by Addison Wiggin & Ian Mathias

• Bernanke says recession technically over… but government scrambles for second real estate crisis
• Dan Amoss with one sector slide “only in the first inning”
• U.S. wins China trade war with chicken feet? Chris Mayer on this ridiculous, but worrisome trend
• Plus, Frank Holmes with three good reasons gold still has appeal

  “From a technical perspective, the recession is very likely over,” Ben Bernanke assured the world after a speech at the Brookings Institute yesterday. If you’ll spare us a few seconds, we’d like to start today’s 5 with a semantic gripe:

Is there any point in saying something is “technical” unless you’re just trying to put a pretty mask on an ugly reality? When our mechanic told us last month that the brake pads on our old Honda Civic were “technically” useable, we grimaced and reached for our wallet. Picture an anxious young couple in the doctor’s office post examination when their trusted physician announces, “Well, technically, you’re pregnant.” Mmmmm… how assuring.

So the economy is technically just fine, but “it’s still going to feel like a very weak economy for some time,” Mr. Bernanke hesitantly added, “as many people will still find that their job security and their employment status is not what they wish it was.”

In Bernanke-speak summary: Technical economy = what you wish it was. Real economy = not what you wish it was.

  Here’s another serious indicator that the powers that be will soon be declaring an end to this recession: Capacity utilization inched up for the second month in a row in August. In data announced by the Fed today (now way Mr. Bernanke got a peak at this beforehand), the U.S. manufacturing sector utilized 69.6% of total capacity during August, its highest level since February.

We’ve noted this several times before, but it bears repeating. In postwar history, when capacity utilization rebounds, the technical conclusion of the recession has already occurred… just a matter of time before the NBER calls it:

So we wonder... how long until the next one technically begins?

  As usual in Washington, it’s “Do as I say, not as I do.” While Ben Bernanke is talking up the U.S. economy, Congress and the IRS are scrambling to stop another real estate collapse.

First, the political left and National Association of Realtors are in the process of extending the now famous “first time homebuyer tax credit.” The initial plan, which was passed around this time last year and allows first-time homebuyers an $8,000 tax credit, is on track to cost about $15 billion -- double the projected budget.

Heh, and just like “cash for clunkers” going massively over budget must be a sign of scorching legislative success. Thus, the new plan is to extend the tax credit into the summer of 2010, boost the credit to $15,000 and make all potential homebuyers eligible. Those who are content with their current home and/or unwilling to invest in a new one… well, they get the prideful assurance of knowing they played it safe -- and their kids get the bill.

  Also, the IRS has changed some rules to help keep commercial real estate afloat. It’s a technical matter (aren’t all American tax laws hard to understand?), but basically, the IRS fudged their rules on tax penalties for real estate investment pools. Under the new laws, certain commercial real estate loans could be modified or refinanced without hitting investors with a tax penalty.

We’ll save the details for more seasoned analysts, like our resident CFA, Dan Amoss. But you get the gist… the government is going out of its way to keep commercial real estate from going down.

  “The fundamental outlook for REITs and commercial real estate remains bleak,” says Mr. Amoss, “and the market will soon wake up to this fact.

”The core of the bear case for REITs rests on falling comparative property values, falling rents, falling occupancy rates and tight to nonexistent refinancing conditions. Refinancing conditions are important because if lending remains tight, this will push up the amount of property foreclosures and liquidations. And conditions will remain tight because the regional and community banks that typically lend against commercial real estate collateral are not answering phone calls from desperate borrowers. They’re nursing hangovers from their existing commercial real estate loans, and have regulators watching their every move…

“Richard Parkus, head of mortgage-backed security research at Deutsche Bank, estimates that cumulative commercial real estate charge-offs will be in the range of 10% of the banking system’s $1 trillion in core commercial real estate loans. That’s a $100 billion hole in the banking system’s capital that many banks will not be able to “earn their way out of.” I think 10% cumulative charge-offs could be conservative.

“Thus far, according to SNL Financial data, commercial banks have charged off just 1-2%. So in baseball parlance, “We’re only in the first inning” of the process of recognizing and writing off whole commercial real estate loans sitting on bank balance sheets.

“As this occurs, this will lead to a flood of foreclosures and liquidations, which will push down market prices for commercial properties -- the same types of properties owned by REITs.”

What’s the smart way to profit from the fall of commercial real estate? Get Dan’s advice here.

  The recent U.S. versus China protectionism scuffle entered a new level of silliness today. If you recall, earlier this week, the Obama administration attempted to boost U.S. manufacturing by slapping a 35% tariff on Chinese tires. China fired back with a formal WTO complaint, plus rumors of doing the same to American chicken and auto part exports.

Heh, well today, American poultry experts have returned fire with the help of The New York Times: “We have these jumbo, juicy paws the Chinese really love,” said the NYT expert, “so I don’t think that they are going to cut us off.”

That’s right, the U.S. contends that the Chinese appetite for overgrown U.S. chicken feet is so insatiable that it will squash the trade dispute. They can conduct a legendary Olympic Games, build nuclear bombs and space shuttles, but NO WAY they can match our chicken feet.

Really… how could anyone live without?

  ”Besides from being just ridiculous,” notes Chris Mayer. “I find stories like this very worrisome. History gives us some chilling lessons.

”I think most people tend to take globalization for granted. In other words, most people think that the world is getting smaller and more connected all the time. This is really not true when you look at the longer historical picture. It ebbs and flows.

“For instance, a pretty good, if dense, book on the history of world trade titled Power & Plenty makes one thing very clear. ‘If anything,’ the authors note, ‘history suggests that globalization is a fragile and easily reversible process.’

“Where it gets chilling is during the Great Depression: ‘When the system was hit… the result was wholesale protectionism, and a renewed disintegration of international commodity markets.’

“The authors go on to show how the collapse in trade led to all kinds of bad things. It created mass unemployment in places such as Germany, which was a big factor in Hitler’s rise to power. In Italy, the Depression contributed to Mussolini’s rise to power. The rise of tariffs and trade disputes also fanned imperialistic flames in Japan as it sought to gain self-sufficiency through conquest. All of this contributed to the outbreak of World War II.

“In any event, many people call what we are going through today the Great Recession -- the worst global slump since the 1930s. And I wonder if the playbook will follow the path of the 1930s. It seems as if it might.”

(By the way, have you checked out Chris’s latest special situations portfolio? He calls it “the primeval portfolio.” It’s a group of investments perfect for uncertain times… find details here.)

  In the markets today, this week’s trends endure. Stocks are slowly rising, which is adding to the dollar’s steady fall. The S&P opened up just a few points today after yesterday’s 0.5% rise. The dollar index fell as far as 76.2, just a breath from a 12-month low.

  The dollar’s fall is always good news for gold investors. The spot price is back up to $1,015 as we write, just $18 from its record high set back in March 2008.

“No one knows what gold will do this time around,” says our colleague Frank Holmes of U.S. Global Investors, “but there are some plausible reasons why the price could stay higher longer:

• The first reason is one that we’ve discussed before -- we are now in what has historically been gold’s strongest season of the year...
• A second reason relates to the weak dollar due to prolonged rock-bottom interest rates and massive deficits being piled up in the U.S. Gold and the dollar typically move in opposite directions, so a weak dollar tends to be good for gold…
• A third reason is rebounding interest in commodities overall. Prices for copper, zinc and other metals have seen strength recently. This isn’t surprising, given the growing signs of economic recovery and the dollar weakness.

“Many are afraid that a global economic recovery will unleash inflation. Stimulus spending by the Federal Reserve and central banks around the world has added several trillion dollars to the global money supply. This will eventually erode the value of the dollar and other currencies.

“There is an opposing fear that all of the stimulus spending won’t be enough to get the global economy out of its sickbed. What happens then? The Fed and others have made it clear that their medicine will be more stimulus spending, which will further devalue paper currencies.

“Either way, gold has appeal.”

  Last, consumer price inflation is down 1.5% over the last 12 months, the Labor Department said today… all the more reason for the Fed to keep the easy money flowing. Still, we note that prices inched up 0.4% in August, month to month, ahead of forecasts.

  “Why would you think that investors, or anyone else with any sense, would turn to the dollar for safety?” a reader asks, referring to Bill Bonner’s forecast that before inflation erupts in the U.S., there will be another deflationary period where the world once again flocks to the safety of the dollar.

“The feckless spending and running up of debt is a major cause of the flight from the dollar, which is one of the primary reasons the dollar price of gold is up (over 5% in 10 days, an annualized rate of 180%) and why the dollar index is down.

“A break in banking or in the market is highly probable, but how can it bring on a deflationary collapse? In the ’20s and ’30s, there were price decreases as the dollar increased in value and as merchandisers chased revenue/sales, but that was a sound dollar. We have not had a sound dollar since the ’70s.

“I think your readers, our country, will find that the dollar price of gold has already entered its final bubble phase and that price will go up, more or less exponentially, until the official inflation figures recognize some 1,000% and we get a new medium of exchange. Regardless of what the government stats say, inflation is running somewhere around 20% right now, and the rate itself and its rate of increase show signs of increasing. This inflation will eliminate the middle class in America. And probably provide the backdrop for a drastic change in our government. And I am an optimist.”

The 5: We suspect the dollar will be the money of choice until proven otherwise, if that makes any sense. There are plenty of signs that reckoning day is coming, but not yet. We’re with Bill.

Best regards,

Ian Mathias
The 5 Min. Forecast