Legacy of a Berserker

April 26, 2013

  • The curious culinary habits of Kim Jong Il… and whatever happened to his nukes anyway?
  • How North Korea got nukes in the first place… and Byron King performs a thought experiment
  • Major number misses expectations, markets unfazed
  • Amoss on the most important number relevant to gold: Zero
  • Buyer beware: Neil George on the rush into REITs
  • A sampling of your answers to our question: “What’s the greatest threat to your financial security?”


  “North Korean Despot Ate Hippos, Snakes and Spiders,” says the breathless headline in the British tabloid The Sun.

Time has picked up the story too: “Kenji Fujimoto, a Japanese national, first visited North Korea in 1982 and six years later became Kim Jong Il’s personal sushi chef, earning $70,000 a year in the impoverished nation and driving two Mercedes cars.”

“Hippopotamus was very good,” Fujimoto said, “and tasted like chicken.” Of course it did…

Kim Jong II

No doubt Kim enjoyed these delicacies with some fava beans and a nice Chianti…

Evidently, this is what passes for “news” from North Korea now. What happened, you might ask, to the nukes obtained by the now-deceased Kim… and brandished by his pudgy progeny only days ago? Today, The 5 sets out in search of, if not definitive answers, at least worthy insight.

  “Administration officials are increasingly confident that the worst of the crisis on the Korean Peninsula has passed,” says The Swoop — the elliptic website updated precisely once a week by the Washington Assessment and Analysis Service.

“There is still some surprise in the intelligence community that the North Koreans did not carry out some demonstration of military prowess – which leads analysts to suspect that another round of belligerence by North Korea lies ahead.”

In other words, when you see “Breaking News” on CNN about a missile firing or nuclear test, don’t be surprised.

  “How did a berserker like North Korea’s Kim Jong Il get the bomb in the first place?” asked freelance journalist Greg Palast in 2006.

“Answer: He bought it from the Dr. Strangelove of Pakistan in 2001 — while all our president’s men ordered our intelligence agents to keep their eyes shut tight.”

Two months after the Sept. 11 attacks, Palast — on assignment for the BBC — got a phone call from Washington. “The top-level U.S. intelligence agent on the line had much to be unhappy and disturbed about: a ‘back-off’ directive… He said there were particular investigations that were effectively killed.”

Among those investigations: A.Q. Khan, the father of Pakistan’s atomic bomb. “To raise the cash for Pakistan’s program (and to pocket a tidy sum for himself), Khan sold off copies of his baby, his bomb, to Libya and North Korea—blueprints, material and all the fixings to blow this planet to Kingdom Come.”

The U.S. investigation was squelched because of Khan’s other money source: “The Saudis, who had secretly funded Saddam’s nuclear weapons ambitions in the ’80s, apparently moved their bomb-for-Islam money from Iraq to Dr. Khan’s lab in Pakistan after Saddam invaded Kuwait in 1990.”

The orders from on high to U.S. intelligence in late 2001: Back off Saudi Arabia. Khan and Kim sealed a deal.

  “For the longest time,” says our Byron King, “Western analysts believed that the North Koreans used only plutonium for nuclear weapons, the manufacture of which requires a highly visible ‘hot’ reactor. Yet recently, the North Koreans appear to have cooked off an enriched uranium bomb.”

If true, “for how long have the North Koreans been enriching uranium? Just a few years? Or perhaps 20 or so years? They don’t say. And whatever enrichment facilities the North Koreans have, they’re doubtless buried deeply, far from the sharpest of prying eyes.”

  “I’ve seen public estimates, allegedly by intelligence ‘experts,’ that North Korean leaders have perhaps five or eight nuclear weapons at their disposal,” Byron added in a recent briefing for Military-Tech Alert readers.

“Oh, really?

“Let’s stretch our minds here. What if the North Koreans have, say, 50 special weapons? What if the North Korean target list includes Seoul and Tokyo? What if the North Koreans seek payback for decades of perceived humiliation? (As for the Japanese colonial years, Korean memory runs deep.) Indeed, what if even neighboring China — say, Beijing — is hostage to North Korean nuclear weapons as well?

“What do the North Koreans have? What does the rest of the world look like viewed from a nation of tunnels? Perhaps it looks to them like they have a lot of other nations painted into a tight corner. What’s the tech solution for that?”

[Ed. note: We’re still making Military-Tech Alert available only to readers of Byron’s existing publications. But if you haven’t tried out his other premium advisory, Energy & Scarcity Investor, you don’t know what you’re missing — including a development that could revolutionize everything from transportation to aerospace to electronics.

“Full-scale production,” Byron says, “is expected to begin by June of 2013.” Which means now’s the time to pounce.]

  The big economic number of the morning was a big fat miss: The Commerce Department’s estimate of first-quarter GDP rang in at an annualized 2.5%.

That’s better than the 0.4% in the fourth quarter of 2012, but the “expert consensus” was looking for 3%. For people who believe GDP measures something meaningful, the internals of the report are worrisome — starting with an inventory build. That suggests the Keynesian be-all-end-all known as “aggregate demand” is softening.

  The Street is taking the disappointment in stride, knowing every rotten number only encourages the Fed to keep mainlining monetary heroin.

The major indexes are oscillating around yesterday’s closing numbers, the Dow still holding the line on 14,700.

  Gold is likewise holding on to yesterday’s late-day gains, at $1,469. Silver’s lost a little ground, currently $24.20.

  “Ignore Wall Street’s clueless, half-baked opinions of the gold futures market,” says Dan Amoss. “The number you need to remember is zero.

“Zero is where central banks will peg interest rates for several years into the future. Zero is also the number of times in recorded history that the monetary policy currently in place worldwide has boosted an economy to ‘escape velocity’ (as economists say).

“Such radical policies always result in destruction of the currency being printed. In other words: stagflation — not sustained economic recovery. Japan will discover that history rhymes once its financial market sugar high wears off.

“As inflation expectations rise — the great hope of Bank of Japan governor Kuroda — Japanese investors will discover that money-printing schemes are addictive, with no practical exit. Here’s why: Once consumers buy tomorrow’s products today (ahead of expected price rises), what will they buy when tomorrow arrives? When tomorrow arrives, the howls for another round of printing will be louder than ever!”

  “The real world isn’t nearly so simple, and easily modeled, as the professors running central banks believe,” Dan adds.

“Trying to ‘boost inflation expectations’ will only trap central banks into permanent cycles of easing — both in the U.S. and Japan. The bigger government debts get, the harder it will be for central banks to tighten policy.

“Finally, zero happens to be the number of fiat currencies in history that held their value. The dollar’s value isn’t going to zero anytime soon, but debasement continues, and stopping the growth of federal entitlement spending — the real driver of chronic deficits — is politically impossible. The guardians of the dollar’s sanctity, rather than preserving its value with positive real interest rates and balanced budgets, are aggressively pushing it toward its ultimate destination: zero.

“When these facts change, it will be time to sell gold. The facts have not changed.” For the speculative-minded, Dan has a bargain-priced gold play in today’s 5 PRO.

  “There’s a real ‘land rush’ for real estate investment trusts (REITs) and related dividend-paying real estate companies,” observes our income specialist Neil George.

“Investors are buying them up because of the strong demand for underlying land and property assets, as well as the steady stream of dividend flows.” A year-to-date chart of Bloomberg’s REIT index looks like this…

High Demand

But success comes with a price. “The increased demand for REITs has actually hurt their yield,” says Neil, “dropping the average to a measly 3.35%.”

Part of the problem is the underlying value of REITs’ net assets. “Book value — the net measure of the properties and other assets net of liabilities — has continued to rise across the market. And the market bidding up much of the stock prices of the overall REIT market has ramped up how much of a premium investors will pay for the average REIT.”

At present, the U.S. average is sitting at over 2.48 times the underlying net assets. “That’s a hefty premium,” Neil says, “especially when you consider that the average REIT was selling at a discount to net assets just a few years ago.

“So finding discounted REITs is extremely hard. In fact, most of the discounted REITs you will find are in measurable trouble.”

That is, with a handful of niche exceptions Neil has recommended in Lifetime Income Report. Not a subscriber yet? Here’s one of Neil’s favorite income ideas right now.

  “Real simple — inflation,” reads one of the hundreds of replies Addison solicited from Daily Reckoning readers, asking them what’s the biggest threat to their financial security.

“I am a senior, have gone through all my savings and watch all bills go UP on a weekly basis. I mean everything. Groceries on a daily basis. So I say INFLATION.

“Our personal liberties are in great danger,” he adds. “We are becoming a police state every waking day — it’s very scary. Even if we find a way to earn extra income, it will be eaten up through inflation as quickly as we get it. We have no place to store our money, except under a mattress that the government can’t get their greedy hands on. Thank you, Obama.”

  “I believe,” another writes, “the greatest threat to our financial security is the present administration’s desire to overtax and overregulate the engines of economic growth, while at the same time encouraging a majority of the population to dependency and nonproduction, all done with total disregard for appropriate budgeting or debt reduction. This threat is equally great for me personally and for us collectively.”

  “The individuals who serve in the House and the Senate,” writes a third, “are controlled by lobbyists and big corporations whose interests are not aligned with the majority of the people, and the banking system, controlled by the Federal Reserve, protects the interest of bankers.”

  “One has to wonder,” suggests yet another, “how the federal government, which does include the Federal Reserve, in my opinion, will make the next transfer of wealth from the rest of America to the large banks on Wall Street and to itself.

“They have successfully implemented the zero interest rate policies to ‘steal’ from the people that have saved, or even want to, and now they have conspired to help drive down the price of all precious metals, which will allow all those same Wall Street banks and the Federal Reserve to cover their short positions at the expense of every other person who had a long position.

“I am wondering what they will do next. Maybe force us to buy U.S. Treasury bonds, the same way they now force us to buy health insurance? I am sure there are plenty of suggestions bouncing off the walls of Congress and the White House, and I’m sure we will see a new one by the end of the year.”

The 5: Thank you for the replies. The second part of our survey was even more interesting than the first. After you identified the biggest threat, we posed a multiple-choice question. Check this out…

You Talked, We Listened

As we’ve suggested the last couple of days, your replies are central to the major changes coming to our flagship daily e-letter. They’ve helped us formulate solutions to your problems that Addison says are “unlike anything we’ve done in the 13-year history of publishing The Daily Reckoning.”

A big promise, indeed. But I still can’t take the wraps off what’s about to happen. That’s up to Addison himself… and last I checked, he’s still revising the announcement email that will hit your inbox later today.

Stay tuned…

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

P.S. “From staffing to Web development,” Addison mentioned in passing, “we’ve spent more than $1 million preparing for today.”

But this announcement isn’t about us… It’s about the next step we’re taking to meet your needs. Again, keep an eye on your inbox. All will be revealed before the close of business today, East Coast time.


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