Total Cost of the Bailouts, Symposium Synopsis, How to Pick a Gold Miner and More!

by Addison Wiggin & Ian Mathias

  • Government inspector general pegs maximum bailout bill… almost double annual U.S. GDP
  • Marc Faber on the future of the U.S. economy and an outlook for the S&P
  • A 30-second roundup of the Investment Symposium’s first day… buys, sells and trends you can’t miss
  • Pension funds in peril… America’s two largest announce $100 billion loss, more to come
  • Frank Holmes on the three most important value drivers of a gold mining stock


“The total potential federal government support could reach up to $23.7 trillion,” said Neil Barofsky this week. He’s the special inspector general for the TARP — one of the government’s many bailout programs dumping billions upon billions. Say again… this whole mess could put U.S. taxpayers on the hook for just under $24 trillion.

Barosfky’s report was self-admittedly an overblown worst-case scenario… for example, it assumes that every mortgage loan on Fannie and Freddie’s books will go bad and that every government-aided bank will go bust. (Heh, we like this guy).

But we see why he bothered crunching all the numbers for a scenario that will never happen (or if it were to happen, no one would really care what the exact cost would be). This is what your government is willing to do in order to maintain the status quo. Votes for this year’s election are worth $24 trillion for tomorrow’s generation.

So when Congress asked, hey Neil, what’s your real guess? $3 trillion, he responded. Phew, what a relief!

“You cannot create prosperity through money printing and debt growth,” Dr. Marc Faber told us yesterday. Dr. Faber was the first speaker of our Investment Symposium and he preached an idea that is already becoming a theme of the event: Government fiscal and monetary intervention, “can postpone, but not prevent crisis…

“I believe next year’s economy will face even larger deficits. Their deficit is attempting to stimulate credit growth. Unless real credit growth returns, they will have to put more and more money into the system to maintain the status quo. All polices target consumption. That is a mistake.”

So what’s this mean for the market?

“The S&P 500 will not recover to 2007 highs. At the peak, 44% of the S&P was the financial sector. That is gone… not coming back.”

  And since it’s our nature to cook things down and serve them in tasty little bits, here are some rapid-fire, take ’em or leave ’em themes to the first day of our Investment Symposium:

  • Do not expect a V-shaped market recovery. The crisis aftermath will be long and volatile 
  • Short U.S. bonds
  • Technology breakthroughs in DNA over the next few decades will be akin to the Internet and computing breakthroughs of the last 20 years
  • Either invest like a contrarian or suffer like a victim (Rick Rule’s mantra)
  • Buy alt energy, especially geothermal
  • Buy commodities, particularly grains.

Of course, we can’t hope to accurately summarize six hours of yesterday’s presentations in our humble 5 Min. That’s why you should check out the Symposium CD/MP3 set. It’ll have every minute of every presentation, notes from the private breakout sessions and all the specific stocks and funds our speakers recommend (we’ve already heard at least half a dozen.) Get details here… since it’s still early in the game, the set is priced at a discount.

The market rallied yesterday, in spite of Dr. Faber’s warning. The Dow and S&P 500 inched up 0.8% and 0.4%, respectively, led mostly by more blue chip earnings beats. The one that really caught our eye was Caterpillar. The company jumped 8% after beating earnings by a mile and issuing a pretty rosy outlook.

  “Caterpillar is the crown jewel of American industry,” notes Jim Nelson. “It represents the engine of the blue-collar world — at least in the U.S. CAT makes everything from bulldozers — needed for nearly every road and construction project in the country — to turbines — needed to keep the lights on in the U.S.

“The company’s customer base reaches from Canada to Indonesia…from China to Chile. There’s almost no developed or even developing country in the world that doesn’t show Caterpillar some business.

“So what does this quarter’s profits mean for CAT, the U.S. and the rest of the world? It means that either the stimulus plans worldwide are starting to work or we are turning a corner on this recession…or both.

“We’re not calling for the recovery to start now, and we certainly aren’t calling for the bottom of the market. But we are pointing out the No. 1 indicator. We’ll know when the economy is back on track when Caterpillar starts performing like years past.”

Jim is at the helm of one of our newest publications, Lifetime Income Report. If you seek steady, dividend-yielding companies with long-term upside potential, he’s your man. Learn more here.

  Yesterday also marked a big win for the year-to-date stock market. The major indexes have recovered from the muddling about over the last six weeks and are now at or near YTD highs. The S&P is now at its highest level in eight months. The Dow is close behind, at a six-month high.

  The Nasdaq has been particularly strong lately, as you can see above. Its 0.4% rise yesterday marked the 10th day in a row of gains. The Nasdaq didn’t have a winning streak like that even at the height of the tech boom. You’d have to go back to July 1997 to find a track record like that.

Now, we don’t have anything against tech. In fact, after Juan Enriquez’s presentation yesterday — which completely redefined what we think about biotechnology — we’re excited for the future of tech. But a streak like that in an economy like this? Hmm…

  The two biggest state pension funds in the U.S. have lost $100 billion, and they’re about to lose more. Yesterday CalPERS and the California State Teachers’ Retirement System revealed annual fiscal year losses of $56.2 and $43.4 billion, respectively. That’s about a quarter of the value of both portfolios.

CalPERS and California state teachers have it especially bad… unemployment in that state is higher than most, which will limit money flowing into the funds. And just yesterday, Gov. Schwarzenegger announced all kinds of plans to bridge the budget gap that will be detrimental to the funds.

But what really bothers us… both funds, and most around the country, are still counting on La-La Land returns for the foreseeable future. CalPERS, for example, needs a 7.75% annual return for the next two years or it will have to ask the government and municipalities to hike contributions in order to pay for new retirees. That’s no problem, as the fund said in a statement yesterday that its "long-term 20-year investment return remained positive at 7.75%.” Heh… so of course, it’s reasonable to assume the next 20 will be just as pleasant.

  BTW, CalPERS sued Moody’s and Standard & Poor’s last week for its role in grossly overrating toxic assets during the credit boom.

“I will make a prediction,” said Barry Ritholtz, who is spoke in today’s session, “that CalPERS is going to torment these guys until someone is in prison.”

Barry himself has an interesting history with rating agencies. His book, Bailout Nation, included a scathing (and deserving) attack at the ratings agencies. When his publisher, McGraw-Hill (which also owns Standard & Poor’s) found out about it, they squashed his deal.

  “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Ben Bernanke testified on the Hill yesterday. Should that continue, Mr. Bernanke so eloquently suggested that a recovery could “prove transient.” Wait… so if credit tightens, unemployment rises and consumer spending falls, the economy will get worse? Thanks, Ben.

  After its recent fall, the dollar index has entered a tight range. It’s been bouncing between 78.6-79 all week.

  “If the dollar goes back to where it was a year a go, gold will be $1,200 an ounce,” Frank Holmes forecast yesterday in his presentation. Mining Journal named Frank the best mining fund manger in the world… so when he talks gold, we tend to sit up and pay attention.

The dollar index’s low last year was around 72.3.

  The dollar’s narrow trading band has given gold a small range too. Since rising to $955 Monday, the spot price has largely stayed put.

  And if you’re on the hunt for a gold mining stock, check out this snippet from Frank’s presentation: “In all the research we’ve done, the key to success is finding miners with growth in production, growth in cash flow and growth in reserves. They are the three key value drivers. If the stock has positive momentum on top of it, even better.”

  Oil’s holding steady too today, at $64 a barrel.

  “Notwithstanding your expressed distaste,” writes a reader, “for some of the elements of California’s budget solution, I think at least part of you should be cheering the fact that the state did gore some sacred cows by reducing $15 billion in program funding and (because compromise is part of our government) having the taxpayers shoulder a smaller part of the burden in the form of $4 billion in new taxes. Is this not the sort of solution that we should all be encouraging our federal legislators to make to balance the national budget…. rather than this insane bailout strategy that they are following?

“My textbook learning on fiscal restraint indicates that when your revenues can’t cover all the legislated services and special interest programs so in vogue when times are good (and believe me, California leads the pack), you need to pare them back to what is affordable. Spread the pain. I’m sure you know already that our tax rates in California are quite a bit more than in most states, but it’s unrealistic to think program cuts will be the total answer given the diversity of interests out there… the ratio agreed to by the legislature and governor seems like a fair attempt to get the state back into operation.

“You were right to call out the accounting trick of pushing a payday forward — but if you really want to talk budget tricks, you could write a huge book on such things, as our national Congress has become expert in regarding unrealistic projections and other interesting devices to justify more spending. I’d like to see the other states in trouble work their own compromises and then all of us press our national government to show some intestinal fortitude to paring back programs until spending equals revenues.


“While taking issue with you on this one point — I’m extraordinarily thankful for your daily newsletter and your editorial courage… and our ability to disagree and still support each other in our larger goals for the nation!”


Ian Mathias

The 5 Min. Forecast

P.S. Investment Symposium CD and MP3 sets are now available for purchase. Since the conference has not yet concluded, we’re offering them at a discount… check ’em out before we bring them up to full price.


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