Vigilante Justice

by Addison Wiggin – December 13, 2010

  • Gold up, Treasury rates up… return of the Bond Vigilantes…

  • Ugly choice: Should the White House sacrifice the bond market… or the stock market?

  • New revelations from the Hong Kong gold exchange…

  • Hard numbers underscore the dubious value of a college degree in 21st-century America…

  • “Foaming loonies” and other brickbats inspired by Assange and the $600,000 food stamp recipient…

Gold shot up $13 an ounce, to $1,397, as soon as the Comex opened at 8:20 a.m. EST. The yield on a 10-year Treasury note is up to 3.37%.

Yet there’s no news, no fresh data point to make traders itchy. Just an unfriendly environment if you’re making government policy… or a great one if you’re willing to bet against them succeeding.

The 10-year yield is now at a six-month high. It has risen 100 basis points — a full percentage point — since early October.

Through last week, this was largely a function of the Bernanke Backfire — bond traders frightened by the Federal Reserve’s renewed pursuit of easy money.

But a good chunk of this increase has come in the last week. Bond traders have something new to be frightened by — the Grand Bargain that President Obama and the Republicans in Congress reached last week.

Sure, it extends current tax rates at all levels of income. But it also includes a host of goodies like an extension of unemployment benefits and a cut in the payroll tax of two percentage points.

And there are no — none, zip, zilch — spending cuts to accompany them.

“The deal demonstrates a total lack of will to cut the fiscal deficit even a smidge,” says Strategic Short Report editor Dan Amoss. “Holders of U.S. dollars and Treasury bonds will react; they'll soon realize that the U.S. government's long-run budget projections are even further off the mark than they typically are.”

In that vein, we note Uncle Sam ran a $150.4 billion deficit during November, according to the Treasury Department — the 26th consecutive monthly shortfall. And the largest ever in a month that starts with an “N.” Revenue was higher than a year ago, but spending was higher still.

Of course, that’s just the “official” number. According to Treasury’s own website, the national debt grew during November by $191.9 billion. Good grief.

“In the last month, the interest rate on that key benchmark — the 10-year Treasury note — is up 28%,” Chris Mayer agrees while looking at the prism from yet another angle. “So the U.S. government's funding costs have just gone up 28% in the last month.

“Those big deficits need financing and — finally — the market is wondering just how good a credit old Uncle Sam really is.

“Economist John Williams, who looks over the government's books and ferrets out the truth in the footnotes, reports that the annual deficit is now running at a pace of $4-5 trillion. This includes the change in unfunded liabilities, such as Social Security obligations.

“This is a lot to finance and Wednesday's sell-off is our first indication that the market may be choking on it.”

[Ed. Note: Chris just told readers of Mayer’s Special Situations to close out three positions this morning, for gains of 30%, 100% and 120%. To learn about something he likes now with at least as much potential, look here.]

 As the bond vigilantes awaken from their slumber, we’re reminded again of Bill Clinton’s infamous line, spit out in fury during a White House meeting early in his first term, told in Bob Woodward’s book The Agenda:

“You mean to tell me the success of [my economic] program and my reelection hinges on the Federal Reserve and a bunch of f*****g bond traders?”

No doubt, a similar “discussion” is under way today. Except the number of zeros has grown substantially… as has the desire for the federal government to save everyone from everything.

Still, scuttling the Grand Bargain and mollifying the bond market could mean crashing the stock market — maybe this week.

You may recall our nugget on Strategas Research Partners. In a move that’s likely to play our across the market, if their clients don’t have some certainty about next year’s capital gains rates by Dec. 15 — um, two days from now — many of them will likely take profits at the current rate.

Wednesday is the last day to trade stocks before options-expiration Friday begins to exert some critical trading pressure.

Still, no sign of a sell-off yet on this Monday. The Dow and the S&P are both up 0.4%, traders relieved that China passed on a chance to raise interest rates.

Thus the Chinese inflation menace grows… and the Chinese pile into gold.

The latest sign the Chinese can’t get enough gold: The Chinese Gold & Silver Exchange is planning a first for early next year — an international gold contract denominated in renminbi.

Right now, the Hong Kong-based exchange settles all its trades in Hong Kong dollars. Adding renminbi to the mix could boost the exchange’s trading volume by 20%, to a daily total of $6 billion.

That trifling bit of news comes in addition to these recent items pointing to skyrocketing demand for gold in China:

  • Chinese imports through October of this year total more than 209 metric tons. The total for all of 2009 was just 45 tons.

  • Chinese regulators have approved the first mutual fund to invest in gold-backed ETFs.

Gold ETFs now hold 2,088 metric tons of bullion — an amount equal to nine years’ worth of U.S. mine supply, according to data assembled by Bloomberg.

What’s more, investment demand is now outpacing jewelry demand for the first time in 30 years. Careful readers will note that 30 years ago was 1980… when gold hit a generational high of $850 an ounce.

All of this is bound to be bullish for gold miners going forward, and Byron King is keen on one play in particular, citing a unique mine site he visited in October.

“The early, patient investors will be rewarded over time,” he advised his readers just last Friday. “I expect to announcements from management anytime — this month, or in January.” You might be interested in becoming one of those “early, patient” investors once Byron lays out the case in this presentation.

The FDIC shuttered two more banks after the close of business on Friday, one in Michigan, the other in Pennsylvania. The total this year is now 151, compared to 140 in 2009.

If you suspected a college degree was becoming worth less and less, even as students spend more and more to get one, you now have statistical proof.

The proportion of college graduates working in jobs that don’t require college degrees has doubled since 1992, according to the Center for College Affordability and Productivity at Ohio University.

Professor Richard Vedder put a bunch of students to work crunching the numbers. Their findings: In 1992, 17.6% of college graduates were stuck in “noncollege level jobs” as defined by the Bureau of Labor Statistics. By 2008, the figure was 35.3%.

“I am saddened that this is happening,” Vedder writes in The Chronicle of Higher Education, reflecting how new grads are saddled with an average $24,000 in debt.

“Many of those advocating more access [to higher education] are well-meaning and have pure motives, but they are ignorant of the evidence… Some in higher education KNOW about all of this and are keeping quiet about it because of their own self-interest.

“We are deceiving our young population to mindlessly pursue college degrees when very often that is advice that is increasingly questionable.”

Amen.

We expected confirmation on our suspicion regarding Tea Party candidates… but not entirely this quickly.

The budget deficit in Nassau County, N.Y., ballooned this year from $310 million to $350 million under the leadership of County Executive Edward Mangano, described by The New York Times as “a Republican who won one of the first upsets of the Tea Party era.”

After taking office last January, he cut taxes… but not services. Now Moody’s has downgraded the county’s debt. Mangano sought a bailout from the State of New York (he was laughed out of Albany). Now he’s looking at raising the sales tax.

“You might want,” writes a reader, “to point out to the foaming loonies who've got their hate on for Julian Assange that he isn't the one who took the information from the government's computers. What he did was disseminate the documents.

“In this, he is no different from all the media outlets who have since posted the information, including The New York Times and the loonies’ apparent key source of all knowledge and wisdom, Fox News.

“You might also want to point out to them that as an Australian, neither he nor any other non-American can be a ‘traitor’ or commit ‘treason’ against the United States.

“But I suppose that distinction might be too subtle to the armed-and-dangerous knuckle-draggers who have so deeply imbibed the toxic fumes of the American Imperium that they now automatically assume that the rest of the world's people are nothing more than our vassals, somehow required to bow, quaver and submit before our Sanctioned-By-Jesus Exceptionalism.”

“The letter by the loaded guy,” writes another, “who makes his wife apply for food stamps goes to the heart of what is wrong with America and exposes the core reason why the country is disintegrating: Nobody has any compunction anymore.

“Rich or poor, right-wing or left-wing, all just want to game the system. ‘After me, the deluge’ could be their motto. No system of government (taking that word in the broadest sense: to describe all collective arrangements governing our lives together), however poorly or well designed, could withstand such unrelenting assault for long.”

“Make no mistake,” writes a third “the $600,000 guy isn't the only one in America to figure this out. I see couples all the time who have a stable, long-term relationship with children but who are unmarried.

“He works full time with benefits; she stays at home as a single, unemployed mother and collects thousands of dollars supplemental income and assistance. This is epidemic in the U.S.”

“Current IRS mandate,” writes a small business owner contributing to another perhaps tangential thread here in the inbox “is for audits on all S-Corps to try to force owners to pay themselves a salary, instead of distributions. The upshot of this is that the IRS is trying to push all S corps small business owners into a salary as high as possible to increase FICA revenue and Medicare/Medicaid revenue.

“In short, I now have the government telling me how much I have to pay myself, regardless of the profitability of my business. If this isn’t regulatory abuse, I don’t know what is.

“I also suspect the revenue agents are given salaries PLUS some portion of the amounts they can collect from us peons.”

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S.: If you haven’t taken us up on your free copy of Economics in One Lesson, time’s a-wasting. We’re giving the classic away to help celebrate the grand reopening of Laissez Faire Books under our direction. But as with all good things, this one has an expiration date. When the books we set aside for the introductory offer run out, well, so does the offer. While supplies last, grab your free copy here.

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