Fool Me Once…

Dave Gonigam – September 14, 2011

  • Stocks rally improbably: Traders celebrate a new fix for Greece after the last bazillion that didn’t work
  • The risk to your money that still festers in the eurozone
  • Austerity in your face: Fork over higher taxes or lose your electricity
  • How a Greek goddess could deliver you a fortune
  • Shooting the messenger? Readers unload, label The 5 “callous” (among other things) for assessing Social Security’s prospects

   “France, Germany Throw Support Behind Greece,” reads the alert on CNBC. “Agree Greece Will Remain Part of European Union.”

Really? They’ve “fixed” Greece? Again?

Well, it’s good enough to send the Dow up 200 points today: Just a communique, devoid of details, issued after a teleconference among the leaders of France, Germany and Greece.

How many more times will Greece be on the precipice of default, only to be pulled back at the last minute… until the time comes when Greece will inevitably tumble over… and pull everyone else down with it?

No telling… But the credit default swap market isn’t buying this latest announcement. Traders still give Greece a 93.7% probability of default. Not as high as Monday’s record, but there aren’t many takers on the other 6.3% of that trade, you might say…

   BNP Paribas, one of the big French banks, furiously denied a report in The Wall Street Journal that said U.S. money market funds have told the bank to take a hike.

The article quoted an anonymous BNP executive: “We can no longer borrow dollars. U.S. money market funds are not lending to us anymore.”

BNP says the piece contained “erroneous information” — which is not the same thing as saying the claim is a lie. One of those “nondenial denials” we’re accustomed to hearing in Washington, D.C.

True or not, the money market funds have ample reason to stop lending to BNP, as Eric Fry pointed out in The Daily Reckoning last July: “Greek debt accounts for more than 1/20th of BNP’s net worth.

“That number, while large, doesn’t seem too worrisome until you add in BNP’s exposure to the other PIIGS governments. The chart below tells the tale. Loans to PIIGS’ government debt represent nearly half of BNP’s net worth. And this figure does not include any of BNP’s loans to corporate borrowers in those nations.”

Meanwhile, “the largest American money market funds,” Eric goes on, “have allocated an average of about 40% of their assets to European debt securities, most of which are issued by European banks.”

And BNP is shocked that the money market funds are pulling back now? As if they should self-immolate and break the buck, as the Reserve Primary Fund did — the post-Lehman event that nearly froze world credit markets three years ago this week.

Once again, if you have to park short-term cash, a U.S. T-bill fund is the way to go. “Your money won’t be worth as much,” writes Addison in the new issue of Apogee Advisory, mindful of the dollar’s diminishing purchasing power, “but at least you know you’ll get it back.” [Access to that issue is here.]

   As evidence the rating agencies haven’t lost their sense of irony, Moody’s downgraded two other big French banks today — Societe Generale and Credit Agricole.

BNP? It’s merely under review.

   Meanwhile, Greece — in a futile attempt to step away from the abyss — has come up with a new “austerity measure.” It’s a property tax increase with a unique twist: They’ll be collected through homeowners’ electric bills.

Ingenious. Positively diabolical. Skip out on the tax, lose your power.

And it affects a lot of Greeks who acquired property in years gone by. “Because the drachma wasn’t a hard currency,” explains the German newsweekly Der Spiegel, “they invested their savings in property. Some 85% of the people’s wealth is invested in houses and apartments.”

The union whose members work for the state energy utility promise to fight back: They’ll simply stop sending electric bills.

   “Austerity” is a concept Americans have yet to wrap their minds around.

Not when the president proposes a $447 billion stimulus plan. Not when Uncle Sam spends over $1 trillion a year pursuing an overseas empire. And not when Social Security recipients are unable to reconcile themselves to the fact their “contributions” have disappeared into a black hole. (Um, see today’s mailbag below.)

But in a sense, austerity is already here. To wit…

  • High earners and college graduates are among the fastest-growing group of debtors filing for bankruptcy, says a new report from the Institute for Financial Literacy. The bankruptcy filing rate among people earning more than $60,000 a year grew 66% since 2005. Among college graduates, the rate grew 20%
  • Perhaps not coincidentally, the default rate on student loans grew from 7% in 2008 to 8.8% in 2009, according to new figures from the Department of Education.

It’s just that “austerity” hasn’t manifested itself in the form of the usual “benefit cuts and tax increases” now being imposed on Greece.

That comes later… when America’s credit card is cut up by the Chinese and Uncle Sam’s other lenders. See the consequences… and learn how to prepare for them… here.

   “The Great Depression of the early 1930s,” says Patrick Cox, looking at the flip side of hard times, “was one of historic technological progress as well as investor opportunity.

“If you were an investor then, there were a number of enormous and obvious technological trends changing the way people lived.” Radio was one. Early investors in Motorola made a fortune. So did people who realized electric refrigerators were a quantum leap over iceboxes.

With that in mind, Patrick is eager to bring you up to speed on what he’s calling “Panakeia” — after the Greek goddess of that name. From, her we get the word “panacea” — or cure-all.

It’s a fitting name for the anti-inflammatory treatment now on the market. “300 people in the Midwest are currently enrolled in a study that seeks to find out just how well this possible panacea works — and for which ailments. There’s a study in Europe going on right now, too.

“The wife of a famous politician is pushing for this breakthrough to gain wider awareness, too… she wants to give it to every worker in her state that she possibly can.” That’s because this potential cure-all has uses far beyond pain relief.

Inflammation is a marker of most of the diseases of aging — including cancer and heart disease. And the evidence is compelling that this compound, derived from tobacco, tomatoes and bell peppers, can keep that inflammation at bay.

Patrick is eager to tell you all about the company, whose shares can still be had for only a few bucks per share. He’s even convinced us to give you a break on the membership fee for his premium advisory, Breakthrough Technology Alert.

The offer expires at midnight tonight. Here’s your last chance to move on it.

   With the bogus relief rally celebrating the latest paper-clip-and-rubber-band job for Greece, the Dow is pushing 11,300.

Earlier in the day, traders chewed over a stream of numbers. And like the August figure for new jobs we got last week, they’re reading zero.

  • Retail sales: Flat from July to August, according to the Commerce Department. That’s softer than the “expert consensus” was counting on. July’s numbers were revised downward. Year over year, sales grew 7.2%
  • Wholesale prices: Flat from July to August, according to the Labor Department. Falling energy prices acted as a counterweight to rising food prices. The year-over-year increase is 6.5%.

Tomorrow, we’ll get the August report for consumer prices. If they show an easing trend, that’ll give the doves at the Federal Reserve even more reason to push for a new easy-money policy of some sort when they meet one week from today.

“Look ma, no inflation!”

   Gold is keeping its head down amid the euro turmoil, quietly doing its job of preserving purchasing power.

At last check, the spot price was $1,817. An ounce of silver fetches $40.71.

   “Easy way to let Congress and the president off the hook for continuing to pilfer Social Security revenue,” writes a Reserve member, who takes exception to our pointing out that Congress has raided the Social Security trust fund for more than 40 years, and while it might not be fair, it’s reality.

“Sounds like your default position is to say ‘too bad’ to current and future citizens who paid into Social Security, while the federal government and, indirectly, state governments took the money and left behind IOUs.

“I say that until Congress, the president and leaders of all types stop spending tax dollars on pointless wars and war-ready posturing, then hell no to any of your support for ‘cut Social Security’ for fully qualified recipients.

“I am a veteran of the Marine Corps, and know how foolish ‘war mongering’ is, even when building ‘guns’ was considered the only way to grow and stoke the economy. Disappointed in your remarks.”

The 5: Where, oh where, did we advocate “cutting” Social Security?

   “Your ‘reality’ comment, though it may be correct, is as callous a comment as I have ever heard. Instead of looking at Social Security as the only solution to solve our debt crisis, what about the other thousands and thousands of other government programs that eat up billions of taxpayer funds?

“I would like to ask YOU and Congress: What do you expect the millions and millions of senior citizens of this country to do if the government stops Social Security payments? As it is, the COLA is not even calculated correctly. As you are aware, energy and food is not even considered in the calculation, and those are two of the most prominent expenses all of us have.

“Unlike wage earners, our options to adjust are limited or not available at all. Congress stole this money, let Congress find a way to put it back.

“And don’t tell me I should start subscribing to one of your ‘retirement’ newsletters. I don’t have 10 years to build a retirement fund to substitute for what I currently receive in Social Security.

“Maybe Congress should state an age whereby no Social Security deductions will be taken from a worker’s paycheck, and if below that age, he will have to find alternate means to fund his retirement. The only thing wrong with that is they won’t have the program to steal from.”

The 5: Where did we say Social Security is the only solution to the debt crisis?

Look, we understand your angst: You paid into the system for years; you expect to get something back. We get it.

Unfortunately, the Supreme Court ruled 51 years ago that you are — and we hesitate to use the word here — entitled to absolutely nothing. Flemming v. Nestor established there is no contractual right to collect Social Security benefits, no matter how much or how little you paid in.

Congress saw a license to steal… and used it to the max. Please don’t shoot the messenger.

   “I’d like the reader who paid the max in Social Security payments over his 40-year working career,” writes a reader pouring gasoline on the fire, “to add up all of his Social Security tax withholdings and compare that with the total amount he has received over his 16 years of retirement.

“I suspect that he has already received well in excess of 500% of what he paid in. The reality is that Social Security payments are not correlated at all to what the recipients paid into the system. This is just one flaw in a broken system. People’s insistence on receiving an inflated entitlement payment is a bigger flaw and an emotional obstacle difficult to overcome.”

   “Isn’t that embezzlement?” a reader asks rhetorically about Congress raiding the Social Security trust fund. “Or, at the very least, misappropriation of funds and malfeasance?

“It used to be called old-age insurance. If a private insurance company behaved that way, they would be in big trouble.

“I resent the term “entitlements” for Social Security lumped in with other programs where the recipients paid nothing.

“I paid into this fund for 45-plus years and would think myself a fool, poor investment, except that it wasn’t voluntary or my choice. And now I am really concerned that in two years, when I retire, I will get no benefit from all those ‘contributions.’

“Fair? What about the illegality?”

The 5: Well, as long as you bring it up, what about the fraud pursued by the banks in writing and securitizing mortgages during the previous decade?

The FBI issued 10,000 criminal referrals in the wreckage of the savings –and loan crisis 20 years ago, resulting in more than 1,000 felony convictions. Number of referrals this time? Zero.

We won’t hold our breath for any indictments, either for mortgage fraud or the raid on the Social Security trust fund. But we share in your outrage. We really do.


Dave Gonigam
The 5 Min. Forecast

P.S. Only a few hours remain in which to snag a significant discount on membership in Breakthrough Technology Alert — giving you instant access to the name and ticker of the company Patrick Cox believes is “the last stock you’ll ever need.”

The deadline is midnight tonight. Here’s where to go.


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