoming a carry trade whipping boy… and they are not happy. America, as usual, is jabbing back with human rights pleas and the never-ending quest to spread democracy.

“With President Obama embarking on his first official visit to China this week,” Dan Amoss explains, “the issue of the dollar/renminbi peg is at the forefront of concern. As the U.S. dollar index weakens, so does the exchange rate of the Chinese renminbi versus floating currencies like the euro and the Japanese yen. This translates into an effective price cut for American and Chinese exporters, without the typical hit to profit margins. European and Japanese exporters are suffering from what they consider to be an unfair playing field.

“Debasing the value of a currency is an old-fashioned way for politicians and central banks to subsidize politically powerful exporters. Cheap currency policies are widely popular among the bureaucrats and central planners that populate the halls of academia and policymaking. But over long periods of time, the quality, efficiency and productivity of an export sector will determine its success — not whether it’s located in a nation with a weak currency.

“Like doping in sports, a weak currency gives exporters a price advantage against its competitors. But once too many countries get involved in this ’mercantilist’ type of policy, it transforms into an ugly race to the bottom. In the end, the average citizen is impoverished by diluted purchasing power.”

  But at least the average Joe is starting to “get it.” Alan Greenspan’s interest rate policies garnered the number six spot in Newsweek’s recently released “Top Ten Tactical Blunders” of the last decade. “Let’s blame Alan Greenspan,” the paper joked. Seriously, let’s!

We’ll give Newsweek more credit than usual this week. In another list, “Top Ten Worst Predictions,” they assigned Hank Paulson number five for his Feb. 14, 2008, call that “The worst is likely to be behind us.” Jim Cramer found himself at number two with the always entertaining, “Bear Stearns is fine!” clip.

(Doesn’t this make the present all the more insane? Ben Bernanke has taken Greenspan’s easy money policies to a whole new level. Hank Paulson’s protégée at Goldman Sachs and former Fed insider is the new secretary of the Treasury. And, as the station proudly boasts, more people get their investment news from CNBC than anywhere else in the world. Fool me once…)

  Three banks failed on Friday, bringing the annual headcount to 123. Two in Florida and one in California will cost the FDIC roughly a billion dollars… money they haven’t had for months.

  To pull their deposit insurance fund out of the red, the FDIC made official Thursday its new fee structure. The 8,100 insured banks in the United States will have to pay certain FDIC premiums in advance… a move the FDIC thinks will raise about $45 billion. Tax the successful to pay for the failures… quite a plan.
 

  “The motivating idea behind the various U.S. bank rescue measures,” notes our macro-man Rob Parenteau, “was to do whatever it would take to get bank loans to the private sector growing again. That mission remains distinctly unaccomplished.

“Despite all the policy machinations — from TARP capital infusions to outright asset purchases, temporary lending facilities, a near-zero fed funds rate and various guarantees on bank liabilities — loans outstanding in the commercial banking system have continued to contract. Instead, banks have preferred to accumulate securities rather than make new loans. Even those purchases have flattened in recent months as banks are back to hoarding more excess reserves.

“We won’t argue with the counterfactual — without these measures, the contraction in bank loans outstanding would no doubt have been much more dramatic, as an Austrian-style simplification of balance sheets would have naturally gathered momentum following the Lehman Bros. bankruptcy. But the reality is neither the household nor business sector is eager to add to its debt, and bank loan officers are still battling rising loan loss recognition from the last private credit bulge. This is much as we anticipated — the private sector has hunkered down, is spending less money than it is earning and is paying down or liquidating existing debt loads.”

  Consumer sentiment fell to a three-month low in early November, says the latest reading from Reuters/University of Michigan. They surprised the Street on Friday with a sentiment index score of 66 — worse than expected and the second month in a row of falling confidence.

  Retail sales inched up in October after a hefty fall in September, the Commerce Department says today. Uncle Sam took a page from David Copperfield this morning… the government offered a measly 1.4% October rise as misdirection for a massive September revision, moving a 1.5% drop to a 2.3% decline.

  Today’s market activity: Dollar down, everything else up.

The lowly dollar index is right on its 2009 low this morning at 74.8, aided much by the rising tension in China that we noted above. The low dollar is pushing just about everything else up… the S&P rose 1.5% within the first hour of trading, oil rose over $2 to $78 a barrel and gold found another record high of $1,134 an ounce.

  Two more CEOs of major gold companies have sounded the “peak gold” alarm. Any near-term increase in gold supply would be “artificial” Randgold exec Mark Bristow told the Financial Times. “We will see little corrections that keep capacity alive, but the fundamental reserve base is in decline in terms of both quality and ounces.”

“It costs more to get the ore up,” added Mark Cutifani of Anglogold. “It takes longer for workers to get to the job. Costs are going up and grades are going down.”

 
  Here’s some good perspective on the recovery that wasn’t:

With the majority of publicly traded companies done reporting third quarter earnings, the trend is clear: Profits were way better than expected, revenue was flat at best.

Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can’t be any questions left as to how the market pulled off this quarter… companies are simply trimming the fat at an incredible clip. Not exactly a long-term plan for growth.

  The contrarian trade of the day: Famous foreseer of the 2008 crash John Paulson picked up 300 million shares of beaten-down Citigroup in the third quarter, regulatory filings show today. The fund manager also sold his entire stake in Goldman Sachs and a big chunk of JPMorgan Chase — widely believed to be the only two “safe” blue-chip banks.

  As the U.S. economy “recovers,” our trade deficit has expanded by the greatest margin since 1999. September deficit came in at $36 billion, the Commerce Department reported Friday. That ‘s an 18% jump from the month before, the biggest in 10 years. Imports rose 5.8%, the biggest jump in 16 years.

  “I think you guys missed commenting on the real point,” a reader writes referring to Friday’s issue. “So the Treasury says now it will not SPEND as much on TARP as initially allocated. And by NOT spending this it will pay down the debt. This is typical government nonsense — like when they say that not increasing a future payment for something in the budget amounts to a cut.

“But not spending funds allocated for TARP at best can reduce the annual deficit by that amount — presuming it is not spent on something else. Not spending on something will NOT reduce the debt — at best it will result that the debt is not INCREASED by quite so much.

“OK — so say the Treasury puts the unspent funds from TARP into the box called debt reduction — meaning reducing the current total debt. The result will be that the future increase in total debt will be the same and the end result will be the same. Spending it would increase the debt, but not spending it will not decrease the debt; it will simply not increase the debt as much as if it were spent.”

   “When and if the gold frenzy tapers off, how does one sell gold coins?” a reader asks. “Can they be sold for market value or will they have to be sold at a discount?”

“Wouldn't it be wiser to buy gold bullion just for its weight in gold rather than pay a higher price for graded coins?” another reader asks. “And if you do buy bullion for its weight, must it be circulated, or does it matter?”

The 5: We got a slew of great questions from you about investing in gold and silver coins. Thanks for writing in.

We got so many questions, in fact, we're going to bring in our friend Nick Bruyer to answer them for you. Nick, you'll recall, is one of the worlds leading experts in rare coins and collectibles. Back when Odyssey Marine found $500 million worth of coins off the coast of Gibraltar, it was Nick who was flown in to their ship to assess the value.  Now we're going to bring him in to assess your questions first hand. 

We're just about done compiling the best and most popular questions for him... but if you have a last minute submission send it now. Stay tuned on this one. There's much more to come.

Best,

Ian Mathias
The 5 Min. Forecast

P.S. “Cattle Farmer Makes $140k Watching T.V.” reads a headline that just got tossed on our 5 Min. desk. Read this odd story here… and find out how you could do the same.