April 26, 2007 by Ian Mathias

• Warren Buffett gives The 5 his run-down on productivity, the US economy, and the dark side of the trade deficit
• DOW hits record high…are these real gains? Cheerleaders say “YES” but we and the Fed bet on the weakening dollar;  Foreign markets breaking dependency on the U.S. economy
• Red hot China heats two cool commodities; Has “Peak Oil” already peaked?  One guru tells The 5 “you bet!”
• And… felicitations from readers before the first issue is even published!

We're off an running... and we've already taken up 23 seconds of your time, so let's get right to it!


“Our country has a fine future, economically,” Warren Buffett recently told us in a rare interview. In 2003, Mr. Buffett penned a now infamous article for Fortune Magazine called Thriftville vs. Squanderville. The piece outlines the dangers inherent in the historic trade imbalance the US has with China. We’re animating the story for a documentary we’re filming on Americans and their love affair with debt. Buffet granted us an interview for the film. And, we have to say, we were surprised by some of his remarks.

The Oracle is a productivity bull!

He’s high on the land of Mickey Mouse, Cherry Coke, AMEX and that little GEICO lizard. (And for good reason - he owns them all!) “We are continuously getting more productive in the country. We have more people turning out more things…our country has a fine future economically. You don't want to bet against the United States.”

But Mr. Buffett wasn’t all hat in hands about the economy. “We are creating debts and selling off assets which will require American citizens in the future to service those debts…and that will take some part of their output.”

That’s the dark side of the trade deficit. And in some ways, that leaves the door open for politicians to start making up their own laws of economics. “One thing I don't like about the consequences of sustained large trade deficits,” says Buffett, “ I think it makes the potential for demagoguery…and really foolish policies more likely over time.”

More from the Oracle, tomorrow…

As if to put a point on Buffett’s remarks – or merely to mark the auspicious arrival of the 5 Min. Forecast - The DOW punched through 13,000 yesterday. Fund managers and day-traders were foaming at the mouth in excitement, but we at The 5 see things differently…and we’re not alone.  Wednesday’s Federal Reserve Beige Book release shows weak economic growth. 

“Most Federal Reserve Districts noted only modest or moderate expansions in economic activity since the previous report,” said the Beige Book…more proof that the market’s current bull run often has little to do with a healthy economy, and more to do with consumers willing to spend themselves into arrears.


“For the first time in years, foreign stocks are NOT moving in tandem with the U.S. markets,” notes Chris Mayer, our resident prognosticator of all things in crisis.

For years, the U.S. market and major foreign markets seem to move together.  An anxious reader hiding out in Brazil or seeking solace in South Africa rarely achieved true effective diversification for their portfolio. If the U.S. market tanked, so would these markets.  However, the trend appears to have shifted. From the Wall Street Journal:

“During the two-year period that ended in February, correlation between U.S. and other developed markets was 0.63, according to ING Asset Management. That is a big decline from 2003 to 2005, when they practically moved in lockstep, at 0.93.”

Chris suggests that slowing U.S. earnings growth and an overvalued market, getting more so by the day, compare poorly from an investment standpoint to more brisk growth abroad. “It’s the reason why smart money is taking the red-eye to anywhere but here,” says Mayer.

Chris is no stranger to banking big gains abroad himself. In his monthly newsletter Capital & Crisis, an Argentine stock loaded up with real estate is up 44% since October. And in Mayer’s Special Situations, a higher priced, more aggressive “back-end” service… he’s up 21% since March 15th on another foreign agricultural play.

In fact, he hasn’t picked a single loser in his last 10 recommendations! 

Recent Chinese consumption trends reveal a massive bull market in coal and diesel fuel.  Earlier this week, when Bloomberg released their global coal usage report, our Maniac Trader, Kevin Kerr, had only one thing to say: “Wow!” 

China – who is already the planet’s largest coal consumer – claims they will need an additional 80 million tons by January.  India is estimated to need an extra 120 million tons, and most other Asian countries are expected to increase demand by 7%. In case you have trouble putting 200 million tons of extra coal to scale (we sure did) try picturing the combined weight of every registered car in the U.S. and you’re not even ¾ of the way there…yikes!   

“Coal prices are going much higher than I thought,” Kevin told us via email earlier this week. “Keep an eye on those diesel prices too…they are already creeping up.  These two markets are going to surge this summer, absolutely.”

Christopher Hancock, of the soon-to-be released Free Market Investor, couldn’t help but agree.  He came bounding down our office stairs in classic “Kif” (his nickname) form yesterday – rambling stats to us faster than we could jot them down. While we were stuck briefly in “Kif-time continuum”, we did manage to capture these stats: vehicles on China’s roads have almost quadrupled over the last decade. Currently, there are approximately 30 million vehicles running on gasoline and diesel. That’s one car for every 43 some odd people (the U.S. has one for every 2.14).

Out of breath, Mr. Hancock slowed down enough for us to record this: “some estimates project China will have 140 million private cars by 2020. That’s even more than the United States.  Multinational car companies are well aware of this trend. They also know cars that produce less emissions will find favored status among government officials, as Beijing faces alarming environmental concerns.”

The fact remains that both the United States and China share the responsibility as the world’s leading polluters. Our two countries combine for 40 percent of the world’s total carbon emissions. One solution says Chris: diesel engines.

Diesel powered cars generally have about a 40% better fuel economy than equivalent gasoline engines and produce only about 69% of the greenhouse gases.

“The world has now reached and passed the point of Peak Oil,” Iranian oil expert Dr. Ali Samsam Bakhtairi told our Outstanding Investments editor Byron King via private correspondence.  Byron reports that the doctor – who’s opinions are internationally renowned and respected – “sees the world entering a phase of irreversible decline in daily oil output, moving down from the current 82mb/d towards daily oil extraction of only 55 mb/d by the year 2020.” 

According to Bakhtairi, this “phase” began sometime in 2006.

Where do millionaires go to sleep hungry? Zimbabwe.  We are certainly unafraid to take shots at the U.S. economy…but this little “moment of Zen” puts our woes in serious perspective.  In his continuing effort to wreck the country, Zimbabwe’s President Mugabe is now presiding over a 1700% inflation rate.

“Hallelujah!” writes an enthusiastic Vancouver subscriber. After yesterday’s welcome letter, we received a slew of support. “Can’t wait…thanks…good luck…its about time,” said countless readers. We’re assuming they’re responding to our promise to keep our correspondence short and to the point!

One reader suggests: “Bring back the market updates!”  We can’t do it yet, but we’re on it.

If you’ve got something to say, let us have it.

Well, we’ve got lots more to tell you, but when we say “5 Min. Forecast” we mean it.  Tomorrow’s issue will give you a look inside our monthly editorial meeting (which we are currently late for). 

Time’s up…thanks for reading.

Regards,
Addison Wiggin,
The 5 Min. Forecast

P.S. We want to offer a special thanks to our young compadre, Ian Mathias. He has jumped into the project with both feet, and is doing a fantastic job helping us round up the day’s news. You’ll be hearing a lot from this bright young man.

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