Age of Repression

Addison Wiggin – July 28, 2011

  • “Hitler liked kids and dogs” and other one-liners from our Whiskey Bar…
  • “Financial repression” — Monetary mandarins purposely punish savers… and the chart revealing one asset that can preserve capital…
  • “Stalin’s box of rocks” offers up a lesson on how to make money in the mining biz… Byron King shows us how…
  • Anonymous strikes again…. ooooh…. why we tremble…
  • What do longer life spans mean for Social Security? What is Uncle Sam’s FICO score? Readers ask, The 5 responds… sort of.

   “Even a blind squirrel finds an acorn now and then,” quipped Byron King at last night’s Whiskey Bar here in Vancouver. That was in response to a question about whether we should worry because Jim Cramer is talking up gold at $1,600+.

Each year here at the symposium we gather a few of our more opinionated speakers… get them liquored up on whiskey… and let them loose on a panel. The questions are derived from the audience. No topic is off-limits…

To the question, “What is your favorite cocktail?” for example, Byron replied, “Umn, Molotov.”

   “Hitler liked kids and dogs,” Doug Casey retorted after John Mauldin had a kind word to say about Cramer and Larry Kudlow. “You never know what’s going on with these sociopaths.”

Asked for a forecast of the 2012 election, Mr. Mauldin replied: “With 9% unemployment, God could not get re-elected.”

The discussion veered this way and that… into the potential to weaponize Microsoft’s Kinect gadget, how one bank will give you a 30% instant return and the gov’t agency that has killed more people than the Defense Department.

[We couldn’t possibly convey the gist of the Whiskey Bar here in our 5 Min. But, as you know, the audio is available, along with all of the talks by all of the contributors in the main hall. Chances are we’ll be sending you the MP3 files a week from tomorrow… but only if you sign up here. The Whiskey Panel alone is worth the entertainment value.]

   “Your bond portfolio is being raided by government,” warned David Franklin, CEO of Sprott Private Wealth, earlier in a more sober part of the day. David’s one of 12 newcomers to this year’s symposium. He joined us by virtue of our good friend Rick Rule’s new partnership with Sprott Asset Management.

“Financial repression” is not a reference to foreign exchange controls or gold confiscation. Mr. Franklin recalled the term, coined by a couple of Stanford economists in the ’70s, to describe how governments seek to systematically reduce debt. And by extension, the period of economic history into which we have now passed again.

The key tool governments use to engage in “financial repression” is something called “negative real interest rates”: A 10-year Treasury note yields just under 3% this morning. But inflation is running at 3.6% a year, even by the Bureau of Labor Statistics’ gamy figures. So the real interest rate is –0.6%.

The danger, as David showed, is during periods of “financial repression” savers get slaughtered. Unfortunately, we’ve entered this period just as 79 million baby boomers enter retirement years… and seek to hold “safe and secure” bonds in their portfolios.

That could be a problem.

“In a negative rate world,” says Mr. Franklin, “speculation must be part of your portfolio. The safest speculation of all is revealed here…

Gold has a history of performing well under negative real rates. Worth keeping in mind as long as the Federal Reserve continues to talk about keeping rates “exceptionally low” for an “extended period.” To Franklin, that means a good five-10 years.

   “Gold is a trade,” Barry Ritholtz cautions, “not a religion.” While the debt ceiling debate and “financial repression” are at play, gold is a good trade. But Mr. Ritholtz advises you keep a cool head about it. He’s long the gold trade now… but is looking for an exit as soon as he perceives a sea change in the macro picture.

   Short term, gold is pulling back. But at $1,607… a pullback now means that it’s still above $1,600.

Silver is once again proving the more volatile asset. After punching above $41 yesterday, it’s back to $39.67 this morning.

   “I buy gold because I don’t trust the bastards,” John Mauldin — who dollar-cost averages into the metal every month.

John’s view of gold is similar to that of perennial Pollyanna Warren Buffett. The yellow metal in their view has no utility and delivers no income stream. “But it’s insurance.

“Fundamentally, I want gold to get cheaper, because that means things are getting better,” he adds. When I’m 150 years old, I want to give those coins to my grandkids and they’ll be worthless trinkets.” Mauldin expects to live until he’s 150 because he’s a huge “buyer” of the biotech advances presented by Patrick Cox, Juan Enriquez and Dr. Mike West this week.

But for now, he continues to add to his gold stash, while steering clear of broad market stocks.

   When asked what keeps him awake at night during the Whiskey Bar, Mr. Mauldin was unequivocal: Europe.

“The European problem is the subprime problem on steroids,” Mauldin warns. “Within two years or less, 80% of their banks will be functionally insolvent. You don’t want to be long the S&P 500 when this hits.”

Specific details abound in the CD set of the symposium.

   Stocks have arrested their relentless decline this week. The major indexes are up 0.25%.

The Bureau of Labor Statistics delivered a number on first-time jobless claims below 400,000 for the first time since April. Of course, 398,000 is cutting rather fine. And if past performance is indicative of future results, the number will be revised above 400,000 come next week.

But for now, it’s enough for the Dow to bounce off 12,300.

Tomorrow, the Commerce Department gives us its first read on second-quarter GDP.

   “The best place to build a mine is near another mine,” Byron King told the crowd in Vancouver, introducing them to a concept he calls “closeology.”

In other words, it’s easier to build a mine when you know resources already exist nearby… and much of the work proving up those resources has already been done.

Case in point — a rare earths play in one of the former Soviet republics, at a site Byron visited last April. The metals happen to come from one of the most prolific uranium mines in Soviet history. Stalin’s nuclear scientists were so proud of what they dug up back in the day, they presented him with a box of assorted polished nuclear stones.

New caption: When you open up a box of nuclear rocks, you’re never sure what you’ll get…

“Stalin loved it!” Byron recounts. “He was thrilled. After he died, this box went to the Stalin Museum. Then some smart guy figured out it was radioactive as all get-out. So the Stalin Museum decided in a hurry to get rid of it.”

It ended up in the museum of what was once Stalin’s “Laboratory No. 10” — which developed the Soviet bomb. Today, that research institute is in the forefront of efforts to recover rare earths from the same region that yielded up all that uranium.

Byron rattled off five ticker symbols in the course of a 40-minute talk on the subject of “closeology”… most of them recommended in his high-end letter Energy & Scarcity Investor. If you weren’t in the room, you can still get access here.

   The hacker group Anonymous, fresh off its of its failure to secure the resignation of Ben Bernanke, is claiming victory over eBay.

Recall that eBay subsidiary PayPal cut off donations to WikiLeaks last year, prompting Anonymous to launch one of its periodic attacks, shutting down PayPal servers.

Yesterday came the next step — a boycott campaign, launched via the hashtag #OpPayPal on Twitter. The idea was to encourage as many people as possible to cancel their PayPal accounts.

They can crash PayPal’s cancel page… but can they really crash eBay stock?

Anonymous claims “tens of thousands” of people canceled. PayPal won’t confirm that… but enough people canceled to crash the cancel page on PayPal’s site — forcing people to resort to the telephone.

Less credible is the claim of Anonymous that the canceled accounts dragged down eBay stock 3% yesterday. That was more likely due to a disappointing earnings report.

   “Your item yesterday on living to 100 and running a marathon is just what Washington did not want to hear,” a reader writes. “With their geriatric Social Security and Medicare funds gasping for breath already, they were hoping for a cardiac arrest just past qualification and the starting line.”

The 5: “The technical term for Social Security is ‘screwed,’” we heard a member of the Whiskey Panel retort…. precisely because “regenerative medicine” will extend life spans at breathtaking rates.

Even extending life for one year, on average, across the 79 million baby boomers now retiring will wreak havoc with actuarial tables for the government and insurance companies alike.

At dinner last night with Patrick Cox, we decided to launch a study of the impact of rapid increases in longevity in the very near future… we expect the results to be devastating.

   “You recently published a piece on what could take place should the U.S. government default,” writes another, “and things go into a spiral downward. It was written as a ‘worst-case scenario.’ I read it and found it to be both fascinating and scary.”

“Sadly, it got deleted before I could reread it. Would you be able to tell me where I can find this piece?”

We believe you’re referring to our most recent forecast… which you can review here.

   “I would like you to come up with the USA’s credit score as if it were a person trying to get a mortgage. “I think that is a number we could all understand and relate to. 56 maybe?”

The 5: Well, let’s consider the five factors that go into a credit score:

  • 35%: Payment history. Uncle Sam has had a flawless record since 1979, and what happened that year was an administrative hiccup
  • 30%: Amount owed. Hmm… not so good here, especially since the debt ceiling means the figurative credit card is maxed out
  • 15%: Length of credit history: The U.S Treasury’s been around for over 200 years. Rock solid
  • 10%: Credit mix. Uncle Sam looks good here, with a wide variety of creditors ranging from pension funds to the Federal Reserve to the Chinese government
  • 10%: New credit. Another black mark… At $14.3 trillion, the national debt has run up 23% in only two years.

FICO’s system for crunching the numbers is proprietary, but since Uncle Sam still gets some of the best interest rates out there, it’s safe to say the score is somewhere north of 720.

Which just goes to show you how worthless FICO scores are. Lots of borrowers had no way to service their mortgage debt in 2005… but they had sterling credit scores.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.“I found even this in-progress cut of Risk! to be an understated, yet deftly assembled film that’s both inspiring and depressing — and I truly hope it finds its way onto the American public’s consciousness…”

So writes our colleague Jim Amrhein about the rough cut of our documentary. You can catch his review… and some other items from our symposium we didn’t have space to cover ourselves… right here.


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