The Day the Town Went Dry

Addison Wiggin – July 13, 2011

  • No booze, more hookers and a license fee to own a cat: Weird tales from cash-strapped state and local governments
  • Bernanke dangles the lure of QE3… Dow bites with a 150-point rally… and the show goes on…
  • Big Pharma failure delivers new opportunity for scrappy competitor… Patrick Cox says, “This could change everything”…
  • Readers try to solve the budget conundrum… explain how the tax man follows wherever you go… and show concern over energy stocks during a crisis…

   “I’ve lost enough wages to cover a house payment,” says Jim Golombecki, “so I’m having to scrape.”

And that’s after only 12 days.

Mr. Golombecki repairs vending machines for a living. His main client is the state of Minnesota. He is hardly alone.

We can’t help but add to the file of front-line skirmishes in the fiscal meltdown of state and local governments this morning. Brace yourself. It gets weird.

   Tempers are fraying in the Gopher State as a partial government shutdown drags on… even with the troopers still on patrol and the courts still open for business.

State parks are closed. So are the highway rest stops. It’s nearly impossible to get a driver’s license test. Prisoners aren’t accepting visitors. 22,000 state employees are furloughed.

“Where is your conscience?” pleaded a college professor yesterday in the city of St. Cloud, where Democratic Gov. Mark Dayton and several Republican lawmakers gathered for a “town hall” meeting.

“It’s not about you,” said the professor, “it is about us who sent you there.”

The scene was surreal. It was as if the governor and lawmakers weren’t at loggerheads over how to make ends meet in the new fiscal year. This was a previously scheduled gathering to discuss special education funding.

Those in attendance weren’t putting up with the charade. Still, it being Minnesota, the tone was polite.

   How long the tone will stay polite may depend on how readily people can drown their sorrows. For among the little ways in which people are being affected is their ability to buy booze.

For owners of bars, restaurants and liquor stores whose licenses just expired — or are about to — this is a matter of whether they stay in business or not. No license, no ability to buy inventory.

“We have a permit to sell alcohol, we just don’t have a permit to buy alcohol,” explains bar owner Erik Forsberg.

“This doesn’t just affect retailers,” says Frank Ball of the Minnesota Licensed Beverage Association, “but wholesalers, and the manufacturers, and wedding parties, and church functions, and one-day liquor licenses for charity events, and festivals and the list goes on and on and on.”

Such is life as states and cities downshift into austerity. The new reality manifests in all sorts of unexpected ways.

   In the heart of Silicon Valley, prostitution is making a comeback.

When the new fiscal year began for San Jose, Calif., on July 1, the police budget was slashed and the vice squad disbanded.

Over the last two weeks, “prostitutes have even been traveling from as far as Oakland and Fresno to take advantage of San Jose’s less scrutinized street corners,” reports the local NBC station.

Yes, she knows the way to San Jose

   In San Diego, there’s talk of licensing cats the same way dogs are licensed. It’s being pitched as a public health-and-safety measure.

But the city auditor points out that if only 5% of the city’s cats were registered at $25 a pop, the city would have saved $536,000 over the past three years.

So the real motive is “revenue enhancement” — not for the welfare of cats.

“San Diego is known for being very conscious of the feral cat and unowned cat situation in the community,” says Joan Miller of the local Cat Fanciers Association chapter.

“The last thing I’d want to see,” she says, “is to have any deterrent to people who are trapping those cats, neutering the cats and then returning them to their environment where they can be cared for and fed.”

   “The government will try anything and everything it can to desperately raise money,” we write in a forecast we issued on July 1, coincidentally the same day many states and cities began their new fiscal year.

“They’ll pickpocket your wealth through new taxes… propose weird new fees… even conduct ‘fire-sale’ sell-offs of state-owned roads and buildings.”

It’s happening now. Maybe it’s not making headlines where you live… but how can you know whether it will? That’s why we’ve prepared American Oases, our state-by-state breakdown that shows just how vulnerable you are to a localized debt crisis.

It’s one of five special reports we’ve prepared for the formal launch of our monthly Apogee Advisory. You can get all five of them right here.

   Stocks are rallying today, the Dow within spitting distance of 12,600, thanks to Fed chief Ben Bernanke’s twice-a-year testimony on Capitol Hill.

“The possibility remains,” he intoned, “that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.”

Translation: If our own rosy projections don’t pan out, we’ll mainline more QE heroin to prop up stock prices. We’ve got your back, Wall Street.

   With Bernanke’s remarks, gold sits at a record today. The spot price hit $1,588 midmorning and has pulled back only a buck or two since.

Silver is up more than 5.5%, to $38.17.

   The dollar index, which pushed past 76 only two days ago on the latest euro-scare, is back to 75.

   Also boosting gold and suppressing the dollar: Chinese GDP clocking in at a 9.5% year-over-year increase during the second quarter. That beat the “expert consensus” of 9.4%.

“As if anyone in China can really nail down a tenth of a point, one way or the other,” quips Byron King. “Still, it’s good for oil futures, if you think oil will rise in price. It’s good for commodity prices, if you think that les Chinois will still build new cities, roads, bridges…

“It’s good for gold, because it means that the Chinese-led upward pressure on energy and minerals will cause Western inflation, which is bad for the dollar.”

   Oil is up to $98.67 at last check. That’s West Texas Intermediate, the price paid for oil at the terminal in Cushing, Okla. — which is overflowing with crude from the pipelines coming down from Canada.

Most of the rest of the world is paying prices closer to Brent Crude — which is up to $119.21.

   Shares of Pfizer have barely skipped a beat on the recent news that its anti-smoking drug Chantix may increase the risk of heart attack and stroke in some patients. But it highlights a significant opportunity, says Breakthrough Technology Alert editor Patrick Cox.

Extra irony: It was the FDA — which approved Chantix — that issued the warning. Indeed, the FDA has issued regular warnings about Chantix for the five years it’s been on the market.

“Chantix doesn’t really work anyway,” Patrick says. “Most tobacco users return to tobacco. In a year, nine out of 10 Chantix consumers are using tobacco again.”

For months, Patrick has been following the fortunes of a tiny company that’s developed a non-drug method of breaking the tobacco habit once and for all.

“It provides far more of the calming and health benefits of tobacco than cigarettes,” says Patrick “without carcinogens.”
Its real promise, however, lies far beyond smoking cessation. Patrick has uncovered powerful evidence the active ingredient in this treatment has the potential to fight the inflammation that comes with nearly every disease of aging — cancer, heart disease, Alzheimer’s and more. The promise is off the charts – how far, we’ll know within weeks.

Best of all: It’s not a drug, so it’s outside the FDA’s purview. So it can be marketed for these other purposes without seven years of review.

“Medical technologies are going to lengthen our lives significantly and make you, I trust, very wealthy,” Patrick says. “The opportunity to make great fortunes does not often come, and it is frequently associated with serious societal disruption.

“That’s where we are now,” he concludes. “Take advantage of this opportunity.” Here’s where you can.

   “It appears,” a reader writes, “that you made a classic error in your graph ‘The Debt That Overwhelms All Others.’ You seem to have made the radius of the U.S. circle 5.5 times that of Italy. That would make the area of the circle just over 30 times the area of Italy’s circle. Since the area registers in people’s perception, the result is misleading.

“To make the area 5.5 times as large, the radius should be about 2.35 times as large. The circle would still be impressively larger, but more accurate.”

“I greatly appreciate The 5 (and Agora overall!), and am just doing my little bit to correct what I presume is an unintentional error.”

The 5: Grrr. Nostra culpa. Here is the corrected graph.

The size of the circle is smaller, but the scope of the threat is not.

   “An excellent place to start cutting federal spending is cut out all (I mean all, including Israel) foreign aid. Our Congress sends all kinds of money all over the world in exchange for nothing, and most of the recipients hate and resent the U.S.

“Next, we have military bases in over 150 foreign countries that are no longer needed. Close the American Embassy in Baghdad. It sits on 104 acres surrounded by fortress walls and houses 5,000 people. It’s the biggest and most expensive embassy in the world. Why is it there? Dare I suggest oil?”

“Cut the salaries and benefits of all government employees in half. Install the fair tax. That would significantly cut down the number of IRS employees and save a huge amount of money.”

“I have more, but I’ve given you a good place to start. Keep up the good work… we need you!”

The 5: We hate to burst your bubble, but foreign aid comes to $13 billion… in a $3.8 trillion budget.

A military force that bestrides the globe? Now you’re getting somewhere. The Independent Institute’s Robert Higgs has long estimated the cost of maintaining the national security state — not just the Pentagon, but everything from veterans’ health care to airport gropes — at north of $1 trillion annually.

As it is, however, the baseline Pentagon budget — not including the cost of wars in Iraq, Afghanistan or Libya — is scheduled to grow 3.3% next year, to $530 billion.

   “In regard to your reader who emigrated to China and found employment as a teacher,” responds a reader, “typically, the school pays the tax, and enforcement varies widely by location, big cities being more strict.”

“I have been in China for 20 years off and on,” concurs another. “You can, indeed, be taxed on local salary, with a normal average of about 40%. If a U.S. citizen, you could potentially have additional U.S. tax, and it gets into a bit of sticky business with foreign earned income exclusion.”

“Indeed, there is beer and many other staples available, but the cost of living is not so low anymore here, and rising quickly (6.4% CPI is not what the consumer is seeing in terms of price increases.)”

“I think the reader actually took a good approach: Come on a tour as a whim and see if there is anything there for fun.”

The 5: We wouldn’t be surprised at all to see more people try it.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. “Man, I love getting The 5 every day,” writes our last reader, exuberantly. “You’re one of the few media sources with something intelligent to say, rather than all of the garbage about us being in a recovery. I do have a question, though, about a topic that has me confused.”

“I subscribe to Outstanding Investments. Byron (and others) recommend energy stocks because the demand is going to outstrip supply, especially with more emerging markets coming on line. That makes sense to me.”

“However, when poor economic news comes out, the price of oil and the related stocks tend to go down because demand is going down. Now, if I agree with Byron’s premise but also agree with you that the economy is going south in a hurry, do I buy energy stocks or not? Thank you.”

The 5: It’s not just a question of rising demand in emerging markets. It’s also a question of supply — whether the world’s major oil producers can pump out what they promise.

Saudi Arabia sits on aging fields that require injections of more and more seawater to bring up less and less oil. If oil prices are up tenfold since 1998, why are the Saudis producing no more today than they did then?

Yes, energy stocks got hit hard in 2008 when the economy hit the rocks. But if you’d bought a basket of, say, oil services stocks at the bottom, you’d be up 150% today.

Throw in a sudden geopolitical crisis, and oil could hit $220 in a heartbeat — as we demonstrate here.


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