How We Blew It

by Addison Wiggin – January 27, 2011

  • The 5 throws itself upon the mercy of readers… How a government agency showed us up

  • Arab leaders try to stave off revolt, drive wheat prices to highest since summer 2008

  • S&P downgrades Japan… prompting Chuck Butler to start thinking "Conspiracy!"

  • Prime foreclosure property… if you're a herpetologist

  • Wide consensus of readers urges us to "ignore the nutball" who told us to "keep politics out of it"

We begin today with a confession. We have grievously erred. Ironically, it was a government agency (gasp, nooo!) that highlighted our error.

We were trying to get a grip on the Fed's vaunted second round of quantitative easing, the unsinkable QE2.

We made our calculations with the best of intentions: According to the Fed's plan, they were going to purchase $600 billion in Treasury purchases across eight months. And roll another $275 billion in maturing mortgage securities (MBSs) over into Treasuries.

Total price tag: $875 billion.

Here's where we went wrong. On Nov. 4, 2010, we said we thought the Fed planned "to monetize all of the debt that Treasury plans to spit out from now through the middle of next year, and then some.” (Emphasis added.)

We assumed a federal deficit of $1.2 trillion. Or $800 billion for the first eight months of the fiscal year. $875 billion meant the Fed was monetizing 109% of the deficit from November 2010-June 2011.

Now, the Congressional Budget Office has upped its estimate of the fiscal 2011 deficit to $1.5 trillion, spitting egg all over our faces.

The Fed is not monetizing “all” of deficit across an eight-month span “and then some”… it’s monetizing only 88%.

We were off by 21%. Nostra culpa.

Although following their line of thinking, it probably leaves the door open for QE2 part deux. Or even QE3.

Indeed, gold has given back much of the late-day gains that materialized yesterday after the Fed announced no changes to its QE2 policy. The spot price is back to $1,334.

Silver, on the other hand, is holding its ground at $27.66.

Ah, well, let’s call it even… the CBO report included another nugget that confirms another forecast we've been criticized for:

Yesterday's report indicates Social Security will pay out $45 billion more in benefits this year than it will collect in taxes.

With no changes to the program, CBO says Social Security will now run permanent deficits… and will drain all the Social Security trust funds by 2037.

You may recall during much of 2010, we projected Social Security would go into the red on Sept. 30, 2010… the end of the federal fiscal year. Of course, the reality is worse than even the CBO admits because Congress already spent all the “trust fund” money, leaving IOUs in its place.

[Ed. Note: One alternative source of retirement income — what we’ve labeled “the ‘other’ government-backed retirement program” — is still a viable choice. Lifetime Income Report editor Jim Nelson shares the details with you in this presentation.]

With stocks up a tad this morning the Dow is again knocking on the door of 12,000. The old gray lady got her foot through yesterday. But then she got kicked in the shins by a late sell-off just before the close. She beat a hasty retreat to 11,985.

First-time unemployment claims moved up big-time over the last week, from a revised 403,000 to 454,000. Incredibly, the Bureau of Labor Statistics blames this on… snow. Think they’re taking their cue from the Brits, who just blamed negative Q4 GDP on bloody foul weather? Nah.

Durable goods orders fell 2.5% in December, according to the Census Bureau, which — for the record — did not cite weather among the contributing factors.

The month-to-month number is extremely volatile, but the overall trend is heading down — orders for everything from washing machines to cars to aircraft parts has fallen four out of the last five months.

Wheat prices have hit a 29-month high of $8.60 a bushel, amid the following reports of stockpiling…

  • Algeria bought 800,000 tons yesterday from an undisclosed seller

  • Jordan bought 15,000 tons last week from the United States

  • Saudi Arabia plans to double its reserves, to cover a year’s worth of demand.

Given the WikiLeaks revolution in Tunisia last week, you think autocrats across the region are getting nervous?

It was one thing for an American-backed strongman of 30 years standing to be chased out of a tiny holdout like Tunisia.

But now they’re rioting in Yemen… where an American-backed strongman of 30 years standing is helping the CIA pursue terrorism suspects. And in Egypt… where an American-backed strongman of 30 years standing rules over one-third of all Arabs. The Egyptian stock market fell 10% today.

Everywhere the story’s the same… years of corruption and repression finally boiling over because of rising food prices. Thus, “panic buying” of grains, says the Financial Times. “Governments are reacting to growing social unrest about rising domestic prices.”

“Across the Middle East, we are waiting to see the downfall of America's friends,” writes veteran Middle East correspondent Robert Fisk of the London Independent. “Could it be that we are going to see a new Arab world which is not controlled by the West?”

And what would that do to oil prices? So far, the revolts are confined to Arab states that don’t have much oil. This morning, crude clings to $87 a barrel. Tomorrow? Who knows? If you haven’t considered Byron King’s “New War” scenario in a while, you might want to give it a look now.

The currency market is in a lather this morning after S&P downgraded Japan’s credit rating from AA to AA-minus… for reasons that should surprise no one: big deficits and an aging population.

“Japan’s deficit has been huge for years now,” says EverBank’s Chuck Butler, “so why is it important for S&P to downgrade them now? OK, my conspiracy blood is really boiling over right now, so I’m going to throw this out there and see if it sticks.

“S&P is just getting tuned up for a run at the U.S.’ credit rating. Now that would take some intestinal fortitude. I’m pushing the envelope here, thinking that S&P has that kind of intestinal fortitude, but I’m willing to take that chance.”

In the meantime, the yen has lost nearly 1% against the dollar, currently trading at 82.9.

Foreclosure property for sale: Price slashed from $175,000 to $109,000.

The snakes come free.

The most recent owners, the Sessions family, walked away from the five-bedroom, two-bath home in Rexburg, Idaho, bankrupted and unable to control the infestation of harmless-but-annoying garter snakes — in the ceilings, the walls, the crawl space, pretty much everywhere.

The irony is what motivated them to buy the house in the first place: "We were told that the previous owners in there didn't want to… pay their mortgage, so they made up a snake story," Ben Sessions told the local paper.

Then spring came and the snakes came out of hibernation. "I went online to find out what was going on,” says Amber Sessions. “I typed in ‘Idaho snake house,' and there was a Channel 6 news report of the previous people that lived there… and it was our house.”

“It's been a horrible experience,” says Todd Davis, the real estate agent hired by Chase to find a new buyer. Um, yeah.

“Too funny!” a reader writes of the guy who wrote in yesterday telling us to “keep politics out” of The 5 and stick to “coldhearted research.”

“Leaving politics out of economics would be like trying to drive a car with no steering wheel, or making an omelet without eggs.”

“Ignore the nutball who wants you to cull your political observations from your economic ones,” another reader implores. “They’re so intertwined and interconnected, it’s essentially a nonsensical request.

“I don’t agree with some of your political views, but I’d much rather have your version of the unvarnished truth — including the occasional political rant — than to have you try to adhere to such a silly editorial standard. You guys do a great job!"

The 5: That's the funny part… to which political views are you referring? We can point to editions in which we are accused of being too far to the "liberal," using the right's worst insult, and others in which we're accused of being "right-wingers", the equivalent on the left. Which is it?

Both parties use what Karl Rove proudly called "wedge issues" to force you to decide what side of the aisle you're on. Both parties believe government is the "answer" to the "problems" they decide to face. Neither party will own up to how impossibly expensive it is to run a centralized government and economy. Is this a political view?

We don't like to be forced to pay nearly half our income for horribly inefficient and misdirected government bureaucracies. Is that a political view?

We don't like the fact we're automatically a party to the high-stakes game being played by Treasury and the Fed by virtue of having been born into the downside of an asset bubble pumped up by the same players… is that a political view?

“Unfortunately, Washington has a huge impact on our daily lives and our investments," concurs a third. "Do not take the politics out of your newsletters!

“Thanks for all your thought-provoking investment advice, especially for us small business owners.”

“The reader who objected to you inserting your 'politics' into The 5 is perhaps understandably confused," writes another reader. "You aren't inserting your politics into The 5, you're inserting your economics, which is absolutely relevant and what gives the various Agora newsletters their value.

“What I interpret as your fundamental Austrian economic analysis is generally confused with conservative/Republican/etc. politics because it resembles the sounds those derelicts make when their mouths are moving (i.e., lying) as they continually vote to expand the state.

“And you're correct in that when the government is so thoroughly inserted into every facet of our economic lives one ignores them at your own risk.

“I'd refer him/her to Laissez Faire Books for remedial instruction. Just finished Financial Reckoning Day, by the way — that would be a good start for anyone.”

The 5: Thank you for the referral.

“Reading The 5 keeps me informed about what is really going on in the world. Politics and the flow of money are inseparable, in my opinion. Events that affect either seem to make their way into your newsletters along with advisories about the significance of those events relative to the flow of money.

“Therefore, I am seldom surprised by 'news' of what is going on around the globe that concerns things that affect my portfolio or my and my family's overall wealth and welfare. I almost always already know more about it from The 5 than the published, superficial, politically correct and otherwise slanted efforts of the media.

"Hang in.”

The 5: Hangin'.

“As an answer to the guy that doesn't like hearing about politics,” writes our final contributor, “I would like to point out that it is really an added benefit to your service.

“Yes, you have the guys that hop all over the planet collecting air miles on what seems like a daily basis to get the inside goodies on those companies that seem to profit mightily on a routine basis. Yes you have the Reserve membership (which I am glad to have signed up for) that gives you a lifetime of the best data I've seen out there for a one-time fee.

“But on top of all that, there is one invaluable service that is tossed in for free — perhaps not the most valuable service compared with all the rest — but nonetheless worth quite a lot to me.

“In the daily 5 Min. Forecast and The Daily Reckoning, I have a beautiful – if tongue-in-cheek — synopsis of anything important that is going on in the political/financial world without the need to personally get that slimy, dirty, creepy feeling that comes with actually having to listen to things like the current president speaking in a State of the Union address or having to listen to the talking heads on the mainstream financial media.

“While I do send my condolences to the poor editors that do have to listen to all that junk every day, I happily read their synopsis and thank them for saving me a 30-minute shower at the end of the day.”

The 5: Thank you. In our efforts to spare you a shower, we maintain an onsite decontamination chamber.

“I have had enough of your negative attitude toward the president,” writes the lone dissenter, at the tail end of a list of other thing he doesn’t like about us. “It seems to me that things are improving, although not at the rate desired — so do you think it might be reasonable to address some of the positives and where we can gain financially from them?”

The 5: We actually have nothing against this president. At least, we don't have any more against this one than the last. In many ways, they're indiscernible. But you might be onto something. Maybe we could tap our golden rolodex of money managers to organize private placements in some of the president’s favorite initiatives that aim to get the economy “back on track.”

Judging by the Lenny Skutnik list of the president’s invited guests at the State of the Union address, this fund would invest in, say, roofing companies that retool into solar panel factories… and organic ice cream parlors.

Yes! Ingenious! Thank you!


Addison Wiggin

The 5 Min. Forecast

P.S.: On a slightly different note: “He's the best,” writes a satisfied reader of Byron King’s premium advisory Energy & Scarcity Investor. "I'm extremely happy. The range of gains is between 50-90% in less than six months.

“Worth the subscription — of course — and then some!” writes another, who lays out his positions…

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Right now, new subscribers to Energy & Scarcity Investor get the skinny on a “dark horse” in the rare earths sector that could beat all the familiar names into production… within months, or even weeks.

By his reckoning, it could be a nine-bagger… for reasons he makes abundantly clear here.


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