China Tells the Truth

  • China lays it bare: Ignore the official GDP numbers… and watch these data points instead
  • Market celebrates “Grand Bargain” between Obama and the GOP… Why you shouldn’t get so excited…
  • More than precious metals: Chris Mayer on how to navigate the waters of inflation
  • Why neither QE2 nor the plight of the Irish bother our man Ray Blanco
  • The real “destruction of the currency”: Uncle Sam’s $120 billion printing error… readers send in spreadsheets… and more!

We’re starting to like this Julian Assange character, trumped-up rape charges in Sweden notwithstanding.

This morning, thanks to the diplomatic cables made public by Assange’s WikiLeaks, we’re getting a better look at GDP numbers published by China.

One of the cables tells of a dinner between the U.S. ambassador to China and the head of the Communist Party. Li Keqiang is his name, and he’s widely expected to become the new premier in a little over two years.

Li says if he really wants the pulse of the economy, he needs to know just three things…

Heh, Li must be reading from The 5’s playbook: We check in from time to time on rail volume and other real-world economic indicators that can’t be massaged by government statisticians.

“By looking at these three figures,” the cable says, “Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,”

Heh. Just like the Bureau of Labor Statistics!

Stocks are up this morning in reaction to the “Grand Bargain” between the White House and Republican congressional leaders over the “Bush era” tax cuts.

In case you missed the hours talking that passes for analysis on television, here are the quick and nittys:

  • Current income tax rates are extended through 2012 at all income levels; ditto for taxes on capital gains and dividends
  • Payroll tax is cut two percentage points during 2011; the “Making Work Pay” tax credit that took effect in April 2009 goes away
  • The alternative minimum tax is temporarily “patched” yet again
  • Businesses can expense 100% of capital spending
  • Estate tax comes back at 35%, applied to estates $5 million and over, through 2012
  • Long-term unemployment benefits (that is, between 26-99 weeks), which expired last month, are extended through 2011.

But really, what’s to celebrate? The parties agreed to spend more money (a lot more)… and avoided talking about cutting spending. Again.

 For reasons that aren’t immediately apparent, gold is selling off from record levels reached earlier this morning. The spot price slid from over $1,430 just before 9 a.m. EST to below and is hovering at $1,415 as we write.

Silver is at $30 on the nose… but that’s down from $30.70 earlier.

Oil likewise topped $90 a barrel for the first time since October 2008… and then retreated to $89.31.

Yesterday, AAA estimated the nationwide average price for gasoline is $2.95 a gallon. If oil returns above $90 and stays there, this could be the first holiday season in which getting from here to there will cost more than $3 a gallon.

Merry Christmas.

“Inflation is a tricky foe for investors,” writes Chris Mayer as he contemplates rising prices of precious metals, energy and other commodities. “It erodes our wealth slowly, unlike, say, a stock market crash. If a stock market crash is like jumping from a 60-foot building, suffering inflation is like drowning in a bubble bath.

“Different assets and businesses behave differently in times of inflation. Some ride on the inflationary wave like a cork, others sink like a stone. And sometimes, it surprises you which do which.”

For example, “gold popped like a cork in the 1970s,” Chris says. So you would think gold stocks did well. Yet gold stocks were not necessarily the best inflation hedge. If you put $100 in Newmont Mining, you had $149 at the end of the decade.” Bleah.

In contrast, $100 put into shares of the grain processing giant Archer Daniels Midland would have multiplied nearly six times over — as spotted recently by Horizon Asset Management’s Murray Stahl:

“The price of oil is a gold miner’s biggest expense,” Chris continues, “and oil went up a lot, too. And we know gold stocks deplete their reserves and must replace them. Newmont had to do this in a market in which gold properties also became much more expensive.

“So you can see that Newmont’s profit margins were under pressure the whole decade. ADM had no such issues.

“Don’t get stuck in the rut of thinking only ‘Inflation hedge means gold and silver.’ You’ll want (and need) more arrows in your quiver than that.”

Just some food for thought as we head into a new year marked by rising prices. …

Between the potential inflation unleashed by the Federal Reserve and the continued jitters over the PIIGS nations in Europe, “lots of folks are pretty scared,” acknowledges Technology Profits Confidential editor Ray Blanco.

“For the long-term technology investor, however,” Mr. Blanco suggests, “I don’t think it really matters. From an orbital perspective, these panics come and go. They always have. The technological arc of human history, however, can be seen to move in only one direction, and that is upward.

“Granted, over the short term, it might have some negative effect, but even that remains to be seen. Breakthrough technologies, however, are an excellent way to weather an inflationary storm. We could even call breakthrough technology the ultimate hedge against inflation.”

Ray cites the example of Microsoft, founded in 1975, when inflation averaged over 9%. “Granted, it wasn’t publicly traded back then, but there were private investors. Imagine what a dollar invested in Microsoft in 1975 would be worth today. Just since its IPO in 1986, the company has turned a (split-adjusted) share price of 10.1 cents into over $26.

“Even with the dollar losing about half of its purchasing power since 1986, that is still an inflation-adjusted gain of 13,000%. I can live with that.

“The point is that early investing in companies that will transform the market will beat any devaluation caused by inflation.”

Oh, the irony! The Federal Reserve and the Treasury can’t even get printing money right. Literally.

In February 2011, the Treasury was planning to dump hundreds of thousands of new, high-tech, impossible-to-counterfeit $100 bills from their Bernanke-approved helicopters. Unfortunately, the process of making them is so complicated the paper has started creasing inside the printing press.

As much as 30% of the bills have blank spots.

Nobody knows how to fix the problem yet. And sorting the “good” bills from the “bad” will take — get this — about a year.

Even before this snafu, the printing costs of these bills came out to 12 cents each — double existing paper currency. At 1.1 billion bills printed so far, that’s more than $120 million dollars in sunk costs — plus, whatever it’ll cost to extricate the good. And shred the rest.

Oh, yeah, “destruction of the currency” has a whole new meaning now. This metaphor is just too easy!

Our worst fears are being realized. After we showed a pie chart of the federal budget yesterday, several readers wrote in with their own ideas about how to shrink spending. Two of these emails were accompanied by spreadsheets.

We’re supposed to be helping you exploit investment opportunities in the markets… yet here we are debating public policy once again. Ugh.

“Let the federal government go back to the 2008 budget for the remainder of 2011,” wrote one of those readers, “and have every department start from zero and develop a budget in which they can justify with every dime to be spent for 2012.

“The yahoos that sat on the deficit commission could not understand a zero-based budget if they saw one. Going back to the 2008 budget would reduce the deficit by at least $300 billion the remainder of this fiscal year ending September 2011.

“Starting 2011 with a 2008 budget and requiring justification for every expenditure in 2012 will reduce the budget further for 2012. This process used year after year should balance the budget by 2016.”

“My plan,” says the other spreadsheet-maker, “is simply to cut 5% of the fat out of our bloated expenditures across the board each year until we have a balanced budget.

“Scenario No. 1 assumes no growth in tax receipts. In this case, the budget is balanced by 2021 (11 years). In scenario No. 2, I assume a very modest 1% increase in GDP each year and that ‘trickles down’ into an additional 1% increase in tax receipts. In this case, the budget is balanced in 10 years.

“The last scenario assumes an increasing rate of growth in tax receipts as we eliminate the government’s inefficient allocation of resources and replace it with growth in productive assets. This scenario balances the budget in nine years.”

“I’m just a working man, like 95% of the population that still has a job, and I don’t get this government,” writes a reader who did not prepare a spreadsheet.

“Headline: ‘Payroll Tax Break, Cut Social Security by 2% for the Working American.’

“Why? How stupid is that? This is the first year that Social Security went into the red! So the plan is to make it worse? Medicare — I pay for that also, why didn’t they cut that? Gotta pay for the Obama health plan!

“I am not an economist or an accountant or a banker, but the plan to cut the taxes just kicks the can down the road, again more IOUs to the Social Security Administration.

“’What they cut, they must borrow. What a great plan. Figures don’t lie, but the liars figure.

“I gross $60,000 a year and don’t itemize. I would pay more if anyone can have the guts to develop a real plan, and I hate taxes, especially the fed’s inflation tax. So which one should I pay? A direct tax or the coming inflation tax.”

The 5: Too bad it’s not an either/or proposition. Instead, with “compromises” like the one announced this morning, you’re headed for both.


Addison Wiggin
The 5 Min. Forecast


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