Taxes to Come, A Canadian Opportunity, The Return of Nuclear and More!

by Addison Wiggin & Ian Mathias

  • Here come the taxes… Obama targets risk-taking banks, Walker warns: All taxes will go up
  • The odd couple: How China’s and rural Canada’s futures are inexorably linked
  • Trader calm (complacency?) hits its highest level in 17 months
  • Plus, Byron King says “it’s time” to get in this sector, now priced at an attractive discount


  So it begins…

When France and the U.K. announced super-sized taxes on bank profits and employee bonuses last month, we warned, “Interested parties in the U.S. should keep an eye on this, too… lest you think Mr. Peace Prize and his Pay czar aren’t tempted to do the same.” Well, here we go:

“Obama Weighs Tax on Banks to Cut Deficit,” headlines today’s New York Times. Details are still very vague, but word on the Hill is that next month’s 2011 budget will include a tax that is, as the Times puts it, “based on the size and riskiness of an institution’s loans and other financial holdings, or a tax on profits.”

We get the pretty idea of it all: Avenge the downtrodden taxpayer, calm the populist ire and shush those WASP “tea baggers” and their insistence on fiscal responsibility. But what a tangled web… and slippery slope. (Can those metaphors work together?)

  Here’s a REAL budget crisis: “Within 12 years, without an increase in interest rates, the single-largest line item in the federal budget would be interest on the federal debt,” former Comptroller General David Walker told NPR yesterday. “That means more than defense, more than Social Security, more than Medicare. And that’s, obviously, not acceptable.

“It’s OK to run a deficit in the short term, when you’re in a recession, when you face serious challenges dealing with housing and financial markets. It’s not the current deficit that I’m concerned about. It’s the structural deficit that will exist whether the economy’s growing, whether or not we’re at war, no matter what the circumstances are. The dangers are that we end up losing the confidence of our foreign lenders. They end up wanting to charge much higher interest rates. The dollar declines dramatically, and the effect on that on the budget, on the economy and on, frankly, Americans, the cost of credit and other things is not a positive sight…

“There’s absolutely no question that taxes are going to have to go up. When you look at the promises that have been made for Medicare — for example, $38 trillion underfunded, Social Security $7.7 trillion underfunded, plus military and civilian pensions and retiree health care — to make the numbers work, you have to restructure those programs, constrain spending and raise revenues.”

  The U.S. trade deficit increased last month by more than the Street expected. The gap ballooned almost 10% to $36.4 billion in November, says the Commerce Department today.

Here’s the highlight of the trade balance report: Chinese demand for American goods climbed to a record $7.3 billion, led by — of all things — soybeans. Drought in Argentina was partly to blame, but there’s a trend under there that can’t be denied:

  “One of the more certain ideas on China hinges on its appetite for something very basic: food,” Chris Mayer told his Special Situations readers yesterday. “We’ve talked a lot about the world’s growing appetite for food and China’s role in that. The shifting diets… the straining of water resources… the diminishing acreage of arable land…

“All of these things put pressure on the food supply. We’ve got a few ideas that answer the bell here, but I want to focus for a minute on just one — Saskatchewan, Canada.

“We took note of this rich prairie to the north in a couple of letters in 2008. Half of all the arable land in Canada is here. It has one quarter of the world’s uranium production and one third of its potash reserves. It produced 160 million barrels of crude oil last year.

“Some of the growth in output here is astonishing. This from The Globe and Mail:

‘On the farm front, the surprise is that much of the new prosperity comes from pulses, crops that were hardly known in the Prairies two or three generations ago — peas, beans, chickpeas, lentils. In 1981, 85,000 acres of lentils were planted; this year, there were 2.3 million acres. In 1976, 15,000 acres of peas were planted; this year, 2.8 million acres. Canada is now the leading exporter in the world of both foods, almost all of it from Saskatchewan.’


“We own one company that is in the heart of all this earthy goodness. We’ve owned it since August of 2006. It’s given us an 11% annualized return since — which is one hell of a good return considering what the broader market has done over that time. I view it is a core Special Situations holding, and it still trades for just above book value.”

Of course, you can access this pick by subscribing to Mayer’s Special Situations. You’ll gain access to the rest of the MSS portfolio too, which is chock-full of asset-rich, debt-poor, under-the-radar stocks well suited for the astute value investor.

  Stocks were a bore again yesterday. Traders were intent on waiting for Alcoa to kick off the fourth-quarter earnings season after the U.S. close, and thus moved the S&P up just 0.1%

And even after Alcoa’s disappointing earnings yesterday afternoon, the market failed to start earnings season with any kind of chutzpah. Alcoa stock suffered an 8% fall this morning, but as we write, the Dow and S&P are suffering less than a 0.5% loss. 

  The snooze fest that the market has become is now fully demonstrated by the VIX:

The VIX — best described as a measure of market uncertainly among options traders — hung around 10-15 from 2004-2007. So there’s room for the stock trade to get even more dull and/or consistent. But after what we’ve just suffered — and all the obstacles still out on the horizon — it’s hard to believe it’ll stay this low for long.

  The bond trade, on the other hand, is on a tear. The yield curve steepened to yet another record this morning. Now at 289 basis points, the spread between yields on a 10-year bond and 2-year note reflects bond traders’ worry over the government’s ability to finance long-term debts… and reinforces our New Trade of the Decade. 

  The dollar index is right where we left it yesterday: 76.9

  Ditto with gold, at $1,155.

  Oil’s taken a bit of a hit today, down a buck and change to $81 a barrel. We like this snippet from Alcoa’s report… they cited “significant increases in power or energy costs or the unavailability or interruption of energy supplies for Alcoa’s operations,” as one reason for their net loss. As James Howard Kunstler pontificated in last week’s 5, at what point do higher oil prices stop signaling global growth and start becoming a global pain in the ass?

  “In 2010, I believe that the stars are aligning for nuclear power,” says Byron King. “In 2008, costs for everything (steel, concrete, copper, equipment, etc.) pretty much skyrocketed and a lot of developments in the nuclear space were either delayed or deferred. In 2009, the markets crashed and capital availability dried up. Again, many nuclear projects were delayed or deferred.

“But the world needs the energy. The so-called alternative energy systems — wind, solar geothermal — are starved for capital, technically problematic and hard to scale up even on the best of days. Carbon-based systems are now out of favor, certainly in the elite salons of the Western world. Coal-fired power won’t cut it in the West (unless things get really bad — which they might.)

“The modern nuclear power industry offers fourth-generation technology that’s MUCH safer than it was in the past. This includes nuclear reactors — with standardized designs and less-dangerous fuel systems — that are faster to construct and much less costly than in the olden days. To cap it off, the nuke power industry today offers a better handle on nuclear waste and weapon proliferation issues. It’s all good — or at least, it’s much better than it was 10 or 20 years ago.

“Thus, it’s time to get into the nuclear investment space, and I believe we’re getting in near the bottom.”

Byron tells us he’s got his eye on “an outstanding fast-growing company in the nuclear power space. I’ve been watching this rising star for the past year or so. It’s gaining traction and is ready to move into the big-time.” That’s a perfect fit for his Energy & Scarcity portfolio… gain access to it here before he recommends this nuclear standout.

  Last, a tragedy: The Great Recession has caused a remarkable surge in law school applications. Following the famous mantra, “when the going gets tough, the tough go back to school and get a degree they never wanted in the first place,” a record 60,746 would-be lawyers took the LSATs last October. That’s up 20% from last year and an all-time high, the administrators of the test reported yesterday. Interest in graduate school is booming, too. The number of Americans taking the GRE last year jumped 13%, to a record 670,000.

Is this the appropriate paradigm? You tell us. Bill Bonner often reckons that this Depression is not simply an economic breather, but a long-lasting retrenchment that could cripple a whole generation. If so what happens to those tens — if not hundreds — of thousands of new J.D.s three years from now? Heh, well… there’s always politics.

If we see any opportunity here, it must be in higher ed and debt servicing. Clearly, the American appetite has not waned for either.

   “Why do you always hate Hugo Chavez so much,” a reader writes, “but have no problem with our utterly corrupt allies from Saudi Arabia to Haiti? Weird.”

The 5: “Hate” is such a strong word. Amused, might be a better one; we’re amused by people all over the place. But since we’re on the monetary, economic and fiscal beat… and Mr. Chavez is currently conducting a tutorial on how to botch all those policies at once, he gets the laughs here at The 5’s HQ. Ha!


Ian Mathias

The 5 Min. Forecast

P.S. Nearby Venezuela, we’ve been amused the by the socialist, albeit elected, government of Daniel Ortega in Nicaragua, too. “When you drive the 100-odd kilometers,” Addison reports, “from the Managua airport to our strip of paradise along the Pacific coast in Rivas, you see that nary a telephone pole or palm tree trunk has escaped the black, white and red paint of Ortega’s FSLN party.

“Ortega is vastly popular among the working folk of Nicaragua — so much so the party leaders are trying to find a work around that country’s term limits law so Ortega can run again in 2011. We’re not sure if he’ll seek to become president for life or not… but so far, Ortega’s political antics have favored the country’s economic development, rather then simply trying to control it.”

Tomorrow, Addison will chime in with another installment from Rancho Santana, explaining why a rare weather phenomenon in the region has created a heretofore hidden hot spot for the world’s surfing community… and promises to help the ranch attain sustainability faster than anyone has yet predicted.



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