Alert Status: Still Elevated

Addison Wiggin – November 23, 2011

  • New crisis warnings: El-Erian “terrified,” Stockman on a “certain” downgrade, old Wall Street hand recommends gold for the first time
  • Rigged game: Corzine gets a pass on required registration… Insiders get access to Fed decisions weeks before you do… trading rules that apply to you, but not to Congress
  • The regulatory state, metastasized: Feds seize a haul of contraband… tuna
  • Readers “see only evil” from a police state… or do they? Plus, a torrent of outrage unleashed on the hapless soul who enjoys being groped by the TSA
  • Food for thought this Thanksgiving: Jeffrey Tucker reviews The Idea of America

   Here’s a small bit of advice for you while you’re looking for ways to escape your family over the holiday weekend: Be careful what you read on the Internet.

Short case study: “We’re raising our alert status for the next financial crisis,” we wrote in a blog post on Forbes.com. We cited concerns of derivatives exposure, expressed by fund manager Mark Mobius, followed by even more systemic issues detailed by our own Michael Pento.

The post was picked up by Yahoo! News… the Yahoo! piece elicited more than 700 comments on the discussion board.

Then… the Drudge Report linked to it… it “trended” high on Reddit… and got picked up by Russia Today and Newsmax as a breaking story… and then criticized by an industry rag called AdvisorOne.

AdvisorOne accused us of “exaggeration” and… and scaring people to — gasp! — try to sell newsletters.

Heh.

Alas, the writer at AdvisorOne never did his homework.

Our original piece at Forbes.com was posted June 1, 2011… just a few days after Mobius raised his concerns before an audience in Tokyo, which was, in turn, reported in a piece by Bloomberg.

Oy.

Why our post got rehashed by Yahoo! as “news” this week, we still don’t know.

But it goes to show… you can’t always believe what you read. And if you’re making decisions about what to do with your money based on what you read — even here in The 5 — you had better do your homework first.

   Wait… unless you start to think otherwise… our “alert status” has gotten anything but old and crusty, like the original Forbes.com post.

In fact, today, we’ve assembled a fresh list of concerns to take its place. And quite a doozy, at that: In fact, it’s rare to get a confluence of events such have combined for today’s episode of The 5.

Warning: the following is not for the faint of heart.

   U.S. economic conditions are “terrifying,” Mohamed El-Erian said yesterday. El-Erian, as you may know, is Bill Gross’ right-hand man at Pimco, the world’s largest bond fund. He gives the U.S. a 50/50 chance at a renewed recession.

“What’s most terrifying?” El-Erian asked rhetorically in a Bloomberg TV interview. “We are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9% and at a time when interest rates are at zero.

“The big concern is the U.S. getting tipped over by Europe. Things in Europe are getting worse, not better.”

   Indeed, they are. A plan to bail out the French-Belgian banking mongrel known as Dexia is falling apart, according to a Belgian newspaper.

That’s fueled talk of France having to dig deeper into its bailout fund… which, in turn, prompted Fitch to say it might have to revisit France’s AAA rating.

   That’s the headline news from Europe. Beneath the surface is this scary little ditty: A German bond auction failed today.

The German government hoped to sell €6 billion of 10-year bunds. It could attract bids for only €3.644 billion.

Conventional wisdom is writing this off: “The auction reflects the deep mistrust [of the] euro project, rather than a mistrust to German government bonds,” an analyst from Danske Bank tries to reassure The Wall Street Journal.

Conventional wisdom might wish to consult the respected German newsweekly Der Spiegel… “It is debatable how much longer Germany can be seen as a refuge of stability and security,” reads an article that came out yesterday.

“Germany’s budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU’s limit. In some respects, Italy’s finances are in much better shape.”

   The Federal Reserve plans to carry out a new round of “stress tests” on 31 major U.S. banks — the third time since Lehman and everything else hit the fan three years ago. This round will, purportedly, assess domestic banks’ ability to withstand a sudden escalation of the eurozone crisis.

We’ll save you the drama: We expect a result similar to the two previous tests — a limited release of data carefully designed to paper over thin capitalization of every major bank.

   “When are we going to wake up?” asks David Stockman, who served last century as budget director under Ronald Reagan.

Stockman’s beef? With the failure of the “supercommittee,” talk in Washington, D.C., is switching to an extension of this year’s Social Security tax cut into next year ($110 billion), plus, a continuation of unemployment benefits beyond the standard 26 weeks ($200 billion).

“I don’t know what Washington thinks,” says Mr. Stockman, “that we can just continue to go out into the market and borrow $100 billion every month, and nothing is ever going to go wrong, the Fed can just keep printing the money. That’s what the Europeans thought. Look where they are today.”

Another downgrade of U.S. sovereign debt is a “certainty,” he adds. “It’s only a matter of when.”

   Perhaps it’s a realization of all these things — Europe isn’t fixed, the U.S. banks aren’t fixed, Washington is broken beyond repair — that’s put the safety trade back in play today:

  • Major U.S. stock indexes are tumbling, again. The Dow sits at 11,300 — down 900 points from four weeks ago, but right where it was seven weeks ago
  • Spot gold has retreated to $1,678. Silver’s off 4%, to $31.36
  • The euro has sunk to $1.333, sending the dollar index above 79 for the first time since early October
  • The yield on a 10-year Treasury has sunk to 1.94%, while the 30-year is at 2.88%.

   Not helping matters: With a holiday-shortened week, the government statisticians have been racking up the OT to get all the usual figures out before stuffing their faces on your dime.

In the market’s eyes, every number is moving in the wrong direction…

  • First-time unemployment claims: Up last week to 393,000. And at this point, it’s almost superfluous to say the previous week’s figures were revised upward
  • Durable goods orders: Down 0.7%, although a lot of that was skewed by a drop in orders for civilian aircraft
  • Personal income: Up 0.4% last month, while personal spending was up only 0.1%. This reverses the trend of recent months, in which consumers were spending more and more out of an empty pocket. In the perverse logic of the Street, this relative parsimony is a bad thing.

   Accompanying all this fear and loathing, one of Wall Street’s most-respected “establishment” figures is finally coming around to gold. Byron Wien, vice chairman at Blackstone Advisory Partners, officially recommended gold as part of his model portfolio for the first time this year.

“The money supply will be expanded in the major currencies in the developed world,” he tells The New York Times, “and investors will seek the protection of hard assets: something real, and gold is perceived as real.”

   It’s also, as the saying goes, the only asset that carries no counterparty risk. Which sounds pretty good, given the latest news about MF Global. A judge in New York is refusing to allow its customers to form a committee to represent their own interests.

Instead, they’ll have to rely on the trustee who’s now in charge of their accounts. That trustee, James Giddens, disclosed yesterday the amount of “missing” money might be as much as $1.2 billion — double the previous estimate.

Mr. Giddens has an interesting background: His law firm has done extensive business with JPMorgan Chase — which is one of MF Global’s major creditors. But the judge, evidently, does not feel that’s enough of a conflict of interest to allow the “small fry” to advocate on their own behalf.

   Meanwhile, it appears MF Global’s CEO, Jon Corzine, was not registered with FINRA, the securities industry’s self-regulating body. Under FINRA requirements, “Anyone actively involved in the member’s investment banking or securities business must be registered.”

Bill Singer at Forbes looked into FINRA’s records. It appears Corzine’s registration lapsed about a decade ago, after he left Goldman Sachs. To return to the industry after his gig in politics, he had to take an exam. It appears he did not.

A special favor for someone well connected? Hard to say. But as they say in Washington, the “optics” aren’t good.

   The Senate is about to take up a bill that’s advertised as allowing more credit in the housing market… but in fact, would allow the major banks to load more bad debt onto the backs of taxpayers.

The Covered Bond Act of 2011 would allow the major banks to bundle mortgages into marketable securities that would be guaranteed at face value by the FDIC.

But it’s not just mortgages. No, under the language of the bill, auto loans, student loans, credit card debt… it’s all fair game for the treatment, along with “any other eligible asset class” designated by the Treasury secretary.

This abomination already passed a House committee earlier this year. The bill “is all about Wall Street and does nothing to increase the availability of housing credit,” said Chris Whalen from Institutional Risk Analytics at the time. “The bill lacks basic protections for investors in bonds and for the FDIC, which would be fully exposed to losses from covered bonds.”

True enough… but think of the insider-trading possibilities this opens up for members of Congress!

And as we learned a few days ago in a 60 Minutes expose, it’s completely legal for them — even as you or I would get handcuffs and a cell at Club Fed.

   Meanwhile, as if the preceding weren’t enough to fill your plate for Thanksgiving, today’s Wall Street Journal reveals “people with clout” get regular access to Federal Reserve governors, who, in turn, tip them off weeks in advance of major policy moves.

Surprise!

On Aug. 15, 2011, the Journal says, Fed chairman Ben Bernanke unveiled “Operation Twist” — the Fed’s attempt to bring down long-term Treasury rates — to Nancy Lazar, an economist with International Strategy & Investment Group.

You and I “officially” learned about it on Sept. 21, 2011 — nearly six weeks later.

In the interim, Ms. Lazar’s high-powered clients collected double-digit returns on 10-year Treasuries in a five-week span.

Sounds like a decent gig if you can get it, doesn’t it?

“Ms. Lazar is among a group of well-connected investors and analysts,” the Journal reports, “with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves.”

Special meetings with Fed leaders… insider trading by members of Congress that you can’t do… big banks conniving with Congress to load more of their bad debts onto you… politicians allowed to skirt the rules to get back into the securities industry… defunct brokerages whose clients are delivered to the tender mercies of a trustee loaded down with conflicts of interest…

Golly, it’s enough to make you think the system is rigged.

   In the thick of the 2008 crisis, the chairman of the House Financial Services Committee was privy to a meeting with Ben Bernanke and Hank Paulson, the Treasury secretary at that time. Using what he had learned in the meeting — that the global financial system was on the brink — he bought put options, betting the market would go down.

It’s legal for the House Financial Services Committee. You, on the other hand, would get an extended live-in date with Bubba.

Potentially, when you need them most, your elected officials are looking out for their own bacon, rather than truth, justice or any of the other goofy things you’ve been lead to believe they’re up to.

The rules have changed, and you’d be wise to have a plan in place when the next wave of this crisis gets underway. We make our suggestion here.

   As if you need another sign of a corrupt government exercising capricious rule, the following was story provided by several of your fellow readers.

11 days ago, Carlos Rafael, a professional fisherman in New England, made a historic and spectacular catch: He landed an 881-pound bluefin tuna.

No fish story: Carlos Rafael with his prize catch… before the busybodies arrived

But when his crew returned to port… agents of the National Oceanic and Atmospheric Administration (NOAA) seized the fish. Apparently, Mr. Rafael caught the monster with a net — and quite by accident. An occurrence “that only happens once in a blue moon,” according to The Standard-Times in New Bedford, Mass. Alas, the permit Carlos possesses only allows the luxury of using a rod and reel to catch big fish.

“We didn’t try to hide anything,” Carlos told the paper. “We did everything by the book. Nobody ever told me we couldn’t catch it with a net.” Yet Mr. Rafael is now out a six-figure payday. A similar haul — 754-pound tuna — recently sold for $396,000.

NOAA plans sell his catch overseas and collect the proceeds.

Carlos will, likely, give up his existing permits. “What good are they if I can’t catch fish with them?” he asks.

   “Now the feds are stealing fish from private fishermen,” writes one of several outraged readers who brought the story to our attention, “and yet they allow the use of long lines and many other commercial fishing methods that destroy the oceans.”

“Total hypocrites, it’s all about the money. They must be really desperate!”

   “I can only see evil permeating from this type of activity,” writes another reader after our ‘police state’ issue yesterday. “It is nonsensical that police would play dress up as SWAT teams to execute a search warrant.”

“And the Indiana court decision that said the right of self-defense from a police raid ‘is not in acceptance of modern Fourth Amendment rights’? Do the members of that court know how to READ?”

“The Fourth Amendment is supposed to be absolute, but the Constitution has been twisted so far that it has been broken by the Northeast Legal Elite of our nation, who never saw a freedom that isn’t able to be denied. Unless it’s a freedom related to ‘modern’ art.”

   “I know a story of a SWAT team. I am not going to say where; I knew a member of the team who was subsequently reassigned.”

“The SWAT team approached the wrong home, went through a window, shot and killed the alleged perp, whom they thought was defending with a gun, but was, actually, holding a Pepsi can. At the wrong address.”

   “I would not be so quick to jump to conclusions about the UC Davis students who were pepper-sprayed,” a reader writes.

“If you had seen the earlier video, you would see the number of students arrested, the students resisting arrest, the crowd locking arms and surrounding the police officers and not allowing them to leave, and then the warnings about the use of pepper spray before it was administered.”

“The video that has gone viral is only part of the story, but when all the footage of the episode is taken into account, the officers were well within their legal rights.”

The 5: Congratulations, you’ve succumbed to the modern disease of equating what’s “legal” with what’s right.

   “You can tell the moron who likes to be fondled at the airport by TSA,” a reader writes, “that he is perfectly welcome to fondle himself, or get anyone else to fondle him who is willing. Probably, there are also people stupid enough, or self-loathing enough, to want to be raped, physically abused or who knows what else.”

“Tell all these freaks they are welcome to such abuse, if that is what they wish. However, to advocate that the rest of us must submit to rape, physical assault and other abuse is ‘crossing the line’ and tantamount to advocating slavery.”

“These freaks need to understand the difference between ‘voluntary’ and ‘not.’ How difficult is that concept, anyway?”

   “To the idiot that wrote in about how helpful the TSA was,” chimes another, “wise up. Every single encroachment on liberty has always been delivered in incremental steps with the most-plausible explanations that can be found every step of the way.”

   “Your reader who enjoys the TSA is a moron who understands neither liberty nor private property, but that’s another story,” writes a reader who, instead, regales us with the tale of his own travels aboard Greyhound from Arizona to North Carolina.

“The whole experience was worse than the Third World and reminiscent of the 1941 movie Sullivan’s Travels. TSA was in Memphis going through people’s stuff and wanding them. In Atlanta, a local cop was doing it. He even made forays into the waiting area doing same. Disgusting to see.”

“I managed to avoid searches, in Memphis, because they were doing such a thorough job on line No. 2 they did not get to line No. 1, and in Atlanta, just because the cop never got to my side of the waiting room. I put it down to the Ganesh button I was wearing.”

“Since I was carrying about $10,000 (to buy a car), I had cause for fear, ironically, more over ‘my’ government than my fellow passengers, who — while a world apart from me — were respectful and honest.”

“Passengers up from Florida had some TSA horror stories. One guy was accused of having coke and stripped and searched. No apology when none found, just loud insistence that he had some they simply could not find, and they were going to ‘keep an eye on him.’ A diabetic lady was reduced to tears when they found her stuff.”

“Bad, bad, bad.”

“Outside of U.S. airports, in all my travels worldwide, I have never seen such disgusting violations.”

“I have never taken a bus trip of that length before. I took it to avoid the TSA.”

The 5: O the irony…

Whatever your travel plans this week, we hope you’re thankful that you’re with people you care about, far from the doom and gloom in the public world this holiday.

Happy Thanksgiving,

Addison Wiggin
The 5 Min. Forecast

P.S. U.S. markets are closed tomorrow for Thanksgiving and will trade an abbreviated schedule Friday. The 5 will return on Monday. Enjoy your tryptophan-induced coma.

Now for the real warm and fuzzies you really tuned in for. The newly minted executive editor of Laissez Faire Books has penned an eloquent review of The Idea of America, a “splendid” collection of essays compiled by Bill Bonner and Pierre Lemieux.

The new electronic edition brings together thinkers across time, from Jefferson to Emerson to Mencken to Rothbard, and is succinctly introduced below. With best wishes and food for thought this Thanksgiving, here is Jeffrey Tucker.

The Idea of America
reviewed by Jeffrey Tucker

There are occasions in American life — and they come too often these days — when you want to scream: “What the heck has happened to this country?!” Everyone encounters events that strike a particular nerve, some egregious violations of the norms for a free country that cut very deeply and personally.

We wonder: Do we even remember what it means to be free? If not — and I think not — The Idea of America: What It Was and How It Was Lost (hardcover and Kindle), a collection of bracing reminders from our past, as edited by William Bonner and Pierre Lemieux, is the essential book of our time.

I’ll just mention two outrages that occur first to me. In the last six months, I came back to the country twice from international travel, once by plane and once by car. The car scene shocked me. The lines were ridiculously long, and border control agents, clad in dark glasses and boots and wearing enough weaponry to fight an invading army, ran up and down the lines with large dogs. Periodically, U.S. border control would throw open doors of cars and vans and let the dogs run through, while the driver sat there poker-faced and trying to stay calm and pretending not to object.

When I finally got to the customs window, I was questioned — not like a citizen of the country, but like a likely terrorist. The agent wanted to know everything about me: home, work, where I had been and why, whether I would stay somewhere before getting to my destination, family composition and other matters that just creeped me out. I realized, immediately, that there was no question he could ask me that I could refuse to answer, and I had to do this politely.

That’s power.

The second time I entered the country was by plane, and there were two full re-scans of bags on the way in, in addition to the passport check, and a long round of questioning. There were no running dogs this time; the passengers were the dogs, and we were all on the agents’ leashes. Whatever they ordered us to do, we did, no matter how irrational. We moved here and there in lock step and total silence. One step out of line, and you are guaranteed to be yelled at. At one point, an armed agent began to talk loudly and with a sense of ridicule about the clothes I was wearing, and went out of his way to make sure everyone else heard him. I could do nothing but smile as if I were being complimented by a friend.

That’s power.

Of course, these cases are nothing like the reports you hear almost daily about the abuse and outrages from domestic travel, which now, routinely, requires everyone to submit to digital strip searches. We have come to expect this. We can hardly escape the presence of the police in our lives. I vaguely remember, when I was young, that I thought of the police as servants of the people. Now their presence strikes fear in the heart, and they are everywhere, always operating under the presumption that they have total power, and you and I have absolutely none.

You hear slogans about the “land of the free,” and we still sing patriotic songs at the ballpark — and even at church on Sunday — and these songs are always about our blessed liberty, the battles of our ancestors against tyranny, the special love of liberty that animates our heritage and national self-identity. The contrast with reality grows more stark by the day.

And it isn’t just about our personal liberty and our freedom to move about with a sense that we are exercising our rights. It hits us in the economic realm, where no goods or services change hands that aren’t subject to the total control of the leviathan state. No business is really safe from being bludgeoned by legislatures, regulators and the tax police, while objecting makes you only more of a target.

Few dare say it publicly: America has become a police state. All the signs are in place, among which the world’s largest prison population. If we are not a police state, one must ask: What are the indicators that will tell us that we’ve crossed the line? What are signs we haven’t yet seen?

We can debate all day about when, precisely, the descent began, but there can be no doubt when the slide into the despotic abyss became precipitous. It was after the terrorists hit on Sept. 11 in 2001. The terrorists wanted to deliver a blow to freedom. Our national leaders swore the terrorists would never win, and then spent the following 10 years delivering relentless and massive blows to liberty as we had known it.

The decline has been fast, but not fast enough for people to be as shocked as they should be. Freedom is a state of being that is difficult to recall once it is gone. We adapt to the new reality the way people adapt to degenerative diseases, grateful for slight respites from pain and completely despairing of ever feeling healthy and well again.

What’s more, all the time we spend obeying, complying and pretending to be malleable — in order to stay out of trouble — ends up socializing us, and even changing our outlook on life. As in the Orwell novel, we have adjusted to government control as the new normal. The loudspeakers blared that all of this is in the interest of our security and well-being. These people who are stripping us, robbing us, humiliating us, impoverishing us are doing it all for our own good. We never fully believe it, but the message still affects our outlook.

The editors of The Idea of America are urging a serious national self-assessment. They argue that freedom is the only theme that fully and truly animates the traditional American spirit. We are not united in religion, race or creed, but we do have this wonderful history of rebellion against power in favor of human rights and freedom from tyranny. For this reason, the book begins with the essential founding documents, which, if taken seriously, make a case for radical freedom not as something granted by government, but as something that we possess as a matter of right.

The love of liberty is rooted in our Colonial past, and it is thrilling to see Murray Rothbard’s excellent account of the pre-revolutionary past printed here, with follow-ups to make the point by Patrick Henry and Thomas Paine. Lord Acton makes the next appearance with a clarifying essay about the whole point of the American Revolution, which was not independence as such, but liberty. He forcefully argues that the right of secession, the right to annul laws, the right to say no to the tyrant, the right to leave the system, constitute great contribution of America to political history. As you read, you wonder where these voices are today and what would happen to them if they spoke up in modern versions of the same thoughts. These revolutionaries are pushing ideas that the modern regime seeks to bury, and even criminalize.

The voice of the new country and its voluntaristic themes is provided by Alexis de Tocqueville, along with the writings of James Madison. As Bonner and Lemieux argue in their own contributions, the idea of anarchism, that is, living without a state, has always been just beneath the surface of American ideology. Here, they bring it to the surface with an essay by proto-anarchist J. Hector St. John de Crevecoeur, who said of America, “We have no princes for whom we toil, starve and bleed: We are the most perfect society now existing in the world.”

The anarchist strain continues with marvelous writings by Thomas Jefferson, Henry David Thoreau, Voltairine de Cleyre, plus some court decisions reinforcing gun rights. The book ends with another reminder that American is an open society that is welcoming to newcomers. The final choice of Rose Wilder Lane’s “Give Me Liberty” is inspired.

The value of this book is dramatically heightened by the additional material from Bonner, whose clear prose and incisive intellect is on display here, both in the foreword and the afterword, as well as Lemieux, whose introduction made my blood boil with all his examples of government gone mad in our time. Bonner in particular offers an intriguing possibility that the future of the true America has nothing to do with geography; it exists where the free minds and free hearts exist. The digitization of the world opens up new opportunities for just this.

The contrast is stark: what America was meant to be and what it has become. It can be painful to take this kind of careful look. Truly honest appraisals of this sort are rare. Adapting, going along, pretending not to notice, are all easier strategies to deal with the grim situation we face. But this is not the way America’s founders dealt with their problems. This book might inspire us to think and act more like we should.

We should prepare.

In the words of Thomas Paine:

“O ye that love mankind! Ye that dare oppose, not only the tyranny, but the tyrant, stand forth! Every spot of the Old World is overrun with oppression. Freedom hath been hunted round the globe. Asia and Africa have long expelled her. Europe regards her like a stranger, and England hath given her warning to depart. O! receive the fugitive, and prepare in time an asylum for mankind.”

rspertzel

Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More