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Weekend Edition

The Best of The S&A Digest
Saturday, February 20, 2010

I spent the week trying to figure out what will happen as the U.S. continues to default on its debts. And make no mistake, the U.S. is defaulting.
 
By that I mean it can no longer find any real creditor to finance its obligations, so it is making ends meet by having the Federal Reserve paper over our funding gap, which I estimate is at least $500 billion per year.
 
I know what will happen in general... Inflation will rise, interest rates will soar, and credit, generally, will be harder to come by. But the big question is whether or not there will be a real run on the dollar.
 
I estimate our annual foreign borrowing requirements are now around $2 trillion per year. That's the foreign contribution to our annual deficits plus the amount of foreign debt we must roll over each year. China has stopped buying. What happens if we have to paper over the entire $2 trillion? It could happen. In fact... I think it will happen.
 
And here's the curious part. U.S. Treasury and agency debt makes up about 60% of the world's banking reserves. So... what happens when the world's reserve currency defaults? I don't think anyone knows for certain. But I know a few things are very likely to happen – soaring hard commodity prices, for example. In my latest newsletter, I tell my subscribers how to protect themselves from a full-blown dollar crisis. It's coming. If you'd like to receive my report, which I released yesterday, click here.
 
Back in my November issue, I explained the secret of the Greenspan-Guidotti rule. It accurately predicts when countries will experience a currency crisis. And it flashed a warning signal about the U.S. in 2009.
 
One guy I know who understands Greenspan-Guidotti is George Soros. You might not like his politics, but no one in history has made more money trading currencies. He put on his biggest trade in years last December – just after I wrote my analysis of the Greenspan-Guidotti rule and U.S. finances. What did Soros buy? More than $600 million of gold. He knows what's going to happen. If you don't understand the Greenspan-Guidotti rule, you really ought to read my newsletter. This one idea alone is worth more than the price of admission.
 
If you think you can pour yourself a drink, sit down, relax, watch the Olympics, and escape the commercial real estate crisis – think again.
 
The Whistler Blackcomb ski resort, where U.S. Olympian Lindsey Vonn won a gold medal this week, should have been sold off in a foreclosure auction yesterday. Fortress Investment Group owns the resort operator, Intrawest ULC. Intrawest has been selling properties to pay down debt. Lenders, including Lehman Brothers (of course), have been circling since Intrawest missed a December payment on a $1.4 billion loan. But creditors agreed to extend the foreclosure auction date until February 26, to avoid a sale during the Olympics.
 
The buyers could be getting quite a good deal once the sale goes through. Fortress Investors saw their $1.7 billion equity investment in Intrawest sink to just 4 cents on the dollar as of October 31, 2009.
 
 More than 120 hedge funds bought shares of Citigroup last quarter, adding a net 1.2 billion shares. Fund purchases outnumbered sales by a ratio of more than 10 to 1. And you'll recognize the names of the three biggest buyers...
 
John Paulson bought over 200 million shares, bringing his Citi holdings to 506.7 million shares. Eric Mindich's Eton Park Capital Management bought 138 million shares, making it the fund's largest holding. And George Soros reported a 94.7 million-share stake worth $313.4 million. Hedge funds are buying Citi because government-regulated banks make a killing during periods of inflation – especially when the government is manipulating interest rates in their favor.
 
The government has already proven it will pump as much money as needed into the bank. And it doesn't want the public embarrassment of losing money on its investment.
 
Wal-Mart's sales last quarter rose 4.2%... but sales at stores open more than a year (called comp sales, a key retail metric) fell 2%. Naturally, the Wall Street Journal headline said, "Wal-Mart's Profit Rises 22%," while the Financial Times noted correctly, "Walmart suffers first US sales decline."
 
Those who fear inflation can't ignore what's going on at a monster like Wal-Mart, the world's largest retailer. The world's largest grocer said the drop was caused by deflation in the price of groceries – which make up 40% of its U.S. sales – and in the price of electronics. Wal-Mart is known to eschew temporary, promotional pricing in favor of its trademark "everyday low prices." Seems like every day last quarter they got lower and lower.
 
Wal-Mart also said its ongoing remodeling of U.S. stores hurt foot traffic more than anticipated. That's Wall Street speak for fewer people shopped at Wal-Mart last quarter.
 
Perhaps Wal-Mart isn't the best bellwether for inflation... For the 12-month period ended January 2010, the unadjusted producer price index of wholesale goods in the U.S. rose 4.6%. That's the largest 12-month increase since October 2008.
 
Of course, the news stories all say that, when you strip out increases in food and energy, it's really not that bad. These folks should try stripping food and energy out of their lives. I bet that would be pretty bad.
 
Regards,
 
S&A Research




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