Underbelly of a Decadent Empire

Addison Wiggin – August 31, 2011

  • WikiLeaks taken down, days after exposing U.S. dealings with Gaddafi
  • The interview that pushed gold above $1,800… where it’s still holding steady
  • Frank Holmes on three historic pivot points for gold stocks… and one of them is right now
  • Eric Sprott on why silver is set to retest $50
  • Bankers’ moral hazard… and homeland security hysteria… wrapped up in one sorry story
  • Readers castigate us for reasons unknown, amend Bastiat and furnish on-site gold-buying report from Asia

   WikiLeaks is up and running again, after a cyberattack last night.

We have a soft spot for the whistle-blower website: In December 2010, it blew the lid off the U.S. government’s collusion with Spain to influence the outcome of a trial over $500 million worth of gold coins discovered by our friends Odyssey Marine. Without that knowledge, our documentary project wouldn’t have been nearly as spicy.

There’s no way of telling who’s responsible for the cyberattack on WikiLeaks.

Three months ago, the Pentagon claimed computer sabotage can constitute an act of war. Unless, as in the case of the Stuxnet virus attacking Iran’s nuclear program, it’s the U.S. government carrying out the sabotage.

Ahh… the underbelly of a decadent empire. We pause today, despite protests from readers (below), to briefly observe a few of the details.

   The attack comes days after WikiLeaks exposed some of the footsie U.S. officials were playing with Libya’s Col. Gaddafi before they decided early this year he was a creep who had to go.

The cables shed some additional light on a 2009 meeting Gaddafi’s son and national security adviser Mutassim held with four U.S. senators. According to one cable, Sen. John McCain “assured” Mutassim the United States “wanted to provide Libya with the equipment it needs for its security” and “pledged to see what he could do to move things forward in Congress”:

Mutassim Gaddafi, doing his best mobster impersonation

The cable also quotes Sen. Joe Lieberman calling Libya “an important ally in the war on terrorism, noting that common enemies sometimes make better friends.”

That was then. This is now: McCain calls Gaddafi “one of the most bloodthirsty dictators on Earth” and criticized the White House for failing “to employ the full weight of our airpower” in Libya.

   It also turns out Western technology firms were tight with Gaddafi’s regime, helping enforce his rule. Wall Street Journal reporters visited a monitoring center installed by the French firm Amesys that spied on the online chats of the opposition.

“I’m wanted,” a young man wrote his girlfriend in one of the files. “The Gaddafi forces… are writing lists of names.”

The Journal also says Gaddafi’s regime met with officials from Narus, a unit of Boeing that makes Internet traffic-monitoring products. “Narus does not comment on potential business ventures,” a statement from the company said, while denying any deal had been cut.

   On an unrelated note, the acting head of the Bureau of Alcohol, Tobacco, Firearms and Explosives has been demoted.

Kenneth Melson was one of the people who dreamed up “Operation Fast and Furious.” He thought it’d be a fine idea to conduct “straw sales” of illegal weapons through U.S. gun dealers to Mexican drug gangs… you know, to see where the weapons ended up.

One of them ended up near the bullet-riddled body of a U.S. Border Patrol agent last year.

The U.S. attorney for Arizona has also been forced out. As accountability measures go, this is only marginally more meaningful than the token fine levied against the Bank of Buffett — er, Wells Fargo — for laundering $400 billion of Mexican drug profits.

   Turning to the markets, we see stocks are rallying after ending yesterday nearly flat, the Dow up 125 points.

Among the numbers traders are chewing on…

  • Private employers added 91,000 jobs this month, in the estimation of the payroll firm ADP. Not a great number, but it’s encouraging that most of it came from small business
  • The Institute for Supply Management’s reading of business activity in the Chicago area clocked in a 56.5 — down from last month, but still comfortably above the 50 level that marks the difference between expansion and contraction in ISM indexes
  • Factory orders rose 2.4% from June to July in the estimation of the Commerce Department.

Only the first of those three numbers fell below the “expert consensus.” Thus, the Dow is within sight of 11,700 this morning — a level last seen during the market’s 511-point drop on Aug. 4.

   Small caps are starting to act like themselves again. The Russell 2000 outperformed the S&P 500 for much of the last year, only to sink even worse than the S&P during August.

This week, that has reversed:

“Only a couple of weeks after double-dip sirens sounded around every corner,” advises Greg Guenthner of our small-cap team, “and investors have cast aside gloomy predictions in favor of blind bullishness.”

Mr. Guenthner offers three rules for navigating the market at a time like this in today’s Penny Sleuth.

   For the first time in four trading days, gold is not gyrating around the $1,800 level. In fact, it’s holding its own very nicely as we write at $1,833.

“Additional monetary stimulus should give traders the green light for even higher gold prices,” says Euro Pacific Capital’s Michael Pento… and he sees that just around the corner.

He points to a CNBC interview yesterday with Chicago Fed chief Charles Evans, signaling “aggressive” easing. The interview “validated my contention,” Mr. Pento says, “by indicating the September [Fed] meeting would provide more dollar confetti.

“The bottom line is with 10 trillion dollars in national debt accumulation in the next decade, the Federal Reserve must either monetize the debt or allow interest rates to soar. Bernanke’s love affair with turning the US dollar into confetti spurred the gold market into record advances once again on Tuesday.”

   Gold stocks, which showed signs of outperforming the metal at the start of this month, are ending August lagging once again. Bullion is up 13%, while the HUI index of major gold stocks is up 10%.

“A report this week from BMO Capital Markets offered one reason behind the performance gap,” says Frank Holmes, U.S. Global Investors chief and Vancouver favorite.

“Using the implied value of a defined group of global gold stocks, it calculated the internal rate of return to measure how gold stocks have underperformed compared to the yellow metal.”

“Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this inexpensive. Only twice — during the tech bubble in 2000 and the financial crisis of 2008 — has the internal rate of return compared so closely with the price of gold bullion.”

Frank also spotted a separate report from RBC that concludes, “if gold prices remain elevated and/or investors accept a higher long-term gold price, we could see 25-50% upside in equities.”

In other words, it’s a historic opportunity in gold stocks. That’s why we’re still offering access to the pick of the litter among all our editors — a special report naming six gold stocks. It’s available as part of an extraordinary package of privileges and benefits: All is revealed here.

   While gold holds steady, silver is moving up today. At last check, the spot price was $41.67.

“I’m very optimistic about silver, for a number of reasons,” says Eric Sprott, the Canadian hedge fund legend who’s now in partnership with our friend Rick Rule. “Reasons that most people wouldn’t know about are the use of paper money in the silver market.”

“At the peak [in late April] when it was $49.80 or so, there was something like 800 million ounces of paper money trading.”

“We know that there’s about a million ounces of physical silver available each day for investment. So this preponderance of sellers just seemed unbelievable. Whenever anybody talks about the speculators in silver, I always say, ‘Well, who’s the speculator? The guy buying it or the guy selling it who doesn’t have a hope in hell of delivering it?’

“And so [there is] this big short position in silver, and I’m sure it’s going to resolve very positively to the upside.” Much more of Eric’s interview today in our sister publication, Daily Resource Hunter.

   Last today, a sign — rather, a painting — of the times…

Alex Schaefer, an artist in southern California, set up his easel across the street outside a Chase branch in Van Nuys and got to work. Mr. Schaefer wanted to depict the role the banks have played in the economic wreckage of the last four years.

You can tell where this story is going, right?

Up rolls a cop car. “They told me that somebody had called and said they felt threatened by my painting,” Schaefer later relayed the incident to the Los Angeles Times. “They asked if I was a terrorist and was I going to follow through and do what I was painting.”

“Um, no,” he said.

If he had ill intent, why would he do it in plain sight? The cops took down his name, address and phone number. He declined to provide his Social Security number.

Schaefer thought that was the end of it… until two plainclothes cops showed up at his door the next day.

“One of them asked me, ‘Do you hate banks? Do you plan to do that to the bank?’”

“It’s a situation we don’t take lightly,” Chase spokesman Gary Kishner tells the paper, auditioning for his next gig doing PR at Homeland Security. “Hopefully, this is not what his actions are. It’s kind of scary — you don’t know what other people are thinking. We have to look out for the safety of our customers and employees.”

This, from a company that hosed two mortgage customers whose houses actually caught on fire. Chase sat on the insurance money, placing it in a “suspense account,” instead of applying it to pay off the mortgage, as is customary. They then called the homeowners at all hours to harass them for payment.

Looking out for their customers all right.

The artist’s two interviews with the cops haven’t led to any charges, but says Schaefer: “I have this feeling I’ll get different treatment at airports from now on.”

   “I subscribed to your service for financial information,” a reader writes, “not your goddamn stupid political comments.”

Umn…that’s all he wrote. We pored over yesterday’s issue to deduce what might have set him off. Another reader’s rant provides the only possible clue…

   “All the horse dump by the so-called libertarians over the weather-mothers screaming, ‘We’re all gonna die’ was a bit much,” this one writes. “You jokers think you live in a vacuum.”

“When the bridges are out and the roads are down, are you road apples going to help put them back, or, as I suspect, sit at your screen and rail about the ‘gubmint’ getting in the way? I thought so — screw you.”

The 5: Nope, still no clue. We do enjoy your invectives, though. Thanks for reading. Perhaps, you’ll also enjoy the following reader comments regarding the “political economy.”

   “While Bastiat and Hazlitt are, of course, correct about the broken window fallacy,” a reader writes after reading Monday’s P.P.S., “David Kotok was not completely off base, either, simply because of the ridiculous way that GDP is calculated.

“It doesn’t measure improved living standards, a real measure of economic progress — it measures spending. And all government spending is included in the GDP calculation.”

“It’s not just that many don’t understand basic economic principles; it is also that the very measures we use for economic calculation are flawed.”

The 5: Amen. We refer you to The Demise of the Dollar, Chapter 2: Fictitious Capitalism and the iPod Economy.

   “I am sure,” a reader writes of Bastiat’s shopkeeper who shells out 6 francs to replace his broken window instead of buying something else, “he stopped there knowing his audience could barely follow the thought.

“But it is not merely 6 francs of directed output lost. It is 6 francs of lost output plus 6 francs of misdirected output. That’s 12 francs. When the broken window is smashed by a protection racket, add the 6 francs for protection. When the protection racket is the government, place the 6 francs down as an ante for the minimum payment on the government’s borrowing.”

“Allowing the government to borrow, say, 120 francs to misdirect the economy, and now one is smoking with stimulus. That’s 18 francs annually plus about 20 francs for everyone in annual revenue. And if one is a bank, add interest for having to suffer a flood of risk-free money.”

“The end result is a government protection racket of kingmakers bestowing privileges upon the chosen ones while the fuel of profit drives the economy into the ground, rather drive the economy to create new wealth.”

“Double the cost and adding interest: Every dollar wasted is at least three lost to the economy, assuming the waste is not spent on a program accelerating spending.”

“And the boomers wonder what happened to their retirements.”

“They should consider themselves lucky the euthanasia movement has not teamed up with so-called fiscal conservatives to remove them from the Social Security rolls, the better to fuel further economic distortion.”

“Always enjoy The 5.”

   “We were eating and shopping in Hong Kong two weeks ago,” a reader writes with an on-site report about gold demand in Asia, “I went through a couple of the reputable jewelry shops looking for a birthday gift for my wife.”

“The diamond and pearl sections were literally empty, but toward the gold counters, they were packed. Mostly mainlanders paying in (RMB) cash, buying heavy bracelets and necklaces, negotiating away the last little bit of the craftsman’s added value, but at the end of the day, heavy buying was enjoyed by all.”

“That was entertainment Hong Kong-style! My wife remained giftless… so far!”

   “Although I shan’t gloat,” a reader writes after our tongue-in-cheek warning about gold yesterday, “I can assure you that there is no ‘guilty’ in the pleasure of reading about $1,800 gold.”

“I didn’t buy ‘toys,’ because I have a wife. I didn’t add to my antique book library, because I bought a house. I didn’t buy my airplane, because I had children to educate… but I did take your advice and start buying gold around 2001.”

“Because of your advice, or rather guidance, I am on the cusp of being able to do all the above that I postponed… and have change left over. Thank you, my friends.”

The 5: You’re more than welcome.


Addison Wiggin
The 5 Min. Forecast

P.S. “How amusing,” a reader writes, “this talk of P/E ratios and such. In this brave new world of high frequency trading in which 10,000 quotes literally can be placed in a second, to which millisecond does a P/E ratio apply?”

“With generally accepted accounting principles meaning ‘mark to fantasy,’ balance sheet values mean what? Manipulated markets… heh! Sorry, 5, but the traditional wisdom don’t work no more.”

The reader raises a valid point — one that’s “gone viral” after financial blogger Karl Denninger advised last Friday: “Don’t even try to ‘invest’ in this market.”

“Every amateur plunger,” muses Chris Mayer in response this morning, “sees forces moving things around just so he can lose money. It’s a human reaction to make stories for things we don’t understand.”

That said… the reader raises a serious subject. Expect some serious examination, tomorrow…


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