Financial No-Man’s Land

by Addison Wiggin – April 15, 2011

  • Gold back near record levels, as upper-middle-class Chinese look for a new place to park cash
  • Doug Casey with advice on surviving in a “financial no-man’s land”
  • Three commodities you’ve probably never heard of that jumped up to 735% in two weeks
  • “Fun tax facts” by reader concerned with income inequality… and more from us… without any more clarity than that with which we began…

It was a good effort…. but “federal debt held by the public would double under the President’s budget,” says the Congressional Budget Office (CBO).

While we were exploring gold storage, junior miners and asset protection in Zurich, the CBO did some heavy lifting on the budget proposal advanced by Mr. Obama on Wednesday.

Even as the president promises to raise taxes, protect consumers and cut spending, the CBO shows the federal debtportion of the national debt held by the public growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021… adding $9.5 trillion to the nation’s debt from in 9nine years.

“Even if the president could persuade Congress to enact all of his proposed tax increases,“ Alan Reynolds from the Cato Institute adds, “in addition to surtaxes already included in [the health care reform bill], the CBO finds we would still face endless budget deficits averaging 4.8% of GDP…”

What kind of solution, we humbly ask, is that?

“We are in a financial no-man’s land,” muses our friend Doug Casey, surveying the landscape. “‘Investing’ is problematic because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices.

“Nothing is cheap in today’s investment world. Because of the trillions of currency units that governments all over the world have created — and are continuing to create — financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains.

“Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.”

“The next chapter in this sad drama will include a rapid rise in consumer prices. Raw commodities are the first things to move in an inflationary boom, largely because they’re essential to everything.”

“Retail prices are generally the last to move,“ Doug sums up, citing a couple of themes we’ve been keeping our eyes on, “partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.”

Retail may, indeed, be moving now. This morning, the Bureau of Labor Statistics (BLS) announced the consumer price index rose 0.5% last month.

The “core” rate that strips out food and energy — the one the Federal Reserve watches to determine whether we have any “inflation” — was a tame at 0.1%. But look these annualized rates of change:

The first column of numbers is for the six months ended last September. The second column is for the most recent six months.

Over the last 12 months, the CPI has risen 2.7%, according to the BLS. John Williams at Shadow Government Statistics, who crunches the numbers the way the government did during the Carter presidency, comes up with a slightly higher figure of 10.2%.

“It’s Atlas Shrugged time,” Doug Casey chimes back in… and by that he doesn’t mean tonight’s release of the movie based on the novel.

“Few large fortunes have been made by investing. Most are made by creating, building and running a business. But running an active business is increasingly problematical.”

“Sure, there will be plenty of people out there to hire – but in today’s litigious and regulated environment, an employee is a large potential liability as much as a current asset.”

“Business itself is seen as a convenient milk cow by bankrupt governments – and it’s much easier to tap small business than taxpayers at large. Unless it’s a special situation, I’d be inclined to sell a business, take the money, and run.” Atlas Shrugged, indeed.

In contrast, “the years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs,” Doug continues.

“An entrepreneur is ‘one who takes between,’ to go back to the French roots of the word. Buy here for a dollar, sell there for two dollars – a good business if you can do it with a million widgets, hopefully all at once and on credit. An entrepreneur ideally needs few employees and little fixed overhead.”

“Just as a speculator capitalizes on distortions in the financial markets, an entrepreneur does so in the business world. The more distortions there are in the market, the more bankruptcies and distress sales, the more variation in prosperity and attitudes between countries, the more opportunities there are for the entrepreneur.

“The years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs. Keep your passports current, your powder dry, and your eyes open. I suggest you reform your thinking along those lines.”

Doug is famous, if nothing else, for taking the “flight” side of the “fight or flight” question that’s the central theme of this year’s Agora Financial Investment Symposium. He’ll be back for this year’s shindig… along with last year’s top-rated speaker, offshore oil pioneer Marcio Mello; perennial favorite Rick Rule; Bill Bonner… and a host of others.

You can still grab a discount on admission, but seats are filling fast. You don’t want to wait till the end of the month, only to find we’re sold out. Check out this year’s agenda and secure your early-bird rate right here.

Gold is holding on to most of the gains it made yesterday. At $1,473, the spot price is less than $6 away from the all-time record reached less than 24 hours ago. Silver has powered above $42, currently at $42.18

As China’s torrid housing market is showing signs of cooling off, the country’s “mass affluent” are shifting to gold, according to a new report from J.P. Morgan Chase.

In recent months, China’s government has raised interest rates and required down payments to try to put a lid on urban property prices… and it’s starting to work.

“These households possess sufficient capital to purchase investment property,” says the report, “but do not have the same degree of access to investment vehicles such as private equity funds and retail property” that the super-rich do.

Thus, Chinese demand for gold coins and bars rose 70.5% in 2010.

[Ed. Note: If you have any interest in fast-moving junior gold stocks, Chris Mayer is out this week with a special report naming two of his undervalued favorites. One sits adjacent to the “Golden Staircase” in northern Canada that’s been yielded up treasure for more than a century. The other sits on a mountainside in Colombia — an opportunity Chris dug up during our visit last month. Get the story right here.

Major U.S. stock indexes are ruler-flat as we write. At 1,314 the S&P 500 sits 30 points below the high it set in February.

The dollar is moving up as the PIIGS take to the slop in Europe once again. Moody’s downgraded Ireland today, and Greek bond yields blew out yesterday.

But for all that, the dollar index still has yet to crack 75.

Against the new save-haven currency of choice, the greenback hit an all-time low this week. It now takes $1.12 to equal one Swiss franc.

Still, “this move might be temporary” cautions our currency trading expert Abe Cofnas, “if Ben Bernanke signals concern about inflation and raises expectations of rising interest rates.”

“The more important relationship is the franc against the euro,” he goes on. “The Swiss economy depends more on exports to Europe than the U.S., and therefore, a weaker Ffranc against the euro is desirable.”

And with the European Central Bank raising rates last week, a weaker franc becomes more likely. “From a trading perspective,” Abe concludes, buying euro and selling Swiss has huge upside.”

You can bet Abe will be watching for trading opportunities. The next one could come as early as Monday. In the meantime, Abe and his readers they booked a 57% gain in three days this week on the Canadian dollar. By day’s end it could turn into a 200% gain.

That comes on the heels of 104% gains last week on the British pound, 170% the week before on the yen, and 239% on the pound the week before that.

Abe is rapidly acquiring legions of fans who write appreciative emails like this: “I decided to ride out the GBPUSD 1.6325 binary and that is a 308% profit trade! It is a very decent amount for a complete beginner like me.”

Every trade is “in on Monday, out by Friday” in the market Abe follows. No other North American trading advisory covers it. And for a limited time, you can still join at the charter-member rate. Please review your invitation here.

While most commodities are pulling back from record highs, one sector remains on fire. Guess which one.

Check out this performance between March 28 and this past Monday:

  • Neodymium: Up 23%
  • Cesium: Up 49%
  • Lanthanum: Up 75%.

These are rare earth elements – the metals whose production is presently 97% controlled by China. These prices reflect a government crack down on illegal strip -mining.

“The black market for rare earth materials has amounted to as much as 40% (maybe more) of total output, up until recently,” Byron King wrote in this space on Jan. 20. The crackdown has resulted in a supply squeeze.

Noting the price increases, JPMorgan raised its buy-up-to price on the industry darling Molycorp, from $74 to $90.

“Molycorp is overvalued,” Byron tells us in an email from Moscow. Heh.

“It might be a good day- trade play, if you have nothing better to do than stare at the screen and react to every twitch.” Byron got readers of his premium advisory, Energy & Scarcity Investor, out of Molycorp in January — with a 178% gain in four months.

Now he’s moving them into a rare-earth play with far greater potential — a company surely flying under mainstream analysts’ radar. In fact, this firm delivered some promising news just yesterday — putting it on the fast track to beat Molycorp and all the other “usual suspects” into production. Byron clues you in right here.

“Gold is priced in paper,“ writes a reader weighing in on the gold bubble debate, “and there is a higher degree of misperception associated with a fragment of a tree than a piece of metal.

“So I’d say that the bubble is in fiat currency, and not gold.”

“If anything, my best guess is that gold has been manipulated to create the misperception in the tree, to the advantage of the tree., and tTherefore, if there is an unwind, it will likely be that in the future, metal will be able to buy more trees, rather than trees being able to buy more metal.”

“Key Tax Facts” writes another reader:

  • 15,753: The number of households in 1961 with $1 million in taxable income (adjusted for inflation).
  • 361,000: The number of households in 2011 estimated to have $1 million in taxable income
  • 43.1%: Percent of total reported income that Americans earning $1 million paid in taxes in 1961 (adjusted for 2011 dollars)
  • 23.1%: Percent of total reported income that Americans earning $1 million are likely to pay in taxes in 2011, estimated from latest IRS data.
  • 47.4%: Percent of profits corporations paid in taxes in 1961.
  • 11.1%: Percent of profits corporations paid in taxes in 2011.

The 5: We invited folks to continue the tax philosophy discussion on the blog site, which they have… but this one looked like too much fun. So we added a few more digits of our own:

  • $289 billion: National debt in 1961
  • $14.26 trillion: National debt today
  • $7.68. Amount of money you need to buy the same amount of goods that $1 would have bought in 1961
  • $35,431: Total income subject to Social Security tax in 1961, adjusted to today’s dollar
  • $106,800: Total income subject to Social Security today
  • $42,075: Median household income in 1961, adjusted to today’s dollars 
  • $49,777: Median household income today (ah, not so fast — how many two-earner households were there in 1961?).

“I’m reading your recommendation, When Money Dies. “It’s a great read.”

“Especially interesting was the observation that while Britain financed World War I by taxation, Germany financed it by borrowing, a major contribution to monetary instability leading to the collapse of the Mmark. Thanks for the recommendation.”

The 5: Well, it’s not exactly beach reading, but Fergusson succeeded in making the subject a page-turner. If you are interested in reading it, but haven’t yet, you can get the book for the cost of shipping and handling, plus a one-month trial of Chris Mayer’s Capital & Crisis free, here.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. We left Zurich yesterday,. tToday we’re in Stockholm. We attended a presentation this morning at the Stockholm School of Economics of our efforts to introduce Agora Financial to the Chinese market. It was a bit like looking in the mirror (after a late night)… more on Monday.

Accordingly, on this apt Tax Day premier date, we won’t have a chance to see Atlas Shrugged as it gets released in 391 cities across the country.

Incredibly, the film has scored a “0” to date on Rotten Tomatoes, which may be unprecedented in the history of that website. “I suspect only someone very familiar with Rand’s 1957 novel could understand the film at all,” writes Roger Ebert, “and I doubt they will be happy with it.”

Half the criticism comes from people who appear not to “get it,”, which you might expect. Does anyone really believe the effort will attract a popular audience? The other half say it looks sloppy and amateurish, which could be a problem. We’ll reserve our judgment until we see ift for ourselves.

P.P.S. Less than 72 hours are left for you to take advantage of an offer we’ve never made before on our most expensive service. It’s never been easier to take advantage of Bulletin Board Elite. Learn how here.

rspertzel

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