Cutting Up the Credit Card

Addison Wiggin – July 26, 2011

  • The real problem with the city of Vancouver this week…
  • How Alaska’s winters will be even colder than normal, but for one company’s goods…
  • Patrick Cox partakes of red wine for the first time in years… the “wealth revolution” discovery that makes it possible…
  • Alabama mine owner goes “Galt” on YouTube, tears up nearly granted permit…
  • Readers see a crisis coming, seek guidance… We oblige

   The problem being in Vancouver this week is that we’re subjected to “prime time” presidential speeches during the dinner hour.

Thus it was over a meal we choked on both the president and the speaker of the House’s self-serving, condescending, “angry Dad” speech about the debt ceiling — bereft of substance or even of symbolism.

It’s all tribal allegiance now.

   But that’s where things get confusing. How odd it must have been for both the “red” and “blue” teams, for example, when President Obama quoted President Reagan word for word from a similar “showdown” in the ’80s….

“Would you rather reduce deficits and interest rates by raising revenue from those who are not now paying their fair share,” said Reagan then and Obama now, “or would you rather accept larger budget deficits, higher interest rates and higher unemployment? And I think I know your answer.”

Indeed. Given the two choices… what ass would choose the latter?

Reagan, the Great Communicator, went down in history as the president who cut taxes and trimmed government spending. The former part was almost true. The latter not at all.

Back then, Reagan described the measure as “a limited loophole-closing tax increase to raise more than $98.3 billion over three years in return for an agreement to cut spending by $280 billion during the same period.”

The cuts never came.

“Ronald Reagan was never afraid to raise taxes,” says historian Douglas Brinkley, who edited Reagan’s diaries. “He knew that it was necessary at times. And so there’s a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn’t happen that way. It’s false.”

Reagan raised 11 times during his two terms. And still, the national debt under Reagan began its historic, meteoric 30-year rise…

Now we’re in the curious situation of having the president invoke the Great Communicator’s own words to defend this rhetorical stance: Spending at the federal level is just fine. If the “fat cats” in their “corporate jets” just paid for the wars and Medicare Drug D benefits they started before we were president… there would be no crisis.

Oy. The mind reels.

   “There is no symptom of big government more menacing than our debt,” was the only part of Speaker Boehner’s response that seems accurate. “Break its grip, and we begin to liberate our economy and our future.”

Trouble is, the better part of his party wants a big federal government too. They just want to wield its authority in a different manner.

   The notion of Armageddon come a week from today is looking even more farcical, the idiotic countdown clock in the corner of the screen on CNN notwithstanding.

Analysts at both UBS and Barclays both say Uncle Sam could pay all his bills for a few more days, or even weeks. It’s the difference between running out of authority to borrow (that is indeed next Tuesday) and being able to cover the bills. And it turns out tax revenues lately are coming in better than expected.

“Having borrowing authority is like having a credit card,” Barclays’ Ajay Rajadhyaksha tells Bloomberg. While the Treasury “will no longer be able to use its credit card” after Aug. 2, “it should still be able to pay its bills on Aug. 3, which is ultimately what matters most.”

Yep. Or in layman’s terms, the credit card will be maxed out. Difficult, not impossible.

The real trouble comes further down the road when America’s creditors decide the government is such a poor risk that it cuts up the credit card altogether. We’ve laid out the case before… but if you haven’t seen our July forecast, it’s absolutely worth a look here.

   Even The Globe and Mail here in Canada is getting in on the fun.

This was on the front page — an attempt to make the situation comprehensible to the residents of a country that counts the United States as its biggest trading partner.

Again, take a look at what’s likely to happen when America’s credit card gets cut up, here. It ain’t pretty.

   Our symposium on the state of the union begins today with what we hope is a provocative question: Fight or flight? Stayed tuned for an array of answers.

   Stocks are reacting to the debt-ceiling melodrama in the same way they did yesterday. The indexes are down, but nothing to make your jaw drop. The Dow’s off about half a percent, the S&P about a quarter percent.

   It’s the dollar that’s taking the real beating. The dollar index crested at 74.2 just before the dueling speeches last night. Currency traders, detecting there’s “no there there” to either proposal, have sent it tumbling to, at last check — 73.6.

It’s the first time the index has sunk below 74 since early June. And against the Swiss franc, the greenback has set another record low. This might even be the week it takes $1.25 to equal one Swiss franc.

   “Natural gas shortages seem the order of the day at least for the next winter or two,” writes Chris Mayer from Alaska, scouting out opportunities during a roundabout journey to Vancouver.

Anchorage — by far the biggest city in the state — depends heavily on gas from Cook Inlet, the supply of which has dwindled. In fact, there are times when demand exceeds flow. It’s so tight the mayor is looking into leasing a liquefied natural gas tanker for emergencies.

“The obvious solution,” says Chris, “is to increase production in the Cook Inlet. That’s more than doable: The U.S. Geological Survey recently upped its estimate of recoverable oil and gas tenfold.” One company Chris is eyeing has an inside track to these resources, and it bought them for a song. Learn how to turn their moxie to your advantage, right here.

   Gold, after its Sunday-night pop to $1,620, is still holding its own nearly 48 hours later at $1,614. Silver is up a few more pennies, to $40.37

   “I’ve always been a fan of Chile’s wine industry,” our tech maven Patrick Cox told me in the lounge here at the Fairmont last night, “which is the most underrated in the world.”

“The Carmenere grape is a member of the cabernet family and is probably originally from France. Early vintners brought the wine to Chile, where it was safe from the fungus that destroyed most of the French source.”

“Even in Chile, however, the grape was lost over time. Though it survived, it was misidentified as a merlot and blended with other varieties. Thanks to modern genetics and DNA analysis, however, the Carmenere was isolated in 1994. Professor Jean-Michel Boursiquot of the Montpellier school of Oenology proved that the earlier-ripening vine was Bordeaux Carmenere, not merlot.”

Patrick forecasts the varietal will become the marquee grape of the Chilean industry in the same way Shiraz opened up Australia and Malbec put Argentina on the vinophiles’s must-sip map.

If it were true that Mr. Cox had happened upon some new biotech-engineered grape that would set the Chilean wine afire on the global market, this would be the time to mention it. He hasn’t. Rather, he pointed out the quality in this grape because only recently has he been able to drink red wine again.

“Several years ago,” he explains, “red wines began to give me problems. Among friends of my age, this is not unusual. As a result, I begrudgingly made pinot grigio my table wine.”

But with the help of a “nutraceutical” he’s discussed in these issues before, his stomach has settled and he can drink reds again.

“Just about everybody over the age of 60 who takes this stuff,” Patrick says, also “reports improvements in memory and cognition.” Rumors suggest “you’ll be able to get the product, inexpensively, within weeks”… which will no doubt be a catalyst for the stock of the company that makes it.

And that’s just the beginning of its promise. Patrick will undoubtedly discuss it here this week. If you can’t wait for the details, here’s where to find them.

   In the fight-or-flight debate, we’re reasonably confident where Ronnie Bryant would come down.

Bryant operates coal mines in Alabama. Out of curiosity, he recently attended a public hearing in Birmingham, where people attacked another mine owner whose site lies near a river that supplies drinking water.

We’re agnostic on whether that operation would pose a threat to Birmingham’s water supply. But what struck us — and blogger David McElroy, who attended the hearing — was two hours’ worth of people attacking businesses and blaming them for causing random cases of cancer.

And it struck Ronnie Bryant… who stood up and said this:

I got a permit to open up an underground coal mine that would employ probably 125 people. They’d be paid wages from $50,000-150,000 a year. We would consume probably $50-60 million in consumables a year, putting more men to work. And my only idea today is to go home. What’s the use… Basically, what I’ve decided is not to open the mine. I’m just quitting.

The entirety of Bryant’s remarks are here. The audio quality is poor. You’ll get the gist.

A rash decision? Who knows. We wish Mr. Bryant were here this week.

   “Even IF there is a ‘debt deal,’” a reader writes, “I’m still scared that the U.S. will be unable to pay its debts and obligations simply because of the ‘timing’ limits on refinancing existing debt, not to mention new debt that is necessary to cover the continuous increase in spending.

“I suspect that the private retirement industry may be the next victim of a ‘power grab’ by the government in a effort to use the funds to engage in more ‘smoke and mirrors.’ Do you think this is a reality? What should I do, other than withdraw all of my IRA funds and pay the d*** taxes?”

“As a loyal subscriber, I have learned more than I paid for the subscriptions I received and read. Thanks!”

The 5: The “timing” problem you allude to is not just plausible, it’s inevitable, for reasons we’ve laid out here.

We’re not yet convinced that it’s time to cash out your tax-advantaged retirement plans; we actually think it’s more likely that private defined-benefit pensions will be the first to get “corralled” into Treasuries paying next to no interest.

A far bigger threat is the “virtual Berlin wall” we describe in the current issue of Apogee Advisory — limiting Americans’ options to park their money outside the U.S. dollar and U.S. banks. We also suggest alternatives that are still legal. Details here.

   “About QE3,” writes another, “years ago, a guy I know had to go bankrupt. Another guy I know who is in the banking business asked me: ‘I heard that Joe Smith had to go bankrupt? Do you know how much debt he had?’”

“I said, ‘He told me around $30,000.’”

“He started laughing, shaking his head: ‘$30,000! He goes bankrupt for $30,000! This is ridiculous. If you have no other choice than to go bankrupt, pay yourself for the troubles! Why didn’t he ask for a couple of credit cards when it was still possible and then do a nice $100,000-in-the-hole exit? It doesn’t change much on his credit status for couple of years… but what a party!’”

“So I am sure we will get a QE3 from Ben. We will party for another six months… and what it will change anyway? Defaulting on XXX trillions or XXXXXX trillions?

“I need my dose of realism everyday, so I can’t miss The 5. Keep your good work.”

The 5: You’ve nailed it. We’ll get past the debt ceiling drama, and then at some point the markets will sell off and the Fed will step in with another shot of QE heroin, which will feel fine until the withdrawal pangs hit yet again, and then…

Obviously, the heroin hits have to stop, lest the patient die. That’s the moment of truth. You want to be ready whenever that arrives.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.Around the time this message hits your inbox, yours truly will take the stage to launch the 2011 Agora Financial Investment Symposium. The lineup of speakers for just the first afternoon is worth the price of admission…

  • Juan Enriquez, managing partner of Excel Ventures, and as such a key player in the Human Genome Project
  • Frank Holmes, CEO of U.S. Global Investors, one of the most innovative and profit-making mutual fund managers and a regular 5 contributor
  • Barry Ritholtz, author Bailout Nation, whose speech promises to be even more provocative than his Big Picture blog entries
  • Rick Rule, whose renowned resource investing prowess has this year been duly magnified by his partnership with Sprott Asset Management.

That’s just the beginning. Each of these guys will speak for about 40 minutes. We expect it will be a thrilling, rigorous lineup for the folks who are here.

Of course, if you’re not here, you have the option of listening to everyone’s talk at your own leisurely pace. That’s the beauty of having every speech on handy MP3 files, or CDs. Perfect for your commute, your walk through the park, your workshop project — whatever. You won’t have to wait weeks for your copy. Our production team will be hot on the project as soon as the last speaker leaves the podium. Here’s where to get yours, early-show discounts still available.

P.P.S. Our old colleague Jim Amrhein, one of the original regulars at Whiskey & Gunpowder, is back this year for his colorful firsthand chronicle of our symposium. If you missed his initial dispatch in your inbox this morning, you can link to it right here.


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