Ramp Up the Rhetoric, Stimulus Details, Buy Gold Stocks, Alternate Employment Stats and More!

by Addison Wiggin & Ian Mathias

  • Gloomy rhetoric rushes stimulus bill agreement… but has our financial “rescue” really changed?
  • Government credit crisis tab about to reach $9.7 trillion
  • Stimulus will do more harm than good, warns CBO… 200% inflation in our future?
  • Time to load up on gold stocks, says Mayer… but not for reasons most recite
  • Plus, jobs report follow-up… real unemployment rate 18%, more than double gov forecast

  And they call us alarmists?

“It’s getting worse, not getting better… the problem is accelerating, not decelerating… dark, darker, darkest… crisis… mortal danger of absolute collapse… disaster… catastrophie… ARMEGEDDON!”

That’s just a dessert sampler of words chosen last week by President Obama and various members of Congress to describe the U.S. credit crisis and recession and/or depression. (“Armageddon” came from Sen. McCaskill… get a freaking grip, lady.) For as much as we slammed Bush for talking up a clearly down economy, this “new” government is starting to make us feel like gushing optimists. 

  The rhetoric above was widely used to scare Congress into finishing up the “stimulus” bill this weekend. Senators reached a tentative agreement on the bill on Saturday, which now dons a slightly lower price tag of $780 billion. The Senate managed to cut spending on a few programs that, well… we just can’t tell if these would have stimulated the economy. We’ll let you decide:

  • Now the government will write themselves only a $3.5 billion check to make federal buildings more energy efficient, instead of $7 billion
  • $75 million less for Smithsonian exhibits
  • $100 million cut for an FBI construction projects (it’ll still get $300 million)
  • $100 million less for the National Oceanic and Atmospheric Administration
  • $100 million less for setting up wireless networking for police stations.

Alas, the only items fully nixed from the original bill were the $122 million for Coast Guard polar icebreakers and $55 million for historic preservation projects around the country.

  But don’t worry, there’s still plenty of pork in this hog of a bill. We noticed provisions like STD education, the 2010 Census, “smoking cessation activates,” government building renovations, lead-based paint reductions, Farm Service Agency computer upgrades and movie producer tax incentives, among other things, are all still in the bill. Ugh… don’t forget another $650 million toward this digital television conversion fiasco.

  Should Congress pass the stimulus bill in its current form, the U.S. government will have dedicated $9.7 trillion to this credit crisis.

Say again… $9.7 trillion.

According to Bloomberg, that would be about $1 trillion in stimulus bills, over $3 trillion already spent or loaned trough financial rescues, and over $5 trillion committed or promised via some sort of backstop or aid agreement. We’re sure you could come up with some interesting ways to spend that much money… here are a few of ours:

  • $9.7 trillion could have bought 90% of all U.S. mortgages
  • The same amount would cover all but a trillion of our national debt
  • The government could have written a $1,430 check to every living person in on planet Earth
  • Could have fought the wars in Iraq and Afghanistan for free… up to 13 times over
  • $9.7 trillion would even buy you every single stock on the New York Stock Exchange.

  “The Senate legislation would reduce output slightly in the long run,” warned a letter sent by the Congressional Budget Office to the Senate:

“The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds, rather than in a form that can be used to finance private investment, the increased government debt would tend to ‘crowd out’ private investment — thus reducing the stock of private capital and the long-term potential output of the economy.”

  Even though a chorus of experts from around the world is urging the government to stop wasting money on stimulus bills — can we at least assume congresspeople themselves are cutting their personal budgets and limiting work-related expenses… right… please… anyone?

That’s the Kingsmill Resort & Spa in Williamsburg, Va., where House Democrats met for their annual retreat over the weekend — on the taxpayer dime. You helped pay for a chartered round-trip train to the historic city, rooms for over 200 House members and their entourage of assistants and security, dinners starting at $60 a head and an undisclosed number of massages, tee offs and old-fashioneds at the bar. The government won’t tell us exactly how much they spent.

Wasn’t it a chorus of Democratic congressmen who were ticked off about AIG’s retreat after accepting taxpayer money? And forced Wells Fargo under pain of public embarrassment to cancel their junket to Miami last week?

  The sum of all these bailouts and interventions could equal more than 200% inflation here in the U.S., suggests Marc Faber, who will be appearing at our Symposium this year in Vancouver. "In the U.S., we have a totally new school, and it’s called the Zimbabwe school. And it’s founded by one of the great leaders of this world, Mr. Robert Mugabe, who has managed to totally impoverish his own country. And that is the monetary policy the U.S. is pursuing.

“If I look at government debt in the U.S., and debt in general, I think the only way they will not default physically on their debt is to inflate.” Faber told CNBC the inflation rate could rise to 100 times today’s rates, up to 200%.

  “For the first time in a couple of years,” writes Chris Mayer, with the stories above in mind, “the business of gold mining itself looks attractive, for two important reasons.

“As to the first, I’ll be brief, because it’s not the most compelling reason to buy gold stocks, in my opinion, yet it’s the one most everyone spends most of their time talking about. It’s that the U.S. government is spending money like there is no tomorrow, which is bound to lead to printing a lot of money (read: inflation), and hence a rising gold price. It’s true, though: You couldn’t draw up a better scenario for gold than what’s going on right now.

“Behind the bigger picture, though, there’s a more compelling reason to buy gold stocks today. First: The price of gold miners as a group is off more than 30% in the last year, even though the price of gold has held firm. Add to that mix falling mining costs in 2009 and you have a recipe for explosive earnings.

“Gold miners use a lot of energy to power big shovels and dump trucks and to haul ore. The price of oil, as you need not reminder, has collapsed. It’s down more than 70% from its high in July. For the first three quarters of 2008, gold miners had to contend with an average oil price around $118 a barrel. Barring a huge rally in oil, gold miners will reap a windfall in lower oil costs oil since then. As I write, oil is $39 a barrel.

“Not only will gold miners get the benefit of lower oil costs, the currencies of the gold-producing countries have all fallen against the dollar. This means their costs are lower today in dollar terms.

“Those two factors — lower oil costs and currency effects — mean gold profits should be higher in 2009 than in 2008 even if the price of gold goes nowhere.”

Chris just recommended his favorite gold stock to Capital & Crisis readers. Want the ticker? Just subscribe here … the pick alone is worth the price of admission.

  An ounce of gold costs less than $900 today.

  Despite all the lousy news lately, the stock market just wrapped up its best week of 2009. The Dow climbed 3.5% last week, the S&P 500 5.2% and the Nasdaq jumped an impressive 7.8%.

Much of these gains came Friday, as the markets completely shrugged off the worst employment data in 35 years and rallied over 2.7%. Traders found courage from the government… word leaked that the Senate was near a compromise on the stimulus bill and Treasury Secretary Tim Geithner announced he’d be unveiling the new plan for the TARP on Monday. Rumors were circulating that he’d even reveal his infamous “bad bank” today, which seemed to really give stocks a boost.

  Naturally, Geithner postponed that announcement late yesterday until Tuesday… oops. Stocks were trending down this morning as a result.

  And with that sizable Nasdaq jump last week, we’d like to include this bit of caution: Sales of PCs will likely decline in 2009 for the first time in eight years, forecast the FT today.

  Friday’s jobs report was far worse than the headlines would lead you to think, suggests our colleague John Williams. John’s been keeping track of our unemployment rate in his own way, tracking part-time workers who can’t find full-time employment as well as the infamous “discouraged worker.”

“During the Clinton Administration,” he explains, “‘discouraged workers’ — those who have given up looking for a job because there are no jobs to be had — were redefined so as to be counted only if they had been ‘discouraged’ for less than a year. This time, qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, as estimated by the SGS-Alternate Unemployment Measure, rose to 18.0% in January, from 17.5% in December.”

  “The barn is empty," a reader begins. “Your back and forth with readers about capping TARP-funded exec pay at $500,000 is worthless. The barn door is open and the animals are all long gone. Wall Street and its executives have already raped and pillaged billions from stockholders, funds, pensions and individuals. Now you are arguing about how Obama should close the barn door. The have animals run off to the Hamptons in their chauffeured cars. Get out the guillotines.”

The 5: Er, who would you like to behead exactly? In the Reign of Terror following the French Revolution, the passions of the crowd was so ignited that after the beheaders ran out of aristocracy… they started beheading each other.

We don’t think we’re quite there yet, but the level of understanding of this crisis is decreasing, not increasing. That much we can tell.

  “As an employee of Goldman Sachs,” begins a reader, “I often feel like I am an object of some of your comments. Which is OK by me. I appreciate most of them, because I agree with most of your assessments when it comes to our industry. However, in the interest of fairness, I’d like to respond to your comment when you said, "At least Paulson’s buddies got their bonuses before Obama had a chance to put the kibosh on the plan."
“I don’t recall if you covered it in The 5, but it was all over the news in December that Paulson’s buddies — the CEO of Goldman Sachs and his top executives — voluntarily went to the compensation board and asked to forfeit 100% of their bonuses for the year. I’m sure they didn’t suffer much with their base salaries, but it’s a significant pay cut from the $70 million or so bonuses that they were paid a year earlier.
“Further — and this point was not in the news, and I think most of your readers will not believe the fact — when the Treasury was giving out the first part of the TARP money to the nine banks (that you did cover), not all of those banks ASKED for the money. In fact, some of them (including Goldman) were opposing that money, for various reasons. So they were FORCED to take it — it would be like the whole industry is on life-support, not just some single banks.”
The 5: The facts are stubborn things, aren’t they? Thanks for setting us straight.

Addison Wiggin
The 5 Min. Forecast

P.S. This morning, we wish Congress would get off their butts and start spending some of that stimulus money on infrastructure. A water main broke on our block and three of the Agora buildings, 808 St. Paul St ., 819 N. Charles St. and 14 W. Mount Vernon Place are out of water. The city water guys say it may be Wednesday before the toilets are operational again. Clearly, this is a federal issue.


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