Unleashing Financial Hell

Addison Wiggin – July 18, 2011

  • Pizza owner fined $600 for rainwater runoff: More weird tales for the bankruptcy archives…
  • Major U.S. rating agency downgrades U.S. debt, forecasts “de facto default”… Why their forecast is more credible than those of the “Big 3”…
  • What’s driving gold past $1,600
  • $220 oil wild card: CIA veteran, inspiration for Clooney character, sees Israeli attack on Iran within two months
  • Reader tries to outrun Uncle Sam to Australia, gets only so far

   We begin today’s 5 with an ill omen for small business owners: the story of Anthony Fasolino, a third-generation proprietor of a pizzeria in the Bronx.

Fasolino was recently fined $600 for the head-slapping offense of… allowing rainwater from his parking lot to flow into the storm sewers.

No kidding.

Ummm… should he have collected and disposed of the rainwater instead?

Fasolino figures such bogus fines — $200 for a missing cover on a ceiling light was another recent one — eat up as much as 20% of his revenue.

“New York City is unleashing its latest financial hell on cash-strapped business owners,” reports the New York Post, “desperately stepping up fines and announcing a flurry of new fees to raise funds.” The city is counting on such fees and fines for $900 million in revenue.

The health inspectors are the worst, Fasolino says. “They have to find something wrong with the place. If they don’t, their supervisor will come out and then give you a ticket of some kind.”

As for the rainwater, the Department of Environmental Protection is supposed to be sending someone to meet with Fasolino to discuss his problem.

   The backdrop: For the first time in U.S. history, local governments have experienced two straight quarters of declining property tax revenue.

On average, the year-over-year drop was 3% in the fourth quarter of last year, and 1.7% in the first quarter of this year, according to the Census Bureau.

As we’ve been expecting, the drop in property tax revenues is a hangover from the housing bust: Only now are lower house prices reflected in lower assessed valuation.

Property taxes bring in more than a quarter of local government revenue, so now local governments have to be creative in making up the loss to their spending regimens.

   “Cities and states across the U.S. are already having trouble borrowing,” we observed in our latest forecast. “And without borrowed money, these cities have been forced to cut safety programs, break financial and medical promises and even dig up roads and return them to gravel.”

That’s on the spending side. On the revenue side, when they can get away with it, property taxes are going up… way up. King County, Wash. — home to Seattle — raised rates 14.6%.

Honolulu raised tax rates 3.1%… but revenue still fell 4.6%.

Next, local “government will try anything and everything it can to desperately raise money: They’ll pickpocket your wealth through new taxes… propose weird new fees… even conduct ‘fire-sale’ sell-offs of state-owned roads and buildings.”

   In its own bid to grab headlines as the next major municipal bankruptcy, Jefferson County, Ala. is racing ahead of the worthy candidates we’ve already chronicled, like Harrisburg, Pa., and Central Falls, R.I.

Alabama Gov. Robert Bentley called attention to their plight this weekend, indicating there is a “very strong possibility” of default.

Jefferson County, you may recall, is home to a $250 million sewer project that became a $5 billion debacle thanks to risky debt instruments like interest rate swaps and outright bribery. The sordid affair was described in detail by Matt Taibbi in Rolling Stone.

Should the county choose Chapter 9, it would be the largest municipal bankruptcy in U.S. history. We’ll keep you posted.

   “Unlike state and local governments,” our forecast broadens the scope, “the feds have one tool that has allowed them to get away with overpromising and overspending for a very long time.

“It’s a tool that has been unique to the U.S. federal government since the end of World War II. And the U.S. government takes advantage of this tool like no one has before in history.

“When the nation’s credit card is cut off… when its ability to borrow money cheaply ends… the feds don’t have to try to balance the budget through unpopular service cuts…

“They haven’t had to sell off federal assets. They don’t have to break promises in the way state and local governments do. All because of this one tool: their ability to print the world’s reserve currency — U.S. dollars — on demand.”

But maybe not for long.

   “History has proven that defaults on domestic public debt do occur,” reads the fine print in a report released this morning by the ratings firm Egan-Jones. “In fact, 70 out of 320 defaults since 1800 have been on domestic public debt.

“Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.”

We like Egan-Jones. Here’s why.

Unlike Moody’s, Fitch or Standard & Poor’s, Egan-Jones gets paid by people who want to buy the securities they rate. The “big three” take their fees from the firms whose securities they are rating. Who do you suppose is more likely to remain independent and objective?

According to this morning’s report, Egan-Jones has downgraded Uncle Sam’s AAA rating to AA+. Not because of the debt ceiling debate, “but rather our concern about the high level of debt to GDP in excess of 100%. The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending.”

Indeed.

In other words, the endgame isn’t the Aug. 2 debt-ceiling deadline. The endgame is when Uncle Sam’s creditors consider the same factors as the Egan-Jones crew and decide act – cutting up Washington’s credit card.

How soon that happens after Aug. 2, we can’t say. But the sooner you start to prepare, the better off you’ll be when the endgame does unfold. Allow us to make our case here.

   As the debt ceiling drama drags on, and a handful of European banks have flunked another round of heavily gamed “stress tests,” the safety trade is on…

  • Major stock indexes are down 1.3%. The S&P is back below 1,300
  • Oil is down more than 2%, to $95.15
  • Commodities in general measured by the CRB index are down about 1%.

   With the dollar and Treasuries at the center these financial storms, the prime beneficiary of the safety trade is gold. It pierced $1,600 in overnight trading and remains now at $1,605.

Silver, meanwhile, has powered up another 3%, and just like that we’re back above $40 — $40.44 at last check.

   “Here’s a conundrum,“ writes a reader, ”Why would a credit rating go down when the creditor is cutting back on debt and their income source is secure? “Why would the US government AAA rating decrease, when they know they have the income to pay the interest and can roll the debt? I can’t go out and borrow more to raise my score. I have to keep my total debt down, and keep my usage of open lines of credit down. ”Isn’t this debt limit rating scare upside-down?”

The 5: The debt ceiling debate is political theatre. And not even fun to watch. What the rating agencies are really beginning to warn is the U.S. government has already run up more debt than it can pay… and the trajectory gets worse no matter which party holds the purse strings.

The debt will get increasingly difficult to roll over.

“The bond market simply will not finance a deficit [or debt] as large as the one that looms in our future,” writes our friend John Mauldin, echoing concerns similar to our own.

We can’t predict when Uncle Sam’s credit card gets cut off, but the moment will not be kind… see what line of dominoes will begin to fall — and the consequence for you — when that day arrives, right here.

   “I left the U.S. last year,” writes a reader, “because I was a professional consulting engineer and just grew weary of struggling to get work in the door. I wanted to check out the Antipodes, so I came to Australia to work for a local firm (with a few years of encouragement from your writings). They paid for my temporary visa and moved me here.

“With the AUD up to US 1.07 on top of a nice salary increase, I’ve nearly doubled my salary. To be fair, things are quite a bit more expensive here, but the increased compensation outweighs the added cost by a good bit. I do miss things about the USA, but life here is pretty darn good.

“Surprisingly, they really like their big government, taxes and petty rules here too (don’t try walking through customs with a banana or other contraband), but at least they don’t make me send an FBAR to a bureaucrat in Detroit with all my foreign bank account numbers, balances and personal information. I was outraged when my accountant told me my government required this at the risk of heavy penalty for noncompliance.

“I love my country, and it treats me a suspect terrorist for having more than 10,000? Oh, and you can’t file it electronically. You have to print it and mail it snail mail. There is no doubt an army of federal bureaucrats in Detroit on the receiving end getting $20 or $30 per hour to open these things and read them line by line.”

The 5: No doubt. We detail the “virtual Berlin wall” that’s going up around Americans and their money in the current issue of Apogee Advisory — right down to the reporting requirements if you have a foreign bank account with $10,000 or more.

We also spells out some legal ways to protect your hard-earned wealth overseas… and you don’t even have to move out of the United States to do so. U.S. residents and expats alike are invited to check it out here.

   “I very much enjoy your 5 Min. Forecast. But there are major problems with your reports. I have no idea how long the presentation is. I do not have all day to listen. I have never listened to a full report. Come on, get to the points faster.”

The 5: As you wish. You can read our latest forecast in its entirety, at your leisure, right here.

Cheers,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. The aforementioned John Mauldin will be joining us next week in Vancouver for our 2011 Agora Financial Investment Symposium.

He joins a distinguished line of speakers running the gamut from Doug Casey to Barry Ritholtz to Adrian Day to Bill Bonner.

The sold-out event gets under way one week from tomorrow. But as soon as it’s done, our production team swings into action — preparing high-quality audio recordings of every session. Meanwhile, our editorial team assembles a concise write-up of every investment recommendation discussed.

And it all hits your email inbox within one week of the conference’s close, so the information is still current. But only if you sign up to get it. Do it this week and you can still lock in the best price.

“There is a warning order inside the Pentagon” to prepare for an Israeli attack on Iran during the next two months, warns Robert Baer, the former CIA operative whose book was the basis for the George Clooney movie Syriana.

An attack, Baer told KPFK radio in Los Angeles on Friday, would forestall a planned vote in the United Nations General Assembly on recognizing a Palestinian state. According to Baer’s contacts still in government, Defense Secretary Robert Gates used his influence to forestall an Israeli attack. But with Gates’ resignation, all bets are off.

Strangely, Iran might actually welcome such an attack. The mullahs, Baer says, are “worried about … what’s happening to their country economically, in terms of the oil embargo and other sanctions.

“They need an external enemy,” Baer asserted, to unite a restive population behind the government. Saddam Hussein used to play that role, but the United States carried out regime change and the new rulers are friendly with the Iranians. Iranian leaders, “would love an attack on their nuclear facilities, love to go to war in Bahrain and Saudi Arabia and Iraq and hit us where they could.

“Their defense is asymmetrical,” Baer goes on, getting into the gritty details. “We can take out all of their armored units. It’s of little difference to them, same with their surface-to-air missile sites. It would make little difference because they would use terrorism. They would do serious damage to our fleet in the Gulf.”

A scenario like this would drive oil to $220 in a heartbeat. If you haven’t examined Byron King’s “New War” forecast — or if it’s been a while since you’ve done so — we urge you to do so now… before it’s overtaken by events.

rspertzel

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