The Truth Behind the Spin, A Silent Crisis, When to Trade Gold and More!

by Addison Wiggin & Ian Mathias

  • The 5 aims for true contrarianism… maybe it’s time to give Obama a break
  • Or is it? Dan Amoss on how “this Keynesian experiment will end in tears”
  • Chris Mayer on the coming topsoil crisis… and one country poised to benefit
  • When’s the right time to buy or sell gold? Frank Holmes’ easy, proven metric


  If you read the paper this morning you probably saw something like this:

“New Obama Plans: ‘Spend Our Way Out’ of Downturn” as The Associated Press, the global journalistic standard, put it. Oh… how the pendulum swings.

As Bill Bonner has said, “We have always had fondness for minstrels, misfits and lost causes.” With Mr. Obama’s approval rating down to 47% — the lowest ever recorded for a president’s first year — the majority seems to think he is at least one of those three. He’s not broken down enough to garner our affection, but we begin today by noting that the story isn’t as simple as the media spins it:

  The White House did not announce yesterday that “the nation must continue to ‘spend our way out of this recession,’” as the AP and Matt Drudge — pathetic placaters to the mob — quoted out of context. Here’s what Obama actually said, which is far more interesting:

“Even as we have had to spend our way out of this recession in the near term, we have begun to make the hard choices necessary to get our country on a more stable fiscal footing in the long run. Despite what some have claimed, the cost of the Recovery Act is only a very small part of our current budget imbalance. In reality, the deficit had been building dramatically over the previous eight years. Folks passed tax cuts and expensive entitlement programs without paying for any of it — even as health care costs kept rising, year after year. As a result, the deficit had reached $1.3 trillion when we walked into the White House. And I’d note: These budget-busting tax cuts and spending programs were approved by many of the same people who are now waxing political about fiscal responsibility while opposing our efforts to reduce deficits by getting health care costs under control. It’s a sight to see.”

Politics as usual… but the man’s got a point.

  The executive branch also announced that a $175 billion chunk of TARP leftovers will be used to pay down the budget deficit. We would have rather seen $315 billion — the balance of unused bailout bucks — used that way. (Instead, $140 billion will get bumped to Congress in what will basically become a stimulus slush fund.) And if you think about it, this move is a lot like taking money out of one pocket and putting it in the other… but for chrissakes… we have to start somewhere, and soon.

  The U.S. government is already $292 billion in the hole for the first two months of the fiscal year 2010, the Congressional Budget Office guessed yesterday. That’s even worse than the same period last fiscal year, which ended in October with a record $1.4 trillion budget deficit. The fine print shows that our government is actually spending less than in 2009, but federal income is down even more — 9% year over year.

  A few other quick hits from the Obama administration: In yesterday’s speech, he proposed more spending on infrastructure, a temporary moratorium on the capital gains tax for small businesses and tax credits for those who retrofit their homes with “green” appliances and amenities. Will this simply undo the very deficit reductions he plans? Probably.

  “I expect that this huge Keynesian experiment will end in tears,” opines Dan Amoss, “and policymakers will be forced to make unpopular decisions — like hike tax rates or cut spending — by the end of 2010.

“I disagree with the stock and bond market consensus, which believes that government spending and the Fed’s money printing will lead to sustainable recovery in private sector capital spending and employment. If current policies remain in place, I expect more of a late-1970s environment, in which flight out of paper money and into tangibles was the dominant investment theme.

“The Fed and Treasury can create new claims (government bonds and paper money) on real assets, but these institutions cannot control how the private sector adjusts to this flood of new claims . If the private sector no longer wants to hold money or government bonds as aggressively as it used to, we could soon see rising prices in many “unwelcome” markets — like food and energy.”

  Perhaps we’ll soon follow Britain’s lead. Desperate for funds (and voter approval) Treasury Chief Alistair Darling announced today a one-time 50% tax on banker bonuses larger than 25,000 pounds. Brit bankers asked their spouses shortly after, “What do you think about Singapore?”

  Back in the U.S., a record 37.2 million people received food stamps in September, the USDA announced yesterday. That’s up 18% from the same time last year. Now about one in every eight people living in America is getting ’em. Scary.

Even scarier… what if we run out of food to feed them?

  “The world continues to deplete its base of arable land,” notes Chris Mayer, a student of the silent agricultural and soil crises on the horizon. “Though it’s been going on for some time, the dramatic blows are only now showing their effect. In East and North Africa, in the plains of India all the way to Turkey, the story is the same. Some of it is just human carelessness about the land. Some of it is climate driven: the declining snowmelts of the Himalayas and more frequent crop-killing heat waves in places such as India…

“China, you may recall, is now the largest net importer of soybeans in the world. A mere 15 years ago, it made more than it needed and exported soybeans. Now India may import rice. Some think that India could import as much as 2 million metric tons, the most in the world. Traditionally, India has been the world’s third largest exporter. (It’s already banned overseas rice sales in an effort to keep rice at home.)

“The Philippines, thanks to typhoon damage, will also be a net buyer of rice this year. South America will produce less, and there is potential trouble with the crop in the Mississippi Delta. Yes, Thailand and Vietnam appear to have healthy rice supplies. But it won’t be enough.

“All of this puts Brazil in the catbird seat, as more people are starting to figure out. “Superpower Is Ready to Feed the World,” reads a Financial Times headline. You may quibble with the FT’s exuberant labeling of Brazil as a superpower. But Brazil is now the top exporter of chicken and beef, orange juice, green coffee, sugar, ethanol, tobacco and the soya complex of beans, meal and oil. It is No. 4 in maize and pork. It is, agriculturally speaking, deserving of the superpower label.”

  Japan, once a great superpower, announced another disappointing GDP reading this morning and YET ANOTHER ill-fated stimulus plan. Nipponese leaders said the economy grew just 0.3% in the third quarter, about half of what the Street anticipated and not even close to Japan’s initial projection of 1.2%.

Thus, Japan has decided to do what is has done many times before: Hand out yen. On Tuesday, the government approved an $82 billion stimulus packaged and ordered the Bank of Japan to pump out another $113 billion in new loans.

  That’s another feather in the dollar index’s cap, which at 76, is just off a one month high.

  Stock markets are quiet today — unless you reside in the UAE. Their major index fell another 6.4% this morning, to its lowest level since March. As we noted yesterday, even though American coverage of this looming default was surprisingly fly-by-night, the Dubai story is far from over.

  Oil took quite a hit in the last 24 hours, falling to an eight-week low of $72 a barrel. The stronger greenback and a few better-than-expected supply reports are taking their toll.

  Gold is still gravitating around the $1,140 mark. After taking a trip down to $1,125 yesterday, the spot price is back to $1,142 as we write.

  “There’s a lot of speculation in the market that gold has gone up too far too fast and is destined for a sharp correction,” notes Frank Holmes, the head of U.S. Global Investors and a favorite at our annual Investment Symposium.

“No one should be surprised if gold goes up or down one standard deviation over 60 trading days. Statistically speaking, movement within that range would be interpreted as normal, with roughly 70% of all data points being within that range. For the past 10 years, one standard deviation for gold is plus or minus 7.3%.

“In dollar terms, using the peak London closing price of $1,212.50 per troy ounce on Dec. 2, that percentage works out to plus or minus $88.50, or a range from $1,124 on the low end and $1,301 on the high end.

“Basically, any price between that high and low is no cause for alarm — it’s just the market being the market.

“We see [the latest] pullback in gold and related equities as a speculative correction following the release of the latest U.S. employment numbers. The better-than-expected job results spurred a rally in the dollar, which nearly always moves in the opposite direction from gold.

“In our view, the dollar’s strength will be temporary, given its significant head winds — near-zero interest rates, massive injections of stimulus money and gaping federal deficits. We believe gold’s longer-term uptrend is still well intact, with weakness in the sector over the past couple of days likely to prove a buying opportunity.”

  “Your debate about estate taxes misses the fundamental point about what they are for,” a reader writes. “Like them or not, it’s not about the revenue, it’s about the redistribution. Estate taxes are specifically designed to prevent families accreting too much wealth and power over generations. Antitrust and monopoly laws (are supposed) do the same for corporations.

“Sure, they raise revenue for governments and in these straightened times, it is easy to see the expediency of raising or extending them, but in the great scheme of things, the tax take from this source ($23 billion in 1998) is not be enough to bail out a medium-sized bank.

“Absent effective estate taxes, a country will eventually be captured by a small wealthy elite like the 3% who now block development in Haiti, or the seven families who run the Philippines as a glorified private fiefdom. Overly concentrated, powerful elites do not share the hopes and ambitions of a nation as a whole, and once they are vested and established, they can frustrate initiative for the common good that threatens their existence.

“By some measure, you appear to think that this has already happened in the U.S., and the elites are already mining the wealth of the majority to protect and consolidate themselves.

“Perhaps the argument should be about how to improve or extend the estate tax so that it can more effectively break up the establishment before it’s too late.”

  “Frankly, it amazes me that we have allowed the government to tax us from the cradle to the grave,” another reader writes. “What’s next? A tax at the time of conception? An invoice waiting for you once you’re ‘welcomed’ into the world? As citizens, we need to stand up and stop this nonsense. People in government are public servants and they need to start doing something for the public, besides taking their earnings. The sooner we start correcting the current situation, the sooner a lot of corruption, incompetence and greed of ‘public’ servants will stop.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

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