What’s Wrong With This Picture?

Addison Wiggin – June 8, 2011

  • Despite rising revenue, budget shortfalls and layoffs coming to a state near you
  • Bernanke’s Buzzkill for stocks… and when to expect he’ll start trying to juice them again with QE3…
  • Gold within $40 of all-time record… Byron King on what to do now…
  • Florida conference spotlights profit potential for “magic bullet” treatment… and your second chance to get in
  • “Shame on you” writes one reader among legions who missed our point…

   “You’re damned if you do, damned if you don’t,” writes a reader kicking us off today with an observation about employment in the post-bailout and —stimulus United States.

You have a choice:

  • You can work for the government directly by becoming a gov’t bot (i.e., become a postal worker, work for the city or state, be a cop or urban firefighter, etc.)
  • Apply for gov’t funding for a business to employ more of the bots
  • Or create your own employment by bidding jobs from the gov’t.

“What is wrong with this picture?”

   Indeed, especially if, as we’ve been expecting, state and local governments go on what CNN calls a “layoff binge” when their new fiscal year starts July 1.

They could cut up to 110,000 jobs during the third quarter — the first time that figure would hit six figures, according to a report from IHS Global Insight. That’s on top of 510,000 jobs lost since August 2008.

   A separate report from the National Governors Association finds that although tax collections are picking up, states will still collect less revenue in the coming fiscal year than they did before the 2007-09 recession.

That’s owing in large part to the end of federal stimulus payments, especially for Medicaid. The report says stimulus to the states over the last three years works out to the following…

2010: $60.7 billion

2011: $51.0 billion

2012: $2.8 billion

“I use the simple, probably oversimplified analogy,” says Scott Pattison of the National Association of State Budget Officers, “that you got a raise, but your bills are coming in higher than the amount of the raise, growing more than the raise.”

   Uncle Sam went another $5.3 trillion into the hole last year, according to a new analysis of the federal budget by USA Today.

Most of that figure is new obligations for Medicare and Social Security. The total unfunded liability totals $61.6 trillion. Added to the official national debt, we’re talking a total of $76 trillion.

That compares to $61.9 trillion two years ago in an analysis by our friend, the former comptroller general, and I.O.U.S.A. protagonist, David Walker. Other estimates run above $100 trillion…Professor Laurence Kotlikoff at Boston University pegs it at $202 trillion.

At some point, the eyes simply glaze over…

   As our eyes did when Federal Reserve chairman Ben Bernanke gave a speech to the American Bankers Association (ABA) conference in Atlanta yesterday 15 minutes before the market close.

The speech was only remarkable in how utterly unremarkable it was.

“Overall,” we recast his most interesting remark, “the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.” You can fill in the monotone voice in your own head.

We yawned and stretched.

But traders threw a tantrum. Helicopter Ben failed to get the blades whirring. He did nothing to signal an imminent QE3 — never mind that QE2 still has another three weeks to go. What a buzz kill.

The Dow was up 80 points barely an hour before the speech. Ben was still droning at the bell. But the Dow had lost 100 points and ended down 20.

   The S&P 500 fell 13% last year before Bernanke telegraphed QE2 during his annual address at Jackson Hole, Wyo., in late August.

This morning, the S&P is down 6.4% from its May 2 high of 1,370. No guarantees here — we can’t read the Fed’s mind, and no doubt we’d be frightened if we could — but keep an eye on 1,233.

That would be a 10% drop, prompting CNBC anchors to uncontrollably bleat “correction” on the fives every hour and mob psychology would compel traders to “sell!”… only then would we expect Mr. Bernanke to talk QE3 and try to jump-start the “wealth effect” anew.

   Perhaps not coincidentally, 1,233 is also the level Penny Momentum Trader’s Jonas Elmerraji is watching — it’s where the low end of the S&P’s rising trendline from the March 2009 sits right now.

“The trendline in the S&P is significant,” Mr. Elmerraji cautiously recommends this morning, “because of the number of times that the index has tested it only to bounce higher as a result. Until that secular trendline is broken, the technical outlook for stocks remains bullish in the long term.”

“Reading the trendline is not the same thing as guaranteeing higher numbers for the S&P 500 — major changes in trend do take place frequently. That’s why it’s especially important to trade as a reaction, not a prediction, to what the market’s doing in June.”

If you’re trying to trade the major indexes, we recommend you take Jonas’ observations into consideration, here.

   After peaking above $1,550 on Monday, gold continues to drift down. The spot price as of this writing is $1,539. Silver is down to $36.78.

   Gold has outperformed the S&P by 8% over the last month.

“Gold is more valuable at this juncture as the flight to quality accelerates,” according to Stephen Weiss of Short Hills Capital.

Not that that will hush the naysayers.

“’Gold is risky,’ I hear from any number of experts,” says our Byron King. “Really, I can’t go to a dinner party without some self-styled investment guru buttonholing me to explain that gold is risky.

“Oh yeah? Gold was ’too high’ and ’too risky’ back when I was buying it at $300 per ounce. Ditto at $400 per ounce. And $500 per ounce. And every hundred all the way up to $1,400 per ounce.

“And now at $1,500? Yep, gold is just as risky as it’s always been.

“So what do you do?” Byron asks rhetorically. “Well, you buck up, bite the bullet and buy more gold. Buy it by the bar, if you can do so, amigos. Who are you going to trust? Ben Bernanke? Or King Midas and a few more ounces of the yellow metal?”

If you’re just rising from a decade-long slumber and haven’t already, here are some ideas to help you place a portion of your portfolio in gold.

   “In the near term, Israel will have little choice but to accede to Cairo’s demands,” new analysis from the private U.S. intelligence firm Stratfor suggests, assessing the Israel-Egypt pipeline standoff Byron has also been monitoring.

It’s now been three weeks since repairs were made to a natural gas line leading from Egypt to Israel after saboteurs blew it up… but the gas still isn’t flowing.

The new military government in Egypt says the contract between the two countries was a sweetheart deal drawn up by cronies of the departed dictator Mubarak who pocketed millions for themselves. The new rulers are demanding Israel pay double previous rates before the gas is turned back on.

“By pushing for a revision of the gas deal,” says Stratfor, “the Egyptian military aims to both increase its revenue to help pay Egypt’s budget deficit and debt, and to legitimize itself in the eyes of the Egyptian public by distancing itself from the former regime.”

Israel says forget it, a deal’s a deal. Still, Israel relies on that pipeline for 40% of its gas.

You can bet that Israeli leaders are redoubling their efforts to bring the Leviathan gas field online sooner, rather than later. That can only work to the benefit of the Canadian-traded company sitting on some prime Leviathan territory. Byron King makes the investment case in this presentation.

   We have another sighting of a merchant in the West willing to take “junk silver” in payment for goods… but, again, the math doesn’t compute.

This time the offer comes from the Long Bridge Grill in Sandpoint, Idaho.

Recall the old silver dollar contains 0.77344 troy ounces of silver. Half of that is 0.38672 ounces. At $37 an ounce, that works out to a burger and fries for $14.30.

For a joint described on Urbanspoon as a “family-style restaurant,” that seems a bit on the high side. But Sandpoint is a tourist spot, so come to think of it… maybe it’s not out of line, after all.

   “It sounds like the City of Minneapolis is long overdue in making a GED the minimum requirement for employment,” writes a reader who saw our item about the tree trimmer who volunteered to help tornado victims, but was chased out of town by city inspectors.

“What’s really scary are the zombies with guns and uniforms and, apparently, too much free time on their hands.”

   “I just realized that we have a backdoor debt reconciliation system under way as we speak, cutting all of the entitlements going out the door.

“Here it is: Our government is fudging on how high inflation is, allowing Congress to approve a lower cost-of-living increase.

“Heck, if we could get Bernanke to induce 20% per year and then just lie till people believe it is only 2%, we’d get a huge cut in all the entitlements, as long as labor costs go up with everything else to raise tax revenue.

“What a plan! Our debt problem is no more! $500K houses for everyone!

“I enjoy The 5 every day. Thanks for your hard work.”

The 5: You joke, but that’s what the policy amounts to. Unfortunately, it’s not working: Labor costs aren’t going up, so tax revenue isn’t going up, either.

   “Why in the world would you print rumors from fringe websites about Obama’s travel spending?” a reader asks. “You should really be above that. Rumors are for scandal sheets, not financial information sites. Shame on you.”

“I can’t believe you hardheaded guys repeating this absurd story,” adds another, “without mentioning that it was comprehensively blown out of the water.”

“The anti-Obama crowd went way overboard on this one,” adds a third, who pointed us to a myth-busting website.

The 5: Congratulations… you missed the point.

No matter how high the figure, presidential spending amounts to a rounding error in a $3.8 trillion federal budget. That’s a fact, regardless whether either party thinks they nailed their opposition with trumped-up figures.

   “I have no doubt that is precisely the way each and every president,” writes another reader, “’justifies’ their outrageous waste of taxpayer money!

“Get rid of the waste and fraud that permeates our government and I dare say raising taxes isn’t necessary!

“Politicians won’t do it on their own, of course — the citizens of our country are going to have to force them to do it! Somehow, the politicians seem to think we work for them — nada — time to smarten them up!”

The 5: As we laboriously pointed out in I.O.U.S.A., that’s a myth also. “Waste, Fraud and Abuse” makes for popular slogans and smear campaigns during election years, but is a mite on the underbelly of the bloated, unfunded budget.


Addison Wiggin
The 5 Min. Forecast

P.S. There’s nothing like a celebrity endorsement to generate buzz about a product. And if government throws its weight behind that product, it’s an almost unbeatable combination.

That’s what’s happening now with the “nutraceutical” being developed by the tiny company Patrick Cox alerted you about in this space two weeks ago. Patrick is just back from a conference in Sarasota, Fla., attended by 125 scientists, money managers and fund managers.

Patrick’s speech stole the show. The first lady of Virginia, Maureen McDonnell, was among those on hand for the conference.

“McDonnell announced,” says Patrick, “that she and her husband were going to spearhead an effort to lower Virginia’s health care costs” by encouraging the use of this product.

“This is significant for several reasons,” Patrick adds. “One is that this raises the obvious possibility that Virginia may be able to test state employees’ inflammatory markers before and after starting use” of this nutraceutical.

“If, as I forecast, widespread use in Virginia succeeds in lowering the state’s medical costs, the game is won. And it could happen quite quickly, by the way.”

If you missed your chance to buy Dell Computer at a split-adjusted 5 cents in 1990 and watch it soar to nearly $54 a decade later… this could well be your chance to make up for it.


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