Macro Trends: America’s New Chapter

by: Marvin Clark
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Sir Winston Churchill - Speech in November 1942

There are moments in history when one or more events can change the fundamental direction of a nation. The most obvious contemporary example is the radical alteration in national defense following the World Trade Center attack by terrorists on 9/11. A political case in point would be the resignation of the 37th President of the United States, Richard M. Nixon. A third such occasion would be the regulatory fallout from the Three-Mile Island nuclear accident.

This past week, the first chapter of America’s 21st century was written. Senator Carl Levin’s Permanent Subcommittee on Investigations’ 10 hour interrogation of Goldman Sachs (NYSE:GS) executives; the fury unleash by the southwestern state of Arizona enacting its new anti-immigration law, and BP’s environmentally catastrophic Gulf of Mexico drilling disaster.
Alone, these events would leave their respective acute scars upon the landscape after temporarily shaking public confidence and inflaming anger. Long-term effects on industrial and investment policy, and society, certainly, would be limited. This confluence of events, at this period in time of near total political polarization, by everyone on every subject, due to fundamental demographic changes and the recent domestic and global economic collapse, will trigger the periodic inevitable rewriting of the American narrative for the next generation. Investors and investment professionals alike, must fully recognize this metamorphic moment we are in to successfully navigate tomorrow.

Goldman Sachs
It was a bad week for capitalism. The mightiest of the investment banks was mortally wounded on live television. The personification of Thatcherism and supply-side economics, which guided America’s industrial policy for the last thirty years, was exposed as being indifferent to the average citizen’s pain and suffering, rightly or wrongly, during and following the worst economic downturn since the Great depression. Two days after this public display, the SEC referred to the Department of Justice a criminal complaint of fraud against Goldman Sachs which compounded their image problem of indifference with moral infidelity.
As I wrote last week, no investment firm has ever survived a criminal conviction. On Friday, Standard & Poor’s downgraded shares of Goldman Sachs from a buy to a sell while Bank of America Merrill Lynch cut its rating on the stock to natural from buy. The price of its stock closed down for the week at 145 from a high of 161. For the month, GS traded as high as 186.
Goldman’s employees interested in a long career on Wall Street are planning their exit strategy, or will do so shortly, before the worst might occur. In the coming months there will be a brain drain on the firm. Weaker CVs and paycheck traders will remain on the sinking ship for as long as possible. Top management will be replaced as punishment for the significant drop in shareholders’ value, as well as allowing trading profits to interfere with client relationships – and getting caught. The most conservative clients will leave first; firing the firm and choosing a competitor. Lawsuits will flood the company from bitter clients with a loss from previous deals. The government will allow them to bleed to death from a thousand cuts from investigations, innuendo, and prosecution.
Buy the GS Jan 2012 100 strike puts and/or sell the Jan 2012 100 strike calls and wait. Time is on your side.
The Economy
The FDIC has closed 64 banks to date with another 700 + on the problem bank list. Federal dollars from the stimulus bill are propping up economic data. Artificially low interest rates are lifting share prices. Real estate assets are dead money. The economy is much weaker than popular news stories would have you believe.
Global business will change the nature of our country this decade as well. Respective debt levels for the European PIIGS (Portugal, Ireland, Italy, Greece, and Spain) nations, are unsustainable. Europe as a whole is facing more than $2 trillion dollars in maturing debt over the coming three years. That much refinancing will be unavailable in the marketplace for high credit risk debt.
A three-year $140b rescue package tentatively approved by the EU and the IMF just for Greece, in exchange for a self-induced economic depression, cannot be repaid. It is delaying the inevitable default or restructuring on their debt. Meanwhile, this will cause protests and violence in the streets of Athens, leading to an unstable political environment. Without austerity measures Greece’s debt will collapse, causing the European Union to quickly unravel. There is only a 50/50 chance that the EU will still exist in 24 months. Either scenario can throw the world financial system into turmoil for the second time in four years.
Over this same period, the US has enormous and unsustainable funding requirements too.
Australia, Brazil, Canada, China, and India have raised interest rates as industrial and food commodity prices experience inflation. Australia announced a new 40% windfall profits tax on miners. China again raised its banking reserves requirement by 50 basis points. Another interest rate hike is expected later this year.
Prices are rising here in the US as well; however, the reality of modern macroeconomics and the granularity of deflationary and inflationary forces coexisting across different asset classes in the same economy is an unfamiliar and difficult concept to grasp. Real estate prices will continue to slump, due to an absent of consumer credit and borrowing demand. Energy prices will move higher than previously thought, in part, because of the BP oil well fiasco (more on this later) and higher demand in Asia and South America. Food prices are higher.
As confidence falls and tensions rise later in the year, a substantial stock market correction will occur and gold will make new highs. Gold’s correction earlier this year did not break its long-term trend line.
Contrary to conventional thinking, a lower -- or very slowly rising Chinese Yuan against the dollar is in the best interest of the US. Consider this example: if you are PADI certified to scuba dive and understand buoyancy, think of the role your weight belt plays. Your body mass (the dollar) is greater and heavier than your belt (the Yuan). But the density of the lead weights in your belt assists you to descend. If the Yuan rapidly decouples from the dollar today, the dollar’s intrinsic properties, massive debt and deficit spending, low GPD growth, net imports, energy consumption, war, will cause the dollar to fall rapidly, accelerating a move away from the dollar as the world’s reserve currency. Whenever this reign ends, America will be the last one to know.
The stock market has rallied since March 2009 on cheap money and undervaluation; the former is unsustainable and the latter no longer the case. In my predictions for 2010, I predicted market highs for this year would be made in the first or second quarter. I stand by that prediction.
Move to cash and gold bullion or bullion-backed ETFs: SGOL, PHYS, and GTU.

BP Underwater Gulf Gusher

The most devastating event this week, both in terms of financial and social damage, is BP’s Gulf of Mexico deep sea drilling rig disaster; gushing from 200,000 gallons or 5,000 barrels of crude oil per day, to 1,000,000 gallons or 25,000 barrels per day, or more - no one knows for sure, into the ecologically sensitive Louisiana estuaries. Alabama, Louisiana, and Mississippi account for 19% of the US refining capacity.
A pipe from the Deepwater Horizon drilling rig, located 50 miles offshore and 5,000 feet below the surface, ruptured April 20th, ironically, the 40th anniversary of Earth Day. The explosion, which killed 11 workers, was first reported to be leaking about 40,000 gallons per day. That figure was revised three times.
A remote-controlled shut-off switch, called an acoustic switch and costing about $500,000, was not employed on this drilling rig. This device is designed to, and could have, stopped the flow of oil after the rupture. It is not required on rigs by the US. It is mandatory for offshore drilling by Norway and Brazil. Norway has used them since 1993. Some oil companies use this device even when they are not required.
Double-hull tankers will see a pickup in business. Makers of cleanup materials will do well. Chemical companies will also play a part in the aftermath of the catastrophe.

With the fishing industry destroyed at least for the next five years, it’s possible that Genetically Modified [GM] and farm raised crawfish, scrimp, and oysters may become an alternative supply of gulf seafood.
Expect to see a $1 to $2 impact to the gasoline this summer and spot oil above $100.00 a barrel, as the interruption of production, inspection of other offshore rigs, regulatory review modification, and the beginning gulf coast cleanup operations transpire. At this time, it is unknown how to cap the leak. Drilling a new well to stop the flow of this one could take two to three months to complete, experts say. There could be more than 10 million barrels of oil at that well location. America’s gulf coast has become the poster child for clean, renewable energy. That sector is no longer out of favor as this week ends.
The most famous comparisons for this oil spill are the January 28, 1969, Santa Barbara Well Blowout off the coast of Santa Barbara, California, losing 100,000 barrels and the March 24, 1989, Exxon (NYSE:XOM) Valdez oil tanker spill in Prince William Sound, Alaska, losing 240,000 barrels of crude.
The truest comparison, however, is the Ixtox1 oil spill in the Gulf of Mexico, 600 miles south of Texas. On June 3, 1979, the Mexican government-owned oil company Pemex was drilling an 11,000 feet deep well when the explosion occurred. In total, 352,400 barrels of oil escaped. It took 2 months for oil to land on the Texas coast, versus 10 days for the BP spill. Experts did not finally cap off the leak until March 23, 1980.
We are living in a new century. The pages of history are forever turned by the winds of unexpected events and timing. We either curse or applaud that moment in time but what is impossible to do is to reverse its existence.

Move to cash and gold, avoid corporate bonds, short Goldman Sachs and the financial sector, and buy clean tech ETFs.

Disclosure: sgol, gtu