On the Brink

Addison Wiggin – June 29, 2011

  • Small-town cash crunch sends entire police force packing… details of a nation on the brink
  • Bank of America flagellates with the largest fine in U.S. history… why the worst is yet to come
  • Brazil at a crossroads… no worries, Jim Nelson is ready to take profits…
  • New research reveals a dramatic shift in Wi-Fi use… Ray Blanco shows us the resulting opportunity…
  • The U.S. Mint casts a blind eye on law of supply and demand… why one reader wishes those who advocate armed revolution “lotsa luck”… lessons from

   “We had to do something drastic,” says Jerry Flowers, a city councilman in Alto, Texas.

Lately, we’ve find ourselves in the curious habit of collecting stories of impending calamity from around the nation. This morning is no different.

“The police department,“ the curiously named Mr. Flowers goes on, ”being a nonmoney-making entity, was the easiest to get rid of while we catch our breath and build up some cash.”

And just like that, Alto did away with its police force.

The chief and his four officers put a padlock on their offices two weeks ago today. They’ll be back in six months, assuming the town’s balance sheet gets the love it needs.

In the meantime, for protection against ne’er-do-wells, petty thieves and outright criminals, citizens of Alto will have to rely on the Cherokee County sheriff’s office, headquartered 12 miles away.

“I’m going to try,” commented the county sheriff when notified, “but I can’t guarantee you there will always be an officer in the town.”

   Until recently, drastic cutbacks like this were the province of down-and-out medium-sized cities like Camden, N.J. — where half the police force has been let go. Or Oakland, Calif. — where the cops no longer answer burglary calls.

Alto’s population in the 2000 census was 1,190. Yet “Everybody’s talking about ‘bolt your doors, buy a gun,” says Mayor Monty Collins.

There’s no dramatic story about how things got to this point — no boondoggle sewer system as in Jefferson County, Ala., no six-figure city salaries as in Bell, Calif.

It’s simple: The economy’s hurting, property and sales tax revenues are down and the city’s chief source of revenue — a natural gas distribution plant — needs expensive repairs, for which city fathers obviously didn’t save up. Now the cops have been sent home.

“Can you imagine,” we ask in a new special report, “being the victim of a robbery… and knowing the police won’t be there to answer your 911 call?”

Big city, small town, doesn’t matter. It can happen almost anywhere. But how vulnerable are you, exactly?

Your best defense is knowledge — knowing how deeply your state is in debt, how much it gets in handouts from Washington, how steep are its future pension obligations. We lay it all out in the aforementioned special report, titled American Oases. Details on how you can get your copy on Friday.

   Half a world away from Alto, the parliament in Greece agreed today to bind itself in another round of debt servitude.

Violent demonstrations notwithstanding, members approved another round of tax increases and spending cuts to keep Europe’s own extend-and-pretend game going a while longer.

Think of Greece as one of your hapless neighbors — maxed out on five credit cards, taking on a second part-time job, holding yard sales and applying for a sixth card just to keep up minimum payments on the other five.

Ahhh… deep breath, everyone.

For now, Greece can keep up its minimum payments to the European banks. Which is good because then European banks won’t show up on the doorstep of the American banks to collect on their credit default swaps.

(Not that any of the U.S. banks have the resources to pay, anyway.)

   “U.S. deficits and debt as a percentage of GDP are at the same level today as what Greece displayed just a few years ago,” reminds Euro Pacific Capital’s Michael Pento, bringing our focus back stateside.

“But that fact — if it is being acknowledged at all — is quickly dismissed, because we are also told that the U.S. has a single currency and a printing press that can save us all…

“Once the bond vigilantes come to America and bond yields surge, our saving grace is going to be inflation? Yep, that’s our government’s long-term strategy. To boost GDP growth, strengthen our dollar, increase foreigners’ faith in our debt market and lower our borrowing costs, we are going to use Al Capone’s printing press.”

   U.S. stocks bought the Greece rumor on Monday and Tuesday and are selling the Greece news today. The Dow is up again, but by less than 40 points. The S&P has squeaked past 1,300.

   Bank of America has reached an $8.5 billion settlement — the largest in U.S. history — with Pimco, BlackRock, the New York Fed and other outfits that bought BofA’s truckload of mortgage-backed securities.

Well, Countrywide’s MBSs.

Bank of America inherited the hairball when they bought Countrywide. With today’s ruling, the bankers have confessed they knew Countrywide misrepresented the putrid nature of the mortgages bundled into those securities, but didn’t share the information with investors.

Ah well, so much for BofA’s earnings for the first half of 2011. The settlement wipes those earnings out completely.

Naturally, BAC shares are up more than 3% on the news.

   Gold is firming again. At last check, the spot price is up to $1,509. Silver has popped 2%, to $34.71.

   Oil is up nearly 2.5%, to $95.16, on word of a drawdown at the terminal in Cushing, Okla., during the last week. And with that, oil is back to the price it was a week ago today — right before the International Energy Agency announced it was tapping into its member nations’ emergency reserves. That worked out well, didn’t it?

   A Greece-driven rally in the euro is driving down the dollar. The euro has moved up to $1.443, while the dollar index is down to 74.6.

Congratulations to readers of Strategic Currency Trader. Editor Abe Cofnas advised selling half their position on rising euro play this morning, good for a 100% gain in two days.

Another play delivered 133% this morning… and a third delivered a double yesterday.

Not bad for a series of recommendations that came out Monday morning. To learn more about these unique trades — covered by no other North American advisory service — check this out.

   “While Brazil has been one of our favorite income environments over the past few years,” writes Jim Nelson of our income desk, “it is becoming increasingly unnerving to see this South American giant’s economy overheat.” Thus, Jim joins Chris Mayer in the time-to-give-Brazil-a-rest camp.

Interest rates continue to rise in Brazil, but so do consumer prices.

“The central bank has now officially hiked its target rate four times this year,” comments Mr. Nelson. “Yet it seems nothing can keep Brazil’s inflation rate under check. It is approaching 7%.

“To any expert in South American economics, this doesn’t sound so bad. And it really isn’t. We don’t expect Brazilian stocks to collapse and Brazil’s tremendous economic growth to relapse into its old patterns. Brazil is still a global powerhouse. And it will still be the same success story going forward as it has been in the past few years.

“But we are hitting a plateau. Over the next few months, President Dilma Rousseff will have to make some tough decisions and perhaps tighten the government’s fiscal policies.”

Last week, Jim advised readers of Lifetime Income Report to take profits on two Brazilian income plays. Between dividends and capital gains, they’ve been good for gains of 50%… and 137%. To learn what Jim likes now, look here.

   From our innovation bin: New research spotlights how much Internet habits have changed in the space of the last 12 months. The cloud computing firm Meraki, just released a study showing what devices people use to connect to Wi-Fi networks.

We recently converted to an iPhone. On occasion, we look at it in awe and think, “How did I ever survive without this… thing?” We also gave iPads to our staff for the holidays last year. Even so, these results are stunning:

Last year, desktop computers accounted for 64% of Wi-Fi usage. In the space of 12 months, that number has crashed to 36%. Viva el iPhone!

We were made privy to Meraki’s research by Ray Blanco of our tech team. The research suggests a boon to one company that supplies critical components to devices using both of those operating systems.

Without the firm’s technology, “top tech companies like Apple, Google and, most recently, Microsoft… could not make today’s mobile devices,” says Technology Profits Confidential editor Ray Blanco. Ray’s been crooning over the company, one of the top picks in his portfolio…

“Over 200 companies right now all pay into this growing pool of ‘mobile royalties’”… and it all feeds into the bottom line of this one firm he identified late last year. Even after a run-up of nearly 50%, he still considers it a buy. Check it out… and see what else he likes right here.

   The definition of “insanity,” one often hears, is repeating the same action while expecting a different result. Perhaps, Webster’s should use this illustration for insanity in the next edition of its dictionary:

The Presidential Dollar Coin

The Presidential dollar series was unveiled amid great fanfare in 2007. The nation was meant to be showered with $1 coins proudly featuring every U.S. president, minted in chronological order.

So far, the mint has managed to depict George Washington, the nation’s first, through Ulysses S. Grant, the 18th president. To reach Barack Obama, il duce number 44, they’ll have to keep the mint humming until 2016.

Trouble is, nobody wants the coins.

For a variety of reasons — familiarity and comfort with paper dollars, more small transactions done with debit cards, vending machines and parking meters not retrofitted to accommodate them — the dollar coins have not been embraced by the public.

Not by a long shot.

Today, more than a billion of these $1 coins sit idle in Federal Reserve vaults around the country. Here’s a view of one in Baltimore, courtesy of NPR:

Nobody wants ’em, but the U.S. Mint keeps making ’em

Included in this stash are Sacagawea dollars, which by law, must comprise 20% of all dollar coins minted.

Heck, there are still Susan B. Anthony dollars in this vault. Those were last minted in 1999… but have been caressed by nary a greasy palm.

A billion. Oy.

   “The video of the reporter getting arrested at a public meeting,“ writes a reader, returning to a recent hot topic, ”was even scarier than most will realize. The government in this country was once ‘of the people, by the people, for the people.’

“Today, the people have allowed the government to call all the shots.

“The reader, however, who, essentially, said that the (implied physical) revolution is coming seems to forget that the U.S. military has one hell of an arsenal and that the head honcho can now deploy that military within the borders of the United States.

“Lots of luck with your revolution, guys, regardless of how badly it is needed and deserved.”

   “For decades federal, state and local government employees,” writes another reader, “have received regular pay increases, along with increases in health coverage, pension benefits, holidays, etc.

“Now government workers earn more, have better benefits, work fewer days and take longer vacations than the private-sector employees. And the number of government employees has soared. There is something wrong with this system. We are paying taxes so that our employees (government workers) can earn more than we do?

“What if they just rolled things back until they were equal to the private sector and kept that as a limit? What if they reduced the number of employees to the same level as 10 years ago? How many trillions would that save us?”

The 5: Who is “they”?

The “public choice” school of economics suggests the goal of those in charge of bureaucratic agencies is to increase the number of minions in their direct report… thereby increasing the budget allocated to one’s agency.

That said, the number of federal employees last year was 2.65 million, a mere 20,000 higher than the 2002 figure of 2.63 million. Under the 2012 budget proposal, the federal payroll would total $177 billion — 5% of a $3.8 trillion budget.

Even if there were a “they” who could roll back the clock, they’d have to keep rolling a lot farther than 10 years.

   “My 15-year-old grandson,” writes another, “asked me a question I’m embarrassed to say I cannot answer. Surely, you can.

“Why, he asked, are there so many ads on TV selling gold? If it’s so good to own, and it’s rising in value, why would companies spend a lot of money selling it? I’m stumped.”

The 5: Most of the outfits selling gold on TV are either selling it at substantial markups or performing what could be constituted as bait-and-switch, using straight bullion to get you in the door and then pitching you collector coins… at substantial markups.

As we also have marketing and advertising relationships with coin vendors, we’ve prepared A Beginner’s Guide to Coin Collecting to help sort out the issues. You can down load it free. No charge. No additional purchase necessary.


Addison Wiggin
The 5 Min. Forecast

P.S. We were surprised to see I.O.U.S.A. turn up on a list of “25 Great Movies About Money” compiled by the frugal-living website Wise Bread.

“As a nation,” writes reviewer Paul Michael, “we’re hooked on credit, we save less than we ever have before and the nation can no longer survive on what it collects through taxes. As we follow the U.S. comptroller general David Walker across the country, we see the damage that has been done, and the economic disaster on the horizon.”

I.O.U.S.A. is one of six documentaries on Mr. Michael’s list — which also includes a motley assortment ranging from Wall Street to Office Space. The numbers in I.O.U.S.A. may seem dated by now, but that only makes the message more urgent. You can grab the DVD at Laissez Faire Books, as always at a 20% discount.


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