by Addison Wiggin – March 25, 2011
- "We're No. 28!"… results from David Walker's comprehensive survey of fiscal soundness around the globe…
- China's latest "5-year plan" even more bullish news for natural gas… 11 Ways to Play; "Japan Donation" drive winding down…
- Frank Holmes debunks a prevailing meme re: Gaddafi and the "forever war"
- "Twitter analysis" predicts market moves… reader updates Libya costs… and more…
- Plus, an "all-new" Friday Entertainment Brief in which we mourn the loss of a former colleague's sense of humor…
— Two weeks ago, Moody's downgraded the government debt of Spain. However, they still consider the government debt of the United States AAA.
This morning, a new measure of fiscal soundness — courtesy of our friend, I.O.U.S.A. protagonist and former U.S. comptroller general David Walker — warns otherwise.
0:08 — Walker's Comeback America Initiative (CAI) just wrapped up six months of work with grad students from Stanford analyzing and ranking 34 countries in a survey they call the Sovereign Fiscal Responsibility Index.
We'll spare you any dramatic buildup: The United States comes in No. 28. Australia looks pretty stout at No. 1.
A quick explanation of the numbers they crunched…
- "Fiscal space" is the additional amount of debt as a percentage of GDP that a country could take on before it entered a surefire fiscal crisis
- "Fiscal path" is the number of years it would take to reach that crisis point, based on IMF projections of future government obligations
- "Fiscal governance" is a stab at quantifying the strength of rules in place to ensure fiscal responsibility.
0:19 — The Stanford students also ran the numbers on the assumption Uncle Sam adopted the recommendations of President Obama's bipartisan deficit commission. The U.S. ranking would move up to No. 8.
You'll recall, however, the commission's final report late last year was met with mostly crickets — and a new $400 billion stimulus package from Congress.
"It's time for the president and the Congress to seriously consider the commission's work," says Mr. Walker, "and come together to resolve short-term spending levels, and, much more importantly, agree on appropriate terms for increasing the debt ceiling limit."
0:27 — In the same spirit, 10 former chairs of the president's Council of Economic Advisers published an Op-Ed today at Politico urging "intense negotiations" on deficit reduction, using the deficit commission recommendations as a starting point.
"There are many issues on which we don't agree," reads the statement. "Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention."
Unfortunately, the impact of the message is undercut when one of the signatories, Christina Romer, says things like this: "We should have a package for short-term stimulus that also includes concrete policies that deal with the deficit."
0:38 — The Commerce Department released its third and final guess on GDP in the fourth quarter of 2010 — an annualized 3.1%, up from last month's estimate of 2.8%.
Sounds OK, until you examine the factors commerce itself cites behind the number:
- Imports turned down sharply. Don't look for that to continue. During Q4, prices of that key imported item, oil, ranged between $80-90 a barrel. This morning, they're a few pennies shy of $105
- Residential fixed investment grew. That means physical goods purchased and investments made for nonbusiness use. That too doesn't appear sustainable either, in light of the lousy durable goods report yesterday
- Personal consumption expenditures, a fancy term for consumer prices, grew. That, unfortunately, does look like a sustainable trend.
0:44 — Consumers are feeling their gloomiest in five months, according to the latest Reuters/University of Michigan survey. The index clocked in at 67.5, down sharply from last month's 77.5 — which was the highest reading in three years.
The internals of the report are even worse, with large numbers of people expecting rising food and energy prices to take a bite out of their incomes.
0:51 — Corroborating this number, Bloomberg's own sentiment survey, the Consumer Comfort Index, has hit a seven-month low. "Even better-off households are feeling the pinch of rising prices, primarily at the pump," says Bloomberg senior economist Joseph Brusuelas.
0:59 — Good news for you: Fed chairman Ben Bernanke is going to start holding regular press conferences next month.
"The introduction of regular press briefings," says a Fed statement, "is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication."
This ought to give us loads of entertainment-worthy nuggets for The 5. Stay tuned.
1:09 — "The death of a currency," muses Chris Mayer, "is often a protracted affair. It takes years. And as it unfolds, the people who experience it hardly believe it."
Chris has been reading a fascinating book about the hyperinflation of 1920s Weimar Germany. First published in 1975, it achieved a near-cult status, people paying hundreds of dollars for used copies on Amazon.
Now it's back in print, Chris wants to get it in your hands, and he's making it as easy as possible. He'll even arrange a one-month trial of Capital & Crisis, in which this week he closed out a position in an oil and gas producer, to the glee of many readers…
"I couldn't have come in at a better time," writes one. "Subscribed in February 2009. It's unreal to see 1,083% in the Gain % Column."
"Bought at 2.63, closed yesterday at 32.20, up 1,109.63%," adds another. "Thanks for the great pick!"
"I purchased 1,000 shares on Jan. 14, 2009, for $4,255; 1,000 shares on Jan. 15, 2009, for $4,005; and 2,000 shares on March 17, 2009, for $5,005. I donated all 4,000 shares today to the Salvation Army, for a donation value of $132,200. With a total cost of $13,265, that makes this one of those 10-baggers that happen only rarely."
That'll help protect your purchasing power. Grab the book, and a "C&C" trial, right here.
1:24 — Under a new "five-year plan" unveiled this month at the National People's Congress, China aims to double natural gas' share of energy consumption — from 4% to 8%.
You'll notice the data were compiled before the Japan disaster: Nuclear comes under the category of "renewables" on this chart, along with solar, wind and hydro. Even if the Chinese were to follow through on its plan to triple last year's nuclear capacity, nuclear would still remain a small part of the overall mix.
Meanwhile, Russian, Turkmen and Australian firms are falling over each other to supply China with more gas. The government of Turkmenistan alone plans to boost pipeline shipments to China by 50%….
If you needed any more reasons to donate money to Japanese relief and get Byron's special report 11 Ways You Can Profit From the End of Nuclear and the Return of Natural Gas, this ought to do it.
For just the next three days, we're making it available along with a one-month trial of Outstanding Investments, named the No. 1 performing letter over the last 10 years by Hulbert Financial Digest. Over the last five days, readers like you have been helping us try to beat our $80,000-plus raised for Haiti relief last year. Here's how you can help.
1:39 — Gold sits where it has most of this week, a few dollars shy of its all-time nominal record. At last check, the spot price is $1,437.
1:43 — "The notion that gold is being used to finance Gaddafi's war is a faulty one," says U.S. Global Investors chief and Vancouver favorite Frank Holmes, eager to debunk some sloppy journalism that's spreading like a brush fire.
The Financial Times noted this week that Libya's central bank holds 143.8 metric tons of gold, adding breathlessly, "enough to pay a small army of mercenaries for months or even years."
"While 143.8 tons sounds like a lot," says Frank, "it is merely 6% of the country's total foreign currency reserves. The U.S. has nearly 74% of its reserves in gold, and no one is suggesting we are financing our battles with gold.
"Like many oil-exporting nations," Frank adds, "Libya is paid in U.S. dollars and euros, and that means it is far more likely Gaddafi's soldiers of fortune will be paid in those paper currencies than pieces of gold."
2:00 — Silver touched $38.15 yesterday, and then tumbled below $37 when the Chicago Mercantile Exchange upped traders' margin requirements.
The crowd that loves to cry "manipulation" did exactly that… while the savvy traders jumped in to snag a bargain. As we write, the spot price has already rebounded to $37.57.
"I've lost count of how many times they've raised margin requirements," quips Tennessee bullion dealer Franklin Sanders, "but certainly it's not doing any good."
2:21 — A professor at Indiana University says he's hit on a way to accurately predict the direction of the stock market 86% of the time. And now British investors are plowing $40 million into the software he's developed.
The software tracks Twitter.
"We are looking at calm versus anxious, happy versus sad, friendly versus hostile," says Professor Jonah Bollen. "So we monitor those fluctuations and it tells us something about how society is, in general, feeling."
That, he says, translates into market action.
The software scoops up 5-10% of the 100 million tweets per day worldwide and analyzes the general mood. "Then we compare it to the Dow Jones industrial average and they correlated, but they correlated three or four days out," said Bollen.
Bollen says he's looked for a flaw in his program, but can't find one. Heh.
[Chapeau: Our former compatriot on The 5, Ian Mathias, sent this one along.]
3:18 — "I got through 11 Ways You Can Profit From the End of Nuclear and the Return of Natural Gas last night," writes a reader. "And I do have the subscription to the top-rated investment letter over the last 10 years, Outstanding Investments, edited by your own, and my favorite, Byron King.
"I jumped on it today… natural gas plays and oil sands, locally. Why would I want to fight the investments related to war-torn, civil strife uprisings in the Middle East and tragedies in Asia? These plays keep things closer to home and are pretty stable.
"Byron firmed up my beliefs. I like tangible goods, corn, wheat, oil from the pump into my car, heat in my home and beef on my plate. I like the feel of gold and silver coins.
"I like the things that are real."
The 5: As do we. If you haven't reviewed Byron's report yet, all we ask in return is that you make a donation for earthquake relief in Japan. Here's where to go.
4:02 — "'The Air Force bought its last five F-15E jets in 2001 for an average $79.24 million each,'" writes a reader quoting Bloomberg, upping the ante on the cost estimates for the U.S. in the new front of the forever war, Libya.
"Block IV Tomahawks cost about $732,000 each," he adds, citing a report from Defense Industry Daily. In the first four days of the operation, 162 Tomahawks were launched. And at some point, they'll have to be replaced.
"We're already approaching $1 billion."
For perspective, "Every six hours, we have another billion-dollar deficit," says Rep. Roscoe Bartlett (R-Md.), a member of the Liberty Caucus we met with in October 2010.
"This could cost us a billion dollars there," he continued, "which means simply another billion-dollar debt that our kids, our grandkids and our great-grandkids are going to have to pay back."
The 5: We see Ron Paul and Dennis Kucinich have tacked an amendment on the next congressional spending bill denying funding for the Libya operation. We only bring it up to assuage our fondness for lost causes.
4:56 — "If you are wondering what to expect given your budget deficit and public debt," writes a reader weighing in with another international comparison, "here is what happened in my country, Belgium, more than 25 years ago:
- Our public debt reached 100% of GDP [right where you will be by year-end] and went even higher
- The 'snowball effect' (higher interest charges induced ever higher public debt) was threatening to enter a vicious circle
- It took a change of government (from center-left to center-right — as at the time the right wing was more concerned and ready to act) to change the 'free money for all' approach to an austerity program
- After a while, all the political parties stuck with the austerity program. Thank God, because it took over 20 years to bring the debt ratio from about 120% to about 90%.
"Let me be clear: Austerity meant (and still means) BOTH higher taxes and lower public spending. And for a long, long, long, long, long… time.
"In most countries, once taxes have been raised, they tend to stay high… and depress growth.
"Good luck to my American friends!"
The 5: Thanks.
The 5 Min. Forecast
P.S. Next Thursday at 5 p.m. EDT, we'll release the next installment in our occasional video series 6 Stocks for Right Now. Our editors will name their favorite picks, bound to thrive whether the broad market goes up or down from here.
This exclusive presentation comes with membership in the Agora Financial Equity Reserve. Members get access to every stock-picking service we offer for an incredibly low one-time fee — lower than you'd pay if you bought a year's subscription to each service separately, in fact.
Actually, it's so low that when we close the door to new members next week, we will never offer it again at the current rate. The deadline looms… Take advantage here.
"Was ever there a fairer metier than ours?" the 2009 preface to Financial Reckoning Day opens."
"The poor carpenter risks cutting his fingers or banging his knee. The used car salesman's hearing goes bad as soon as he takes up his job: 'No, I don't hear any rattle,' says he. The foot soldier gets sent to a godforsaken hole like Afghanistan, where the women are covered up and the liquor stashed away. "But in our trade as newsletter publishers, hardly a day passes without a good laugh. Our only occupational hazard is a rupture of the midriff.
"Most people, after all, read the news pages for information. They lack the proper training and perspective to fully enjoy them. The consequence is that they are always in danger of taking the humbug seriously, or, worse, finding the people who populate the headlines important.
"If you really want to appreciate the media, you have to get close enough to see how it works — like a prairie dog peering into a hay bailer — but not so close that you get caught up in it yourself. The investment newsletter business is perfect; it is part of the media, but it wouldn't be mistaken for a reputable part.
"Colorful eccentrics, careful analysts, cheerful con men and self-assured delusionals trying to figure out how things are put together — this is the world of investment gurus.
"But guess what? The gurus are often right. True, some financial gurus have gone broke following their own advice. But many have gotten rich."
Others become jaded.
We bring this up by way of reprinting a critique of The 5 Min. Forecast written by a former colleague brought to our attention by "pingback" when he linked to our blog site.
His blog boasts he's revealing what "newsletter promoters don't want you to know." Really? You be the judge. Forthwith, for your leisure entertainment:
Franchise and Inflation: How To Prime a Reader For the Next Purchase
Serious investors wonder how such drivel can possibly be taken seriously: How come some newsletter editors not only get away with writing unadulterated trash? They also make money on it—gobs and gobs of it.
It's all in the "franchise"!
Let me tell you why…
In newsletter theory, the concept of "franchise" used to be of paramount importance.
To differentiate a letter from a competing one, a service had to develop a well-defined Unique Selling Proposition that would reconcile promo and editorial product. That franchise had to transcend mere sector "shoeboxing:" It was insufficient to just be an "international," "tech," "value" letter. A product had to have character to establish the reader appeal that would translate into a reliable renewal stream. It needed an sound, alternate world-view, an integrated, developing philosophy that provided rational interpretation of current events.
As newsletters turned into multi-product publishing companies, copywriting departments into industrial-scale manufacturers of creative fiction, and editors spent more time spinning off ever more new products rather than fulfill on the old, that concept fell by the wayside.
These days, "franchise" is reduced to various trading "systems" (which more often than not are complete B.S.)… and whatever personality an editor brings to the table. Slim pickings in many cases…
The physics of editorial
In the old franchise concept, the editor acted like a prism.
His experience, know-how, unique way of looking at and interpreting news and trends would break the "white light" of daily news and events into a rainbow of colors, one or two of which might resonate emotionally with the reader.
Not much is left of this genuinely interpretive role of the editor, either: The combined phenomena of sycophantism, follow-the-money, superficial thinking, information overload, and under-education have turned newsletter editors into collage "artists."
Like possums, they navigate their contained and pre-packaged little world picking only the branches that might hold their weight. Like revivalist preachers, they fit any phenomenon of the modern world into a custom straight-jacket of Scripture.
No matter what garbage they come up with in the process.
Reading the tea leaves
What do I mean? Let me show and tell…
"Official statistics confirm: In the race to the bottom, the United States surpasses Zimbabwe! If you live in the United States, your cost of living — even by official stats — is rising twice as fast as in Zimbabwe.
"Yes, Zimbabwe… the country where at its worst $100 trillion was worth about 30 of the U.S. variety… and good for four loaves of bread. Yesterday, the Zimbabwe National Statistical Agency announced that consumer prices slowed last month to an annualized 3%.
"But this morning, here in the good ol' USA, the Bureau of Labor Statistics (BLS) announced the U.S. consumer price index (CPI) rose 0.5% last month — which works out to a 6% annual clip.
The U.S. worse than Zimbabwe? We don't know what Mr. Wiggin is smoking.
I started wishing that Mr. Wiggin would've spent more than 5 minutes thinking before writing this kind of nonsense. Maybe even researching. Or, regarding the big picture, even studying economics a bit more seriously than stringing hand-picked, franchise-conforming newsletter clippings into books and schlockumentaries.
But it is what it is. As long as it fits the "franchise." Which in his (and his Hard Money cohorts') case has been reduced to a sneering, pseudo-economic, neo-nihilist rejection of the dollar and an over-enthusiastic embrace of anything that glitters and is not America. Throw in a mawkish "Mr. Market" or two, maybe a "Ben 'Helicopter' Bernanke", stir, and you gots yerself a bidnit!
No thought required. It's enough to mention the franchise trigger points to keep your self-selected audience happy and reason disengaged. The mere mention of buzzwords substitutes for knowledge and deep thought.
Not that there's anything wrong with that. It's still a free country. Free enough to allow pundits to compare apples to pine cones and oranges to screwdrivers.
In this comfortable (and profitable!) little niche, gold and gold standards are the cure-alls for inflation and hair loss. A nicely limited, if completely unhistoric and non-factual idea. Which has the distinguished benefit that it appeals to the economically semi-literate primarily on an emotional level. Who in turn are willing to spend thousands of hard-earned dollars on information products pushing commodities, mining, precious metal, BRIC-country related stocks and options.
Which, applying Mr. Wiggin's underlying logic, would be happily enjoying the fruits of their stable, non-inflation-prone currencies. But let's leve this particular fallacy to the end of this article.
(It's like assembling a subscriber base of people suffering from Obsessive Compulsive Disorder and then feeding them a daily diet of "news" that the government has set up secret batteries of fans offshore to blow invisible Saharan dust particles onto their freshly sanitized toothbrushes… that there's more tiny mites living in their nose hair than in the 'fro of a Kwa-Zulu Natal hippie… and that rogue bands of pre-teen boys have been dispatched to pee into your water reservoir: You'll NEVER run out of customers for special dust rags, mite tincture, and water filters…)
Let's focus on Zimbabwe, shall we?
Indeed, after replacing the Zimbabwe dollar with a basket of currencies and "outlawing" inflation (no kidding!), Zimbabwe's annual inflation rate declined by 0.5% to 3% in February, down from annualized 3.5% in January.
According to the Zimbabwe National Statistical Agency, month-on-month inflation in February was 0.5%… vs. 1% in January 2011.
What luck that Mr. Wiggin picked the February numbers for his specious comparison! Because January's retrospective month-on-month inflation rate would have translated into "annualized 12% inflation"—the exact opposite of what he set out to "prove"!
African sources — who unlike Mr. Wiggin actually spent some time researching—point out that "the decline in annual inflation does not mean a decline in prices and consumers may feel the effect of this positive development until they get a salary increment as inflation only depicts the rate at which prices would have risen over a month or a year. For the month of February, year-on-year food and non-alcoholic beverages inflation prone to transitory shocks, stood at 5.26%, while non-food inflation stood at 2%."
"Transitory shocks," by the way, is the equivalent of the "volatility," based on which government statisticians strip out food and energy prices from core inflation.
What you talkin' about, Wiggin?
So how about the U.S.? "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% in February on a seasonally adjusted basis (…) Over the last 12 months, the all-items index increased 2.1 percent before seasonal adjustment."
Hmm? What happened with Mr. Wiggin's "annualized 6%?" He wouldn't have possibly applied the RETROSPECTIVE 3% in Zimbabwe with a FORWARD-LOOKING dairy-maid's calculation for the United States?
Well, actually, that's exactly what he did. I guess it must be hard to shed the copywriter's habitual cherry-picking of factoids and numbers… and the carefree application of uninhibited PromoMath…
So how does the U.S. inflation rate compare if you compare apples to apples, Consumer Price Indexes to Comsumer Price Indexes, and milipap to milipap?
Go no further than GlobalRate.com which allows you to compare the current inflation figures for a large number of countries and regions.
Turns out that the U.S. monthly and annualized (the proper way!) inflation rate compares quite favorably with such economic "basket-cases" as Germany and Canada. Huh.
But how about those glorious BRIC countries? You know, Brazil, Russia, India, China, with their smokin', commodities-based economies. Well, turns out that if you invested your money in Brazilian reals last year, it lost a whopping 6.014% in value — THREE TIMES the rate of the U.S. dollar.
How about Russian rubles? Ouch… down 9.55%! India? 9.3% — almost 5 TIMES the inflation rate of the United States.
How about China? Your yuan/renminbi, at just 4.9% inflation, lost value twice as fast as the dollar.
All a conspiracy of the U.S. government to deceive the Great Unwashed about the real inflation? Hmm. Then every other government must be in on the scam! Because they compile their own data. And if the U.S. is in a consumer price death spiral — how bad must it be in BRIC, if the best numbers they can make up are this bad?
Of course, you'll never hear a question like that in the 5-Minute Forecast, the Daily Reckoning, or other calculated (and calculating) franchises of this school: "Doesn't fit the franchise. Won't be asked."
No matter if the perspective might actually help you get a more factual assessment of the world…
Because that's really not the point of the exercise. That's feeding your emotional biases with hand-articulated factoids — primarily to upsell you on yet another franchise-conforming service.
So can I interest you in a $3,000 trading service that allows you to quit the market while at the same time hedges against imminent hyperinflation? A 29,000% upside!
Ooops. I forgot the question mark behind my profit outlook… which would get me off the hook with the regulators…
The 5: Ah well, too bad our comparison of the U.S. to Zimbabwe was facetious, at best.
‘This critique was admittedly long. If you're still reading this Friday afternoon and you're interested in a legitimate peek behind the curtain of the newsletter industry we recommend you read Financial Reckoning Day, or at least the preface to the 2009 edition.’