February 28, 2014
- Crisis in Crimea: Byron King foresees the Russian-Ukrainian endgame
- How you can make money when a federal agency’s 134% budget increase isn’t enough
- Don’t count out China yet: Chuck Butler counters Jim Rickards
- New chart affirms one of Chris Mayer’s profitable themes
- The taxing realities of a $10 million gold coin find… alert reader connects the pot dots… a word of praise for some 5-style debunking… and more!
- Overtime: The good ship Bitcoin, foundering
“Eighty percent of the world’s problems are the fault of British mapmakers,” quipped the late Sen. Eugene McCarthy. Or words to that effect anyway; the precise quotation eludes our best efforts to find it this morning.
And who could argue? The Brits drew arbitrary lines in the sand to create something called “Iraq” in the 1920s. Thirty years earlier, they drew another arbitrary line through some mountains in south Asia that today marks the border between Afghanistan and Pakistan.
The big news today falls into the other 20% that can’t be blamed on the Brits. Blame Soviet mapmakers for the mess in the Crimean peninsula — Russian territory transferred to Ukraine in 1954.
Armed forces — with no recognizable insignia on their uniforms — have taken over the two main airports. The Russians deny the troops are theirs. Meanwhile, gunmen have seized the regional parliament building. Oh, and Ukrainians are now limited to foreign-currency withdrawals equal to 15,000 hryvnias a day — about $1,500.
Ugly, ugly, ugly. As a reminder, Crimea is the most Russian part of Ukraine, one of the two deep-red regions we showed in this heat map of language on Tuesday…
[Click to enlarge]
Of course, if you read The Economist, the divide between a Ukrainian-speaking Roman Catholic west and Russian-speaking Orthodox east is imaginary. “The real division among Ukrainians,” reads a flowery editorial in the new issue out this morning, “is not between east and west, but between hope and cynicism: between those who believe a better kind of government is possible and those who understandably think that, in their troubled post-Soviet nation, corrupt paternalism is the best they can do.” The solution? More Western aid, the better to checkmate the Russkies, natch.
We love reading The Economist’s editorials. They’ve got everything figured out: If the peoples of the world simply conducted themselves in keeping with the wishes of The Economist’s editorial board, we’d see an end to war, poverty and even psoriasis.
“We should anticipate that Crimea will soon declare some sort of ‘independence’ from Ukraine,” says our military affairs expert Byron King — bursting The Economist’s bubble with a splash of reality.
“Russia will quickly recognize the ‘non-Ukrainian’ status of Crimea and begin to make accommodation, whether a close association with a ‘sovereign’ state or even national incorporation as part of Greater Russia.
“Western interests will howl, but overall, this will be tit for tat with respect to how quickly the West recognized Kosovo when it broke away from Serbia in 2008.
“Russia told the world that Kosovo would set a bad precedent for future border disputes. Now that legalistic warning comes into play in a manner that the West will not like.
“Meanwhile, Russia will maintain its naval and other military access to the Black Sea, which is a strategic requirement for Russia that dates back over 300 years.
“Ukraine will become a much smaller state — perhaps even landlocked, depending on how much of the ‘north shore’ of the Black Sea region goes with Crimea. I anticipate that we’ll all be updating our map collections in the not-too-distant future.”
“Threats to our nation in cyberspace are growing,” warns Gen. Keith Alexander, head of both the NSA and the military’s Cyber Command.
The military, he told Congress yesterday, needs to boost its cyberdefenses. “Those attacks are coming, and I think those are near term, and we’re not ready for them… We have a lot of infrastructure — electric, our government, our financial networks. We have to have a defensible architecture for our country, and we’ve got to get on with that.”
OK, yeah, Alexander is pushing to feather the nest of Cyber Command, like any other self-interested bureaucrat — even one who’s on his way out the door, probably to a cush consulting gig with an NSA contractor.
Our point is that we fully expect Congress to heed his call — even after boosting Cyber Command’s budget 134% this year, to $447 million.
As always, we’re following the money… and Byron anticipates new fortunes in cyberdefense, starting perhaps only 31 days from now.
Stocks are pushing higher as the week comes to a close. At 1,864, the S&P 500 is venturing further into record territory marked yesterday.
The Commerce Department’s latest estimate on fourth-quarter GDP rang in this morning at an annualized 2.4% — down significantly from the previous guess of 3.2%, but the revision came as little surprise to traders.
Gold is slipping to where it stood about 48 hours ago; as we write, the bid is $1,325.
“The rise in the gold price ran into profit-taking on Wednesday,” writes GoldMoney’s Alasdair Macleod. “Having risen $160, to $1,345, some short-term profit taking is only to be expected.”
“Demand for physical metal from China and Hong Kong continues at record levels,” he goes on, “and there is talk of the Indian government relaxing import restrictions in this election year. I personally think it unlikely, but given that Indians are currently paying well over $1,400 equivalent, the effect on markets of such a move would be immensely bullish.”
The Chinese yuan made its biggest drop all week today… putting an exclamation point on the biggest weekly drop since China loosened the yuan’s dollar peg in 2005.
This morning, it takes 6.145 yuan to equal one U.S. dollar. But Jim Rickards’ prediction of a “financial collapse of unprecedented magnitude” — shared in our virtual pages on Wednesday — doesn’t ring true with our go-to currency maven, EverBank’s Chuck Butler.
“Look, I like James Rickards,” Chuck writes this morning, “and think he’s probably one of the smartest dudes on the planet, but I have to disagree with him on this one.
“The so-called experts are too many to name, but you all know who they are, and they have been calling for a collapse of China for years now, but it hasn’t happened. And I don’t believe it will happen this time.”
Eventually, Chuck says, they may be right and then say I told you so. But in the meantime? “Remember a lot of these same guys said the euro would collapse and the eurozone would break up three years ago,” he reminds us. “So be careful writing off China, folks. I think that as long as they have a treasure chest of reserves, they’ll be able to keep their ship out to sea.”
And now visual proof the Too Big to Fails got even bigger after the 2008 crisis.
The Mercatus Center at George Mason University has crunched some data from the FDIC and found the five biggest banks now hold 40.1% of domestic deposits — double the figure in early 2000.
And look how the share of small banks — those with $10 billion or less in assets — has cratered. Since the passage of Dodd-Frank in 2010, 650 small banks have closed or merged. That’s 9.5% of the total. Most of their deposits seem to have gravitated to the five largest.
“If there is one sure trend in banking,” our Chris Mayer said here three months ago, “this is it: There will be fewer and fewer banks. Higher regulatory costs are driving smaller banks to combine into bigger banks.”
Chris’ favorite bank stock — trust us, it’s not one of the Too Big to Fails! — is up 39% from his initial recommendation 15 months ago. He figures it’s one for “the coffee can” — sock it away and watch it grow for the next 10 years.
The couple who found $10 million in gold coins on their property will likely owe taxes on half the value. Even if they don’t sell, which they plan to.
We took note of the big find on Wednesday: The couple from northern California wishes to remain anonymous, but both Washington and Sacramento will seek a significant cut.
Under a federal court decision in 1969, a “treasure trove” is taxable the year it’s discovered. From the 2013 IRS tax guide: “If you find and keep property that does not belong to you that has been lost or abandoned (treasure trove), it is taxable to you at its fair market value in the first year it is your undisputed possession.”
The San Francisco Chronicle furnishes this helpful pie chart…
Conceivably, the couple could argue the coins should be taxed at the lower capital gains rate — on the theory that they bought the coins when they bought the property — but the IRS would likely squawk. “If the government wants to challenge them,” CPA Arthur Dellinger tells the Chronicle, “the minute they litigate the issue, their names become known.”
Bye-bye anonymity. “They are going to pay the ordinary income tax,” Dellinger surmises, “and be happy with it.”
“The Ukrainians welcomed the German army during WWII,” a reader writes with some history, “until they found out that a Nazi devil is just as bad as a Soviet communist devil. The Germans could have had tremendous allies with the Ukrainians if they had treated them right.
“A Christian missionary in the Ukraine was at my church several years ago, and even then he said most Ukrainians didn’t have a proper diet and were undernourished. At least they didn’t have wall-to-wall fast-food places.”
The 5: Remarkably, there’s a neo-Nazi contingent among the protesters who chased Yanukovych out of power — maybe as many as 30% of them, by one account.
“After Yanukovych fled his palatial estate by helicopter,” Max Blumenthal writes at Salon, “protesters destroyed a memorial to Ukrainians who died battling German occupation during World War II.” The leader of the ultra-nationalist Svoboda party has a history of denouncing the “Muscovite-Jewish mafia.”
Of course, that doesn’t square with Washington’s narrative of aspiring Thomas Jeffersons in Kiev, and has thus been woefully underreported.
After the police chief in Annapolis, Md., embarrassed himself by citing a satirical article to justify his opposition to legalizing marijuana, a reader spotted an account of the gaffe that notes Maryland averages 24,065 arrests for pot possession each year for the last five years.
“How many hours,” the reader muses, “are spent by various government employees handling the work associated with 24,065 arrests? That’s about 463 arrests per week. I’ll bet Baltimore County employees spend more than 250 hours per week on pot work.
“I think that story ties directly to the one yesterday about the police in Las Vegas needing more time to work ‘bigger cases’ rather than spending time helping ordinary citizens in ‘small-case’ accidents.
“Decriminalization of various things, such as marijuana, would free up time for some government employees, and maybe the local governments could cut back. No, I doubt they would go for any such austerity.”
“In some places, the police respond, but it does no good,” another reader jumps in. “My sister-in-law’s spa was broken into and vandalized twice in a three-week period, and the police came and filled out the reports but did little more than call the insurance company. Of course, like most business owners, with a $1,000 deductible, most of these damages came directly out of her pocket.
“But in another twist while repairing the front door from one of the break-ins, my brother got a ticket for not putting on his seat belt before leaving the spa parking lot for materials, So while we have police response in Alabama, priorities are way off.”
“Well, guys,” writes our final correspondent, “gotta give ya points and bonus points on this one.
“The Dow chart ‘eerily similar to just before the 1929 crash’ was making my wife somewhat worried. She saw it during a ‘Disaster is impending — buy our survival stuff’ TV broadcast she happened to click into.
“Thanks to the succinct analysis that had been presented in The 5, I was able to defang their presentation in less than two minutes.
“So way to go, guys. I owe ya on this one.”
The 5: Read The 5, impress your spouse: We can’t think of a better endorsement!
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
Mt. Gox — the largest Bitcoin exchange — filed for bankruptcy today in Tokyo. We suspect this gentleman standing outside its headquarters will wait a long time for the answer to his question…
Depending on whom you believe, weak security at Mt. Gox allowed thieves to steal about 744,000 Bitcoins worth $350 million. The price of Bitcoin, which topped $1,200 in December, is around $550 this morning. Still impressive for anyone who bought in a year ago at $33 — as long as you can get what’s yours.
Bitcoin isn’t exactly on Byron King’s beat — natural resources and military technology are his metier — but with some prodding from Daily Resource Hunter editor Matt Insley, Byron jotted down some thoughts this week that we thought worth sharing…
The Perils of Bitcoin… and the Tried-and-True Alternative
by Byron King
In all three of my newsletters, I’ve refrained from banging the drum for Bitcoin. Ever. Of course, I’ve been aware of Bitcoin for some time. I don’t lack for knowledge or understanding of Bitcoin, let alone the philosophy behind it. But I have never publicly commented on — or even used the term — Bitcoin, until now. And I’m bringing it up only because you asked.
I see the Bitcoin vessel foundering, and the reason is that the underlying design concept was wrong. Long story. Meanwhile, now Bitcoin takes on water and begins a long, cold plunge by the bow, into the benthos, so to speak… “Nearer, My God, to Thee” I believe is the tune I hear the band playing…
Mock not any gods of the sea, nor attempt trickery on those who forge true metal in the fires within the earth.
The demise of Bitcoin highlights the danger of placing one’s faith — and risking one’s wealth — in a “currency” that dates back all of a thousand days or so, versus 5,000 years, or even a mere 222 years in the case of the US dollar.
Bitcoin proves the point that a good currency is hard to find, let alone conure out of thin air. And a hard currency that withstands the test of time is even more difficult to locate, now or looking back across the arc of history.
As Bitcoin fast fades, I cannot afford to dwell, like some weepy Confederate, over a lost cause. I simply return my gaze to the U.S. dollar, which, to be sure, we often slam these days due to its horrid mismanagement by the foolish political authorities and flat-Earth advisers that dominate our era.
Yet for all its flaws, the dollar still boasts a true monetary pedigree… real monetary DNA, after a fashion. The fact is our dollar has come down a long, twisting trail that winds back into the Middle Ages, into the dark forests of the German Erzgebirge and long-lost mines that yielded real silver money called “thalers” in another age.
Indeed, our U.S. dollar is a highly evolved example of successful natural monetary selection over many centuries. The dollar has prevailed in a very brutal world, while elsewhere entire empires have come and gone. That should count for something.
Creating the dollar — and the immense political and economic power behind it — required an American revolution against Britain, 1776-1783. Then, immediately afterward, there was a painful period of national formation, and in 1787 a Constitution which went so far as to compromise the tragic issue of slavery, just to bring otherwise sovereign state economies together. That was truly a sad case of the “political perfect” losing out to that which was merely “good enough.”
And speaking of good enough, no sooner had the ink dried on constitutional parchment than the country experienced its Whiskey Rebellion over federal power to tax within an economy lacking a true, working currency. (Jugs of rye hooch were OK on the frontier, but had their limitations as real money.)
Thus did the idea behind those old German thalers transform into what would, eventually, become the world’s greatest hard currency — the U.S. dollar — beginning with the Coinage Act of 1792.
Yes, today, U.S. politics are troubled, to say the least. Our federal government is peopled by dunces and mountebanks who, in general, lack appreciation for the legacy of a hard, mighty currency and the wealth and opportunity it offers to people who use it in their economic life.
Hard money creates more hard money. Is that so difficult to understand? But let’s not digress too far.
For all the current problems of the dollar, Bitcoin was not the answer… To be perfectly blunt, Bitcoin always struck me as an overambitious ship awaiting its iceberg.
Now, looking ahead to far horizons, our convoy will move through the Bitcoin debris, flotsam and jetsam. We’ll all sail on to our next port of call, if not to our fate.
Of necessity, the holds of our respective ships are filled with dollars, although the ballast near the keel of my hull, at least, is formed of real gold and silver.
Gold, silver and dollars… That’s how the world works. It’s how the world has worked for a long time.
And finally… the lesson. Beware tempting the gods, lest you too fall from grace with the sea.