Crises Close to Home

Addison Wiggin – August 19, 2011

  • Stocks pause while gold soars to another record
  • California scrambles for cash, New Jersey downgraded, Florida fretting… The 5 goes local for a day…
  • Ripping out streetlights, fining drivers for honking and other tales from broke American cities…
  • World’s largest spirits distributor says the West is ready for baijiu… Our take, based on personal experience…
  • “J’accuse”: Reader who seems to understand what we’re about… yet still thinks we’re partisan… or racist… or something… you figure it out.

   Gold hit a new record again today.

The uniquely obnoxious bunch at CNBC’s Fast Money posted a web article this morning with the headline “Is Gold the Only ‘Safe-Haven’ Investment Left?” So we must be getting somewhere in the frothy cycle leading up to a bubble…

All that glitters…

Still, the answer appears to be in the affirmative. The spot price for the yellow metal is up to $1,850 — a $200 move in two weeks. Heh, if you trade gold futures, be on guard for an increase in margin requirements.

   Silver is moving up even more powerfully today, cresting $42.

   “A number of things remain supportive for silver,” says our resource trader Alan Knuckman.

  • Trend — Silver has been one of the most bullish commodities in the last two years
  • Low Interest Rates/ Weak Dollar — Continued fundamental drivers for higher price
  • Value Versus Gold — Silver remains 25% below April highs
  • Hedge — Volatility and uncertainty encourage asset diversification.

Looking at the charts, Alan concludes, “Higher highs and higher lows set a course to move… higher… from here.” His readers already took 125% gains in six weeks on part of a silver play last month… and the rest of the position is set for another solid gain between now and the end of next week.

Don’t feel bad if you missed out. Alan’s always on the lookout for opportunities. You can join him here.

   Today’s follow-up meltdown anticipated for U.S. stocks hasn’t materialized, not as of this writing anyway.

Big losses in Asia and Europe — many indexes are at two-year lows — seem to have rested this Friday on the other side of Atlantic. The Dow and the S&P are down slightly after yesterday’s big losses, and the Nasdaq is actually up a bit.

   And thus… on a slow news day, with the president on vacation in Martha’s Vineyard, and nearly one-fifth of the U.S. House on a lobbyist-sponsored trip to Israel, we turn our gaze from the folly of Washington… and focus instead closer to home.

As August drags on, the dire straits of state and local governments are making themselves known in ways both sublime and ridiculous. Please, take your time and enjoy. They get better as The 5 rolls on…

   Just as they needed it most, California tax revenue came in $539 billion below the most recent forecasts — about a 10% shortfall.

“Gov. Jerry Brown and state lawmakers,” explains the Los Angeles Times by way of background, “patched up the final $4 billion of California’s budget shortfall this year by hoping for a windfall economic recovery.”

“Those hopes are now fading fast.”

“Every drop in revenues puts us closer to the drastic trigger cuts that could be imposed next year,” state controller John Chiang told the paper. Result in California’s case: A cut to education spending that could trim the school year by up to seven days in some districts.

   Fitch downgraded New Jersey’s credit rating yesterday. It was AA. Now it’s AA-. That’s three steps below AAA. The outlook, however, was revised from negative to stable.

The problem, according to Fitch? Not enough money to make good on all the pension and health care promises made to retired state workers. And even if there were enough money… there wouldn’t be enough left over for other priorities like property tax relief, schools and public works.

As a recent study discovered fully funding state and local pensions in New Jersey would require taxing every household an extra $2,475 every year for the next 30 years.

That’s enough to put New Jersey No. 1 on the Pension List — one of three measures we used to assess the economic health of all 50 states. Where does your state stand, and which states are best prepared to weather an economic storm? Answers in our special report, American Oases. Access here.

   Even states in relative fiscal health are facing a crunch, thanks to the debt ceiling agreement in Washington.

True, the agreement doesn’t actually cut spending; it only cuts the rate of growth in spending. But the prospect of “less” money from Washington still has state governments on edge — especially with the flood of money from the 2009 stimulus bill now reduced to a trickle.

“Some lawmakers worry,” reports The Miami Herald, “that less money for Florida will further handcuff state budget writers, who have relied on federal money — plus $2 billion in new fees and cigarette taxes in 2009 — to piece together a state budget that is $4.6 billion smaller than that of 2006.”

Florida actually looks pretty good on The Handout List — our name for a measure of how much each state counts on Washington to help make ends meet. So if they’re worried there, they must be really worried in places where for every $1 sent to Washington, more than $1 comes back.

TIME – Maryland, for instance, the state in which our headquarters reside, is hoping to remain one of nine states still boasting a AAA credit rating.

Your 5 HQ… Just 30 miles north of the Belly of the Beast

“We believe that Maryland’s prudent fiscal management will be viewed positively by the rating agencies as they review the states,” says a nervous-sounding state treasurer Nancy Kopp.

She’s nervous because Standard & Poor’s issued a statement this week about state credit ratings. It included an implied warning for states — like Maryland and Virginia — that are close to Washington’s orbit.

“We expect that many of these obligors, particularly those with relatively low levels of funding interdependencies with the federal government… should be able to retain ratings above the U.S….”

That would not include Maryland, which collects $1.30 for every $1 sent to Washington.

By the way, you might be surprised at the states that show up at the top of the Handout List. A lot of them have a reputation for running a tight ship. But in reality, they’re actually beneficiaries of generous D.C. handouts.

   Proving it costs a bundle of money to go bankrupt, lawyers have charged the city of Central Falls, R.I., $1.2 million since the city filed for receivership in May 2010.

Central Falls declared bankruptcy on Aug. 1, facing a $5 million deficit in a $17 million budget. City retirees are now kicking in 20% of their health insurance. The library, shuttered earlier this year, has reopened — part-time, with volunteers.

Because Central Falls is broke, Rhode Island’s state government has picked up most of the legal tab. One-third of the total to date has gone to a law firm where Gov. Lincoln Chafee’s chief of staff used to be a partner.


No wonder Rhode Island is in the Top 10 on the Debt List — another indicator we used to prepare American Oases.

   Rockford, Ill. — where unemployment runs 11.6% — is saving a little money by yanking streetlights out of the ground.

The city hopes to shave $500,000 off a $2.7 million annual streetlight bill… by removing 2,400 lights.

“Officials spent hundreds of hours determining which lights to remove to make sure adequate light remains,” reports The Associated Press.

Were those hundreds of overtime hours? How about the hundreds more they’ll need to remove the lights?

   In a truly macabre move, the state of Illinois announced this week it will no longer pony up for funerals of the indigent.

In years gone by, the state budgeted $13 million a year to bury some 12,000 people on public assistance. But this year’s budget was only $1.9 million, and that money ran out on Monday. More than 600 funeral homes have been notified they can no longer count on the state to pick up the bill.

“Funeral directors have been advised to look for money from city or county governments,” reports Chicago’s NBC station.


   Starting Monday, police in Detroit will no longer answer calls from automatic burglar alarm calls unless the alarm company verifies there’s a problem.

According to a police memo, 98% of the calls turn out to be false alarms… and the manpower and salaries used to answer false alarms is needed to patrol the streets instead. During a 24-hour span last Friday and Saturday, 16 people in Detroit were shot. Seven died.

Which brings us to the other phenomenon that seems to accompany a poor economy and strapped state and local governments: Violence.

   Kansas City, Mo., will enforce a 9 p.m. curfew tonight for anyone under 18 in five sections of the city.

Last weekend, gunfire wounded three teenagers in an entertainment district ironically called Country Club Plaza. The mayor happened to be in the area at the time; in a case of further irony, he was delivering a speech about large numbers of teenagers congregating in the entertainment and shopping areas.

He had to hit the deck. “They basically forced me into the flowerbeds by the Cheesecake Factory,” Mayor Sly James said of his bodyguards.

As we mentioned on Wednesday, Philadelphia imposed a similar curfew last weekend. There it was a response to the “flash mob” phenomenon of young people cleaning out stores or robbing people on the street.

“This summer, spontaneous incidents of group violence — dubbed ‘flash robs’ — have happened in Minneapolis, Chicago, Cleveland, New York and Washington, among other cities,” says a report from CNN this morning, as if to answer our reader who asked earlier this week why the phenomenon isn’t getting mainstream media attention.

“We’re at a point where everyone understands the power of a flash mob,” California psychologist Jeff Gardere tells CNN. “People inevitably started thinking this was accessible to them, and, of course, it is — everyone has a phone.”

“You’ve got a group that feels angry and powerless, and they’re trying to assume a sense of power.”

Once again, our recent forecast is coming true faster than even we anticipated. But you shouldn’t feel helpless. Along with a vivid description of the problem, we lay out a five-part solution set. You can see it for yourself here.

   And what Friday afternoon would be complete without at least one addition to the ever-popular list of fines for petty crimes, noncrimes and disobedience?

From Marysville, Calif., comes word of three drivers getting ticketed… because they honked their horns in support of a picket line at a local factory.

That’s $233 a whack for “improper use of a horn.” According to the state vehicle code, the horn should be used only to give “audible warnings.”

After this list, we feel like we need a good belt of a vile sorghum distillate…

   After our, um, mixed experience drinking baijiu while in China earlier this year, we’re not sure what to make of this news: The spirits maker Diageo is looking to distribute it beyond China and Hong Kong.

Two months ago, Diageo bought a majority stake in Shui Jing Fang, a premium baijiu label. Word is they’ve already found a distributor in Los Angeles.

“Vile, but strangely alluring” was how we described it at the time.

“Baijiu hasn’t been explained or distributed well” outside mainland China, says Diageo’s Lee Harle. “Just like people will not accept factory-made mapo tofu, they no longer want the Disneyland version of [baijiu].”

When you compare your product to any kind of tofu, you know you have an uphill climb…

   “I have been following you over the last seven years and have found your observations astute and, obviously, pretty accurate.”

The 5: We’ve been at this long enough to know there’s always a “but…”

“What I can’t understand,” the reader confirms our suspicion, “is how you claim to be nonpartisan but gleefully bash away at Obama with all this baloney about black buses and such when it is painfully obvious that our current economic problems were specifically caused by the Bush administration, which inherited a surplus.”

“You did point out Bush’s failing at the time, but now you seem to have sprouted tea leaves. Obama’s policies are actually to the right of Richard Nixon’s, if you examine them closely.”

The 5: Heh. You have to admit the black buses are a hoot. But the president hasn’t tried to impose wage-price controls as Nixon did, we’ll give you that.

“I am tempted to accuse you guys of racism,” the reader plays his final hand. “Unless, of course, you really do want to see a nut job like Perry become president, in which case I can only assume you are planning to move elsewhere and hope to quicken the descent of the United States into chaos.”

The 5: Fine. You clearly haven’t been reading very closely over the past seven years then, either. We do want to thank you, however, for reminding us what a waste of time it is to comment on anything remotely political in The 5.

   “Oh, yeah, I agree,” writes the reader who suggested yesterday that Ron Paul would have more impact as Treasury Secretary or Fed chairman than as president. We wondered who would appoint him, or how he’d have to bend to get someone to appoint him.

“That is the whole point,” the reader goes on. “Even if the Tea Partiers put in the president, and even if the Republicans controlled both bodies of Congress, they all would be shaking in their boots looking at the probability of change, real change. He would never be confirmed.

“And that, friends, is what you write about every day, the corruption and lack of sense in government affairs.

“I would say that the zombies in America don’t have the intellectual capacity to even understand Ron Paul, but they do understand that they will be cut off at the knees if he were elected.

“The chances of Ron Paul being elected president (I will vote for him) and him being appointed as Fed chairman are about the same either way.”

The 5: What do the Tea Partiers stand for anyway? Fiscal rectitude? In a Washington Post poll last spring, 70% of self-identified Tea Partiers opposed any cuts to Medicare and Medicaid. “Keep your government hands off my Medicare,” indeed.

   “When is Bill Bonner running for president?” a reader asks after seeing his “presidential” address. “Or is the nation so full of zombies that too few would wake up enough to vote for him when he gives a speech like that?”

“Seriously, is there a possibility for an Agora Financial spinoff that could bring together those of us who are not free-meat-crazed zombies in way that we could actually have enough impact on the politics and crazy taxation that are choking all of us some to bring about enough real change to free us all?”

“Perhaps I’m dreaming, but if there’s any hope, let me know and sign me up!”

The 5: We were asked the same question in Vancouver. We’re not sure exactly what you have in mind. Gary Gibson hosts thousands of kindred spirits Whiskey & Gunpowder. That’s about as close as we get to a political action committee. Oy.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S.“Normally, I don’t get involved in timing plays, short-term trades or swing trades,” says Ray Blanco of our tech and biotech team.

“However, sometimes it is apparent that big things can happen to a company in the near term, and if we don’t move quickly, we can miss out on the opportunity to ‘get in while the getting in is good.’”

“I’ve been looking at this company for months. I’ve been reading research reports, examining the technology and talking to knowledgeable investors that have maintained a large stake in the company for many years. I think the company presents us with an excellent long-term investment.”

In fact, it fits in perfectly with the view Ray and Patrick Cox take of technology and the role it will play in a post-crisis America… as they explain right here.


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