No Joke

The federal deficit is a joke. But it’s not funny.

They say the government’s red ink is going to be “only” $314 billion this year, and that’s supposed to be “small.”

Now the facts …

Fact #1.	$314 billion is not small. It’s still huge — regardless of the size of the economy.
Fact #2.	The so-called “improvement” in the deficit has nothing to do with prudent fiscal policy. It’s strictly a temporary fluctuation driven by an equally temporary recovery.
Fact #3.	The recovery itself was jury-rigged by Washington with string and duct tape. First, they used big interest-rate cuts, a classic example of bad Fed policy. Then, as if that weren’t enough, they also used big income-tax cuts, a classic example of mad fiscal policy.
Fact #4.	Despite all this heavy lifting and despite the resulting bubble in housing, the economic recovery is actually lame and limp compared to previous recoveries. This begs the question: What happens now that interest rates are going back up and tax cuts are about to expire?
Fact #5.	Even assuming interest rates do not jump and corporate profits do not slump, the same people that told us yesterday the deficit has improved — the Congressional Budget Office — are also telling us that, in future years, there’s likely to be no further improvement. Estimated total red ink for the next ten years: A whopping $2.1 trillion.
Fact #6.	The $2.1 trillion estimate is also jury-rigged. For example, it includes your Social Security surpluses as part of their revenues. When America’s big corporations pull the same trick as your private pension funds, it’s a big scandal. But when America’s big government cooks its books with your Social Security funds, it’s supposed to be OK. Well, it’s not OK. And as soon as you recognize that in reality, the $2-trillion deficit estimate for the 10-year period turns into $4 trillion.
Fact #7.	While the White House and Congress are debating loudly about the shaky future of Social Security, they’re sulking quietly about the far shakier future of Medicare. Include a realistic forecast of Medicare deficits, and the federal deficit swells by another trillion, or more.
Fact #8.	They want you to celebrate this week’s fiscal news. Then … they want you to disregard last week’s trade news. Give me a break! The U.S. trade deficit widened to $58.8 billion in June, much worse than expected. Now, just one year of trade deficits is more than two years of budget deficits!
Fact #9.	They also want you to disregard the obvious inflation dangers that each of these eight facts can bring on. Never mind, they say, that the government’s numbers greatly underestimate inflation. And never mind, they add, that the government’s inflation report this morning shows still more danger, despite its underestimations.

The government’s biggest problem of all: You and I are not the only ones who know this. A growing minority of smart investors — especially overseas — are quickly catching on as well. And they are shifting most of their portfolio to safer harbors.

Case in point: Investors in the …

Sinking Stock of Fannie Mae

Just a few months ago, we issued a major warning to investors that Fannie Mae shares were on the brink of collapse. Now, that collapse has begun.

Less than one year ago, it reached a high of almost $78 per share. Yesterday, it closed at $50.60 per share.

Reason: That growing minority of investors I just told you about, especially real estate and mortgage industry insiders, are beginning to realize that the two biggest threats to companies like Fannie Mae — rising loan rates and falling loan quality — are now about to smack these stocks down.

So they’re not waiting. They’re clearing out now while they still can.

Another example: Delta Airlines, once one of the nation’s most profitable carriers, is about to file for bankruptcy. Just last week, an outside consultant to our company asked if he should pick up Delta shares for about $1.80. That seemed cheap to him.

I hope he didn’t.

Yesterday, Delta closed at $1.39, down by over 13% on the day, 28% in two days, a whopping 64% in just three weeks! So much for the “so-cheap-it-can’t-get-any-cheaper” theory.

Everywhere, smart money is shifting to safety. And if you haven’t done so already, I recommend you do the same.

Plus, as Tony warns below, the disconnects at the national level reflect serious disconnects that permeate every town and city on the local level …

Disconnect at the Gas Pump:
Consumers Holler But Don’t
Change Driving Habits
by Tony Sagami

There’s major discrepancy between what people say about gas prices and what they DO about them.

Just this past weekend, the price for a gallon of regular unleaded gas jumped by another seven cents to $2.484 a gallon, a new all-time high.

Americans hollered, and I don’t blame them in the least.

And, still not fully reflected in the price of gasoline at the pump is the drama that unfolded on Friday at the New York Mercantile Exchange: For the first time in history, the wholesale price of unleaded gasoline busted through the $2.00 barrier. This means gas-at-the-pump numbers are going still higher, almost immediately.

Americans will holler again, and I will probably do the same.

The big disconnect is that despite all the hollering, most Americans — myself included — will still not change driving habits. Where I live here in Montana, the natural scenery is beautiful. But the public transportation is virtually nil. So I don’t have a choice. And even where buses and subways are convenient, Americans love their cars too much to leave them parked in a garage.

Associated Press business writer Brad Foss puts it this way:

“Soaring gasoline prices are getting a rise out of many U.S. motorists, but by and large they’re not getting in the way of summer vacations, commuting habits or SUV sales …

“No matter how much motorists shake their heads in disgust at record pump prices, fuel consumption isn’t expected to plummet anytime soon. Spending on other goods and services is likely to suffer first, economists said, partly explaining why U.S. financial growth has been slower in 2005 than the previous year.

“The latest Energy Department data show regular unleaded gasoline averaging $2.55 a gallon nationwide, or 67.5 cents above year ago levels. At the same time, daily gasoline demand is up 1 percent compared with last year.

“Almost two-thirds of those surveyed for an AP-AOL poll said they expect fuel costs to cause them financial hardship. That was up from April, when only about half felt that way. Still, there is little evidence that this has led to meaningful changes in driving habits.”

The reporter asked consumers what they’d do if gas prices continued surging. One said she wouldn’t change her habits until gas reached $3 per gallon. Another said he’d wait until a gallon of gas hit $4. And I know a lot of people who wouldn’t dream of divorcing their gas-guzzlers even at $5 or $6 per gallon.

(By the time they switch to other forms of transportation, though, they may not save nearly as much as they hope. In this morning’s consumer price report, the government revealed that the cost of public transportation jumped 1% in just ONE month, following a 1.2% increase in the previous month!)

Whether some eventually switch or not, the bottom line is this: The higher gasoline prices may be hitting consumer budgets, but they’re still yet not pinching America’s thirst for gasoline … and appetite for trouble.

So much for the “so-high-it-can’t-go-any-higher” believers.

Disconnect in Real Estate:
Some Housing Markets Still HOT

Mortgage rates are already rising, but housing prices are still not falling.

Moreover, if you look in the rear view mirror — at PAST price increases — you get the impression that real estate is still red hot. And in some parts of the country, we’re talking RED, RED hot!

According to The National Association of Realtors, the price of an average home in the last 12 months increased at the fastest pace in history — 13.6% in the 12 months ended June 30.

Moreover, out of the 149 metropolitan areas surveyed, 67 increased by more than 10%:

Everybody likes it when their home goes up in value. But don’t these single-year jumps of 30% to 40% make the hairs on the back of your neck stand up?

They sure as heck do that to mine. This isn’t like the tech bubble of the 1990s. It’s worse.

Disconnect in Chip Industry:
Agilent to Dump Its Chip
Division And Cuts Jobs

Another disconnect: While the tech-heavy Nasdaq ekes out new highs, there’s a growing number of tech-heavy companies that are unloading their burdens.

Take the executives at Agilent, for example. They had a busy weekend.

They cut a deal to sell their dog semiconductor unit for $2.66 billion, sell their stake in another company (Lumineds) for $950 million, and lay off 1,300 workers.

Agilent also said it would take that $3.6 billion of sales proceeds and apply them to a $4 billion stock buy-back program.

Wall Street thought that was great news and sent Agilent stock soaring today.

I agree that Agilent minus its semiconductor business is a much better company — not good enough to deserve my money, but no longer a train wreck waiting to happen.

The problem is this: If tech companies think it’s time to sell their assets, what gives so many investors the idea that it’s time to buy their shares?

I guess they really don’t care. As long as they can keep the party alive, they’re not going home. But …

Here’s What YOU
Should Be Doing

First, you should be making a nice, not-so-small fortune in the energy stocks and options we have been telling you about.

But if you’re not, that’s OK. Until millions of Americans start waking up and changing their driving habits, oil and gas prices markets are going to continue higher. And as long as those dramatic uptrends are in place, there are going to be abundant new opportunities in the oil and energy area.

Second, you should NOT be putting ALL of your money into energy stocks, energy options or any other single area for that matter. That’s not just because I believe in diversification. It’s also because I believe in CASH — safe, liquid cash.

Third, don’t underestimate the power of all the disconnects Martin and I have told you about today. All it takes is for a few more people to connect the dots, and suddenly, out of the blue, you could see markets going haywire.

In the broad stock indexes, and even in the bond markets, you don’t see that happening yet. But you do see it happening in individual sectors and stocks — wholesale gas prices surging, Fannie Mae plunging, Delta shares in a free-fall to the zero line.

If you’re ready, great. If not, I have just one parting question for you: How many more ringing bells and flashing signals are you waiting for?

It’s no joke.

Best wishes,

Martin Weiss and
Tony Sagami

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

© 2005 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478