Sunk Costs of Empire

by Addison Wiggin – January 17, 2011

  • Cost of empire: U.S. investment of $349 million in African dictator now at risk…

  • …But the dictator absconds with $66 million in gold

  • Chris Mayer on two consequences of the Global Food Crisis, Part 2

  • Seven straight weeks of stock market gains… and why they might not be over

  • How Starbucks’ new super size is actually a new instance of short-sizing

  • Do small businesses need credit? Two readers square off

Before Zine al-Abidine Ben Ali fled Tunisia on Friday, French intelligence agents say his wife Leila Trabelsi showed up at the central bank and collected 1.5 metric tons of gold — roughly $66 million worth.

Ben Ali’s men tried to raid the central bank yesterday to grab more gold, a Tunisian economist living in exile adds, but the army turned them back.

That’s the trouble with trying to maintain an empire. It gets very expensive. And messy…

A deal between the United States and the Ben Ali regime funneled $349 million in U.S. military aid over to Ben Ali over the course of his 23-year regime, official Pentagon figures tell us.

Admittedly, $349 million is not a lot of money considering the trillions the State Department has spent on Iraq and Afghanistan. Still, as just one outpost on the fringe of the empire… these sums begin to pile up.

Last year, the Obama administration asked Congress to approve a $282 million sale of 12 “excess” Sikorsky military helicopters to Tunisia with engines made by General Electric.

Not since the Marcoses in the Philippines does it appear one couple so systematically enriched themselves on the back of the political structure condoned, even supported by, the State Department.

“Swiss banks ultimately disgorged $684 million of Mr. Marcos’ holdings to the Philippines,” The Wall Street Journal reported last year, “though he is thought to have stolen between $5-10 billion.”

Time will tell if Ben Ali and Leila hold a candle to that pair.

Indeed, the royal graft might have gone on indefinitely, except for a confluence of recent trends we’ve discussed ad nauseum in this space… WikiLeaks and rising food prices.

Tunisians had always known Ben Ali and company were kleptocrats (his family was known as “The Family”), but the State Department cables supplied to WikiLeaks provided detailed proof, like “how” the first lady profited from the sale of an elite private school that got free land from the government.

One of the cables sums up the Family in this way:

“Despite increasingly liberal economic legislation, all key decisions, especially related to investment and privatization, are made at the highest levels of the government — probably by the president himself.

“This arrangement has permitted President Ben Ali’s extended family (siblings, in-laws and distant relatives) to become aware of, to assert interests in and to carve out domains in virtually every important sector of the Tunisian economy.

“People are now convinced that the First Family is an insatiable economic animal bent on gratuitous enrichment and unchecked influence-wielding.”

The charade began unraveling last month after a destitute student was denied a permit to sell fruit and vegetables on the street. To protest, he set himself on fire.

Before he fled on Friday, Ben Ali made one last desperate gambit — ordering the prices of staples like sugar, milk and bread to be cut. Obviously, their visit to the central bank proves they knew the writing was on the wall.

Alas, the story’s not over. Protests continue today because it appears the new “national unity government” consists mostly of Ben Ali’s cronies, members of the political party that’s been in charge ever since independence in 1956.

Ah… those nagging food prices — they’re hardly limited to Tunisia.

“Food prices will have to rise,” Chris Mayer says. “There is no way around it. Wells Fargo predicts U.S. retail food prices will rise about 4% this year. Some things will go up much more. Pork and beef could rise more than 10%.

“This won’t necessarily mean that meat producer stocks are good buys, because they may not get to raise prices to fully offset the rise in feed costs. I’ve listened in to the conference calls of a number of food producers — Tyson, Hormel and Sanderson Farms. They all talk about getting squeezed by rising feed costs.

“I do think these companies will be good buys sometime this year, because people will adapt and farmers will respond. Still, weather is the big wild card here. If we have a drought in the U.S. or in Brazil, then this could really get ugly.”

“Emerging markets are especially vulnerable” as a result, says Mr. Mayer. “It doesn’t really faze the typical American to have to pay 4% more at the grocery store. Food is still such a small part of the typical American’s budget,” taking up less than 10% of disposable income.

But “In China, people spend 50% of every incremental dollar on food. And in India, it’s more like 70%. So the rising price of food is felt more keenly in these markets.

“The price of food is rising faster in emerging markets too. In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone.

“The emerging markets boom is not going to go far when it faces a food crisis. Already, the markets are starting to reflect this. India’s Sensex was down three straight days and off 6% to start the year. Other markets also started badly. And if China and India and the rest slow down, it’s going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.”

Sure enough, the Shanghai Composite closed down another 3% today while U.S. markets take the holiday off. India’s Sensex was mostly flat.

In the U.S. “stocks closed their seventh consecutive week of gains on Friday,” notes Jonas Elmerraji on our small-cap desk, “the longest stretch of back-to-back weekly gains since May 2007.

“This most recent period of market gains has some investors concerned – and understandably so. Could we be facing a market top just two weeks into 2011?

“At present, around 72% of market analysts and institutional investors are bullish — an incredibly high number given the market’s mixed economic fundamentals and the already impressive run stocks have taken in the last six months.

“But it’s crucial to remember that stocks can move lower and still remain in a bull market. Just look at June 2009 or Spring 2010, periods when stocks moved lower, but ultimately reached higher ground.

“So while the potential for a momentum bleed off in stocks is very real right now, calling a top in stocks is a bit ambitious.”

You don’t have to be at the mercy of the broad market’s ups and downs following Jonas’ strategies. Since he launched one of our newest services in September, he’s delivered gains of 38% in five days… 49% in 21 days… and 62% in 14 days. Want to know how he does it? Here’s where to look.

Commodity and currency markets are open despite the holiday. Spot gold is off slightly to $1,361 as we write. Silver is sliding closer to the $28 level, at $28.27. The dollar index is up slightly, to 79.3.

Behold the Trenta:

Starbucks is making news today with a new super-size offering. The new 31-ounce serving will be also available for Starbucks iced coffee, iced tea and lemonade come this May.

But just for giggles, let’s do a little math. Right now, if you want to upgrade from a 16-ounce Grande to a 24-ounce Venti, it costs another 30 or 35 cents. But to upgrade from a Venti to a Trenta, it’ll cost you 50 cents more. And you only get 7 more ounces, not eight.

Super size… or just another instance of “short sizing”… you decide. Coffee prices are at a 13½-year high. Starbucks just came up with a clever way to overcome margin squeeze. We’ll see how well it works.

“Thanks for a funny and informative 5 Min. Forecast this Friday,” a thankful reader writes, “I especially liked the dig at Moody’s threat to downgrade U.S. debt and noting the difference you made between ‘reasonable’ and ‘plausible’ when discussing Bernanke’s comments on GDP growth this year.

“Keep up the great work!”

“Three Cheers for the fellow who defined the theft of our Social Security by our inept government,” a reader writes. “He defined it ‘spot on.’ My blood pressure rises every time I hear the young say ‘The young are supporting the old.’ Put yourself in our place.

“As a youngster, you were paying in your 7.65% plus your employer was paying in the same amount for you. This went on for an entire lifetime (say you worked for 50 years like me, from the age of 16 to the age of 66). How would you feel when you were told the caretaker of those funds spent it all?

“To get their greedy hands on the surplus funds in Social Security, Congress amended the rules of how Social Security would be handled. It was originally set up as a retirement fund no one could touch.”

“I say put Congress back on Social Security and take away all those self-serving benefits they voted for. When people finally wise up and decide they’ve had enough, the recent violence in Arizona I’m afraid will only be a footnote for what’s to come.”

“If I remember my Bill Bonner/Addison Wiggin, in Financial Reckoning Day, I believe there was an example of why the Articles of Confederation collapsed leading to the writing of the Constitution.

“The example was of New England farmers who had bought U.S. bonds to support the Revolution. After the Revolution, the government went to the American people, including the farmers, to collect taxes to pay off the ‘Revolution Bonds.’ The farmers asked the government to pay them their interest and principal due on the bonds so they could then pay their taxes.

“The response from the government was that they would be happy to redeem the farmers’ bonds as soon as the farmers paid their taxes, since those taxes were the only source with which the government could pay off the bonds.

“The First American Catch-22? Looks like Social Security is in the same boat…”

“If most small businesses are like mine,” writes a reader in reply to Ben Bernanke’s plea to the banks to start lending to small business, “they don’t need bank money.

“You could offer to lend me a million dollars at 2% and I would turn it down. I don’t need money I have to pay back. I need business. And that is what’s barely happening.

“Bernanke could be considered an idiot…or an accomplice in the Big Theft of America.”

“As an owner of a small business,” writes another who disagrees, “at less than $3 million in annual sales (down from our peak of nearly $10 million), I can assure you that lack of access to bank credit is our No. 1 concern.

“Before the bottom dropped out, we had a fairly decent line of credit with our local bank. It allowed us to draw from the credit line to make weekly employee payroll, and then pay the line off when our customers paid us (terms were net 30). Then suddenly and without warning, our bank cut our line of credit in half and raised the interest rate.

“After six-12 months of operating on the reduced credit line, the bank just decided to cancel it altogether. Their reason given was that they were no longer going to be issuing any small business lines of credit.

“At that point, things really got interesting.

“We had over 60 employees to pay each week, which we were somehow managing even without the line of credit, until our biggest customer changed our payment terms from net 30 to net 90 and asked for a price reduction. Take it or leave it!

“Sales? They are not the issue. The sales are there for the taking. The issue is we can’t afford to get too many sales because we won’t be able to pay our employees while we wait to get paid by our customers.

“Sad and ironic, isn’t it? We could grow. We could get more sales. We just can’t afford them. Crazy times we are living in!

“Now we were really desperate for operating capital, so we tried working with a factoring company. Basically, this is a legalized version of loan-sharking, and I would not wish the experience on my worst enemy.”

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: “We made the decision to operate on a 100% cash-only basis,” our reader concludes.

“In the end, we had to sink every penny we had back into the business to keep it running until the cash flow cycle caught up to the point where the money coming in equaled the money going out.

“And when I say every penny, I mean every penny. Retirement? Gone! Life insurance? History! Savings? Forget about it! I went months without taking a paycheck just so I could pay my employees each and every week.

“The good news is… we are still here.

“The only thing that saved my home last year was some of the big winners I had investing in Dan Amoss’ recommendations from Strategic Short Report. I’m an Agora Financial Reserve Member.

P.P.S.: The discounted rate on membership in Options Hotline is available this week only. As of midnight on Saturday, Jan. 22, it returns to full price. And we’re throwing in something extra to make it worth your while. Check out this one-of-a-kind offer here.

rspertzel

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