Epicenter of a Bursting Bubble

June 4, 2013

  • Not Detroit or any other big city: where “armed citizen volunteers” are doing what the cops can’t
  • Jim Rogers on whether commodities still have legs after 15 years… and Byron King with the outlook for “the metal with a Ph.D. in economics”
  • Hindenburg? Seriously? Jonas Elmerraji sends a market myth up in flames
  • The decade-long correlation between gold and a liquid asset class — now breaking down
  • Readers write: China’s motives in Iraq… the future of the “petrodollar”… the outlook for a “bond riot”… and more!

  “Josephine County is broke,” wrote the commenter at Huffington Post. “Armed citizen volunteers have taken over most patrol duties against the wishes of Sheriff Gilbertson.”

Washington, D.C., is flush with new tax revenue… and Wall Street is riding high with the big stock indexes near record highs. Meanwhile, in places far from the centers of power, we’re seeing one of our forecasts play out. Now nearly two years old, we said the “mother of all financial bubbles” would make itself felt first on the local level.

Josephine County, Ore. — population 83,000 — sits on the California state line. As long ago as 2007, the county government ran out of money for the libraries and shut them down; they’ve since reopened under the auspices of a nonprofit group.

  “I don’t have anybody to send out there,” said the 911 dispatcher to the woman who was about to be raped in her own home. “Can you ask him to go away?”

It happened in Josephine County last August. The story “went viral” only last week. The intruder — the woman’s abusive ex-boyfriend — eventually broke in, attacked and fled. Then police swung into action and arrested him.

“If you don’t pay the bill, you don’t get the service,” said Josephine County Sheriff Gil Gilbertson. Budget cuts, he says, make it impossible to respond to emergency calls on evenings and weekends.

“What’s left of the Josephine County Sheriff’s Dept. is basically only available 9-5,” concurs the HuffPo commenter.

“You may want to consider relocating to an area with adequate law enforcement services,” the sheriff added helpfully.

  The Sheriff’s office does, however, have the resources to carry out marijuana raids.

HuffPo’s Radley Balko put Google through its paces and came up with accounts of no less than four raids — all of them taking place since the woman was attacked in August.

Blame it on Washington’s perverse incentives, spotlighted in a 2010 Wall Street Journal article featuring Tom Bosenko, the sheriff two counties south in Shasta County, Calif. “If he steps up his pursuit of marijuana growers,” the paper reported, “his department is eligible for roughly half a million dollars a year in federal anti-drug funding.”

“The problem here,” writes Balko of the current case, “isn’t that there are no resources available for law enforcement officers to respond to 911 calls in Josephine County. It’s that federal, state and local officials have decided that preventing Josephine County residents from getting high is more important than preventing them from getting raped.”

 Turns out that even back in better days, it was federal money keeping Josephine County government afloat.

“Federal forests make up 60% of the land in many rural Oregon counties,” explains the Portland Oregonian. “Because federal land isn’t subject to property taxes, the federal government for decades shared timber sale revenue with the counties.

“But that money dried up as environmental restrictions, lawsuits, recession and market changes reduced logging on federal forests by 90% since 1989. The change cost counties millions.”

  The situation is quickly moving from bad to worse.

Josephine County residents narrowly rejected a property tax increase last month. Gilbertson is threatening to close the jail.

And the state government might end up Bigfooting the county for having voted the “wrong” way. Gov. John Kitzhaber is imploring the Oregon legislature to grant him emergency powers. “The measure would authorize the governor to declare a public safety emergency for up to 18 months,” reports the Associated Press. His powers would include the imposition of a local income tax.

Wonder what the “armed citizen volunteers” would think about that.

Who knows? Before it’s all over, Oregon might lose its status as one of five states with no sales tax.

Point is it’s not only places like Detroit where you can no longer take things like basic law enforcement for granted. If you haven’t examined our “mother of all financial bubbles” scenario — or you haven’t lately — you might want to do so while there’s still time.

  Once again, gold can’t hold the line on $1,400. At last check, the Midas metal has slipped to $1,395. Silver’s at $22.41.

This week’s metals movement has been tied mostly to the fate of the dollar. As we write, the dollar index sits at 82.8.

  “In all bull markets, there are big corrections,” says Vancouver veteran Jim Rogers — who says the commodities bull market he called in 1998 is not over.

“I still don’t see massive new supply coming into the market which will keep prices down,” he tells our acquaintance Lauren Lyster at Yahoo Finance.

One of his favorite real-asset sectors remains farmland: “Farmland has been extremely exciting for three or four years now. I hope it’s slowing down… otherwise, we won’t have any farm products.”

To the extent prices are easing, it’s in places like Iowa “where the farmland got way ahead of itself. It hasn’t slowed down in Mississippi.”

[Ed. Note: Mr. Rogers has graciously agreed to help us make sense of what we’ve come to call the “Zero Hour” scenario in gold.

It’s being hailed as stronger than central bankers’ printing machines… bigger than when Nixon closed the gold window in 1971… and could bring in faster potential gains than any event in history. Jim Rogers will be joined by another precious metals expert, Ed D’Agostino, for an event called Countdown to the Zero Hour. Click on the image below to learn more.

It takes place one week from today — Tuesday, June 11. By joining this FREE event, you’ll learn how to position your portfolio defensively… and collect a potential profit windfall. Sign up here.]

  “Let’s get specific to copper,” says our in-house resource guru, Byron King. “There’s gloom on the horizon.

“Generally, things were going reasonably well with copper until about mid-February,” he explains. “Then, if you read the news accounts, it’s as if the wheels fell off the copper bus,” registering an 18% drop.

This morning, we see copper is bumping up against $3.35 a pound for the third time in six weeks. Can it punch through this time?

“I was in London a couple of weeks ago,” says Byron, “and sat with a group of commodity analysts who are pessimistic about copper prices for the next 18 months, but optimistic toward the end of 2014 and into 2015 and beyond. Their view is that the ‘China growth’ story is petering out and copper demand from China is slumping.

“Fewer wires in China going forward?” he asks. “Perhaps. More wires in other parts of the world? We should all hope so. So I respect what the market is telling us. Yet I suspect that there’s still quite a bit of copper yet to be mined, pulled into wire and strung from poles.”

  The major U.S. stock indexes are all slightly in the green as we write… adding to yesterday’s respectable gains. The Dow sits within 15 points of 15,300…. the S&P at 1,645.

Yet a decent bounce from last Friday’s 200-point Dow drop has done little to chill the chatter about one of the most useless market “indicators” devised by the mind of man.

  “Ah, yes, the old Hindenburg Omen,” says our Jonas Elmerraji — “from the folks who brought you the boogeyman. Just hearing the name Hindenburg Omen makes my inner quant cringe.”

The Hindenburg Omen is a confluence of five market events, hinging largely on the number of new 52-week highs and lows. If the omen appears, there’s supposed to be a 77% likelihood of at least a 5% correction. If that’s not enough to satisfy your curiosity, we laid out the details with a skeptical eye in August 2010 — one of many times the omen failed to materialize:

“The ‘omen’ has only popped its head up a couple of times each year,” says Jonas — “not nearly enough for the signal to be statistically significant. There’s a better chance that subsequent market crashes have happened because of random chance than the ‘omen’s’ predictive power. More recent studies show a 25% success rate looking back to 1985.

“A few years ago — right when the Hindenburg Omen got really popular — I was at a technical analysis conference attended by a who’s who of buy-side and sell-side technicians. One of the speakers, a strategist at a major investment bank, joked that the first time he’d heard of the Hindenburg Omen was on CNBC that morning.

“That just shows how seriously real technicians take it.”

  “They’re both physical assets,” Chris Smith, a London-based investment manager tells Bloomberg, “that have their own intrinsic value.”

Mr. Smith, of the Wine Investment Fund, is talking about wine and gold — two assets “that tracked each other in the past decade amid demand for alternative assets,” says Bloomberg.

But, the ‘berg goes on, the “assets are now diverging after bullion slumped into a bear market as some investors lost faith in the metal as a store of value.”


“The Liv-ex Fine Wine 100 Index,” we read on, “tripled in the past 10 years, and gold advanced fourfold.”

What they’re getting at is, as of this year, the wine gauge slithered up 5.9%, while bullion fell 17%. And, Bloomberg notes, while Credit Suisse is forecasting bullion at $1,100 an ounce by next May, Smith’s Wine Investment Fund, managing roughly $50 million of truly liquid assets, expects the sauv blanc scale to rise another 7.6% before the new year.

  “The idea of keeping Iraqi oil out of Chinese hands would occur only to an intelligent individual,” a reader writes after we mooted the idea yesterday that such considerations lay behind the invasion of Iraq. “George W. Bush is not that man. He had problems with pronouncing ‘nuclear,’ remember?

“But this idea is a stretch, and I don’t care what James Norman thinks. If we wanted to stop oil deals from being finalized, then we would have attacked the oil fields, instead of turning a country that had done us no harm to rubble.”

  “Right,” says a reader, responding skeptically to the suggestion that the Chinese are getting in over their heads with their Iraqi oil deals.

“As if the Chinese will put up with Iran perfidy and all the other shenanigans in Iraq like the U.S. did. I would not want to be the guy who made it to the top of Shiite list. With the Chinese, it’s all business, and Sunni and Shiite jihadi body parts are pretty interchangeable. Iran is probably not stupid enough to get the attention of the Chinese.”

The 5: Maybe… but if the Iraqis are determined to restart a civil war, they won’t ask for Chinese permission first.

  “It has always been my understanding that the USA is the beneficiary of the petrodollar,” a reader writes after yesterday’s mailbag, “the term used to describe the agreement Kissinger brokered with Saudi Arabia in 1973.

“This agreement is the foundation for all the deficit spending our country has done since then and has allowed our country to run up its massive debt without destroying our own economy. When Saudi Arabia decides to end this agreement, things should become very interesting in this country if you understand the fact that over 50% of all reserves held by every central bank on Earth consist of U.S. dollars.”

The 5: Exactly.

But in the meantime, Saudi Arabia’s oil exports to the U.S. grew 14% last year, the “shale gale” notwithstanding.

Still, this dynamic is one of the things that fascinates us about China and Iraq. If the day comes that they start trading in yuan and dinars…

  “I continue to be a raving fan of The 5 and appreciate your service greatly,” a reader writes.

[We see the “but” coming from three miles away…]

“However, and respectfully, it seems to me that in your Friday 5, Mr. Ritholtz forgot one of the most important reasons government bond yields go up — market riot via bond sales.

“Greece didn’t tighten, experience higher inflation or experience increased demand for capital, but its debt crisis got to the point that bondholders dumped, and that forced rates up at the fastest rates in its history.

“Japanese government bond rates led the recent global rate increase, and they aren’t increasing because of any of the three reasons Ritholtz listed primarily, but because more bondholders are dumping at artificially high prices than the BOJ is buying. Might I suggest that bond riot is another critical part of rate increases in this global debt crisis to both understand and watch out for?”

The 5: No doubt… indeed, that’s a key to our “mother of all financial bubbles” scenario.

But it’s way too early to suggest that’s what’s happening with U.S. Treasuries now. And the people doing so are generally the same ones who’ve missed out on a monster four-year stock rally because they’ve written it off to Fed money-pumping the whole time.

Or as Mr. Ritholtz pithily puts it, “Some people will scream that ‘yields have skyrocketed 25%’ (but these are the same folks who have been yelling POMO! POMO! POMO! for 146%).”

No wonder we have him back to Vancouver every year…


Dave Gonigam
The 5 Min. Forecast

P.S. “Shrinking near-term federal deficits, slowing health care cost increases and partisan gridlock have all but wiped out the likelihood for a deal this year to reduce long-term U.S. deficits,” according to The Wall Street Journal.

The result, of course, is that later on, the deficits will once again explode… as will the cost of health care. Consider bulletproofing your portfolio accordingly.


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