Dave Gonigam – July 15, 2011
- “Time to pay the bills,” the president warns. Too late, we say…
- The bill that can’t be paid: How a $1.65 trillion deficit is really $5 trillion… and what you need to do about it now
- Gold stocks turn up in July: Why now’s the perfect time to start loading up
- Activist types call for mass protest on Wall Street… with “one simple demand” that beggars belief
- Readers contend with the water-heater police and “a three-ring circus”
“We’re running out of time,” the president intoned during yet another midday press conference at the White House; the debt-ceiling deadline is now 18 days away.
“The Congress has run up the credit card, and now it is time to pay the bills.”
Hmmm… Sounds a lot like something Addison’s been saying lately. Has Barack been reading your beloved 5 Min. Forecast? We’ll leave it up to you to decide…
No matter though, the president is missing one big point. As Addison proves here, we’ve run up a credit card bill so high… that we’ll never be able to pay it. Not without printing money out of thin air, of course.
And, um, Congress is hardly the only party to blame.
While cable channels and political blogs obsess over who said what to whom, and who walked out of a meeting in a snit, the real question is how long will it be until some sort of under-the-table deal is cut… raising the debt ceiling without doing anything meaningful to shrink the debt over the long haul.
That’s the not-too-subtle point of Rep. Ron Paul’s new campaign commercial, which starts running today in Iowa and New Hampshire.
Right on cue, we learn of a deal being worked up behind the scenes, as reported by The Wall Street Journal, quoting an anonymous “Democratic official familiar with the negotiations”:
It would include roughly $1 trillion in deficit reduction, but would not come with tax increases or Medicare savings, the official said. It could include an extension of unemployment insurance, the official said, which costs $40 billion and would be offset by spending cuts.
A few days ago, the talk was of cutting $4 trillion in spending… over the next 10 years. That was later talked down to $2 trillion… and then $1.5 trillion. Now we’re down to $1 trillion. Again, over 10 years.
So we’re talking an average $100 billion per year. That would bring this year’s staggering deficit of $1.65 trillion down to… a staggering $1.55 trillion.
That’s how Washington thinks it can solve a problem. And the reality will likely turn out to be worse…
As an example of how these things take place in the real world, think back to last April, when a partial government shutdown loomed.
That was averted when the White House and Congress agreed to $38 billion in spending cuts. That was all supposed to take place during the current fiscal year.
Never mind that during the three weeks the politicians tangled over this, the national debt ran up by $41 billion.
But it gets better: The Congressional Budget Office put the accountants to work, figuring out how much of the savings were real, and how much were just an accounting fiction.
Actual savings — only $352 million. Out of a $1.65 trillion deficit, that works out to 0.02%.
Want to hear something really scary? Even if the government could come up with $4 trillion in savings for just one year… it wouldn’t be enough to cover all the obligations Uncle Sam is taking on in one year.
Here we pause to introduce a term you may or may not be familiar with: generally accepted accounting principles, or GAAP.
GAAP is what companies use to keep their books. If they don’t, their executives can go to prison.
GAAP is not how the government keeps its books. If it did, it would have to account for future Social Security and Medicare obligations.
Now… there’s set of books maintained by the U.S. Treasury that does the accounting honestly. You don’t hear much about them. A new one comes out every year a few days before Christmas, when no one’s paying attention.
According to these books, if you take into account all the new Social Security and Medicare obligations that Uncle Sam is incurring this year alone… the deficit would not be $1.65 trillion, but rather…brace yourself…
So once the deal is cut, and the can is kicked, we get to the most serious question of all: What’s all this political posturing and off-the-books accounting mean for… YOU?
This is what prompted Addison to update the forecast we issued two weeks ago. “If I’m right, it will destroy everything you’ve come to expect from the United States government.”
“You’ll no longer be able to count on the government to provide you with police and fire services that keep you safe… to provide you with cholesterol and blood pressure medication in your golden years… or to guarantee you a financially secure retirement.”
“What the government eventually decides to do about this crisis will dramatically drop the value of your home and savings accounts… and simultaneously drive up the cost to heat your home, drive your car and put food on your table.”
“So you’ll feel the pinch on both ends.”
“When this happens, the crisis will kick into its final and most dangerous stage — complete political and social unrest.”
Don’t get the wrong idea: Preparing yourself is not about holing up in the woods with a small arsenal and basement full of Mountain House #10 cans… It’s not about signing on to some type of political petition or grabbing a picket sign.
But it is about taking a few simple and sensible steps.
Before you get to those steps, though, it’s important to have all the facts about America’s credit card debt and proof that we’ll never be able to pay our bills — from someone who sits beyond the boundaries of Washington, DC.
What Addison exposes here isn’t pretty. And it’s sure to stir up a hornet’s net. But it’s important to hear an independent view… before you decide to take action.
Don’t you agree?
Stocks are regaining the ground they lost yesterday when Fed Chief Ben Bernanke amended his “we’re prepared to do QE3” remarks to Congress… by refusing to commit to a timetable.
The Dow is within reach of 12,500 again, the day’s economic numbers notwithstanding…
- Consumer price index: Down 0.2% in June, the first monthly drop in a year. But that was driven wholly by lower energy prices, which are already rising again. The year-over-year increase is still 3.6%
- Empire State Manufacturing Survey: Up 4.03 points (but still negative). This Fed reading of manufacturing in New York State contracted for the second straight month
- Industrial production: Up 0.2% in June, say the Fed figures… but that’s less than the “expert consensus.” And the previous month’s gain was revised downward to a loss.
But at times like this, it’s all about quarterly earnings. Google’s and Citi’s were good. Thus the broad market is up.
Gold is taking a breather from this week’s big run-up, with the spot price down modestly to $1,584. Silver, in contrast, is up over 1% to $38.68.
A growing number of forecasts point to gold stocks finally breaking out in the second half of this year.
“Gold equities now are likely to take the upper hand” over bullion, according to a Reuters report, “as the flow of cheap U.S. cash slows and miners boast juicy margins and good growth prospects.”
So far this year, bullion is up 10%, while the large-cap stocks are struggling to reach break-even.
There’s historical precedent for a second-half breakout. According to a website called Next Big Trade, the HUI index of major gold stocks has risen an average 2% in the first half of the year since 2003… but almost 20% in the second half.
Here’s a more lasting factor that could propel gold stocks well beyond the second half of 2011: Several of the large-cap issues are starting to pay dividends.
That makes them much more than a traditional dollar hedge, according to Brent Cook, the proprietor of Exploration Insights, a gold stock newsletter. Soon, he says, money will start pouring in from institutional investors like mutual and pension funds.
“Investors and fund managers are going to start looking at these companies as real businesses,” says Mr. Cook, “and we should see a shift of the type of investors in gold companies into the mainstream.
“This, to me, looks like an ideal time to be getting into the mid-tier and major gold companies.”
Of course, the really big money comes from the riskier “junior” gold plays — the sort that Brent spends most of his time scouting out in person. Brent will be sharing some of his favorite names with attendees at the Agora Financial Investment Symposium — which gets under way in Vancouver only 11 days from now.
If you can’t attend in person, there’s always the next best thing — audio recordings of every session in the main room and a handy write-up of every investment recommendation during the small-group “breakout sessions.”
Last year, we put MP3 files of the sessions and a PDF of the tickers in readers’ inboxes only one week after the conference’s close — so the information was still timely and actionable. Be forewarned — the price will rise once the conference opens. Lock in the best price right here, right now.
If the revolution is nigh, we know one way it won’t happen.
A webzine called Adbusters is calling for its readers to launch an Egypt-style public protest under the name #OCCUPYWALLSTREET. “The time has come,” reads the appeal, “to deploy this emerging stratagem against the greatest corrupter of our democracy: Wall Street, the financial Gomorrah of America.”
“On the 17th of September, we want to see 20,000 people flood into lower Manhattan, set up tents, kitchens, peaceful barricades and occupy Wall Street for a few months. Once there, we shall incessantly repeat one simple demand in a plurality of voices.”
The appeal goes on to explain that the Egyptian protests were effective because they focused on “one simple demand” — that Hosni Mubarak step down from power. With that in mind, what is Adbusters’ demand?”
Brace yourself. It’s big.
“We demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington. It’s time for DEMOCRACY NOT CORPORATOCRACY, we’re doomed without it.”
Your demand for redress of your grievances is that the president name a blue-ribbon panel?!
Wow. We can just imagine some of the people the president might name to this commission. Jeff Immelt from GE would be a lead-pipe cinch. Lloyd Blankfein from Goldman Sachs would be too obvious a slap in the face… but Jamie Dimon from J.P. Morgan Chase would be a fine stand-in.
Memo to Adbusters: A presidential panel to address the excesses of “corporatocracy” is bound to be stacked with all the usual suspects of corporate welfare and regulatory capture. (No doubt they’d also trot out retired Indiana Congressman Lee Hamilton; he always shows up for these charades.)
Safe prediction: If Operation Empire State Rebellion could muster a turnout of only four people last month for a concrete demand like Ben Bernanke’s resignation, #OCCUPYWALLSTREET could well have a turnout in negative numbers.
“Here in Topeka Kan., we also have a fee to install a hot water heater,” writes a reader adding to our ongoing chronicle of new taxes and weird fees. “It can be up to 50% of the price of the heater itself. Lowe’s told me that it was an ‘inspection fee.’ But only about 1/4 of the heaters are actually inspected by the government, so I see it as another expensive tax on homeowners.”
“My solution was to buy a heater outside of the local area and sneak it in and the old heater out. The old heater is in a rural backyard being used for target practice. I had a trusted friend install the new heater. No one was the wiser. The house sold several years ago and there was never any problem.”
“I guess this makes me a criminal.”
“I keep buying QID,” a reader writes. “It’s an ultrabear QQQ fund. My purchase is based on the logic that the government can’t fund itself… yet they keep breaking their pledge to stop QE.”
“It’s killing me that basic logic does not prevail. What does one do in this situation?”
The 5: We’ll pause a moment to let another reader chime in with a different question… to which we’ll then suggest the same answer.
“Frankly I’m getting a little tired of the three-ring circus,” the reader writes. “You know, Obama and Cantor in their version of the OK Corral shootout in the ring on one side, the European Central Bank and their dancing PIIGS in the Eurozone ring on the other side, and Ben Bernanke with the FOMC smoke and mirrors show on center stage. Ben starts the show off by arriving in a helicopter.”
“Here’s the problem. Wednesday, Ben says there might be QE3, and the markets jump up. Thursday he says maybe but not yet, and the markets jump down. The clowns in the two side rings are also similarly amusing.”
“I’m tired of jumping up and down for these clowns. I’ve cut back my investing. Fridays are out because you can’t tell who might have an emergency meeting over the weekend. I mostly write off Mondays as markets readjust and try to determine a direction for the week. Some weeks I won’t invest at all — FOMC meetings coming up or in front of quadruple witching Fridays.”
“I am this close to letting all my stop-limit orders play out and sidelining my cash until things settle down. I know that might be a long wait.”
“Ben and his friends are a large part of the problem when a few words can drive the market in an entirely new direction. Those words create the uncertainties, gyrations, erratic responses that I have to live with as an investor.”
“So maybe I will just fade out my investments, pick up some popcorn and watch the show for a while.”
“That doesn’t really mean much to the big boys, the circus masters, does it? After all, they are concerned about the welfare of banks and bankers, not Joe Blow investor. But what happens if I’m not the only Joe Blow who feels this way about their antics? What happens if a number of investors start sitting on the sidelines?”
“Then the circus might end.”
The 5: Careful about that sitting-on-the-sidelines thing. As Bill Bonner is wont to say, “Cash is a position.”
That is, like any other investment, you’re making an assumption — in this case, that the money you pull out of the mattress in the future will have the same purchasing power it does when you stuff it in the mattress now.
In light of the Federal Reserve’s 98-year track record, that’s a lousy long-term bet.
Meanwhile, the other reader, cognizant of that track record, is counting on the Nasdaq to tank. So he bought an inverse ETF, and is getting slaughtered.
“What if,” we propose in a new special report, “you could look at one simple yardstick… and make one simple investing decision… and be right no matter what? *#8221;
“You wouldn’t have to spend hours or days on the Internet or in the library trying to figure it out. You could take a handful of basic steps… and you could finally sleep at night.”
The report is called, “The Most Important Financial Question You Face… And How to Sleep Soundly Even if You’re Wrong.” Coupled with another report called, “The Secret to Set-It-and-Forget-It Wealth,” it’s a powerful combination designed to give you all-weather protection against whatever the White House, Congress and the Federal Reserve throw at us.
Both reports belong to a package of five that you can download and read this weekend. Here’s where to get them.
Have a good weekend,
Agora Financial’s 5 Min. Forecast
P.S. As of this writing, Addison is showing an early cut of the new documentary Risk! to an audience at FreedomFest in Las Vegas. If you’re joining us in Vancouver, you can attend a special screening on Tuesday night, July 26.
P.P.S. Perhaps the beer won’t stop flowing in Minnesota after all. The governor and the legislature have come to terms on a new state budget. Assuming lawmakers pass it next week, the partial shutdown that began two weeks ago today will be over.
For the last two weeks, Minnesotans have learned what it’s like to live without state parks and a host of social services. The licensing agencies were closed, too — meaning MillerCoors was in danger of having to pull its beer brands from store shelves.
So the crisis is almost over — for now. But the agreement doesn’t alter the fact Minnesota has racked up a debt that works out to $1,928 for every man, woman and child in the state. That’s almost as much as the fiscal basket case of California.
Where does your state stack up? And equally important, how much does your state depend on handouts from Washington, D.C.? And how much are you on the hook for state workers’ pensions?
Simply put, you can’t plan your financial future if you don’t know the answers to these questions. We answer them in our special report that seeks out “American Oases.” You can get your copy right here.