Surviving the Fall of Entitlements

by Addison Wiggin & Ian Mathias

  • How the United States has defaulted before… and is on the verge of defaulting again

  • “A milk cow with 310 million tits”: a salty politico’s crusty comments and the serious issue they obscure

  • New bull market: Why lean hogs are fattening the wallets of traders in the know

  • Chris Mayer makes sense of China’s 62-mile traffic jam… Plus, the great chopstick crackdown!

  • Readers light us up on marijuana legalization


  “Governments will impose a loss on some of their stakeholders,” reads a new report from Morgan Stanley on sovereign debt. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”

Of course, we’re talking only about “other” countries like Greece and Ireland, right?

  The report points out a little-noted statistic: Government debt as a percentage of annual tax revenue. With debt soaring and the revenue tanking, the United States now has one of the highest in the world at 358%. (Compare that to Italy — one of those pesky “other” countries with baby boomers poised to overwhelm the system — with a figure of 188%.)

But we’re the world’s reserve currency, right? We can’t default. And if we ever run the risk, we’ll just print our way out of it. Right?

Uncle Sam has defaulted in the past, or as the Morgan Stanley report put it, “imposed a loss on some of his stakeholders.” When Social Security was “reformed” in 1983, following the advice of the Greenspan Commission, anyone born after 1937 had to work at least a little past age 65 to collect full benefits. If you were born after 1960, the retirement age was bumped up another two years.

That’s one promise reneged upon. We have no doubt another is on the way.

  "Social Security needs to be tweaked,” declared Brad Woodhouse, communications director for the Democratic National Committee this week. True, he said that to differentiate his party from Republicans who want the system “torn apart from its very foundations.” But the very party who claims Social Security as integral to its heritage knows the game is up. The No. 2 Democrat in the House, Maryland’s Steny Hoyer, is already proposing another increase to the retirement age.

  It helps to keep a sense of humor about all this. Which clearly some people don’t when it comes to the cantankerous old coot Alan Simpson, the retired Wyoming senator who’s now the Republican co-chair of President Obama’s deficit commission.

Earlier this week the head of OWL, a group describing itself as “the voice of midlife and older women,” sent him a letter insisting Social Security “doesn’t contribute” to the national debt. (Ah, Social Security denialism.)

Simpson’s reply ended with the following: "Yes, I've made some plenty smart cracks about people on Social Security who milk it to the last degree. You know 'em too. It's the same with any system in America. We've reached a point now where it's like a milk cow with 310 million tits! Call when you get honest work!"

I said what? No, I’m pretty sure I meant, “teats

We could hear people whining all over the capital from here in Baltimore. More than one sourpuss asked for Simpson’s resignation from the commission. That doesn’t appear to be forthcoming, but Washington propriety being what it is these days, he did issue an apology: "I can see that my remarks have caused you anguish, and that was not my intention."

That’s Washington for you: Silly cable news distractions while Social Security is just 35 days away from officially slipping $28 billion into the red.

“What does that mean?” our dividend hound Jim Nelson asks rhetorically. “Either they hike up your payroll taxes now… slash your retirement payouts later… or both. Payouts shrink. No matter what, it means you come out of this with less.”

Mr. Nelson spends his days, and even some of his evenings and weekends, sniffing out sources of investment income to make up the difference. We’ve prepared the following presentation to help share his most recent discovery with you. If you haven’t yet taken the time to view it, please do so here.

  The Dow and S&P opened up slightly this morning, thanks to this week’s report on first-time unemployment filings. The number is back below 500,000; indeed, it came in below the consensus guess. Given the rest of this week’s dismal data, traders will find comfort wherever they can.

Yesterday, lousy monthly reports on durable goods (terrible, save for cars and aircraft) and new home sales (worst since records began in 1963) pushed the Dow below 10,000. But that seemed to trigger enough automatic buys to propel the index back above that “psychologically important level.”

  Home builder stocks rallied yesterday. Yeah, we know. Nuts.

The major ETFs that track the sector jumped 3% on the theory that such an awful report as came out yesterday indicates we’re “near the bottom.”

If the unemployment picture — thus the income picture, thus the ability-to-buy-new-construction picture — were “near the bottom,” that would make sense. Maybe traders are toking even more than the numbers we told you about on Tuesday indicate.

  Gold sits at $1,238, down only slightly from this time yesterday. The dollar index is down more substantially, back below 83.

  Here’s a bull market in the making: hogs.

“American per capita meat consumption according to the USDA has dropped from a 40-year peak in 2007 at 220 to 210 pounds for this year,” our commodities specialist Alan Knuckman explains by way of background. “The straight uptrend increases halted as the financial crisis changed incomes and diets.

“A major culling of the herd in 2009 to reduce livestock inventory drove hog prices to extreme lows. Then the H1N1 outbreak created a perfect storm and proved that the pork reduction strategy left few animals in the pipeline to meet present demands.”

“It takes six months or more from birth for a pig to reach market weight,” Alan goes on. “And with many breeder pigs sold on the economic downturn, there wasn't a quick fix to restart production again. That's where we are today.

“The United States is the largest pork producer in the world. On Aug. 12, 2010, the USDA said that it expects pork production to be down 3% in 2010 and the price of barrows and gilts to average 54.5 cents per pound, 74 cents lean (live hog is pricing for the whole animal versus the lean hog futures contract that is the dressed carcass). So far in 2010, U.S. pork production is down 4% from a year ago.”

”The June 1 count of all U.S. hogs and pigs was 64.400 million head, down 3.6% from a year ago and less than expected. The March to May pig crop was down 4.7% from a year ago.”

No wonder Alan’s readers are sitting pretty right now with a lean hog position. They’ve collected other gains in the past month totaling 83%, 103%, even 187%. You can join them now at a reduced rate — but only for the next five days. After that, membership to Resource Trader Alert returns to full price.

  We confess we were skeptical earlier this week about reports of a “62-mile traffic jam” in China. For the first 24 hours, there were no pictures accompanying these stories. Apparently, 130 miles outside Beijing is remote enough that it takes time to get pictures to the rest of the world. But seeing is believing…

Gives “bumper-to-bumper” a whole new meaning, no?

Late word at midday is the jam has broken up as mysteriously as it began.  (And again, no pictures yet.)

Now, everyone from The Christian Science Monitor to the Beijing Youth Daily is trying to explain this by saying many of these trucks are hauling coal from Inner Mongolia to coastal ports because China’s rail system isn’t up to snuff. Which is true… but “this has been going on for a while,” Chris Mayer tells us, “so I don’t know that it suddenly caused this backup.”

Still, the trend is unmistakable… and Chris is in the process of identifying a way to profit for the next issue of Mayer’s Special Situations. There’s still time — but not much — to pay just $1 for a trial membership, which gives you instant access to seven China plays, every one of them available on a U.S. exchange. Here’s where to go.

  Then there’s the news that China is cracking down on chopsticks. Seriously. The Ministry of Commerce recently issued a directive that "Production, circulation and recycling of disposable chopsticks should be more strictly supervised."

China goes through 130 million pairs every day. Greenpeace China figures that amounts to 100 acres of forested land every day — a big deal for national leaders who want to increase the percentage of land covered by forest. (In 1949, it was 8%. Today, it’s about 12%. In the United States, it’s 30%.)

Of course, it’s one thing to tell the factories to cut down on production. It’s another thing to tell ordinary Chinese to cut down their use. We’ll see how it all shakes out…

  “Legalizing marijuana would be a step in the right direction toward freedom and liberty more than anything else,” writes a reader who agrees with one of our correspondents yesterday. “Sure, there would be revenues and uses for cancer patients, but for me this issue is about freedom and nothing more. I will put what I want in my body, and it is none of the government's business.

“The drug cartels are running roughshod over the Southwest on both sides of the border. How did organized crime become powerful in the 1920s? Prohibition. History again repeats. This isn't about drugs being good or bad: It is about freedom and ending the power vacuum created from the prohibition of a substance. If we cannot keep drugs out of our prisons, how are we accomplishing anything other than to give incentives to criminals with this stupid ‘war on drugs’? The stupidity of the ‘war on drugs’ is surpassed only by the idiotic ‘war on carbon.’"

  “Anyone who thinks that marijuana is ‘productive’ and that it can be called an ‘industry,’” counters another, “is obviously delusional. So we are to turn our cropland and grazing pastures over to the growing of weed? I think not!

“And we are supposed to put up with stoned Wall Street workers? Spare me. They should all be repeatedly and randomly drug tested and fired when they test positive! They make a mockery of fiduciary responsibility both to their firms and to the firms' clients.

“Marijuana is an addictive, mind-altering drug and ought to be avoided, at least on the job, by everyone who is depended upon for clear thinking, good coordination and efficient and productive work.”

The 5: Buzz kill.

Do you remember the infamous farewell letter Andrew Lahde wrote when he shut down his hedge fund two years ago, having successfully shorted subprime? He opted to drop out and tune in instead.

“Hemp has been used for at least 5,000 years for cloth and food,” he wrote toward the end of his message, “as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana.”

For entertainment purposes, we’ve reprinted Andrew’s entire farewell letter below.


Addison Wiggin

The 5 Min. Forecast

P.S. “We’re rediscovering the values that made us a prosperous society in the first place,” we suggested yesterday in conversation with Dan Rodricks, host of the Midday talk program on Baltimore’s NPR station. “You have to have high savings, high investment in the goods people can use in order to have an economy that grows.”

Of course, not everyone’s gotten the memo yet. Later in the day, we ran across a survey by the purveyors of the Case-Shiller home price index. Each year, they ask new homeowners in four metro areas — Boston; Milwaukee; Alameda County, near San Francisco, and Orange County, near Los Angeles — where they think home prices are going. The consensus right now: They’ll rise 10% a year for the next 10 years. Which is what new homeowners also thought in 2005. Oy.

During the program, Mr. Rodricks was trying to define “sustainability” and wondered aloud what’s next for the U.S. economy?

We benefited from the communications revolution in the 1990s. At that time, the reinvention of the economy got us out of recession and helped balance the federal books (on paper, at least) for about 18 months. What's going to happen this time around? The Internet and its concomitant parts were a 100-year event, at least. What new industry will bail us out this time? What’s going to replace the credit-based financial industry and housing market with all the jobs, etc., dependent with those two industries?

P.P.S. Andrew Lahde’s infamous “farewell” upon shuttering his hedge fund in October of 2008:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won.

At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde



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