Something Wicked This Way Comes

September 20, 2012

  • “What are you guys smokin’?” and other gems from the mailbag… more serious than it looks…
  • Viral email warns of troop buildup in Israel? The 5 surveys its own “chatter”…
  • The Empire sews its own destruction… impending “financial crisis” forecast by top money manager… and bank bailout insider…
  • Three more good reasons to buy gold… readers abuse Tucker for can opener discovery… one reader actually gets the point… a “hostess of horizontal refreshment”?… the secret to Sarnoff’s options strategy… and more!


  You have to love a day that begins with: “What are you guys smokin’?”

Specifically, the reader was responding to Jeffrey Tucker’s amazement over a new can opener he’d purchased. But could have easily applied to any number of themes we plumb in The 5 on a daily basis.

Take this next item, for example:

 “This is the second iteration of the same message I have received today,” begins a viral email which also landed in our inbox. “Is it true? I don’t know, but the state of the world certainly makes it a strong possibility.

The email alludes to political motivations of the president. And the direct impact of the U.S. election should Obama get re-elected. You’re free to speculate as to what one politician winning over another means… we did as much, here.

  But we have a different mission in today’s 5: If this viral email is true… and war breaks out before the election, what does that mean for you and the decisions you have make about your money and your family’s future?

The mainstream media outlets have barely touched this story, except to capture posturing and saber rattling from both sides… merely, it often seems, for their obvious entertainment value. Bread and circuses, we observed in Empire of Debt, it now seems like a lifetime ago.

Alas, this is the world we have inherited.

130  “Empire building bears the seeds of its own destruction,” Dr. Hans-Hermann Hoppe writes in The Great Fiction, in an exclusive release from Laissez Faire Books.


“The closer a state comes to the ultimate goal of world domination and one-world government, the less reason is there to maintain its internal liberalism and do instead what all states are inclined to do anyway, i.e., to crack down and increase their exploitation of whatever productive people are still left.

“Consequently, with no additional tributaries available and domestic productivity stagnating or falling, the Empire’s internal policies of bread and circuses can no longer be maintained. Economic crisis hits, and an impending economic meltdown will stimulate decentralizing tendencies, separatist and secessionist movements, and lead to the breakup of Empire.

“We have seen this happen with Great Britain, and we are seeing it now, with the U.S. and its Empire apparently on its last legs.”

Forthwith, we present the two exhibits for a crumbling financial infrastructure: one from an architect for the bailouts… another from a principal benefactor of the financial system for well on four decades.

  We have a lot less dry powder to deal with a new crisis, and we almost certainly will have one,” Neil Barofsky said in an interview with Hera Research (HR) this week.

“When you look at the fiscal impact of the 2008 crisis,” Mr. Barofsky goes on, “you have to look at it not only in terms of lost tax revenues and increased government debt, but also in terms of the loss of household wealth. People who became unemployed suffered tremendous losses and the government’s social benefit costs expanded accordingly.”

As Doug French mentioned yesterday, “It all began in 2008, as it usually does.”

When asked why he expects another financial crisis, Barofsky said, “The presumption of bailout for ‘too big to fail’ institutions changes the incentives of a normally functioning free market. In a free market, if an institution loads up on risky assets with too little capital standing behind them, it will be punished by the market.

“Allowing ‘too big to fail’ institutions to exist removes that discipline,” Barofsky explains.

“The presumption is that the government will stand in and make the obligations whole even if the bank blows up. That basic perversion of the free market incentivizes additional risk.”

 “Are ‘too big to fail’ banks taking more risks today than they did before?” HR asks Barofsky.

Yes, Barofsky says, in essence, because if the banks mess up, they know “taxpayers will pick up the tab.

“The presumption of bailout increases systemic risk by taking away the incentives of creditors and counterparties to do their jobs by imposing market discipline and by incentivizing banks to act in ways that make a bailout more likely to occur.”

“Is it just a matter of the size of banking institutions?” HR asks.

“The big banks are 20-25% bigger now than they were before the crisis,” Mr. Barofsky points out. “The ‘too big to fail’ banks are also too big to manage effectively. They’ve become Frankenstein monsters. Even the most gifted executives can’t manage all of the risks, which increases the likelihood of a future bailout.”

Also, says Barofsky, “The big banks are not just ‘too big to fail,’ they’re ‘too big to jail.’ We’ve seen zero criminal cases arising out of the financial crisis.”

The problem being, if one a couple strings of the web are struck, it “would bring the entire financial system down with them. There is a similar danger with respect to their top executives, so they won’t be indicted in a federal criminal case almost no matter what they do.

“If people know they won’t be held accountable, that too will encourage more risk taking in the drive towards profits.”

HR: “So it’s just a matter of time before there’s another crisis?”

“Yes. The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse. We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naive to expect a different result.”

(For Doug French’s take on Barofsky’s new book, Bailout, read his Laissez Faire review here.)

 “It’s urgent that people wake up,” octogenarian John C. Bogle told The New York Times recently.

Despite “at least six heart attacks and one heart transplant,” according to the NY Times, Bogle is making his rounds in the info-world with dire warnings about what’s to come.

What’s worrying him most these days? “The coming train wreck in the financial system,” Bogle told USAToday in another interview.

  “I don’t think we’ve lost the battle for the soul of capitalism,” Mr. Bogle asserts. “But right now, our capital system is functioning badly. Long-term investment is being crowded out by short-term speculation.”

Another problem, Bogle says, is “individual investors don’t speak up for themselves. Seventy percent of the market is owned by agents [those who invest other people’s money]. And the agency system is not working well.

“Capitalism works when it puts capital to work at its highest and best use,” Bogle goes on.

And that is impossible when, “over 99.2% is speculative, and 0.8% is invested.

“In our capital markets, we have an agency system that is really a double agency system. We have the agents for owners [an example is mutual funds] and we have the agents for shareholders [those are directors]. And they operate in a happy conspiracy that is too focused on price rather than value.”

[Ed. Note: Mr. Bogle is a fellow Little Book author at Wiley: The Little Book of Common Sense Investing. If you don’t know already, you can learn “47 ways” to defend against a shrinking dollar, here for free.]

  “In our opinion,” says credit rating firm Egan-Jones this week, “QE3 will be detrimental to credit quality for the U.S.”

“Fearing the negative repercussions of the Federal Reserve’s latest easy-money program,” Fox Business reported last week, “ratings firm Egan-Jones once again slashed the U.S.’s credit rating on Friday.”

Thanks to the Fed, we slid another notch down on the scale, AA-.

“Egan-Jones said it believes the Fed’s third round of quantitative easing, which sent stock prices surging on Thursday, ‘will hurt the U.S. economy and, by extension, credit quality,'” Fox continues.

“The firm said that while the program should boost equity markets, issuing additional currency and depressing interest rates through purchasing mortgage-backed securities will hurt the value of the U.S. dollar and cause a painful increase in commodity prices.”

It would appear Hoppe, Barofsky and Bogle’s “it’s only a matter of time” warning just got a little more real.

  Speaking of price rather than value, let’s see what the markets are up to…

Today, the dollar went up, slightly. It sits at $79.50 thus far, under a half a point more than yesterday’s close.

Oil is up, too. Its first uptick this week added 27 cents, to make oil $92.25 per barrel. Gold is down almost a dollar and hovers around 1,769.80. Silver is up about a dime, to $34.69.

The S&P is down 5 points, to 1,456. The Dow, down 20 points, to 13,557. And the Nasdaq is down 15 points, to 3,166.

  Markets go up. They go down. Sometimes they move sideways. A reason always makes them move. Why do they move today?

Our small-cap specialist Jonas Elmerraji offered to drop in today and explain: “Mr. Market is correcting for a fourth day today,” Jonas writes, “moving sideways after a nearly 4% higher rally in the S&P 500 since the start of September. For a point of reference, if stocks climbed that quickly for all of 2012, we’d be looking at a 70.3% year for stocks. So it’s not entirely surprising that buyers are feeling a little bit exhausted today.

“The pullback has infinitely more to do with September’s rally than the Bank of America layoffs that they’re headlining at The Wall Street Journal,” Mr. Elmerraji says.

“So far, the rally that kick-started in June has been orderly. With momentum still holding an uptrend right now, stock investors have a good indication that prices aren’t likely to start waning short term — especially after Bernanke and company announced that they’d be punishing owners of safer assets by dumping QE3 on the market with a higher level of forward inflation in place than there’s been in any of the previous easing moves (QE, QE2 or Operation Twist).”

“Also,” colleague Greg Guenthner chimes in, “look how quickly the dip was bought this morning. It’s important to remember that A) mutual/hedge funds are very underweight stocks, and B) their collective performance this year sucks (again).

“I suspect we’ll see fund managers continuing to chase the market this quarter — a possible contributor to even higher prices.”

  “Gold is on a roll,” our resource adviser Matt Insley pronounces today.

“The metal is up $140 in the past month — and with no abatement to the government spending (and printing) problem, the shiny stuff could be headed much higher.”

Today, Matt and Greg Guenthner have joined forces to explain the technicals of the Midas metal’s movements.

“Is now the time to buy gold or miners? Where’s the next price target or buying opportunity? Is there any downside to gold’s recent run-up?” Matt asks.

  “Now that gold has extended its August breakout,” Greg responds, “you need to use market-timing strategies to plan your buying and selling.

“Let’s take a look at the power of the latest gold breakout:”

Since Greg’s first alert of gold’s initial breakout last month, “Gold trades at $1,773 — a $100 jump in less than a month. Back in August, I noted strong support at $1,575. This was the point where buyers swooped in at bargain prices in December 2011 and March-June of this year.

“Strong buying at these levels helped spark the momentum gold needed to begin its new run…

“If you’re a buyer of physical gold,” Greg writes, “your next course of action should be determining where you might find ‘buyable’ pullbacks. To pinpoint these important areas, we turn to a daily chart:

“The most important thing to note right now is that gold is overbought and due for a short-term pullback.”

Where’s the bottom if gold does pull back? “If I had to guess right now, I would say you might have an opportunity to buy near $1,725…

“Your second buying opportunity will come later when gold breaks $1,800. Again, the same rules apply for this breakout. Don’t chase the price. If you miss the initial $1,800 break, wait for a retracement back to a new support level and confirmation that gold is once again moving higher before you buy.”

If you prefer shorter holding periods, you should look for opportunities in the mining sector. Greg can show you exactly how he picks these companies here.

  “Where have you guys been?” one befuddled reader asks. “I’ve had a top-opening can opener for several years.”

“Poor Jeff!” Another pities. “He’s been so buried in the past that he has only now discovered the can opener that has been around for many years. It is the rational solution to an old problem and should replace all of those stupid electric can openers. Welcome to the present, Jeff…”

“This type of can opener has been around for years now,” another writes. “I own both types, ‘new’ and ‘old.’ And by the way, it doesn’t ‘cut’ the can, it breaks the glue seal that holds the lid to the sides. Both have good application and use.

“‘New’ might be a little misleading. ‘New’ relative to the invention of the light bulb? Maybe.”

Uhhh, yeah. Well, at least one reader seems to have gotten Jeffrey’s point: “I’m glad to see Jeffrey Tucker is excited about his new can opener,” he writes. “Really. I’m not being sarcastic. It is pretty cool. Inventions like this should make us all reconsider how existing objects and institutions can be reinvented… and hopefully improved. Anyway, I enjoy your ongoing work.”


Mr. Tucker elaborates on exactly that today. Click here.

  “Sure, the housing market has a strong impact on spending,” a reader writes in on a tangent of the housing theme.

“Chances are higher that you will not purchase a new stainless barbecue to fit with your depreciated house. People spend a lot in renovation and house improvement, and that for sure goes down when the value of properties is uncertain.

“It is also proven that during ‘hard economic times’ people reproduce less… money talks bring stress and relationship discomfort. Fewer babies mean less spending, too.”

The 5: Right.

 “Hey, 5,” writes another, continuing on a theme, “you have completely overlooked a segment of the student population — the student who works his or her way through the four-year fest. My attractive, across-the-hall neighbor when I attended a university not far from Detroit was the primo example. Maintaining a small suite in a very famous Detroit hotel, she was a quite expensive ‘hostess of horizontal refreshment.’

“While new graduates today find themselves on their backs, so to speak, my young lady friend not only made her way through the four-year fest in style on her back, but carried through nursing school. She ain’t on her back or beholden to anyone today!!! Of particular interest (in addition to her philosophy of ‘Where else can I find a part-time job as much fun or which pays as well’), if her educational pursuits didn’t pan out, she had a really good backup plan.”

The 5: If you read between the lines of our nugget on SeekingArrangement, we think you’ll see we have this angle covered too.

Thanks for reading,

Addison Wiggin

The 5 Min. Forecast

P.S. “Stocks are moving lower this morning and the small-cap sector is off around 1%,” Steve Sarnoff writes of his latest options trade. “Our most recent reco, anticipating a slip in the small caps, the IWM October $85 put, triggered Sept. 19, 2012, at $143, is trading this morning at $201.

“That’s a 41% gain in one day.”

Having watched Steve post gains of “+44% in less than an hour,” “+84% in four days,” “+124% in four and a half months,” consistently in the past three months, we asked what exactly he saw that precipitated this trade?

“You may think I’m really old school,” Sarnoff replied, “by using ratios from a 13th-century Italian mathematician and charts from the rice markets of 18th-century Japan. The reason those ancient methods are applicable to today’s markets is the basic information available then is unchanged from what’s available today, namely, price, volume and open interest.

“Japanese candlestick charts reveal the human behavior – -buying and selling — that drives price movement. Friday’s action led me to look for a turn, because the small caps fulfilled a pattern, reaching a natural technical price objective, and began to fall. This showed me that selling — supply — was coming into the market just when sentiment was getting too bullish. Then I added the potential for corrections in currencies… which have been driving moves in and out of risk assets.

“With buyers having achieved a target and early warning signs of selling showing up, I found a good option (with a 2-to-1 return-to-risk ratio) to take advantage of a coming correction in small caps.

“I try to position my subscribers on the side (buy or sell) that has the advantage.” For an easy way to trade on that advantage, click here.


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