National Economic Suicide

October 25, 2012

  • If the politicos won’t act, the Fed will: Byron King on Bernanke & Co.’s latest moves
  • A “major shift” in the metals markets: The chart that confirms investors are moving from “paper gold” to the real thing
  • From Uncle Sam’s cross hairs into the arms of Russia and China: new developments in the saga of the rating agency that dared to downgrade the U.S. first
  • Finding holes in an impenetrable substance: New uses for the wonder substance graphene
  • Reporter takes on TSA, TSA takes off the gloves: When life becomes a Family Guy episode… Plus: A reader’s encounter with the no-fly list — and he wasn’t even boarding a plane!

  “From the outside looking in,” opines our resource maven Byron King, “it appears that the Fed has all but given up on the American political class.”

Let’s back up a moment: The Fed wrapped up one of its periodic two-day meetings yesterday. After launching QE-to-the-moon six weeks ago, this time no surprises were expected, and no surprises were delivered…

  • Near-zero interest rates will remain in place through “mid-2015”
  • Operation Twist — in which the Fed trades in its short-term Treasuries for longer-dated ones — will continue through year-end
  • The Fed’s $40 billion monthly purchases of mortgage securities, launched last month, continues apace.

  “For the past couple of generations,” Byron goes on, “U.S. political leadership simply was not serious about the nation’s money, let alone maintaining the foundations of national wealth.

“Even (allegedly) conservative former Vice President Dick Cheney once said, ‘Deficits don’t matter.’ Oh, really?”

Enter the Fed: “Right now, the Fed is playing its last cards — ‘jokers,’ some might opine — via QE3. The Fed rationale is, evidently, that the ‘political’ part of the national government can’t harmonize tax receipts with overall expenses. So the unelected, ‘independent’ Fed will open the currency spigots and inflate away!

“It leads to the question of whether or not the U.S. is committing national economic suicide.”

One of Byron’s readers writes: “It’s all out of my control. I don’t know exactly what to do, so I’m in cash, gold and silver. I have shares in a few mining plays, and a couple oil companies. But mostly cash, gold and silver.”

“I couldn’t have said it better myself,” Byron replies.

  Gold tested $1,700 for a brief moment yesterday, but the line held: This morning it’s up to $1,716. Silver’s back above $32.

100  “It’s not too often that you see a major shift within the gold market,” writes Jeff Clark from Casey Research.

The last one came in 2004 with the introduction of a gold ETF. Today there’s a profusion of them; the largest holds more gold than all but four of the world’s central banks.

Now? “Investors are shifting from paper to physical,” Clark writes.

If you’ve been with us regularly this month, you’ve seen mainstream banker types from Barclays and Deutsche deliver anecdotes confirming this trend. Here, courtesy of Mr. Clark, are the numbers to back it up. “The following chart shows the total purchases since 2001 of gold coins and bars versus the net additions to gold ETPs.

“I began to watch this trend,” Clark goes on, “after it was reported last year that billionaire hedge fund manager John Paulson dumped his shares in the ETF GLD, opting instead to purchase physical metal. Since then, the shift out of paper proxies for gold and into the metal itself has picked up steam, and it’s now clear that a new investor trend is under way.”

The investing take-away: If you want physical, don’t wait for the price to come down further… especially as the Fed opens those currency spigots further.

“Acting now — securing the gold you want and need — is critical to withstanding the likely fallout ahead from the mountain of unpayable government debt and promised benefits,” Clark concludes.

Along with the folks from Casey Research, Agora Financial is a founding member of the Hard Assets Alliance… offering you the simplest means of accumulating your own stash. You can take delivery or you can store it in Zurich, London, Melbourne, New York or Salt Lake City. (Singapore is in the works.)

And the account setup fee is still being waived, so it won’t cost you a thing to get started. [Note that we may be compensated once you open an account; but we would not have joined the Hard Assets Alliance if we didn’t believe it offered you outstanding value.]

  Stocks are up modestly this morning after the major indexes finished flat yesterday. The Dow has hoisted itself past 13,100.

Among the numbers in traders’ sights…

  • First-time unemployment claims: Another big swing last week, down 23,000. But the four-week moving average is again barely budging at 366,500. “Healthy” job growth it’s not
  •  Durable goods orders: Up 9.9% in September. Unfortunately if you take civilian aircraft out of the equation, the number is flat.

  For a refreshing real-world economic indicator, we see truck tonnage grew a bit last month.

The American Trucking Associations’ For-Hire Truck Tonnage Index grew 0.4% in September… after it slipped 0.9% in August. The number has moved within a tight range all year.

Unfortunately, most of the current bump up can be attributed to a single factor — growth in housing starts. That growth, says an ATA news release, “is being countered by a flattening in manufacturing output and elevated inventories throughout the supply chain.”

  One of the more reliable recession indicators out there is no longer flashing yellow.

The Philadelphia Fed State Coincident Index crunches four employment indicators for each of the 50 states. The line on the chart indicates the number of states in which activity is growing; a drop below 38 has preceded every recession going back to 1980.

Last year, the index delivered a false alarm. And the same appears to be happening this year: The number spent all summer below the 38 threshold, only to recover to 41 in September.

  The Fed’s other reliable recession indicator is also refusing to flash yellow.

The Chicago Fed National Activity Index crunches 85 economic indicators. Readings of -0.70 typically precede a recession; only once since 1970 was the index late.

This morning the reading for September came in above that threshold at -0.37… up from last month’s -0.53.

  Having crossed the feds already, the plucky rating agency Egan-Jones is going all in… and joining up with the Chinese and the Russians.

Egan-Jones is the lone rating agency that’s paid by the buyers of the securities it rates — unlike S&P, Moody’s and Fitch, who are paid by the issuers. Or as author William D. Cohan wrote at Bloomberg recently, Egan-Jones is “the one rating firm not on Wall Street’s take.”

Thus did Egan-Jones downgrade U.S. Treasury debt last year weeks before S&P.

Readers with keen memories will recall Egan-Jones was rewarded earlier this year for its ethical business model and forthright opinions… with a Securities and Exchange Commission investigation. It is ongoing.

One of the SEC’s main complaints is that Egan-Jones appears understaffed.

The firm is proceeding to address that concern… by launching a joint venture with the Chinese rating agency Dagong and Russia’s RusRating.

Dagong made a splash when it issued its first sovereign debt ratings in 2010… putting the United States two notches below AAA. And it downgraded Uncle Sam further last year.

The joint venture will be based in Hong Kong. “It is an historic imperative,” reads a statement from the three companies, “to establish a new type of international credit rating system which follows the inherent requirements of credit rating and which is aligned to the common interests of human society.”

Florid rhetoric aside… Nice job on Egan-Jones’ part of sticking a finger in the feds’ eye.

  What can repel bullets better than Kevlar?

Conduct heat better than silver? Transport electrons 1,000 times better than silicon? Is harder than diamonds and a million times thinner than a piece of paper?

If you guessed graphene, good job, fellow 5-er, you’ve been paying attention.

Although we’re pretty versed in graphene’s capabilities, it’s moving so fast sometimes it’s hard to keep up with the latest:

“No one has looked for holes in graphene before,” the new leader of the pack Rohit Karnik observes.

“There’s a lot of chemical methods that can be used to modify these pores,” the associate professor of mechanical engineering at MIT explains, “so it’s a platform technology for a new class of membranes.”

Karnik and his colleagues discovered that the honeycomb pattern of graphene that was once thought impenetrable comes with one unseen flaw: small molecules such as salts are able to pass through quite easily.

Yet one man’s flaw is another man’s fortune. “The results,” MIT News reports, “the researchers say, point not to a flaw in graphene, but to the possibility of promising applications, such as membranes that filter microscopic contaminants from water, or that separate specific types of molecules from biological samples.”

Reaching beyond even our expectations, as graphene continues to grow in popularity, as does its usefulness.

Unfortunately, your opportunities to seize a ground-floor investing opportunity in this revolutionary material are coming to a close… this Sunday, to be exact.

  I think the TSA is engaged in a nationwide effort to cavalierly and routinely strip travelers of their dignity,” writes Diane Dimond. “I think in some instances the system is decidedly un-American.”

Who knew Ms. Dimond — best known for her celebrity exposes as the “investigative reporter” on Entertainment Tonight — had a syndicated column?

“We are captive to the airport monopoly,” she writes. “There is no other way to travel long distances quickly unless you’re Donald Trump and you have your own private jet.

“I completely understand the need for airport security,” she goes on. “But does the TSA have to treat all of us like we’re new arrivals at a prison camp?”

In today’s War on You daily outrage, it seems the TSA is amping up the pressure in replying to its critics. No more pro forma statements about how “TSA officers are following their proscribed procedure.” No, a TSA flack named Lisa Farbstein responded with her own Op-Ed.

“Perhaps,” Farbstein writes, “the next time Diane and her family fly out of a New York-area airport to a fun vacation spot, they’ll look out the car window at the New York skyline minus the Twin Towers and remember some of the true facts about TSA and why it exists.”

Yep. The 9/11 card.

Dimond, Farbstein wrote, “criticized the very security measures that were designed to keep passengers safe — to help ensure that there is not another 9/11 in her backyard.”

Oy… Life is finally imitating art…

Dimond is a frequent flier. Whether the feds allow her to remain one, we shall see.

Which takes us to the War on You mailbag…

  Your item about Wade Hicks Jr.’s no-fly list problems prompted me to tell you about what happened to my wife and me about one year ago when we went looking at new cars one day and were talked into buying one that day.

“We are at an age that we have sufficient funds to pay for the mid-size car with cash or, in our case, self-financing. No, I did not carry $20,000 into the dealership. I simply told them that we were self-financing the vehicle purchase.

“Imagine, to both my wife’s and my surprise, when during the paperwork processing, the lady informed us that we had to sign an authorization for the dealer to check the government’s no-fly list.

“We were both kind of worn out by the salesman and just wanted to get the process over with and signed off. By the end of the paperwork, the paperwork processing lady informed us, ‘Oh, by the way, you and your wife will be happy to know that you are not on the no-fly list.

“I was simply too tired at that time to ask if we would not have been able to buy the car if we were. Or if we were, would we have to finance the car???

“Subsequently, the salesman drove me to the bank, where I got a cashier’s check for the $19,000 purchase price, so literally, I was taking the money from my own savings, but because I had that much in savings, I guess that means you are subject to government monitoring?

“To this day, my wife and I talk about what would have happened if we had been found on the list — could we have not purchased a car with our own savings? Would the local SWAT have swooped in and demanded to know how we saved $20,000?? Makes one wonder!

“Just thought I would share our experience with an ever increasingly overbearing government.”

The 5: Thank you. Does this square with anyone else’s experience? For more hair-raising stories — and a means to start fighting back — look no further than Addison’s latest special report.

  In response to the reader who posted we have a corrupt government as the cause of the ‘War on You’ injustices… I think it is more accurate to say we have a corrupt electorate.

“Voters everywhere turn a blind eye to abuses by politicians if they happen to gain a perceived benefit. After all, roughly half the population is on the government dole in one form or another. From contractors of the military-industrial complex to free ‘Obama phone’ recipients to government workers with generous pensions, everyone votes with their hand out to receive their unconstitutional, unauthorized share of ‘largesse’ from the ‘benevolent’ feds.

“The status quo of Big Government is highly attractive to a vast majority of voters who simply want theirs regardless of the consequences. Because of this widespread lack of integrity and personal conviction, we as a nation truly receive the government we deserve.”

The 5: Now you’ve done it: You’ve inadvertently reopened the debate over whether voting is a waste of time.

Addison will share some new and provocative ideas on the subject in the run-up to Election Day. That’s all we’ll say for now. Stay tuned.


Dave Gonigam

The 5 Min. Forecast

P.S. Seats are filling up fast for a new round of the Rancho Santana Sessions. If you’re interested in foreign business opportunities, foreign real estate or strategies that can limit your U.S. tax liability… Rancho Santana is the place to be Dec. 5-9.

The Daily Reckoning’s own Eric Fry will be your guide through a series of workshops in which you’ll have ample opportunity to ask questions of our expert speakers. To learn who we have lined up, please review this invitation.


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