Deficit Surprise, Money Havens, Renewable Energy Investing, A Conspiracy Theory and More!

by Addison Wiggin & Ian Mathias

  • Government scales back deficit projections… chart, Bill Bonner show why it hardly matters
  • “Cash for clunkers” to wind down… how this government fiasco could end with a bang
  • Switzerland coughs up client secrets… Doug Casey identifies new global safe havens
  • Steer clear of this renewable energy investment, says Byron King
  • Plus, John Williams with a worthy health care reform conspiracy theory

Here’s a small victory, worthy of breaking out some Andre Brut:

The U.S. government budget deficit is more likely to ring in at $1.58 trillion this year, not the $1.84 trillion the Obama administration reported in May. According to some purposefully leaked budget projections due out next week, roughly $250 billion that was set aside in the 2009 budget for bank bailouts will not be used by October, the end of the fiscal year.

Of course, we’ll end up with an annual budget deficit of 11.2% of GDP, the highest since 1945 and an all-time high in dollar terms. But hey (they must be thinking), now we’ll have a little extra for that $1 trillion health care reform!

Back in our grammar school, team sports days, we’d say a game ending in a tie is “like kissing your sister.” Heh, this kind of budget “victory” feels the same, or worse (like your mother-in-law?).

“So far,” writes Bill Bonner, “this money has done nothing to relieve the underlying problem: The consumer has too much debt and too little income. The government can give him a tax rebate…or give him a check for a clunker. These giveaways will produce a temporary boost. But when the giveaways give way, there is nothing left. Does the guy who bought a car with government cash in 2009 buy another one in 2010? Does the fellow who brought his mortgage up to date with a tax rebate in 2008 go out and buy a new house in 2009?

“The problems are real… at the heart of the real economy. They are not problems that can be solved by monkeying with the money supply, interest rates or even fiscal policy. They are problems that need to be solved by the real economy… in the real economy… by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world — adapting their capacity so as to produce things for people who can actually afford to buy them. It’s a long process… with many bankruptcies and disappointments along the way.

“That process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery… and no return to the old model — ever. Look for more layoffs… more foreclosures… more cutbacks and workouts.”

The government is also expected to announce plans to wind down “cash for clunkers” this week. The $3 billion program is in danger of running out of money (again), and suffice it to say the public opinion head winds are getting a bit strong.

And it could get a little exciting… a recent National Auto Dealers Association statement warned that “It is difficult, if not impossible, to accurately project the ‘burn rate’ of available [cash for clunker] funds.” In other words, it’s completely possible that dealers have already or will soon push the program completely over budget, leaving either dealers or the American taxpayer left holding the bag.

Attention privacy seekers and tax evaders: The legacy of secret Swiss bank accounts is coming closer to an end. UBS agreed to hand over formerly confidential information on 4,450 American accounts this morning. The accounts, worth up to $18 billion, will be given to the Swiss tax authority first, and then to the IRS, which has targeted these 4,450 as potential tax evaders. Whether the are or aren’t… well… the IRS can figure that out after they’ve unearthed the secrets these clients have paid so handsomely to protect.

If you seek a private place to store your wealth, “I would recommend places that are geographically distant from the U.S., and culturally distant, as well,” says Doug Casey, a popular speaker at our Investment Symposium and perpetual advocate of “political diversification.”

“To me, the best places to be are in the Orient. That’s partially because the Chinese, and other Oriental civilizations, are much less prone to roll over and do what they are told. National pride assures that, if nothing else.

“But if you go this route, with, say, an account in Hong Kong, you certainly would not want to use a bank like HSBC. It’s got branches all over the world, prominently in the U.S. — so like UBS, they’ll do what they are told… You want a real Chinese bank. That way, when the U.S. government calls, the phone will be answered in Chinese and no one will speak English with them.

“The best places are the least obvious places. Malaysia is interesting. Thailand. These are completely nontax-haven types of places — and that might make them suitable.”

Your hard-earned dollars are worth just a bit less today. The euro is up 2 cents this week, to $1.42. The loonie’s gains are close behind, now up to 91 cents. Even the lowly pound is up almost 2 cents versus the dollar this week, at $1.64. The dollar index is at 78.6, down about 0.8 points from Monday’s high. Why’s the greenback faltering? Look no further:

Economic optimism has regained its footing in the stock market. The S&P snapped back 1% Tuesday after Monday’s sell-off. Then yesterday, despite opening down about half a percent, the market finished in the black again. Traders got their buying juju yesterday largely from the Energy Department’s weekly oil inventory report, which showed Americans are consuming way more oil and gas than the Street had expected.

And the market opened up again today, mostly on this news:

The Shanghai Composite shot up 4.5% early this morning, taking back much of this week’s losses. As we reported yesterday, Chinese investors were a hair short of a technical bear market… seems as though they’ve rejected that notion for now.

But before you join the buying spree: “Insider selling, relative to buying, soared to a five-year high in August,” reports Eric Fry in today’s Rude Awakening. “Last month, insiders sold $3.0 billion worth of stock, or more than 33 times the $90 million they bought.

“Such outsized selling by insiders does not guarantee a market sell-off, but it argues for one. So let’s add this data point to the ‘Probably Not Good’ column.”

A weaker dollar, good market vibes, Chinese optimism and a lower-than-expected oil inventory report have all led to oil shooting up $7 from Monday’s low. A barrel of light sweet crude goes for $72 as we write.

Be wary of some renewable energy stocks right now, especially wind power, Byron King tells us. “Renewable energy — certainly electricity from windmills — has to compete against energy from other sources. The typical base line price competition for electricity is the price for a kilowatt generated in a coal-fired plant. Lately, with the price of natural gas down so low, even gas-fired electricity is competitive with coal. So where does that leave windmills?

“Wind-based electricity is still about twice the price of coal- and gas-generated electricity. The thing that’s keeping windmills in the ring is public subsidies like tax credits, as well as large-scale public policy support, like renewable portfolio standards, that requires utility companies to generate certain percentages of ‘green,’ carbon-free power.

“While we’re at it, windmill systems are extremely capital-intensive. They require lots of upfront investment in land and leases, roads, grid access, concrete foundations, steel towers and complex turbines and blades. Then you need about three windmills, in different locales, just to assure you have 24-hour power generation — due to the fact that the wind does not always blow when and where you need it.

“With the U.S. credit system still broken — and to all appearances, the economy going back into the ‘double dip’ of the Great Recession — things probably aren’t going to get much better for windmills in the next year. Maybe someday. Not now.”

There are a few renewable energies Byron still thinks are worth your attention. Here’s one of this favorites.

Initial claims for unemployment insurance shot up by 15,000 last week, to a total of 576,000. While below the 22 straight weeks of 600,000+ new claims we’ve become accustomed to, today’s jobless number topped Wall Street expectations by about 25k.

6.2 million Americans are currently filing for unemployment insurance, double that of a year ago and not too far off July’s record 6.8 million.

Today’s conspiracy theory: Has the Census Bureau bumped back the annual poverty report to help push through health care reform? The yearly report was due to be released this week, but was suddenly pushed back to September “in response to feedback that releasing the data in late August was not optimal for data users and journalists reporting on the findings.”

“I never have known competent data users or journalists to request data later, rather than earlier,” notes John Williams. The annual poverty report,” writes John Williams, “which includes estimates not only of poverty, but also national income distribution and national health insurance coverage, is based on a survey that is piggybacked on the March household survey (unemployment, etc.).

“Given the current health care program being pushed by the administration, one has to wonder if there are any politically uncomfortable results in the pending survey, where a delay could result in the data being excluded from the debate. Another possibility is that the delay would give the Census Bureau time to “get it right,” a phrase purportedly used by President Lyndon Johnson when he sent drafts of initial GNP (now GDP) reporting he did not like back to the Commerce Department, for revision.”

“Addison was much too charitable with Buffett,” a reader writes in response to our judgment of Warren Buffett’s latest Op-Ed. “It takes balls to plead for fiscal responsibility after making sure Warren ‘gets his’ via the bailouts of Goldman and Wells Fargo. Then again, maybe it doesn’t, because he knows no one in the mainstream will call him out on it.”

The 5: That’s a good one.

“I would take the ‘gold demand being down 22% for jewelry use’ with a great big grain of sand,” another reader writes, this one responding the to the World Gold Council report we cited yesterday.

“With the price of gold where it is at, and all the jewelry and pawnshops offering deals to turn in your old and unused gold pieces for cash or newer jewelry, those shops are doing a good business. So much old gold to remelt means a lower demand for ‘new’ gold. Believe me. I’m one of those buyers… and biz is good.”


Ian Mathias

The 5 Min. Forecast

P.S. Ever heard of a covert public offering? Not many know about them, but the few that do are getting rich as we speak. Learn about CPO investing here.


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