A Predictable Crisis

August 10, 2012

  • “The most predictable economic crisis in American history”… and the man who will do nothing to stop it
  • The TARP vote, Medicaid sleight of hand and a balanced budget in 38 more years: A few things you might not know about the “fiscal savior”
  • Wide open spaces in the middle of a resource boom: After his Mongolia trip, Chris Mayer scouts out an American analog…
  • An “artisanal” alcohol boom… the latest fallout from the “You’re Being Robbed” bank protest… a forecast fulfilled… and more!


  “The unsustainable trajectory of government spending is accelerating the nation toward the most-predictable economic crisis in American history.”

Sounds like something from I.O.U.S.A., no?.

But this declaration is only a year old… it comes from someone who made a lot of news over the weekend… and neither his lofty rhetoric nor his detailed plans will change a thing about that “unsustainable trajectory.”

Fair warning, dear reader, as we launch today’s episode: While The 5 doesn’t do politics, sometimes we’re dragged into it against our will. In response to a reader’s entreaty last year to stick to “coldhearted financial research,” Addison reminded us “politics are the problem, and you ignore them at your peril.”

That reminder sticks in the back of this editor’s head… like a hatchet… as we evaluate the crazed reaction to Paul Ryan’s likely nomination as the Republican Party’s vice presidential candidate.

  No, we don’t mean the crazed reaction from Ryan’s opponents. We mean his supporters, fainting like bobby-soxers at a Sinatra concert in the ’40s. (“Frankie!”)

“Ryan is a strong fiscal conservative,” gushes Amy Kremer of Tea Party Express, which claims to be “the largest Tea Party political action committee in the nation.”

“He consistently argues not just for the practical advantages of smaller government but also about the moral imperative to cut,” enthuses Chris Edwards of the Cato Institute.

Heck, our keynote speaker in Vancouver, the estimable Niall Ferguson, sings his praises: “There are political leaders — Paul Ryan, for example — who have integrity and are prepared to push unpopular measures that will ultimately prove beneficial,” he told Barron’s last spring.

  It takes a special kind of politician to vote for the TARP bailouts in 2008… and for Medicare prescription drugs in 2003… and still successfully pass yourself off as the Foremost Fiscal Conservative of the 21st Century™.

Nor did Mr. Ryan cast those votes reluctantly. No sirree, Ryan wasn’t one of those yellow-bellies who voted against TARP the first time, only to panic and change his mind when the Dow dropped 778 points in a day. He was for it before he was for it!

And Medicare prescription drugs? He wasn’t one of those “fiscal conservatives” whose arm had to be twisted during an epic late-night roll call, kept open for three hours instead of the customary 15 minutes to assure the “right” outcome. As The 5 has documented, Ryan put out a press release proudly trumpeting his support. (Only years later did he try to “disappear” the press release from his website.)

  Then there’s his vaunted budget plan, which delivers a balanced federal budget by… 2050.

Pay no nevermind to the mainstream chatter about the “vast difference” between Ryan’s budget proposal and, say, that of the Obama White House. Sixteen months ago, we showed them plotted on a chart.

“Hmmn…” Addison mused at the time. “Shall we raise the national debt by 84% in the next 10 years, or merely 62%? To even suggest the national credit card may be revoked long before then… well, that makes you a ‘kook’ in these parts.”

Worse, Ryan’s numbers sit on a foundation of ever-shifting sands. Like the president’s figures, Ryan’s rely on crazy-optimistic projections of GDP growth — about 3% a year. For the last debt-choked decade, the average has been closer to 1.6%.

Anything short of that magical 3% projection means the expected tax revenue won’t materialize and the debt grows even faster than on the chart. Never mind the hubris of believing your blueprint is so swell that every president and Congress for the next 38 years will stick to it.

130  But forget 2050. “What does Ryan do in the next two or three years?” asked Reagan budget director and present-day gadfly (we mean that in a good way) David Stockman. “Nothing.

“He cuts $600 (billion) or $700 billion of spending, mostly from a small part of the budget, discretionary and the safety net, leaves Medicare totally untouched for three years, leaves Social Security totally untouched for 10 years, leaves defense totally untouched for the next three years.”

On that last point, Politico has his number: “Ryan has been a dove when it comes to defense spending — so much so that he accused Pentagon leaders of misleading Congress earlier this year when they said President Barack Obama’s budget was adequate for the job they had to do.”

What’s more, many of Ryan’s cuts are accomplished by sloughing the cost of Medicaid onto the states. So the federal share of Medicaid spending goes down, but the state share has to go up by an equal amount. As Addison noted in the current issue of Apogee Advisory, Medicaid already eats up 24% of a typical state budget — the biggest line item.

“Um, Mr. Ryan,” your editor asks sheepishly from the back of the room, “wouldn’t the states have to raise taxes to make up the difference? And wouldn’t that cut further into your projections for GDP growth?”

“Send that man to Gitmo!” [For the record, Ryan voted for the defense bill subjecting U.S. citizens to indefinite detention on the say-so of the president.]

We’re sure that in the fullness of time you’ll learn about these inconvenient realities. But we’d just as soon rip the scales from your eyes today, lest you be lulled into the belief that a politician — any politician — will come along to save your bacon.

“We know that Obamney is going to win the presidency,” a reader wrote us late Friday, “and that nothing he does will change the inevitable decline and fall of the United States. Everyone for oneself!!”

“Sauve qui peut” is the French expression Addison is fond of citing. The trajectory of government spending is “unsustainable” no matter whose rear end sits behind the big desk in the Oval Office.

“This new crisis,” says Addison, “started inflating years ago — with the government’s attempt to pump up the stock market after the tech crash in the early 2000s. Then it got worse and helped inflate the bigger housing bubble… into the even-bigger credit crisis of 2008.

“Now, I’m afraid, we’re in the middle of the largest financial bubble in human history.”

With the help of Bill Bonner, Addison lays out a comprehensive six-step plan to protect yourself once the bubble bursts… at this link.

  Major U.S. stock indexes are slipping today. The S&P is back below 1,400.

“With the S&P 500 nearing trend line resistance,” our resident technician Jonas Elmerraji wrote over the weekend, “we expect to see stocks move a little lower this coming week.

“Whenever there’s a pullback, it’s crucial to keep thinking about context — any move lower next week is still in the context of an uptrend in the S&P, so don’t be surprised if we see some profit taking among investors.”

  Precious metals are also losing ground. Gold is down about four bucks, to $1,616… Silver has tumbled back below $28.

  “North Dakota and Mongolia have a few things in common,” writes Chris Mayer, engaged in a thought experiment.

After his trip to Mongolia — the world’s fastest-growing economy — Chris has generated several ways to play the boom. Most of them are focused on the capital city Ulaanbaatar and a key concept in emerging-market investing: “Buy real estate close to the city center early in the bull market.”

With that in mind, Chris poses the questions, “Where is the Mongolia of America? And how can you own the real estate?”

Chris humbly submits the Peace Garden State as the best analog to Mongolia. “Both are wide-open spaces,” he says, “and relatively sparsely populated. (North Dakota-born CBS correspondent Eric Sevareid called his home state ‘a large, rectangular blank spot on the nation’s mind.’) Both are resource rich. And both are in the early stages of a boom.

In Mongolia, it’s copper and gold. In North Dakota, oil can be squeezed profitably out of the Bakken shale for less than $70 a barrel. “With 7,000-plus producing wells and more than 50,000-plus possible (just with current technology), this bull is still young.”

Housing is in ridiculously short supply. “You can rent a metal box in a ‘man-camp’ for $2,400 per month — that includes food. Rental rates for apartments are similar — but they don’t include the food.

“Recently, a publicly traded real estate company completed a 145-unit apartment complex. Overnight, renters tied up 133 of them for 36 months. There was a 350-person wait list for the last 12 units. The initial yield for the property owner is 16%! Knowing a good thing, the company also grabbed 40 acres of land that can support another 850 units.”

The firm is Investors Real Estate Trust (IRET), headquartered in Minot, N.D. Unfortunately only about 20% of its holdings are in the Bakken region. Nor is that the only problem. “It has too much debt for my tastes,” Chris says. “And though the dividend is fat, cash flows don’t cover it.”

But he remains on the lookout for other possibilities…

 Japan is looking very… Japanese… this morning.

Second-quarter GDP clocked in at an annualized 1.4% — a lot less than the “expert consensus” of 2.3%. There’s still plenty of stimulus coming from the Japanese government more than a year after the Fukushima earthquake… but that’s being rapidly offset by shrinking exports to Europe.

At last check, it takes 78.311 yen to equal one U.S. dollar.

“I see a very interesting opportunity in trading the USDJPY pair for income this week,” says Abe Cofnas. “The dollar/yen is notoriously very sticky. It takes a lot for it to move big. But one thing to watch out for is the yen getting too strong against the dollar. That is not good for exports… and Japan needs more export growth.”

That brings us to this week’s “mock trade.” Like last week’s successful play on the Canadian dollar, it’s a two-sided play that counts on the yen staying within a trading range by week’s end. If the yen stays above 77.25 and below 79.25 both sides of the trade will deliver about 6%.


Not the biggest return Abe’s gone for, but still not bad for four days. To learn more about how you can put these mock trades to work for real, give this a good look.

  The old saw about hard times being good for the booze business is once again proving true… with a twist, as it were.

In the beer space, major brewers like Anheuser-Busch and MillerCoors are seeing profit slump…. But sales at “craft brewers” jumped 14% in the first half of 2012.

According to U.S. News & World Report, there were only 89 breweries in the country in the late 1970s. Today, thanks to the craft boom, the number is 2,126 — the most since 1887.

Ditto for wineries. Since the onset of the financial crisis five years ago, the number of wineries has grown by 2,000 in three years, to 6,672 — a record.

“It looks like wine, like beer, is showing a lot of growth at the high end — the wines that cost over $20 a bottle, the beers that cost more than $26 a case,” says Paul Gatza of the Brewers Association.

So after folks throw up their hands at $12 movie tickets and exorbitant dinners out… higher-quality “artisanal” adult beverages are the last recreational refuge…

time “‘You’re being robbed,'” a reader writes after the crazy protest-arrest story in Friday’s episode, “is not bank robbery, or suspicion or even attempted bank robbery; it’s freedom of speech. He had no weapon on him. Did he actually step into the bank?”

The 5: That he did. He was also wearing all black and at one point had a bandana covering his face, which doesn’t help matters.

Pennsylvania prosecutors have dropped the attempted robbery charges against David Gorczynski, but he still faces a felony rap for “terrorist threats”… and the ever-popular “disorderly conduct.”

The DA says he’s willing to negotiate a plea deal so Gorczynski won’t do time. What a guy…


Dave Gonigam

The 5 Min. Forecast

P.S. Did you notice the recent cover of The Economist?

No, we don’t mean Uncle Sam’s creepy tassels (what were the artists thinking?), but rather the fact the mainstream is about six months behind on Byron King’s “Re-made in America” thesis.

“Many countries have shale gas,” the magazine says, “but as it did with the Internet revolution, America leads in exploiting it.”

That’s not even half the story. Byron reveals the rest… and the highly profitable implications… in this presentation. You’ll want to review it now: What shows up in The Economist tends to show up a few weeks later in Time and Newsweek. By then it’s common knowledge and the profit train might well have left the station. Check it out.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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