$1.1 Trillion Deficit, Why the Euro is Still Down, Eating the Rich, Tech Convergence and More!

by Addison Wiggin & Ian Mathias

  • The tragic story the media missed… the biggest deficit in the history of money
  • Dollar weakens, yet euro stands still… Bill Jenkins on the true valuation of these monies
  • Bill Bonner on Congress’ latest “eat the rich” legislation
  • Our tech adviser shows a powerful example of a coming computing breakthrough


  Here’s what the headline in every paper in the country should read today:


That’s the record budget deficit the government has accrued on our behalf since the fiscal year began last October. The word “record” really doesn’t even do the number justice… $1.1 trillion is more than double 2008’s all-time high deficit of $454 billion — and as you know, 2009 ain’t over. The CBO currently projects a $1.8 trillion budget deficit for the fiscal year, more than triple last year’s record.

Look at the recent history of the Treasury’s numbers and the trend is obvious. Check out our government’s book-balancing stupor over the last couple years:

That’s the kind of chart that should make a lot of sense to an active investor. What’s the outlook for a volatile stock that’s been making lower highs and lower lows?

  But our government’s outrageous deficit isn’t the story du jour… once again, that title goes to Goldman Sachs. The world-famous investment bank reported earnings this morning in line with our sentiment  yesterday: Goldman profited $3.4 billion in the second quarter, roughly double the Thomson Reuters forecast of $1.7 billion.

  Perhaps even more beneficial for Goldman’s share price — and the market at large — newly famous analyst Meredith Whitney gave GS her first ever financial “buy” rating yesterday. The “buy first, think later” types took this news straight to the market, bumping up GS shares 5% and the S&P over 2%.

But as usual, the drama’s in the details:

“Our more bullish outlook on Goldman Sachs shares,” Whitney wrote, “is deeply rooted in our sustained bearish stance on the U.S. economy and the state of U.S. financials at large. Specifically, we expect a tsunami of debt issuance from federal/sovereign, state and local governments to fund woefully underfunded budget gaps. In addition, we expect corporate debt issuance to be at least 60% as strong as peak cycle levels, reflecting sizable debt maturity rolls. What’s more, given fewer players in the market, not only is GS benefiting from market share gains on these products, but more widely in the derivatives products.”

  The market is back to floundering today. Looks like another “buy the rumor, sell the news” trade. Financials and consumer stocks led the way yesterday, and even though Goldman Sachs and Johnson & Johnson beat earnings this morning, both sectors are under pressure today.

As we write the Dow and S&P are still around break-even.

  The data patch won’t help stocks today either. Retail sales improved in June for the second month in a row… but increased only 0.6%, and the majority of the rise was due to the 5% jump in gas prices.

And much to the dismay of the Fed, producer price inflation shot up 1.8% in June, double analyst expectations and the biggest jump since November 2007. Like retail sales, higher energy costs led the rise.

  Yesterday’s stock rally pushed the dollar index down half a point, to 80 even. The Treasury’s announcement of the biggest budget deficit in the history of fiat money didn’t help the greenback, either.

That puts the pound up a few cents from last week’s low, to $1.63. The Canadian dollar has gotten a nice bump too, from 86 cents Friday to just under 88 cents as we write. At 92, the yen is holding on to its newfound strength.

But in spite of the dollar’s marginal weakness, the euro is no better off. In fact, since peaking around $1.43 in early June, the multination currency has been slowly trending down. This morning, it’s at $1.39.

  “Remember that currencies, because they are fiat by nature, are political things,” our currency trader Bill Jenkins reminds us. “While it is the fundamentals that drive them, one of the overarching problems in our market is the absence of reliable fundamental data. It is hard to debate against the fact that governments manipulate what is released.

“But some things are for sure and provide ‘reasonable markers’ to see what a currency is doing. One of my ‘favorites,’ although I hate to call it that, is the ‘civil unrest factor.’

“Across the eurozone, riots and outbreaks of violence have been touched off by escalating economic problems and disagreements between members and neighbors. People involved in civil unrest are a multifold problem. First, they have too much time on their hands because they are not working. Jobless citizens, especially in a heavily socialist culture, are a continual drag on the system.

“Second, it costs money to keep repressing social upheaval — presenting another drag on the system. Additionally, the passions and fears of men being what they are, such activities tend to draw in more normally productive folks as the snowball gains speed and volume.

“Here in the United States, we are not facing such difficulties (yet). This means a more reasonable system of work and distribution of goods and labor. All in all, this is good for a culture, the body politic and the economy. As a result, it also breeds greater confidence in the currency. And when all is said and done, investment money will go where there is a reasonable likelihood of return, even if the return may be lower.

“Longer term, I have to wonder if the euro has what it takes to survive this crisis. I have no doubt that the United States will emerge out the other side with all 50 states still members of the union. I don’t know that such can be said for the European Union.”

Want to make a few bucks while this trend develops? Check out Bill’s Master FX Options Trader.

  Case in point: When American auto supplies got in trouble, their workers picketed. When the same goes down in France, they rig the place with bombs and set a bonfire!

That’s the scene at bankrupt car parts factory New Fabris in Chatellerault. Former workers have rigged the factory with gas canisters and promise to detonate unless the company’s two biggest clients — Renault and Peugeot — pay them off. By their judgment, the automakers got state assistance while they were left to rot. Thus the laid-off employees want 30,000 euro a piece… heh, evidently a payoff worth imminent imprisonment.

  Back in the U.S., another slimy bill is slithering its way through the halls of Congress. The latest proposed health care legislation would both eat the rich and introduce another mandatory government program. Oy…

Under the proposed bill, a 1% tax hike on couples earning over $350,000 would raise an estimated $500 billion over the next decade — barely half the total cost of the program. Those taxes would help finance subsidized health care for the lower class, for which enrollment would be mandatory (or risk being fined).

“If you earn less than $350,000,” writes Bill Bonner, “you feel that you are getting something for nothing. But that money — had it not been confiscated — wouldn’t have disappeared. It would have been put to work in one way or another — added to the nation’s capital formation, lent to the government, used to buy a new car or take a vacation. Instead, it is to be sucked out of the benefits of the willing economy and used to give people something they couldn’t afford or didn’t want to pay for themselves.”

“Don’t bet against us,” the president assured us. “We are going to make this thing happen.”

  “Convergence is and will continue to be one of the most powerful technological trends of our time,” says our tech adviser, Patrick Cox, happy to change the subject. “I’m referring to the fact that all electronic devices are increasingly overlapping and interoperating. IT is converging into single personalized electronic systems.

“Let me give you a recent example of the convergence between the Web, mobile devices and hearing aids. A new iPhone app, soon to be available on other systems, is downloaded from the Web and turns a mobile phone into a sophisticated hearing aid. Combined with earphones, the app allows users to adjust, using the touch-screen, the device to best pick up whatever frequencies they want to hear best.

“If you miss something, you can easily replay a segment. Eventually — not far off — the spoken words heard will be transcribed into written words automatically — in real-time and in your choice of languages. Real life will be subtitled. Those subtitles, in turn, will be searchable terms.

“Tell me that isn’t cool. I dare you.

“Many of the biggest convergence winners are yet to emerge, however. They are the companies that will solve the interface problems. For most people, sophisticated software is still too complex and confusing — especially when it runs on a small mobile device. This is because software controls are limited by current processor and graphics designs.

“When the next generation of 3-D computing arrives, that changes. The entire world of software will become far, far easier to understand and control. This simple change will catapult a number of companies into financial history books. I’ll be adding some of them to the Breakthrough Technology Alert portfolio in the not-so-distant future.”

  “The person commenting on the Illinois prison system really hit the nail on the head,” writes another reader, referring to yesterday’s inbox. “I work in the biggest corrections agency in the country, and I can tell you that public policy went completely in the wrong direction beginning about 20 years ago with stiffer sentencing laws. Those laws sound good to the average American idiot, but are actually counterproductive — the current system doesn’t differentiate between people who we’re actually scared of (like rapists and murderers who can’t be rehabilitated) versus people who we’re just angry at (like people with drug problems, whom it would be much cheaper to rehabilitate). We are spending waaaaay too much money locking up people who don’t need to be locked up, and now we are finally beginning to realize that we can’t afford it. Strangely, it is the people who rail against big government who typically want everyone locked up. But who do you think the guards work for?”

  “Once again, Goldman Sachs escapes any real scrutiny, even by you folks,” a reader writes. “Are you aware that the firm was ‘banned’ from making quant trades at the New York Stock Exchange, just last week? Apparently, their geeks found a way to front-run large trades being made by computer at that exchange. Check it out for yourselves.

“How about pounding the table on these blatantly criminal acts! Just more proof that Wall Street has no shame.”

The 5: Heh, shame isn’t one of our principal virtues either, so you may be barking up the wrong tree. (BTW, we haven’t heard that particular story… feel free to send along some details.)

Either way, we won’t blame Goldman for beating the system the same way we avoided taking cheap shots at Bernie Madoff… if they’re willing to sell their souls for “alpha,” that’s between them and God, Allah, Mammon or whoever. Our major gripes with Goldman are their influence in government and this whole “too big to fail” bailout mess.

Two ironic reader mails for Bastille Day, don’t you think?


Ian Mathias

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