Addison Wiggin – November 10, 2011
- “We’ve reached the last resort”… The 5’s elegy for a $5 billion boondoggle
- Market rallies on miracle Italy fix… (What? It’s not fixed? Oh, yeah… The extreme risk still facing U.S. money market funds…)
- Jobless claims down… U.S. Mint orders for silver blanks up… your own stash, cheap…
- A few gentle corrections (we think)… a plea for beefcake… still more ideas for precious metals storage… and more!
“We’ve reached the last resort,” Jefferson County, Alabama, commissioner Joe Knight declared last night. “We could continue and keep kicking this can down the road but I think the people of Jefferson County have had enough.”
And with that, the largest county in Alabama slimed its way into the history books as the biggest municipal bankruptcy in U.S. history.
What finally did Jefferson County in? A $250 million sewer project that morphed and mutated its way into a $5 billion suck hole of falsehood and hypocrisy.
Yes, there was the usual corruption and backroom dealing. There was even outright bribery, for which four county commissioners are doing time.
But it takes something extra special to multiply the cost of a municipal project by a factor of 20. And even more depravity to force local small-business owners to close up shop because they can’t afford a water and sewer bill of $500 a month.
That “something special” was cooked up by Wall Street. Derivatives… in this case, interest rate swaps. J.P. Morgan sold county commissioners on taking out what amounted to a humongous adjustable-rate mortgage.
Instead of controlling the costs of debt service, the costs exploded — to a point where the county could no longer keep up the interest payments, much less pay down any principal.
Curiously, while the bribees are in prison, the bribers from J.P. Morgan faced only civil charges from the SEC, which the firm settled for $722 million. Pocket change.
Trouble is, the municipal bond market is rife with these kinds of swindle-conomic schemes…
- The Illinois Tollway system got its start in 1953. Once the bonds to build them were paid off, politicians of the day promised they’d be converted to freeways. It never happened. “Toll collection was sure money,” wrote Robert Heuer in the Chicago Reader, “and thus could serve as a source of collateral to keep the bond rating low, allowing the agency to readily borrow more money” to sustain the tollway system bureaucracy
- New Jersey’s Transportation Trust Fund is essentially broke. As of next July, all the revenue coming in from the state’s gas tax will go to fund past debt. Nothing will be left to fix existing roads, much less build new ones
- The old Giants Stadium in New Jersey is now a parking lot, demolished to make way for the New Meadowlands Stadium. But taxpayers are still forking over to pay off $110 million in debt — about $13 for every New Jersey resident. Folks in Seattle and Indianapolis are also paying off stadiums that no longer exist.
You could likely drive no more than 10 miles from your own home and find a public works project — a bridge, a sewage plant, a school — that will never be paid off.
You can almost hear the commissioners moan: “There’s never enough tax revenue to pay off the bonds and pay all the other bills at the same time. And when a recession hits, there’s even less revenue coming in… but the debt still needs to be serviced.”
Once the bond comes due, it gets rolled over into a new bond… and local residents keep paying for it via taxes or user fees. Great if you’re collecting on the bond… but…
There’s no way to get out from under these payments in perpetuity — even going the route Jefferson County is going.
According to James Spiotto, a bankruptcy specialist with the firm Chapman and Cutler, Chapter 9 bankruptcy law was amended in 1988 to ensure that bondholders continued to get paid even after a municipality lands in bankruptcy court.
“The whole purpose,” he told The New York Times last summer, “is to assure the market that in times of distress, the bonds will be paid.” Jefferson County sewer rates are still set to rise even in bankruptcy, according to The Birmingham News.
In other words, bankruptcy filing or no, residents get bled dry in slow motion.
The schemes are the flip side of the list of “new taxes and weird fees” we’ve been trying to entertain ourselves with while the country works its way through this macabre dance with public finance. Here’s your seat, if you want to stop before the music ends.
U.S. stocks are enjoying what’s commonly called a “relief rally” today. At last check, the Dow has recovered about 100 points of yesterday’s 400-point loss.
We’re not sure what anyone’s supposed to be relieved about….
Italy is just as hopelessly in debt as it was yesterday.
The chatter about a “radical overhaul of the European Union” that turned a rotten day into a rout by the close… umn, it’s still out there.
French banks still hold about 20% of Italy’s debt.
And U.S. money market funds still have well over 40% of their assets sunk into the short-term debt of European banks. (More than half of that 40% still consists of commercial paper issued by the big French banks with all that exposure to Italy!)
Uehy.
“There is no way the PIIGS can get out of their debt problems,” warns our short strategist Dan Amoss, “with the current plan of more borrowing and budget austerity measures.”
Dan is following the eurozone’s backwash on American shores as closely as anyone. If you want to build a break wall around your finances, we recommend you look into his strategy.
Oh, well, all that is over in Europe anyway. They’re just a bunch of socialists, anyway, so who cares right? The stock rally in the U.S. today is being goosed in part by the latest weekly figure on unemployment claims. It’s down to 390,000 according to the Bureau of Labor Statistics.
Wee-hoo!
In today’s market, any number under 400,000 is cause for celebration.
The last time there was a sustained stretch of numbers under 400,000 was back before the end of the world as we knew it in early 2008. Before the hoi polloi realized the gas had already escaped the bag… the bubble had burst… and the official “recession” was on its way to being declared under way (six months later).
Alas, as unimpressive as the numbers are, they did deliver a nice short-term trading opportunity for Abe Cofnas and his black box trading binary strategy.
“I have been watching the weekly initial jobless claims data very closely,” Mr. Cofnas wrote yesterday morning, “and I have detected a pattern” pointing to a range between 390,000-410,000.
Using the information, had you been following Abe’s advice, you may have entertained the idea of trading the option on the weekly claims figure he suggested… which ultimately lead to 30% gains in 24 hours.
Yes, there is such a thing… part of the niche market that Abe follows, unique among North American advisories. To learn more about the fast-moving opportunities available nowhere else, look here.
The “risk-on” trade is taking some of the wind out of gold’s sails today. The spot price is back to $1,750, while silver is down to $33.70.
Demand for silver, we learned this morning, from one of the U.S. Mint’s main suppliers doubled over the last year.
Idaho’s Sunshine Minting reports $1.25 billion in revenue from Uncle Sam in the year ended Sept. 30. The previous year’s orders totaled $591 million.
Sunshine is one of five companies that supplies blanks to the U.S. Mint.
[Ed. Note: We still have an extraordinary offer available — 10 Silver Eagles, plus one Gold Buffalo… plus a handsome, discreet storage solution: a hollowed-out book that consists of Empire of Debt and Mobs, Messiahs and Markets stitched together. Supplies are dwindling by the day — get yours while they’re still available.]
“Neither the Italian public nor the Greek public is going to support any government that imposes real austerity measures,” writes a reader with a foreboding message. “This is what the financial markets are coming to understand.”
“Which is just the forerunner of things to come in the US of A.”
“In other words, the few or at least 50% aren’t going to suffer unless we all suffer. I don’t know how far off the calamity is, but I for one will not join the soup lines. As far as I am concerned, if ya can’t see it coming, you’re going to deserve what ya get.”
The 5: Well stated. Our own soup line prevention program can be found here.
“You really need to check more thoroughly before writing about subjects unfamiliar to you,” writes a Christmas tree farmer from Pennsylvania about the tree tax.
“The ‘tax’ is self-imposed by Christmas tree growers across the country to support research and marketing. It has been in the works for several years and there have been several public comment periods. The response by growers has been largely supportive.”
“The funds will be supervised by a board of growers. The program is also subject to another vote of contributors after three years. If it does not function well, it will no doubt be voted out.”
“Please read the information available at USDA before condemning the program.”
The 5: “Self-imposed?” So a tree grower who thinks this is a stupid idea and wants to opt out of the 15-cent-per-tree fee would be exempt?
If you and some of your fellow growers want to get together on a marketing campaign, go for it. But, the bad publicity is giving the Agriculture Department second thoughts. “USDA is going to delay implementation and revisit this action,” says White House spokesman Matt Lehrich.
Heh.
[Small editorial note: We actually have a Christmas tree farm in New Hampshire. It’s a small cut-your-own operation, so not subject to the tax, but the market and industry are not entirely unfamiliar to us.]
“I noticed in yesterday’s 5 you stated Byron said the Strait of Hormuz (oil choke point) connected the Persian Gulf to the Mediterranean.”
[Whoops.]
“I thought you may have misquoted him, as the strait connects to the Arabian Sea. In checking his report, I see he indeed stated this. It’s just a geographical detail, and beside the point. Will subscribe, as his performance is quite impressive.”
“Keep up the great work! I am a fan. Also, of your taste for the ladies: Heh.”
The 5: Nostra culpa. Byron knows the region well, having landed Navy jets on aircraft carriers over there. Crazy how things get mucked up and missed by writers, editors and producers alike these days. You’d think we all worked for Fox News or CNN, wouldn’t you?
That said, we are indeed proud of Outstanding Investments’ track record — named the best over the last 10 years among nearly 100 newsletters tracked by the independent Hulbert Financial Digest. Thank you for subscribing.
“As a female reader of the 5,” writes a correspondent from the fairer sex, “my only complaint with your occasional inclusion of photos of attractive women is that there’s nothing in it for me.”
“How ‘bout some beefcake to go with that gratuitous cheesecake?”
The 5: The last time we got this question, a female reader said she’d “like some of the older stars — they are still sexy” and we tried this. Umn, you don’t want to go there again.
“You mentioned,” our fair reader goes on, pivoting to another topic, “a new law in Massachusetts that requires that even if one successfully fights a moving violation, they still have to pay court costs. My husband found out that hard way this is already law in Oklahoma.”
The 5: Bummer.
“I like The 5 as it is,” writes a reader rising to our defense after yesterday’s incoherent criticism from a new reader. “Always some interesting pieces, and some great points of view.”
“And of course, the chuckles are often priceless from some of the boobs that respond with their silly comments. Especially the guy who just read his first issue and thinks he hired his very own personal investment guru awaiting his commands.
“What’ wrong with you guys? Listen to the man…”
The 5: Right.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “The best place to store (hide) your gold and silver,” a reader recommends following up on our book safe tangent, “is in a safe set into a concrete slab.
“But the safe needs to be in a place where nobody will know it’s there. Under a water heater is ideal, but washing machines work too, or under the oil drip pan in your garage. You should also have a ‘regular’ safe to open for the criminal holding a gun to your head or the burglar poking around in your house (with a bit of gold and silver to sacrifice in it).”
“I hope I haven’t given too much away!”
The 5: That would work if you have a sizeable quantity… our “booksafe” is for a smaller stash — the one that we’re all but giving away right now.
P.P.S. “Bank Transfer Day” last Saturday, organized to coincide with Guy Fawkes Day, appears to have been a bust… at least if the objective was to start a run at one of the big money center banks.
We’re not much on organized protests; we think you’re much better off taking matters into your own hands. That’s the idea behind what the folks at Whiskey & Gunpowder have dubbed their “ditch the dollar” campaign.
You don’t have to carry a sign or hawk petitions… and once you take the two simple steps they describe in this presentation, you’ll be well on your way to safeguarding your hard-earned wealth.