Aiding the Enemy

Addison Wiggin – September 28, 2011

  • 20,000 shoulder-fired missiles missing in Libya? Why the al-Qaida risk is only part of the story… and the investing angle that emerges
  • Markets tread water: Why a series of European shoes will drop between now and Nov. 4
  • National League of Cities catches up to what we’ve been describing for months: Broke governments cutting services, raising fees
  • Law schools develop a solution to poor placement rates: Cover them up!
  • Readers call for re-regulation, warn of civil strife, wonder how American business is supposed to compete overseas

   Here’s a comforting thought: Somewhere out there are thousands of heat-seeking surface-to-air missiles… perfect for shooting airplanes out of the sky… and, at present, unaccounted for.

Up to 20,000 of them were under the close guard of Libya’s Col. Gaddafi… until the Arab Spring began to bloom in the desert in his backyard.

Now? “People can literally drive up with pickup trucks or even 18-wheelers and take away whatever they want,” says Peter Bouckaert of Human Rights Watch, who was in Libya at the time… and took pictures. “I myself could have removed several hundred if I wanted to.”

A Libyan shoulder-fired missile launcher, six months ago: Good luck finding it now

   According to U.S. State Department figures, more than 40 civilian planes have been hit by surface-to-air missiles since the 1970s.

The White House is promising to “deploy additional personnel” to track down the Libyan missiles. Right now there’s one State Department official and five contractors on the job. Tracking down as many as 20,000 missiles.

“We expect in the coming days and weeks we will have a much greater picture of how many are missing,” a State Department flunky tells ABC News.

Actually finding them? He makes no promises.

The mainstream media are abuzz with concern these rockets will fall into al-Qaida’s hands. The real story is more covert: This isn’t the first time U.S. intervention has ended up arming Islamist militants.

   It happened in Somalia too. Four consecutive U.S. presidents have been unable to resist trying to arrange affairs there in a way more to their liking.

The most recent one shipped in 40 tons of weapons and ammunition during late spring 2009, trying to prop up a puppet government.

Many Somali soldiers immediately turned around and sold the weapons to traders… who sold them on to rebel groups, including the hard-line al-Shabaab.

The trade continues to this day. “The U.N. estimates,” according to war correspondent Robert Young Pelton, “that one-third to a half of all ammunition supplied by the United States to [African Union peacekeepers in Somalia] ends up in the hands of al-Shabaab.”

   In a perverse development, this will have the effect of padding Pentagon budgets and contractors’ bottom lines, as Washington creates more enemies it then has to knock down.

This is the logic behind the staggering growth in the use of pilotless drone aircraft. To date, the U.S. government has used them to carry out attacks in six countries: Iraq, Afghanistan, Pakistan, Yemen, Somalia and Libya.

Now the Pentagon is building what The Washington Post describes as a “constellation of bases” to support routine drone strikes in the Horn of Africa and the Arabian Peninsula. The aim? “To create overlapping circles of surveillance in a region where al-Qaida offshoots could emerge for years to come,” U.S. officials said.

The number of U.S. drones has exploded 100-fold in a decade. They number more than 6,000 today. Drone strikes that numbered in the single digits in 2007 numbered 118 last year.

That guarantees a steady stream of business for one company that’s been on Byron King’s radar. It produces a lightweight but very strong material that’s essential to drone aircraft and a host of other uses.

In fact, “this small Canadian company,” says Byron, “has discovered a way to manipulate its unique properties to make it strengthen and lighten satellites and space structures, aircraft, optical systems, semiconductors, medical imaging and nuclear systems.”

In addition, the firm “has also acquired the rights to mineralized properties in two Western U.S. states and Brazil… so they can provide their own metal to their production line.”

It’s one of three companies Byron is eager to tell you about in a package of special reports he recently updated. They’re still available for the next 36 hours, along with a membership in his premium advisory Energy & Scarcity Investor, at a substantial discount. This offer expires tomorrow night at midnight, so it merits your attention right now.

   U.S. markets are seesawing today on whatever nuggets of news come out of the soap opera in Europe.

Yesterday, the Dow rocketed up 300 points on rumors of a “solution.” Then it gave half those points back when the Financial Times reported that up to seven eurozone governments were insisting that Greek bondholders take bigger losses than had been previously discussed.

Oy… Expect this to go on through all of October, right up to when the G-20 is supposed to come up with its final, ultimate, this-is-it solution on Nov. 4.

Tomorrow, traders will turn their gaze toward the German parliament — which votes on whether to expand the eurozone bailout fund.

In one of those ironies arranged so well by the gods of comic timing, tomorrow is three years to the day since another pivotal vote: The U.S. House voted down the first iteration of the TARP bill… sending the Dow plunging 777 points.

As of this writing, the Dow is a shade below 11,200.

   Slumping property tax collections are taking an increasing toll on local governments, according to a report by the National League of Cities.

One-third of cities surveyed are cutting workers this year. Forty percent are raising fees, and half are delaying or canceling public works projects. “Lower property values and declining sales,” the report warns, “may portend something entirely new, a ‘new normal.’”

Detroit: Poster child for cities in decline

“Municipal governments made some rosy projections based on tax revenues during a bubble economy,” reflects Gary Gibson in today’s Whiskey & Gunpowder. “The real estate bubble was generated by the Fed’s manipulation of interest rates to the low side.”

“Now that that bubble is deflating — despite the Fed’s best efforts — the real estate tax gravy train has been derailed. Jobs generated by the bubble economy have disappeared. People have less money to spend and are more afraid to spend what they have.”

For some startling examples of the real-life impact in one state, check out Gary’s full account at this link. And for ideas on how to prepare when the impact reaches your town, look here.

   Gold is holding its own after yesterday’s modest recovery. The spot price is barely changed this morning, at $1,643.

Silver is living up to its reputation as the more volatile metal. It’s down nearly 3% and clings to $31 by its fingernails.

   “Gold has been up 10 years in a row,” says commodities investor and Vancouver veteran Jim Rogers, “which is very unusual in any asset class.”

“So if it is up this year or 11 years in a row, gold is overdue for a correction and it could have a nice substantial correction, given that it has been so strong.”

“I have no idea what is going to happen this year. I doubt if it will go to $2,000 an ounce in 2011. It is more likely to have a correction which will last for several weeks, several months.”

“When fear permeates a market, everybody sells, especially the last ones in — frequently have to jump out. They have raised margin requirements for both silver and gold. So that makes it more and more difficult for people to hold on.”

“I barely pay attention to the price, but I know a lot of people do and that is why you have these sudden spikes up and down.”

   Following the housing and credit bubble collapse, we’ve been expecting a correction in higher education costs. Looks like we may be making some progress on that front. Exhibit A: Law Schools

The course of study to become a heavily indebted waiter

“Law schools,” reports The National Law Journal, “will not have to report to the American Bar Association the percentage of their 2010 graduates who landed jobs requiring bar passage or the percentage of graduates in part-time jobs.”

Last Friday, an ABA committee wrapped up its work preparing its annual questionnaire for law schools, omitting the usual questions about job placement.

The move is “prompting criticism from some reformers,” the magazine goes on, “that the ABA is protecting law schools from reporting what would surely be grim statistics.” Heaven forbid!

So now it’s up to independent efforts to track just how pitiful the placement rate is. Washington University’s Brian Tamanaha looked at numbers compiled by a group called Law School Transparency. Result: At 30 ABA-accredited schools, 50% or fewer of the 2009 graduates had landed a job requiring a law degree after nine months.

“Sure,” quips Byron King, whose CV includes business law in addition to oil field geology and Navy pilot experience, “why report on the job prospects of the graduates? Once you have their money, who cares?

“Does Delta airlines report on the job prospects of the passengers? Law schools or airlines, you’re buying a ticket so they can take you for a ride.”

   “It seems to me,” a reader writes, “that if the U.S. government is on the hook for up to $250,000 for each depositor in a bank, and the U.S. government is going to bail out banks, and some of those banks are risking their assets by issuing derivatives to insure against a Greek default… then the U.S. government should make sure that banks are not risking bank assets by investing in risky derivatives.”

“As I understand it,” the reader goes on after catching his breath, “this lesson was learned in the 1930s with the Glass-Steagall Act, which was taken off the books a few years ago. Instead, we get Dodd-Frank, which solved nothing. Glass-Steagall should be re-enacted so that the U.S. doesn’t have to bail out those banks again! Save Our Banks (‘SOB’)!”

The 5: In one of the more intriguing votes of Ron Paul’s congressional career, he voted against S. 900 — the bill that repealed Glass-Steagall in 1999 and tore down the regulatory wall separating commercial banking and investment banking.

“The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy,” he said in a prophetic speech on the House floor.

“The Long-Term Capital Management hedge fund [which failed the year before] is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.”

“This increased indication of the government’s eagerness to bail out highly leveraged, risky and largely unregulated financial institutions bodes ill for the post-S. 900 future as far as limiting taxpayer liability is concerned.”

   “All major cities will have to hire a lot of police officers in the coming year because of the coming ‘troubles’,” a reader predicts after seeing our account of the confrontation between New York police and the “Occupy Wall Street” protesters.

“They will be needed so they can be trained to shoot to kill the mobs that will be spilling out into our streets in protest of the lack of jobs and injustice in this country, because they will be unable to count on the veterans returning from the Middle East mess to kill American citizens.”

“It will take some nice incentives to pull this trick off with the ‘rookies’ they’ll be putting on the streets for ‘crowd control’! Lots of taxpayer dollars will be needed, which may be triggers for even more protest!”

The 5: According to the aforementioned National League of Cities study, one in five police departments has cut spending on “public safety.”

So yes, the push-pull dynamic you describe is already in motion: fewer police on the streets, more trouble on the streets, higher taxes to hire new police and so on. It’s one thread in a troubling tapestry we weaved in our summer forecast. Before it’s overtaken by events, you might want to give it a look.

   “Your story about the IRS and the ‘accidental American’ makes me wonder,” a reader writes. “Many U.S. corporations have subsidiaries in many countries, and for sure, we need engineers or skilled people from the U.S. there to transfer the expertise and leverage the head office resources.”

“Now foreign banks are protesting, and finance ministers from other countries. But will American companies sooner or later be responsible for our U.S. expatriate employees reporting to the IRS?”

“How much ‘collateral damage’ it will create? Who will be willing to accept a job outside the U.S., and how it will negatively impact American companies? How it will impact my cost of managing human resources, adding another layer of bureaucracy?”

“The job creation message is still paradoxical: Keep your cash outside the U.S. or we will tax you. And try to not expand outside U.S. and develop worldwide markets or we will double tax your employees.”

The 5: For God’s sake, don’t give them any ideas!


Addison Wiggin
The 5 Min. Forecast

P.S. “Engineers and researchers at Boeing Co. and the Massachusetts Institute of Technology have developed an iPhone application,” according to the Los Angeles Times, “to fly a miniature drone aircraft from some 3,000 miles away.

“The Pentagon is testing all manner of smart devices, including iPhones and iPads, for action in the war zone,” the paper goes on. “It has kicked off a race among software companies and defense firms to develop innovative apps for future soldiers to operate.”

We’re certain those future soldiers will be controlling gear that relies on what Byron King calls “the fourth element.” Byron opens your eyes to the profit potential of this miracle metal in this presentation. Be advised: It will be available only through midnight tomorrow night.


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