Don’t Encourage Them!

by Addison Wiggin

  • How this “historic” election will cut the deficit $200 billion, max
  • IMF sells off more gold, Iran acquires more gold
  • Oil zooms past $83.50… Alan Knuckman on why $90 is in sight
  • Rare earth row is over… but the underlying opportunity remains
  • Eyes “glazing with ambivalence” and other debt-and-deficit reader mail

On this day before a “historic” midterm election, we find
ourselves amused once again by P.J. O’Rourke, who entitled his latest
book thus:

“The argument that the two parties should represent opposed ideals
and policies,” Carroll Quigley wrote in Tragedy and Hope nearly half a
century ago “is a foolish idea acceptable only to doctrinaire and
academic thinkers.

“Instead, the two parties should be almost identical so that the
American people can ‘throw the rascals out’ at any election…”

Since we only have 5 Min., let’s examine two promises made in this
campaign season; one a proxy for the “cut spending” crowd… the other
for those who wish to “raise taxes.”

John Boehner, whom many believe will be the new Speaker of the
House on Wednesday morning, boldly proposes a return to pre-2008 levels
of “nonsecurity” discretionary spending.

Why 2008? Why because obviously the deficit spending engaged by the
previous administration was OK, at least politically on his side of the

Fair enough. By one estimate, that would eliminate about $105 billion
of this year’s deficit.

For his part, President Obama wants to raise taxes on families
making more than $250,000 a year. That’s another $70 billion. He also
wants to reinstate the estate tax on estates of $3.5 million or more.

That’s good for another $25 billion a year.

Of course, both tax hike provisions assume those families will stay
put, maintain their current income and/or fail to make alternative
plans. But we can leave that discussion for another 5.

“Deficit hawks” — those policy wonks who believe there is an
appropriate level of promises politicians can make using the public
purse to get elected — would probably take cheer from each of these
proposals: cut spending, raise taxes, bring the budget closer into

Better these ideas than nothing, right?

But if you take just two of these hot-button proposals, strip them of
the emotion with which they seem to enflame in the electorate — that
is to say when you add up Mr. Boehner’s spending cuts and Mr. Obama’s
tax increases — you get a grand total of $200 billion.

Assuming that both plans were kept intact through the committee and
lobbying process, that’s a mere 15% of the deficit for 2010.

What of the rest?

Who cares, really? Stocks are rallying this morning. Today could
be the day the
Dow eclipses its April 26 high of 11,205. Traders are reacting to the
following data points…

  • The ISM Manufacturing Index perked up in October, from 54.4 to 56.9 –
    – well ahead of expectations
  • A similar measure of manufacturing activity in China also came in
    better than expected at 54.7 — a six-month high. (With both of these
    measures, 50 is the dividing line between expansion and contraction.)
  • The Commerce Department says personal income fell slightly during
    September (thanks largely to people’s unemployment benefits finally
    expiring after 99 weeks). Yet somehow, personal spending is up — the
    second indicator in less than a week that hints at people going further
    into hock to maintain their standard of living. The savings rate is now
    the lowest in more than a year.

The dollar is up slightly too, to 77.2. Gold is down slightly, to

The International Monetary Fund (IMF) says it sold 32.3 tons of
gold during September — about 8% of the total 403.3 tons it started
selling last year. India picked up about half of the entire stash a
year ago this week.

True to form, there’s been little transparency from the IMF about who’s
been buying, or how much, as these sales are announced in dribs and
drabs. All we’re told is that the September total was “well above” the
previous month’s.

Iran says it’s converted about 15% of its foreign exchange
reserves into gold. According to the state-run news agency, the central
bank governor says Iran’s gold stash “multiplied several times” over
the last two years.

If we take President Mahmoud Ahmadinejad at his word that Iran’s forex
reserves total $100 billion, that means Iran now holds $15 billion in
gold — placing it among the top 15 gold holders in the world.

Oil is up sharply this morning, zooming past $83.50 — another in
a series of seesaw moves that Alan Knuckman says is bullish.

“Sideways crude oil prices are staged for a breakout above the $84/85
channel,” he says. Crude has traded in a $5 range that sets up for a
run to $90 a barrel and new yearly highs.

“A simple 50% retracement of the crude highs at $147 to the recent lows
at $33 places a modest target at $90 a barrel.”

If you’d like to turn small market moves into big profits, Alan can
show you the way. On Friday, his readers closed out a silver position –
– tripling their money. That’s nine winners in a row, going back to
late July. For access to Alan’s next winning trade, look here.

The tug of war between the United States and China over rare earth
elements appears to be over… for now. The makers of everything from
mobile phones to catalytic converters can rest a little easier.

An embargo of shipments to the United States that began on October 18 –
with no fanfare – ended last Thursday, again with no fanfare. But four
anonymous industry officials tell the New York Times that shipments
have resumed.

As if to confirm these developments, Secretary of State Hillary Clinton
met with her Chinese counterpart during a conference in Vietnam on
Saturday, after which she said, “Foreign Minister Yang clarified that
China has no intention of withholding these minerals” from the world

Of course, when one country controls 97% of world production, it
doesn’t have to “withhold” supplies to cause disruption; it just needs
to start using more of them domestically. Which is exactly what’s been
happening the last two years.

With the immediate crisis over, shares of rare earth producers are down
this morning… which should help provide a nicer entry point on the basket of rare earth stocks Chris Mayer is recommending.

Here are some promising numbers to ponder just before Election
Day: A record number of independent and third-party candidates are
running for Congress.

Researchers at the University of Minnesota have studied midterm
elections going back to 1934… and they find 443 such candidates this
year — up 57% from 2006.

Libertarians lead the way, making up 35% of the candidates, followed by
Greens with 13% and Constitution Party candidates, 9%.

Still, while we quietly cheer any trend that bucks the bipartisan
bigger-government consensus, we’re still more inclined to agree with
P.J. O’Rourke.

“I agree,” another writes leaving out the ‘not really,’ “that both
parties are responsible for the massive national debt that we now must
find a way to manage.

“However, you are misreading the pending election results if you think
that we are returning ‘Bush Republicans,’ those whom you have stated
helped create this mess.

“As a brief reminder, the Pelosi-led Congress has added $5 trillion in
debt since they regained control back in 2006 — that’s four years of
controlling the purse strings, not two. This amount of red ink is
incomparable to any other time in world history — ever!

“Our nation is shrinking quickly. Opportunity is disappearing amid a
barrage of progressive policies from the ‘socialist Democrats.’ Please
stop dismissing this election as a ‘nothing’ — it is historic, and
could be the only event that restores this country to greatness.”

The 5: What, exactly, is any more historic about this election… than,
say, the midterm election in 1994? Semantics, maybe. In 1994, we had
the Contract on America, this year, the Pledge to America. Neither
party is any more committed to fiscal restraint than they were then.

What they really want is for you to send their guy/gal to Washington
tomorrow, so on Wednesday they can continue to divide up the spoils.
You can call it restoring the country to greatness if you like.

“Yes, Bush was president,” still another reader chimes in, “but
wasn’t the Congress controlled by the Democratic Party beginning in
2006. This is not to say that Bush, like most of the Washington elect,
overspent, but the president doesn’t dictate a budget. Congress has

“In this case, the idiotic spending was initiated by the same party
that is bankrupting us now. If the Republicans win next week, I hope
they will begin to reverse this trend, but I have my doubts.”

The 5: We have our doubts, too. Bush was also president in 2003 when
both the House and Senate were in Republican hands. They passed the
Medicare Part D drug benefit, which was projected to cost some $1
trillion but is now expected to cost 8 times that much.

“As one of the teeming unwashed masses,” another reader writes,
with something much closer to the truth, “I have to say that any
discussion of public debt causes eyes to glaze in ambivalence.

“The reason,” our reader suggests, “is simply that we cannot believe
our leaders, because we know they use dishonest accounting practices.

“Why should anyone, for example, believe a central bank that refuses to
be audited? We don’t know how much the Fed makes or spends, so we
cannot know what, if anything, we owe.”

The 5: Indeed, with so much quibbling over who is to blame, voters will
go to the polls tomorrow to execute “the most important duty we as
Americans have”; most of them will do so without a clue.

Most have steeled their minds over the past several weeks after
ingesting a slew of 30-second TV-spots – full of baseless lies from
both parties – aired in between law enforcement dramas and sports
spectaculars. Political spending alone will account for 11% of local
TV station revenue nationwide this year.

And yet, the real debate… the one the British just had the cojones to
begin… the one the U.S. political class has yet to be honest enough
to admit needs to take place… is over the very role of government
itself. Can its representatives promise to be all things for all its
people all the time… and never pay for those promises?

Really?! We suspect in the end, economics will force the issue.

But until, if ever, there are actual differences in the political
philosophy of the parties, you’d be better off working than taking the
time to vote… or at least spending your time doing something that
will actually improve your life, rather than expecting ‘change’ to come
by way of the ballot you cast.


Addison Wiggin
The 5 Min. Forecast

P.S. In fact, instead of voting, we recommend you buy and read this
book: The Pledge. We received a review copy this week. And on first
glance, we suggest it will lead to a life far more productive and
richer, far more quickly, than anything you’ll get out of the election
tomorrow. But don’t tell our wives; when we tell people not to vote,
we’re expressing an opinion our wives don’t even agree with. Heh.

P.P.S. For further useful musings on tomorrow’s elections, please read
“An Honest Capitalist On the Tea Party Movement” in today’s Whiskey & Gunpowder.


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