The Indifference of the Elites

Untitled Document

by Addison Wiggin – February 1, 2011

  • "The indifference of the elites"… Byron King on his time in Egypt, and why he’s selling Egypt-focused energy stocks now
  • Street celebrates as manufacturing measure turns in gangbuster performance… Why we’re not joining in the festivities
  • Housing milestone: "Homeownership" rate returns to near pre-bubble levels… while the ARM makes an improbable comeback
  • Byron’s Egypt commentary stimulates reader request for more charts, and a query about Mexico


  “My impression of Egypt,” writes Byron King, “is a land of a few very wealthy, well-connected people and a whole lot of poor and very poor folk.”

Thus, if 1 million people are demonstrating today in Cairo, guess where most of them fall on the income scale.

“I spent some memorable time in Egypt, back in my days in the Navy, particularly in the mid-1990s as a Navy Reservist. During one military exercise called Bright Star, I saw a lot of Egypt up close. In the company of an Egyptian military driver-translator-minder-handler, I travelled all over the place: Cairo, Alexandria, El Alamein, Suez and more.

“All in all, I spent quite a bit of time with members of the Egyptian military. I got into both the slums and the rural outback — as well as into the upper (and I mean upper) echelons of power and privilege. As to that power and privilege thing, hey… it’s nice work if you can get it, and that’s one part of the problem.

“There’s not much middle class. And the slums of the large cities stretch for mile after mile. It’s an urban squalor, the likes of which most North Americans cannot conceive. You have to see it to believe it. The poverty in some areas is stunning, staggering — as is the indifference of the elites.”

  Hence, the following Tweet that just made it out of Egypt: “The government is spreading rumors of fear and of burglary and of violence. The only incidence of theft and burglary are done by the police themselves.”

Of course, Egypt has shut down Internet access. But Google is offering an ingenious workaround: People can dial a phone number and leave a voice message that’s automatically translated into a Twitter message using the identifying tag #egypt.

  “Jobs are scarce in Egypt,” says Byron, assessing the economy. “Unemployment is easily north of 20%, and under employment is doubtless another 20% or so.

“It hasn’t helped Egypt that in the past 20 years, many of the world’s low-end factory jobs migrated to China. The Egyptian ‘working’ class has been left to toil at the truly local low-wage jobs, where they can’t be out-competed by cheap imports from China. Think about the low economic bar that sets.

“As Egyptian factories closed (or never even opened, due to the China sucking sound), much of the Egyptian working poor stopped working and became poorer. It created an opening for the Muslim Brotherhood to grow, because of its charitable work in distributing food and fuel to the urban masses — along with other messages, if you get my drift.”

As we write, the military has issued a statement ruling out attacks on civilian protesters. Meanwhile, the government has shut down all the mobile phone networks. How long can Hosni Mubarak hang on? We shall see…

[Ed. Note: Yesterday, Byron recommended Outstanding Investments readers sell two companies with oil claims in Egypt — just to be on the safe side and bag certain gains of 44% and 166%.

If you’re not a subscriber, you’re well advised to keep an eye on other events in the Middle East that could affect oil prices. Byron explains it all in this eye-opening presentation.]

  Crude prices are holding steady a hair below $92 a barrel, after a big Egypt-fueled run-up Friday and yesterday.

Of course, that’s West Texas Intermediate, the stuff that flows into the tank complex at Cushing, Okla., where inventories are near record highs. Brent crude, the standard in much of the rest of the world, is pushing $100, thanks to declining supplies in the North Sea and high demand in Asia.

  The ISM Manufacturing survey turned in a robust 60-plus number in January.

Remember, 50 is the dividing line between expansion and contraction. At 60.8, the index just turned in its best performance since last May. All five components of the index look strong, too: Employment jumped nearly 3 points, to 61.7, and new orders rose nearly six points, to 67.8.

But there’s a fly in the ointment: The index for input prices soared from 72.5 in December to 81.5 in January, thanks to rising prices for energy, metals and chemicals.

“Many of the earnings reports coming out in the last week have confirmed the underlying ‘stagflation’ trend developing in the U.S. economy,” writes Strategic Short Report editor Dan Amoss. “Stagflation is a general term referring to sluggish growth combined with high or rising inflation.”

"Stagflation" is bad news for companies whose costs are rising, but whose capacity to pass those costs on to strapped consumers is limited. "Margin squeeze " is what we call it, affectionately. Dan’s readers have laid on a couple of trades aimed at profiting from the trend, and it’s not too late to get in. Learn all about the strategy right here.

  Of course, traders are ignoring the warning signal buried within the ISM report and are reacting merely to the headline number. The Dow is up 80 points as we write. Just 30 more and the index will flirt with 12,000 again, as it did much of last week.

  Gold is languishing at $1,335… but silver continues to progress in steady increments. It’s up to $28.15.

“If we get silver above $28.70,” says James Turk of GoldMoney, “that will reverse the trend followers from short to long. This little shakeout over the last couple of weeks has done nothing to change the very bullish fundamental factors that have been driving gold and silver higher." If you want to get on the silver bus, get your recommendations here.

  Copper prices have zoomed to another record high — up nearly 1% today, to $4.47 a pound.

Traders have been unfazed by the emergence, and then disappearance, of a huge position in the London copper market, equivalent to 80% of all the inventory at London Metal Exchange warehouses. (At one point in the process, that position was owned by JP Morgan Chase.)

By Jan. 19, that position had been sold into the market, according to the LME’s daily records. Copper sold off to below $4.25 in the following days, but launched another big run starting last week.

Meanwhile, in the United States, we have the following random incidents of copper theft:

  • Someone broke into the Williamston, S.C., sewage treatment plant and stole 16 spools of copper — about 2,000 pounds – – from a storage building
  • Deputies in Laurel Co., Ky. have arrested three people for breaking into two churches and stealing the heating and air conditioning units
  • Copper thieves struck two power company substations in Lancaster, Pa. — knocking out power to 1,100 customers late last week.

An electric substation? What’s with these high-risk thefts? We’re still floored by the thieves who broke into a TV transmitter site in Kansas City last year. If the threat of 35,000 volts won’t stop you, nothing will.

  Well, well… we’ve reached a milestone in the housing bust: The Census Bureau’s “homeownership rate” is now back close to pre-bubble levels.

66.5% of Americans owned a home in the last quarter of 2010 — the lowest since Q4 1998. The peak was 69.2% in 2004.

As we’ve pointed out before, this number is a farce. Once you take into account “homeowners” who have no equity… or negative equity… the number slides to roughly 43%.

Meanwhile, 11% of all U.S. homes are now vacant. Whatever happened to the housing bulls’ demographic argument that there will never be enough homes for all new homebuyers and immigrants to the U.S.? Busted.

  The adjustable-rate mortgage is making a comeback. A survey of 112 lenders by Freddie Mac finds that ARMs accounted for just 3% of mortgages in 2009… but will be nearly 10% this year.

Gone are the ARMs that were so popular at the peak of the bubble — where the rate reset after one or two years, forcing most buyers to refinance and fork over big-time fees to the lenders.

The most popular ARM now is something called the “5-1 hybrid.” The rate is fixed for the first five years and then adjusts annually for the next 25, with rate caps just in case interest rates shoot up.

Hoo boy… these might be a good deal for jumbo borrowers who expect to move within five years. But if that’s the case, why wouldn’t you just rent?

  “Any chance that Byron could replicate his Egyptian Peak Oil charts with the other OPEC countries? The one he published in yesterday’s 5 was stunning in its simplicity.

"When the government has co-opted all of a nation’s wealth and resources and is pacifying the populace with bread and circuses, it’s pretty much a foregone conclusion what’s going to happen to the rulers when the bakeries run out of wheat.

" It seems that this would be a pretty good proxy at how fast we can expect to see the other Middle Eastern kleptocracies start to collapse. Maybe he could also add Mexico to the list, as that would have more immediate security issues on top of the economic considerations.

"When I saw the chart and analysis, it put me in mind of the section on demographics in Financial Reckoning Day in that you practically don’t need any other information to see where the train (wreck) is heading."

  “Like many people,” adds another, “I am reading about the troubles and speculation about the possible carnage in the Middle East. Lots of press, and there’s no pause from any news source about the existing and potential problems.

“However, I note that there were some 26,000 murders, or more, this past year on our southern border country. Some of the murders quite horrific. The Mexican government seems unable to cope and is  nearly completely ineffectual and close to disintegration when viewed as the only avenue for stability. Yet hardly a peep from the media.

“Considering our own drift toward s ocialism and the economic and political uncertainty in our own country, it will be interesting to see how things wash out. I hope The 5 stays on top of it all. Thank you."

The 5: Byron’s still attending a conference in Toronto today, but he had just enough time to pass along this chart of Mexico, similar to the one of Egypt yesterday :


You may recall Mexico is set to become a net oil importer as early as 2012. Judging from this chart, the day of reckoning may be a bit further off than that… but the trend is unmistakable.

  “Regarding the discussion about why Americans have to be paid more than $2-$3 a day," a reader offers this suggestion: "Take the regulations and restrictions off industry along with lower taxes and see the needed wage per hour dissolve.

“EPA? OSHA? Minimum wage? Litigation/liability expenses? How about all the drilling permitting/restrictions in the energy industry? Americans have no idea how many costs their government over the last 75 years has added to industry’s costs that must be added to employee salaries and paid for by industry’s customers.

“Until Americans realize how our national government has sold out the American worker, there’s little hope that needed change can be undertaken.

“ Thanks for your publication. I enjoy it daily and find it informative.”

  “I am an investor in smaller private companies,” writes a reader contributing to our patent discussion. “I often hear the ‘ We have patents, so we cannot be copied! ’ argument as to why their company is so valuable. My response to that is always the same. I do not see in your budget the $3 million and three-plus years it will take to protect that patent… per infringement.

“Having owned well over 100 patents, I can say with some certainty that they are merely the ticket to the show. Unless you have the money for the lawyers, patents are not worth much in the real world to little companies and inventors, nor are much deterrent to the knock off folks who know the game well.”


Addison Wiggin
The 5 Min. Forecast

P.S. “Am forced to cancel attendance at the Feb Chill in Rancho Santana due to obligations with declining parent,” reads a letter from a Reserve member. “Hopefully, this doesn’t put us on anyone’s sh@* list, because both of us were truly looking forward to the trip that Resource Trader Alert paid for!”

The 5: No hard feelings, and thanks for the kind words.

This opens up a spot for our Reserve-Only Chill Weekend this month. The dates are Feb. 15-19, 2011. Reserve members who are interested and can free up their schedule on short notice should contact our man on the scene Marc Brown. (We’ve got another Chill scheduled for June 7-11, 2011, if you need a little more time to plan.)

But yes… the gains you can make with Resource Trader Alert can finance your next getaway, wherever it may be. Readers who followed Alan Knuckman’s cocoa recommendation on Jan. 4 — less than a month ago — are now up a staggering 480%.

Never traded commodity options before? Alan makes it simple and oh-so-lucrative. He walks you through the process right here.


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