Debt Warning Signals, Barriers to Recovery, The Uptick Rule and More!

• NABE predicts “recovery firmly on track”… Rob Parenteau on what might derail mainstream expectations
• Marc Faber identifies one nation/sector as “the perfect contrarian play”
• Chris Mayer on when sovereign debt goes too far… and the many nations flashing warning signals
• Since it worked so well last time… SEC mulling more rules/bans on short selling

  Most economists now “expect the recovery to remain firmly on track.”

That’s the word today from the National Association of Business Economics (NABE), the group officially tasked with deciding if the economy is growing or receding. The NABE forecast 3.1% GDP growth this year, largely in line with their last broadcast back in November.

That “firm recovery” will also move the unemployment rate down one tenth of a point this year, the group forecast, from 9.7% now to 9.6% in December.

That’s good, right? C’mon, this is The 5… we never trust good news!

  “Our concern remains,” Agora Financial’s resident economist, Rob Parenteau, says “as investors gain more confidence in private sector growth,” many questions about their recent behavior arise:

For example, investors “may notice that ‘core’ inflation remained above zero all the way through the deepest and longest recession since the Great Depression. If core inflation is driven by slack in the labor market and slack in the use of productive capital, why did deflation fail to show up in one of the sloppiest business cycle recessions in decades?

“If many of the investors that sold mortgage-backed security debt to the Fed under the Fed’s quantitative easing (QE) program,” Parenteau continues, “then turned around and reinvested the proceeds in Treasuries, then the cessation of QE will result in more of a backup in Treasury bond yields than many investors currently expect.

“If at the same time, institutional investors are growing more confident in a self-sustaining economic recovery (and this is certainly where they have been placing their money over the past two weeks), the investment rationale to buy and hold Treasuries at historically low yields is likely to be further undermined.”

One conclusion: If the recovery is here for real, Treasuries are about to get smacked. Even by the Fed’s own logic. Right on schedule, if you’re following the Trade of the Decade.

(Side note: Marc Faber came out in support of the buy side of our Trade of the Decade last night. “There is an investment opportunity in Japan,” he told the audience in Tokyo. “Valuations are not terribly expensive,” he added, saying Japan was “the perfect contrarian play.” For the bold, he had one word for investing in Japan: “Banks!” ¡Ay, caramba!)

These next two nuggets don’t bode well for Treasuries, either:

  “China may have created trusts in the U.K. and Hong Kong,” observes our friend Chuck Butler. “They’ve switched their buying [and selling] of Treasuries to these two trusts, so that the transactions can’t be tracked.

“Really, we don’t know for sure, but that’s the rumor going around right now. I have to think that this ‘story’ about ‘trusts’ has been made up, to keep people from thinking that China is really reducing its holdings of Treasuries. That’s my story, and I’m sticking to it!”

  “Right now, the market thinks that Germany is a better credit risk than the U.S.” Chris Mayer reports. Indeed, if you own U.S. debt today and want to buy insurance against default, you will find that such insurance costs more than it does to insure German debt.

“I think that’s probably an anomaly,” Chris continues, “as I would bet that Germany is a poorer credit risk than the U.S. In any event, there is not much difference between the two. It’s a bit like choosing whether you’d rather flush your money down the toilet or burn it.

“Both countries are in danger territory, at least according to the work of economist Kenneth Rogoff. He looked at debt levels going back hundreds of years. Rogoff found that as a general rule, a country gets into trouble when external debt to GDP exceeds 60%. That means that the debt held by folks outside the country is about 60% or more of the size of the economy. The economy often contracts, and things can get ugly.

“If you look at the countries flashing warning signs right now, you find a meaty list of potential crises. Here is the latest:

“So let’s see… any resemblances strike you? These are almost all Western countries. All the biggies are here: the U.S., Canada, Germany, France, the U.K. and Australia. Plus, four of the five so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the usual suspects like Zimbabwe.

“I’ll tell you this: I can’t think of any lists you want to find yourself on with Zimbabwe.”

  The latest dollar rally took a break over the weekend. The dollar index fell almost a full point from Friday’s high, now at 80.6. The market got all huffy late last week over the Fed’s surprise hike of the discount rate.

Alas, as we wrote Friday, the Fed is “all for show, not for go,” and the market has since retracted its concern.

  Nevertheless, gold took a little hit. It’s down about 15 bucks from the weekend high, to $1,115 an ounce.

  Another four banks bit the dust late Friday. Having taken off Presidents Day weekend, the FDIC had some catching up to do. The banks hailed from mortgage meltdown hot spot states from Florida to California, bringing the 2010 body count to 20.

La Jolla Bank of California was a notable casualty. Its $3.6 billion in assets makes it the biggest bank failure so far this year. All told, the weekend cost the FDIC another billion dollars it too does not have.

  Since it worked so well last time, the SEC is mulling new rules for short selling, again. SEC regulators will vote Wednesday on the reinstatement of the uptick rule — a provision that requires a stock to be bid up before a short seller can establish a position.

“Any sort of ‘uptick rule’ imposed by the SEC would stifle stock market liquidity,” notes our in-house short seller, Dan Amoss, “which would increase transaction costs for all traders and investors. Also, the evidence from studies by academics and regulators has shown that limits on short selling impede price discovery in cases of rampant accounting fraud, like Enron.

“The real driver of stock market crashes are long-only investors all looking to sell at the same time, with nobody willing to buy. If short sellers drive the price of a single stock down to ridiculously undervalued levels, then the free market will ultimately respond — the low price will draw value-seeking investors to step in and buy.

“But in many cases — especially with highly leveraged companies — there is no equity value. The reason Lehman never reached a bottom was because buyers suspected it had no value and eventually were proven right, since management was overstating the value of its toxic assets by tens of billions of dollars.”

Dan, if you recall, was way ahead of the crowd with his valuation of Lehman Bros. back in 2008. And his Strategic Short Report readers reaped the benefits — to the tune of 450% profits on their LEH puts. That’s his gig. He’s our resident stock market vigilante. And he’s good at it. Since its inception, SSR has managed an average gain — including losers — of 49%. Well done, Dan. If you’d like to try your hand, we’re giving away two free months of his advice, right here.

  A tip of the chapeau to crude oil, this morning, too. While the world has been fussing over Dubai and PIIGS, the black goo has shot up $8 this month, to $80 a barrel this morning. Work it.

  “In response to the fake Chinese Silver Panda coins,” a reader writes, furthering our discussion from Friday. “I was really interested in buying some of these coins, but have no experience in rare coins. I trust Agora and believe you guys do your due diligence. My wife did some research so that we could be better educated and found a first-strike PCGS MS-70 Silver Panda on eBay:

“So are you saying that this is a fake, as First Federal are the only people who have access to these coins? If this is a fake, then the vendor should be reported. If not, then I still don’t understand the difference between a PCGS first-strike from First Federal and the PCGS first-strike from this vendor.”

The 5: If it’s truly PCGS certified, it’s the real deal. But that doesn’t mean they are up to snuff with the coins First Federal is offering exclusively to you.

Here’s the key distinction: Not only are First Federal’s Pandas graded first-strike, but each coin also includes a letter from the Chinese Mint’s exclusive distributor declaring that the coin was truly among the first struck. It would be possible for other companies to have first-strike-graded coins simply because they submitted them to PSGS within the first 30 days of the mint release. But only First Federal has that documentation.

  “How do I know that these coins, coming from China, are really MS70-grade coins?” another reader writes. “China has not been on the up and up with the U.S. for some time now, and I am reluctant to buy anything from China without seeing it first. Please reply.”

The 5: Apart from the documentation, First Federal has a 30-day return policy. If you need to “see it to believe it,” the sale is guaranteed. Your investment is protected. And all the graders and merchants involved are international companies with sterling reputations and certifications.

We’ve darn near sold out the exclusive stash the Chinese mint has made available to First Federal, and in turn, Agora Financial readers. Having introduced the coins to you four days ago, First Federal’s inventory is down 80%! At this rate, the well will run dry within the next few days… hours, even.

Just sayin’… if you would like to have your own first-strike Panda, don’t wait.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. Here’s a fun announcement: We just inked a deal with Odyssey Marine to make a new documentary film about its battle with Spain over the “Black Swan” treasure find off the coast of Gibraltar. Our press release to the trade in Hollywood goes out later today, but thought you’d like to know first.

ZEUS on location in Lebanon a few weeks ago, plumbing the depths of the Mediterranean for a downed aircraft’s ‘black box.’