Addison Wiggin – October 28, 2011
- A new low from our ongoing chronicle of “weird fees”…
- Stodgy Germans and Bill Gross both throw cold water on the eurozone party… Markets shrivel like a teenage…umn… well…
- Boom time, revisited: Second consecutive sign of Americans spending out of an empty pocket (again)… this time for the wrong reasons…
- “The Real 1%”… and the chart signaling a run-up in an asset class you already love…
- More concern over the U.S. economy (gasp!)… awaiting “commentary” from LiLo (heh)… a reason to enjoy the ride… and more!
“Taxes,” the old-timers carp. “They get you coming and going.”
The state of Maryland is trying to increase the latter part of the phrase a little too literally for our taste this morning:
As homeowners in the Free State, we pay what’s come to be known as the “flush fee.” No lie.
It amounts to $30 a year, paid via quarterly water and sewer bills. The money, they say, is used to clean up the Chesapeake Bay. We presume it also fills the coffers of the “hookers and blow” fund for members of the state organization that oversees its disbursement.
But what do we know? We’re just citizens, we’re not “professional” politicians.
This week, a separate body known as the Task Force on Sustainable Growth and Wastewater Disposal — no lie — started kicking around the idea of doubling that fee to $60 come 2013… and $90 by 2015.
“The problem is we have no fiscal discipline,” says our state comptroller, refreshingly stating the obvious… and going on record as opposing any tax or fee increases for the next two years.
We’re not optimistic his arguments will carry the day.
We add the flush fee to our long and growing list of “new taxes and weird fees.” Got any more you think we’re missing?
Our thesis: The front line of the financial crisis is not fought in the headlines, on Capitol Hill or among the zombies of OWS, but in your neighborhood. Who actually bears the brunt? Why you do… the honest taxpaying citizen who hopes to save and retire someday.
Ugh.
[Ed note: You know we have more thoughts on the subject. If you haven’t examined some of the solutions we present for the rapaciousness of bankrupt governments, morally or otherwise, you can do so here.]
U.S. stock indexes are taking a breather after yesterday’s euro-euphoria. The Dow is up fractionally; the S&P is down fractionally.
“Skepticism Grows Over Euro Debt Plan” read a headline at TheStreet.com before the open.
What? Buyer’s remorse? And so soon? Say it isn’t so!
Barely 24 hours after the grand bargain that supposedly saved Greece and the euro in one fell swoop… Germany’s central bank is throwing cold water on the whole thing.
Recall that one of the linchpins of the plan is a leveraging of the eurozone bailout fund from €440 billion to €1.4 trillion. This morning, the Bundesbank had the temerity to remind the world that such methods “resembled the risky finance methods that triggered the crisis in 2008,” as the U.K. Telegraph put it.
Continuing with its proclamation of the emperor as buck naked, Bundesbank president Jens Weidmann said the end result could easily be taxpayers getting stuck with the bill for Italian and Spanish government bonds.
Pimco’s Bill Gross, the “bond king,” is likewise skeptical. “No bazooka but should stabilize markets for now,” he tweeted yesterday. “Without it, the plan is a giant SIV [structured investment vehicle] with levered risk.”
We’ll know that sometime next week… after yet another summit. God, this is making our head hurt.
For the moment, the currency markets have stabilized after yesterday’s Big Announcement. The dollar index sits at 75 on the nose.
Commodities are enjoying a broad rally thanks to the faux-resolution of the euro crisis. At 323, the CRB index is up to a level last seen six weeks ago.
In large part, that’s because of dollar weakness. The CRB and the dollar index haven’t been exact mirror images this fall… but a chart still makes for a striking visual.
For the moment, the news from Europe may well allow “a further unwinding of fear purchases that drove the U.S. dollar to 10-month highs,” as our resource trader Alan Knuckman puts it.
“Additional stock market stability should put the currency back on the 20-year downward trend… and add new life to commodities.”
For the second day running, we’re getting statistical evidence that Americans are drawing down their “savings” to make ends meet.
Personal income as measured by the Commerce Department rose only 0.1% last month. But consumer spending grew 0.6%. Year over year, spending is also outpacing income growth.
In addition, “core personal consumption expenditures” — the Federal Reserve’s favorite gauge of inflation — clocked in at 1.6% year over year.
If members of the Federal Open Market Committee (FOMC) are looking to unleash QE3 when they meet next Tuesday and Wednesday, there’s nothing in that number to hold them back.
Gold is holding onto its gains from yesterday and the day before. At last check, the spot price is $1,741. Silver is likewise holding steady at $35.11.
“Not only has gold been a coveted form of money for thousands of years,” observes Chris Mayer, “it is, as the boys on Wall Street would say, ‘underowned.’”
“Meaning that if you look at central banks, the big institutions and even individual investors, you find gold is a tiny fraction of their financial holdings.”
Absolutely, if you judge by this chart. It takes all $146 trillion in global assets held in private hands and splits them up by asset class…
Gold ownership among institutional investors is clocking in at 1.0%, according to the Bank for International Settlements (BIS) and a bevy of other research groups listed above.
“At the height of the gold mania in 1981,” notes Casey Research’s Ed Steer, “that percentage was 26%…and at the height of the Great Depression, it was 20%.”
The obvious: Gold ownership among the suit and tie set was a scant higher in those days than it is today.
“Beyond this,” adds Chris Mayer, “there are the basics of supply and demand. It’s interesting to reflect on the fact that gold has gone from $200-plus an ounce in 2001 to $1,600-plus an ounce today. Yet supply has barely budged.”
Gold production was about 2,689 tons in 2010, compared with 2,641 in 2001, according to the GFMS Gold Survey. Name another commodity that’s enjoyed such a rise in price but no corresponding increase in supply. If you look at copper, the price is up fivefold and production is up 20% in response.
“Why is gold such a laggard?” asks Chris. “One reason is that South Africa no longer produces as much gold as it once did. Hard to believe now, but in the 1970s, two-thirds of global gold supply came from South Africa. In 1970, it produced 1,000 tons of gold all by itself. Last year, it barely mustered 200 tons.”
“It’s mined out the good ore. Whereas it used to get 13 grams of gold per ton of rock, now it gets just three. This is a global phenomenon. Average grades the world over fell from 12 grams per ton in the 1960s to just 2 by 2009.”
Meanwhile, GFMS estimates that a typical gold producer’s cash costs run $800-1,000 per ounce. Last year, it was only $650-800.
“In part,” says Chris, “the market is meeting demand by recycling the metal. If you look at the amount of gold recycled annually, it’s about doubled in the last few years. Scrapping of jewelry for gold actually exceeded new jewelry in North America and Europe last year. But even that’s tapering off. Recycled gold is running around 1,600 tons annually, and actually fell 4% globally in the first quarter of 2011.”
“I still like gold. I like gold stocks, too, but they have disappointed all year. It can’t last, and I expect gold stocks will have their day in the sun here soon.”
[Ed note: In part because of Chris’ recent findings, but also following input from regular 5 contributors Rick Rule and Frank Holmes, we’re convening an online summit regarding the lag in gold miners next week. Stay tuned for details.]
From now through Nov. 19, China’s top rare earths producer is shut down.
“In the circumstances of a continuing fall in prices, tepid demand and oversupply,” reads a statement from Baotou Rare Earth, “Baotou will halt smelting and separation at its processing units from Oct. 19 to further stabilize the market and balance supply and demand.”
Prices are, indeed, coming down after China imposed export controls and cracked down on illegal rare earth mining this year.
“So,” sums up Byron King in an email, “rare earth prices weaken in the face of rocket-assisted price rises…. then the Chinese close down the shop for a month (or at least they say that’s what they’re doing). Very clever.”
That should put wind in the sails of the few rare earth companies in a position to reach production soon. Byron has three names in mind… on the heels of big rare earth gains he’s already racked up, including 178% on Molycorp. New subscribers to Energy & Scarcity Investor can learn about all three of these names. Act here.
Here’s a commodity experiencing a bizarre dislocation in local market demand… either in the U.K. or in Romania, we’re not sure which.
“Gangs of Eastern Europeans are stealing chewing gum from supermarkets” in the U.K., the Telegraph reports this morning, “because it can be used as currency in their home countries.”
From Shrewsbury to Telford, Shropshire to Bridgnorth, thefts are rampant, we’re told.
“I have done some investigations,” says Shrewsbury Constable David Walton, “and in Romania, if you go into a shop and purchase goods, as opposed to change, they will give you sticks of chewing gum.”
Romania belongs to the EU, but retains its own currency, the leu. Inflation was reported this month at 3.5%, the lowest in 21 years. So without further investigation ourselves, we’re at a loss to explain the phenomenon.
But so are the authorities.
After a close reading of the story, it appears the only evidence cops have tying the thefts to Eastern Europe is that cars with Romanian registration often turn up near the scene.
Hmmn… moving on:
“I am 66 years old,” writes a reader who responded to one of our two Project X questions. “I have raised and educated three children and been married for 40 years. I have managed to accumulate about $350,000 for retirement — it isn’t enough.”
“I need to live on that money and grow it so it will go as far as it will go. My biggest concern about America is largely irrelevant. I’m not going to be around to see its demise, and I am sorry it will be more difficult for my children than it was for me.”
“I’m worried that I don’t even have any retirement savings and I’m 55,” writes another. “I am clearly way behind, but I do agree with your sentiment that we need to control our own futures. I changed jobs from one I really liked to one with the government because it should offer better stability, but in the current situation, who knows.”
“At 55, even with 24 years developing software, jobs at this age are difficult to get. Consequently, my biggest concern would be being out of work, again, and having difficulty in even attempting to get some funds set aside that I can trade and control.”
“This economy needs to get back on its feet. We clearly need much less government spending (even though I just became a part of that), a better tax structure for clarity and simplicity and much less regulation and intrusion into our business and personal lives so that the entrepreneurial spirit can be released.”
“As stated, I do work full time, but I also run my own company. It is regrettably just me because there are too many regulations and too much additional administrative paperwork that I can’t keep up with on a part-time basis to try and market myself and bring on employees.”
The 5: We can’t promise you’ll get off the wage-and-hours treadmill by signing up for Project X… but if you’re able to set aside a portion of your funds in savings, we aim get you off to a solid start.
“I’ll be looking forward to Ms. Lohan’s commentary,” a reader writes after we found parallels between the starlet’s Playboy shoot and the eurozone rescue plan.
“While not better than yours, I’m sure that it will be much better than that of anyone in our current government.”
The 5: Yes, we’re looking forward to her “commentary” too. Well put.
“Wow, you truly outdid yourself with today’s edition of The 5. A truly marvelous summary of relevant facts blended together with an outrageously funny slant.”
“I’m still gasping for breath laughing at the LiLo references! We may all be going to hell in a handbasket, but your ability to make it this funny should qualify you for some kind of award.”
“The 5 is brilliant. Only thing I need to read to be sure I know what’s really going on………”
“You are on a roll. To quote the Scorpions, ‘Don’t stop at the top’”.
The 5: We prefer “Hell in a Bucket” by Barlow and Weir.
Enjoy the ride,
Addison Wiggin
The 5 Min. Forecast
P.S. Did we mention there’s no obligation to pay us money if you register to learn more about Project X? Your feedback alone is worth the cost to us.
To avoid annoying you if you’re not interested in learning more, we’re closing registration for the project next Thursday, Nov. 3, 2011… After that, future happenings related to the project will make their way to you only if you’ve indicated you want to learn more by registering. Here.