Praying for a Miracle

Addison Wiggin – June 24, 2011

  • Divine intercession to resolve human folly? City holds prayer vigil to avert municipal bankruptcy
  • Paying for government pensions ad infinitum: Five best and worst states for taxpayers
  • Taxing small business to keep government strong and healthy, as described by the Treasury secretary
  • We don’t need no stinkin’ transparency: Reporters cuffed as they document city’s effort to stifle enterprise
  • Manipulation? Conspiracy? Readers sound off on the decision to tap the “strategic” oil reserves

   The Great Correction is taking on biblical proportions.

Folks in Harrisburg, Pa., will conclude three days of prayer and fasting shortly after this issue hits your inbox. Their objective: Divine intervention to prevent the city government from going bankrupt.

Yes, it’s come to this — a prayer vigil led by “more than a dozen” interdenominational religious leaders in the Pennsylvania state capital, population 50,000.

“We recognize that the answers to the city’s and our region’s problems and issues will not be found in the wisdom or ability of man,” says Pastor Herb Stoner of Christ Community Church of Camp Hill. “Therefore, united, we turn our hearts to God.”

   Of course, it was the hubris of man that got Harrisburg into this fix. The city guaranteed funding for an incinerator project. Now it’s on the hook for $300 million it doesn’t have… and city leaders are counting on God for a bailout.

Putting it all in God’s hands, while washing her own

“Things that are above and beyond my control, I need God,” says Harrisburg Mayor Linda Thompson. “I depend on him for guidance. Spiritual guidance… I am open about my faith and will be participating in the voluntary prayer and fast.”

Naturally, this has drawn protest from groups like American Atheists and Pennsylvania Nonbelievers, who showed up to protest today. Presumably, they don’t intend to sue for damages, knowing they’d end up standing in a very long line of city creditors.

   A new study released yesterday shows the crisis in local government is hardly isolated to Harrisburg, Pa.

Professors Joshua Rauh from Northwestern and Robert Novy-Marx from Rochester have shown the average U.S. household would have to fork over $1,398 every year… for the next 30 years… to make up for the shortfall in state and local government pensions.

They broke their findings down by state. New Jersey’s in the worst shape; meeting the Garden State’s pension obligations would suck $2,475 annually from every household.

For several months, we’ve undertaken a similar research project of our own.

“The deadly combination of low tax revenue and massive pension and retirement promises,” reads our special report titled American Oasis, “has forced certain states into a ’lose-lose’ situation. They’ll be the first to cut police… try desperate money grabs… and break promises.”

“That’s why the first thing you need to do to prepare,” the report concludes, “is to find someplace safe for your family to work and live.”

We’ll be releasing the complete list of the safest places to live in the United States next Tuesday, June 28. Stay tuned…

   Greece — its own basket case of reckless spending and pension obligations — appears on its way to another bailout that will solve nothing.

Because the Greek government can’t keep up the payments on $156 billion in bailout loans it got last year, the European Union and the International Monetary Fund agreed yesterday to lend Greece another $170 billion. And since the United States funds roughly one-third of the IMF, you and I are on the hook.

Yes, it’s madness. Yes, it’s sure to end in tears. But for a while anyway, it’ll maintain the illusion of solvency at the European — and American — banks that were fool enough to lend money to Greece.

Keen-eyed readers might recall that a week ago today, we said U.S. bank exposure to Greece was $41 billion — nearly six times what you see in this chart.

So what gives?

What you see here is direct lending. The rest is derivatives, mostly credit default swaps — the guarantees that U.S. banks have made to European banks in the event Greece goes belly up.

“Guarantees” like the ones Harrisburg made for the incinerator project. Heh.

Pay no attention to the headlines. Greece hasn’t been fixed. It’s been patched with paper clips and rubber bands, which the bankers are hoping — maybe even praying and fasting over — will hold together a while longer.

When the patch job finally gives way, you want to be prepared. We have six ideas to get you started here.

   We’ve been suggesting for some time that any genuine recovery in America will be led by entrepreneurs who generate new ideas and create new jobs. In fact, that’s the premise of the documentary we’ve been working on in Los Angeles this week. (We’ll be doing a sponsored screening of the film to a “focus group” on July 15 at the Anthem Film Festival, which is part of Freedom Fest in Las Vegas that week. The screening will be sponsored by Laissez Faire Books. You can also catch a glimpse of the film at this year’s Agora Financial Investment Symposium in Vancouver July 26-29, 2011.)

As if on cue, entrepreneurs and small-business owners have taken a bullet between the eyes this morning…
Treasury Secretary Timothy Geithner threatened Congress yesterday that small businesses must pay higher taxes, lest the White House “shrink the overall size of government programs.”

At issue is the administration’s desire to return to 1990s tax rates on incomes higher than $250,000 come 2013. Pressed on the small business impact by freshman Rep. Renee Ellmers (R-N.C.), Geithner explained the reasoning thus…

“It’s important to recognize why are we doing this. Y’know, our deficits are 10% of GDP, higher than they’ve been since any time in the postwar period really. We have a big hole to dig out of, and we have to figure out how to do that in a way that’s balanced, good for growth, fair to people as a whole.”

Hmmmn… fair to people as a whole.

Stimulus and bailouts have played a major role in deepening that hole… and who were the recipients of the stimulus and bailouts? The very people who helped create the mess in the first place: State and local governments and members of the busybody class running Wall Street banks. And what are causing the deficits to persist but the very government programs he’s fearful of cutting…

Geithner is an A-1 representative of the busybody class — given his glowing resume at Kissinger Associates, the State Department, the Treasury Department, the International Monetary Fund, the New York Fed and now Treasury, again. What could he possibly know about balanced policies that are good for growth if he’s never been on the hook to meet a payroll?

That’s putting it lightly.

Given this exact perspective we hear repeatedly from policymakers in Washington, you may have no choice but to move to the “flight” side of our fight-or-flight boat.

   Stocks are down this morning, the Dow again clinging for dear life to 12,000 after surging back late yesterday to recover the worst of its losses.
Traders are chewing on the following reports from the Commerce Department…

  • Orders for durable goods grew 1.9% in May. So two of the last three months have been up. But most of this latest increase was driven by aircraft — not a good gauge for the broader economy
  • The Commerce Department’s final answer on first-quarter GDP is 1.9% — up slightly from last month’s guess of 1.8%.

As with unemployment and consumer prices, there’s a lot of gamesmanship that goes on with GDP. Our friend John Williams at Shadow Government Statistics calculates this number using the methods in place 30 years ago. By his reckoning, the U.S. economy has been shrinking ever since mid-2000, except for a weak nine-month expansion during 2004.

   Gold is down a few more bucks after yesterday’s big beat-down. At last check, the spot price was $1,513.
What impresses us is not how far gold fell yesterday, but how resilient it’s been since first crossing the $1,500 threshold a little over two months ago.

   Silver, more volatile than gold, is taking a customary hit today. As of this writing it’s down nearly 2%, to $34.69 an ounce. Still, it’s 84% higher than a year ago.

   We have a chilling, and at the same time inspiring, follow-up to Washington, D.C.’s efforts to turn the city’s taxicabs into a regulated utility.

The capital has about 12 cabs for every 1,000 people — far more than other big cities — and as a result, some of the lowest fares in the country. But the municipal government in D.C. wants to introduce the odious “medallion” system that limits competition and drives up fares in New York, Chicago and elsewhere.

On Wednesday, hundreds of self-employed taxi drivers — who’d be thrown out of work by the medallion system — showed up at a meeting of the D.C Taxi Commission. About 30 minutes into the meeting, a reporter snapped a photo of the proceedings with his camera phone.

The photograph profoundly offended the esteemed personages of the D.C. Taxi Commission, who evidently feel they’re not accountable to the public. So they ordered police to arrest the reporter.

What followed was captured on video by Jim Epstein of Reason magazine’s video unit…

Epstein got arrested too. Both reporters were charged with “disorderly conduct” — the last refuge of ticked-off authorities who can’t figure out what law you’ve broken.

“The reaction of the audience is great,” says our friend David Galland from Casey Research. “This sort of thing is now out of control, but not nearly as out of control as it is going to get…”

   “Yesterday demonstrates why Mom and Pop investors don’t have a chance in the investment marketplace,” a reader writes after the International Energy Agency (IEA) dumped 60 million barrels of oil from government stockpiles on the market. The price per barrel dropped $4 by the close.

“There was no warning,” our reader continues. “Markets were not afforded the opportunity to anticipate and adjust to this change in an orderly fashion.

“The purported reason is to offset the production decline from Libya as a result of that undeclared war. But Saudi Arabia has already said that it will increase production to offset that loss. And check the numbers. The IEA said it would release 2 million barrels a day (bpd) over 30 days onto the world market.

“Prior to the war, Libya’s output was about 1.2 million bpd. So this is more than an offset.

“The other reason given is that this is intended to reduce inflation attributed to increased fuel prices. However, inflation has been driven by the U.S. quantitative easing flooding money through banks into equity markets. A lot of the inflation is due to increased food prices, only marginally related to oil’s price per barrel.

“So what gives?

“When nothing else makes sense, go with the conspiracy theory. This may be an economic attack on OPEC. Clearly, the intended action is to break the price of oil below $90/bbl. Note that a number of OPEC countries need at least $87/bbl in order to make ends meet in their own economies. Also note that the current holder of the OPEC presidency is Iran, not a U.S.-favored state, and the state that led the opposition against Saudi Arabia’s proposal to increase oil production at the last OPEC meeting in Vienna earlier this month.

“This action has every appearance of being irrational. But the IEA and U.S. government knew what would happen when they planned the announcement, down to the decision made about timing of this announcement. It was quite deliberate.”

   “When I heard about the planned releases from the Strategic Petroleum Reserve,” writes another reader, “my first thought was, HUH? Makes no sense.

“Then the light came on: Iran.

“Suppose some classified intelligence has arrived that Iran is on the brink of insolvency and forcing down oil prices might cause the government to collapse, at least in some fantasies in Washington and other capitals?

“This is strictly an off-the-cuff hypothesis, but it fits the facts a lot better than any of the published explanations.”

The 5: As nearly half the oil released comes from the U.S.’ own strategic reserve, the Financial Times speculates the reason is much closer to home. “The Obama administration decision,” the salmon-papered FT surmises, “to dip into its emergency oil reserves has shown how few options it has left to make Americans feel better about the economy.”

   “With the government manipulation of the oil market creaming all the longs out there on this commodity story,” adds a third, “isn’t it just a matter of time before we see a concerted effort to extract the savings of the masses, who have recently bought gold and silver at the highs, via the IMF and other reserve dumping on the precious metals market, even if only through paper trades?

“Seems the metals are taking quite a hit already.

“Or will China and India step in and put a floor under this attempt? Wasn’t the whole food commodity complex and government intervention a major topic at the last G-20 meeting, signaling more danger to those making the commodity/inflation long trade?

“All this counter-market logic, whipsaw action is enough to make you seasick. Almost seems cash is the place to be right now. Like a captain in a choppy sea: ’Slow and steady as she goes, mate.’”

The 5: Short term, commodities might be swooning, but as we noted above, gold is holding above $1,500. Likewise, our friends at EverBank just launched the Timeless Metals CD, which may be a good option for the “steady as she goes” trade.

Longer term, no government or central bank can repeal the law of supply and demand. Hundreds of millions of people in the developing world are entering the middle class, and hundreds of millions more aspire to.

They’re going to eat better. They’re going to consume more energy. They’re going to want more of the good things in life. And all of that will require more commodities — more grain, more oil, more copper, more, more, more.

Yes, there will be downdrafts. They might be as severe as the one in 2008. But the long-term trend isn’t going away. We launched Outstanding Investments in 2000 focused on natural resource and precious metals producers for this very reason. Over the last 10 years, it’s been the best-performing letter among nearly 100 tracked by the independent Hulbert Financial Digest.

Editor Byron King sees no end in sight to this long-term commodities boom. You can find some of his ideas about to invest accordingly here and here.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “Taking 2011 as a whole,” says Greg Guenthner our small-cap team, “the market has been sideways and volatile. “I would not be surprised to see additional swings in investor sentiment before the market ultimately chooses its direction.”

For short-term traders, he offers this guidance: “Do not blindly chase breakouts. It would not be wise to blindly buy stocks on days like Tuesday. Instead, we should be carefully watching stocks with favorable longer-term trends for a suitable lower-risk entry point.

“In a market like this, even smart trading techniques can get you into trouble. The tighter your stops, the more likely you will be whipsawed out of your position as bulls and bears fight for control.”

Greg will offer a new recommendation to readers of Bulletin Board Elite in time for the open on Monday. It’s the most expensive service we offer, but this weekend only, we’re making it more accessible than ever.

rspertzel

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