The National Debt Recalculated

by Addison Wiggin

  • The $200 trillion national debt: Why an old prediction has new legs
  • Investment world goes “a little crazy”… How to brace for Election Day, Fed decision
  • Not just the usual suspects: Foreclosure pace picks up outside the “sand states”
  • “The clown made me do it!”… Employee successfully blames McDonald’s for obesity
  • “Hypocrites!” a reader cries… and our reply

“Let’s get real,” says Boston University economist Laurence Kotlikoff. “The U.S. is bankrupt.”

This isn’t breaking news to readers of The 5. And Kotlikoff issued his estimate of the real national debt — $200 trillion — months ago. But after it was spotlighted this week in Canada’s Globe & Mail newspaper, it’s become an Internet sensation.

$200 trillion is a rather higher estimate than even the $67 trillion of our friend David Walker, the former U.S. comptroller general. But when you’re trying to project the future costs of Social Security, Medicare and Medicaid (especially the last two), and you’re talking tens of trillions, the numbers are bound to get fuzzy.

“To close this fiscal gap [without cutting spending] would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes,” says Kotlikoff.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems — as well as military and other discretionary spending cuts.”

When we began making I.O.U.S.A. in 2006, no one cared about the ballooning national debt… nor even the historically high deficits posted by Bush administration. Now in 2010, there’s fear and anger over debts and deficits like they were created in November 2008. The “outrage” many predict will likely return the U.S. Congress to the party who’d gotten the whole ball rolling in the first place. How soon people forget, eh?

Still, it’s not surprising Kotlikoff’s warning is catching fire now. It underscores what a dicey time this is for the economy and your investments: What would a new Congress actually accomplish after the election on Tuesday? Not much is our guess.

And what will the Federal Reserve do when it decides next Wednesday what the next round of quantitative easing will look like? Whatever euphoria is created by the announcement is bound to be short-lived. We may get, as Marc Faber predicts, a short “crack up” boom, but then we suspect the holidays will be over and Congress will be back to business as usual, no matter the outcome of Tuesday’s election. And the economy will still be suffering the effects of debt deflation.

In the short term, “the whole investment world has gone a little crazy,” says our friend Bill Bonner. “It’s all speculation now… speculation on how much new money the Fed will add to the system.” Everything that happens is evaluated in light of how it will affect the election, and the Fed’s decision making… including routine releases of economic data.

The Commerce Department is out with its first read on GDP in the third quarter — up an annualized 2.0%. That’s about what the Street was counting on, and an improvement on the 1.7% pace in the previous quarter.

Some of the highlights…

  • Consumer spending rose to an annualized 2.6% (highest since Q4 2006)

  • Housing is still a drag

  • Business spending slowed… but businesses did build inventory. In fact, without that inventory build, the overall GDP number would have been essentially flat.

Against all odds, consumers are going into hock again. How else can they spend if their incomes are stagnant? Businesses, for their part, are still too scared to loosen their money belts for new products, new marketing… or new hires.

If consumers don’t keep up their buying through the holidays, and all that inventory languishes in warehouses… well, Q4 could be pretty ugly. To say nothing of the languishing inventory of houses, both official and those kept quiet behind bank balance sheets around the country.

This morning, the markets have no idea what to make of the GDP data or, should we say, what the Fed is going to make of the GDP data.

The dollar index is around 77.3, not too far off the pace of 24 hours ago. The Dow and the S&P are flat. But gold spiked above $1,350 for a while this morning, and is still holding firm at $1,349.

So what’s an investor to do right now… with stocks close to their April highs, gold within $25 of its record and the dollar bouncing around with every statement of every Fed governor?

That’s the question we posed yesterday during our Emergency Summit. We called our editors to Baltimore and asked them to give us their best ideas right now, so you can navigate these choppy waters.

  • Dan Amoss identified his favorite short opportunity. It’s a manufacturing giant so beyond hope that even a business-friendly Congress won’t be able to help it. Worse, the Fed’s quantitative easing will probably kill it

  • Abe Cofnas predicted how politics and the Fed will steer the currency markets next week. He spelled out a medium-term strategy to play the dollar’s ups and downs… and an ultrashort-term way to play the election itself

  • Byron King expanded on his thoughts shared here earlier this week about the de facto ban of U.S. offshore oil drilling… and the chances for deregulation after Tuesday’s vote. He’ll also share the name of a company insulated from U.S. politics — with a good chance of shooting from $4 to $16

  • Chris Mayer identified his two favorite stocks. They’re great companies to own no matter who wins the elections — but Tuesday’s results and Wednesday’s Fed meeting could take one up 256%.

Our video team is assembling this into a polished and professional report, ready for you to act just in time for Election Day. Watch your inbox tonight for details on how to access it.

Foreclosures are gathering pace in places beyond the “sand states” of Florida, Arizona, Nevada and California. According to RealtyTrac, foreclosure “actions” — everything from notices of default to outright repossession — accelerated during the third quarter by 71% in Boise, Idaho; 63% in Seattle; and 38% in Philadelphia. And those are just examples.

Chicago, Atlanta… even Houston saw increases. Lenders took over a record 102,134 properties last month. Until more people have jobs again, don’t expect this to improve.

Sales of foreclosed properties in the “sand states” are beginning to slow, thanks to the growing scandal over who actually holds title on securitized mortgages. According to ForeclosureRadar, foreclosure sales on courthouse steps are down 42% since Sept. 20 in Arizona, California and Nevada.

Bloomberg News is collecting anecdotes of real estate agents whose clients want to steer clear of foreclosed properties just to steer clear of potential title problems — lest they end up like the guy in Florida who bought a short sale with cash and ended up getting foreclosed.

Even oil traders appear to be holding their breaths for the Fed and the election. A barrel of crude trades for a little under $82.

Silver just pushed back above $24 an ounce. Resource Trader Alert editor Alan Knuckman told his readers this morning to close out the remainder of a position for 206% gains in 4½ months. The first half of that trade delivered a 100% gain last month.

That makes nine winners in a row for Alan. If you’d like to be in on his next trade, you can learn about his strategies here.

From the “Is this what the world’s coming to?” file: A judge in Brazil has awarded a McDonald’s franchise manager $17,500… because the manager gained 65 pounds eating McDonald’s food across a 12-year span.

In contrast, this woman wants McDonald’s to help her achieve her goals

The manager says he felt compelled to sample the food daily to maintain quality standards. And the free lunches the company offered also added to his girth, he said.

McDonald’s is deciding whether to appeal. We can imagine how that discussion is going right now: “We can part with the money, but do we want to set a precedent — worldwide?” Oh, to be a fly on the wall…

“I’m catching up on old email,” says a reader, “and just saw your Sept. 21 edition with responses to your question: ‘“Is the prospect of higher tax rates (or just the uncertainty about them) enough to make you think about picking up stakes”‘ and moving to another country?’

“It shouldn’t be. For most people, income taxes were lowered by the stimulus bill. That was a major part of the stimulus bill. Increased income tax rates will affect only the very wealthy and will only return them to the rates they were at a few years ago, still lower than a few decades ago. Were people fleeing the country back then?

“You guys are supposed to be about informing us, not misleading us. I’m beginning to wonder if I can trust anything you say now.”

The 5: Well, you can read into it whatever you like. But if we recall correctly, that debate drew passionate responses among readers for several days. Many folks expressed a similar degree of condescension in their emails as yours does today. We published them all… or at least the literate ones.

We summed up several days later on Sept. 24: “True fact. The number of U.S. citizens choosing to expatriate jumped some 300% between 2008-2009.

“Having said that, we don’t think these figures are putting the fear of God into anyone concerned with extorting the electorate: In 2008, 235 people filed for expatriate status; in 2009, that figure jumped to a whopping 743. In 2007 — before Joe Six-pack was aware there was even a crisis brewing — 407 U.S. citizens expatriated.

“The figures jump wildly, but they are barely even remarkable. Further, the motivation to expatriate appears to jibe very little with the macroeconomic or political environment. Still, there’s hope…”

If you’d like to fault us for even asking the question in the first place, you probably won’t like too many of the ideas we’re interested in pursuing here in The 5. Thanks for reading all the same.

“Great work guys (and gals, no doubt)” writes another, who then adds, “Say what you will about the French and their demonstrations, but at least they serve this point very well: Americans are afraid of their government, while the French government is afraid of her people. Which is the way it should be.”

The reader then goes on to quote Thomas Jefferson: “God forbid we should ever be 20 years without such a rebellion… & what country can preserve it’s liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms… The tree of liberty must be refreshed from time to time with the blood of patriots & tyrants. It is it’s natural manure.”

“With all of you there at The 5 speaking out against the bank cronies etc,” a reader writes, “it all seems ridiculously hypocritical. Your newsletter scam of recommending micro cap stocks and then front running before the subscribers send the price soaring is something that should be investigated by the SEC.

“Granted you are not the only ones but the procedure is shameless and goes against the values of investing that great investors like Benjamin Graham and Warren Buffett have been proponents of for some time now.”

“No surprise,” this reader adds, “that you failed to mention the issues with Patrick Cox and International Stem Cell Corporation. It’s a complete manipulation of markets and it is disgusting. You guys claim to be part of the solution yet are as much a part of the problem. I look forward to the day when Americans wake up to your fraudulent investment practices!”

The 5: Interesting, you claim we failed to mention it. If so, how’d you read about it? In Breakthrough Technology Report, one assumes — a paid product through which Patrick Cox communicates with readers quite easily and eloquently.

On the issue of stock manipulation, we “expressly forbid” editors, analysts, writers, publishers, consultants or anyone involved in the production of the newsletters from having a “financial interest” in the companies on which we publish research. The following paragraph goes out with every issue of every publication we publish.

The publisher expressly forbids its writers or consultants from having a financial interest in any security recommended to its readers. Furthermore, all other Agora Financial LLC (and its affiliate companies’) employees and agents must wait 24 hours prior to following an initial recommendation published on the Internet, or 72 hours after a printed publication is mailed.

It’s also in our employee manual. Everyone, to the best of our knowledge, abides by the rules. Otherwise, they’re in breach of contract and subject to penalty under the law.

Interesting that you bring it up, though, because an equally verbose complaint gets leveled at us from time to time: Why would you prevent your editors from owning the stocks they cover? Doesn’t that mean they’re keeping the best ones for themselves?

Of the two concerns, we lean heavily on the side of providing the best possible, independent and objective research available on a given investment idea or trend. Our obligation is to serve you, the reader — not advertisers, banks, brokers or the companies we cover.

In this particular instance, Patrick Cox issued his sell signal on ISCO precisely because any connection with the firm, not matter how indirect, could create a perception of conflict-of-interest that we wish to avoid. The move was initiated by our policy as publishers. The policy is expressly designed to remove any incentive editors may have to slip up and engage in the type of manipulation you believe you witnessed.

“I found it very amusing,” another writes, who also seems to be a Breakthrough Technology Alert subscriber and ISCO shareholder. ”I have never seen an analyst issue a sell recommendation but don’t want you to sell.

“The price action of ISCO makes me wonder if all the shareholders are Breakthrough Technology Alert subscribers. The funny part is they don’t actually read the whole alert. I think they just look at the bottom of the page and when they see sell ISCO, everybody rushes in until Patrick says stop.

“I have to congratulate Patrick for joining the marketing team with John Mauldin and Lifeline. As he said it time and again how much he loves this company but couldn’t buy it because of his position, now he can and so can everybody in Agora. I wish him all the success in his position as his success means higher share price.

“One final question for Patrick on ISCO, when and where can I get the cream? My wife and I have been waiting for it for almost a year and we are very excited to see how well it works. Thanks for the initial recommendation and I truly believe this company will end up as a life changer like you initially described.”

The 5: We suspect you’re right about the not reading the whole alert part. So it goes…

As far as we know, the cream is not available yet. We assume you can get information on its development from the company’s website.


Addison Wiggin

The 5 Min. Forecast

P.S.: We see shots are being fired across the border between North and South Korea. As if there weren’t already enough uncertainty, between the election and the Fed.

This really is a volatile time to be invested in anything… and it’s just one more reason our Emergency Summit is so timely. We’d include the link here, but the lights in our Richebacher Library studio are still warm and the video hasn’t yet cleared production… watch your inbox tonight for details on how to get your exclusive briefing.


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