The $25.9 Trillion Avalanche

  • A real house of cards… and the virtual one that’s the global monetary system
  • A mealy-mouthed Fed can’t afford to raise rates
  • Taxpayer’s potential tab for the next financial crisis: $25.9 trillion
  • A $9 billion risk hedge from the Pentagon
  • Does it make sense to seek 100-baggers if a crisis looms?
  • Readers sound off: “All student loans are subprime”

  When we compare the financial system to a house of cards, or a casino, we mean it as an analogy. Usually…

Look closely. That’s a house of cards. And it’s in a casino! An explanation follows momentarily…
  Today’s episode of The 5 comes to you on the early side — direct from the Four Seasons here in Baltimore. Your editor is settling in for our all-day “House of Cards” Symposium headlined by our own Jim Rickards.
I’ll bring you a report tomorrow… although the surest way to get up to speed with all the ideas presented here today is to snag the recordings and transcripts. We’ll email them to you as soon as they’re ready… but only if you sign up at this link.
We named it “House of Cards” not only in homage to Jim’s newest thesis about the financial system… but as a subtle tip of the hat to the Netflix series with Kevin Spacey. It’s set in Washington, but shot in Baltimore, thanks to some juicy Maryland tax credits. Many scenes are shot only a stone’s throw from Agora Financial headquarters.
So savor the irony of that picture: That’s the Guinness World Record holder for card-house building. Mere blocks from where our Symposium is about to get underway, he’s hard at work at the Horseshoe Casino for a two-day event. Indeed, he’s constructing 10 card-buildings, including the U.S. Capitol.
The irony would be complete if one of them were the Marriner Eccles Building, headquarters of the Federal Reserve. No such luck…
  As it did in March, the Fed is trying to have it both ways after its latest “policy-setting” meeting.

On the one hand, all but two of the 17 members of the Fed’s Open Market Committee (FOMC) still expect they’ll raise the fed funds rate before year-end. On the other hand, that’s still “data dependent” — as the wonks are wont to say. And the data — jobs, inflation, GDP — still isn’t strong enough to justify pulling the trigger.
It was all very comical, as Bloomberg TV’s graphics team inadvertently conveyed during Fed chair Janet Yellen’s news conference.

Yellen made it clear that the market should focus more on the fact that the Fed will rise interest rates at a very slow pace, rather than focus on the timing of the first rate hike.
Quips Dan Amoss, who heads up our Jim Rickards research unit, “She essentially said: ‘We are aware the Fed has constructed an artificial environment in the credit and asset markets. So we’re not going to tighten policy aggressively.’
“In the end,” Dan adds, “this tightening process will be among the most overhyped in history. The financial markets and the economy cannot afford a true tightening of monetary policy, so we won’t see one.”
After all, a true tightening would trigger the next financial crisis.
But as we’ve seen all this week, another crisis is inevitable — no matter what the Fed does. Which is why we’re gathered here at the Four Seasons in the first place — to learn how to get ready for its arrival.
  When the next financial crisis arrives — Jim Rickards is fond of another analogy, the avalanche — , the liability for U.S. taxpayers could reach as high as $25.9 trillion.
Since 1999, researchers at the Federal Reserve Bank of Richmond have maintained a “Bailout Barometer.” They add up all the liabilities in the financial system — banks, credit unions, Fannie Mae, Freddie Mac, traditional corporate pension plans, money market funds, the whole kit and caboodle.
Then they figure out how much of that has a direct guarantee from the federal government… and how much more has an implied guarantee.
All of those liabilities add up to $43.2 trillion. Of that total, $25.9 trillion carries some sort of federal guarantee.
Big numbers are abstract. Let’s break that down. That’s $80,660 for every man, woman and child in the United States.
For further reference, U.S. GDP — the hypothetical total of goods and services produced by the U.S. economy in a year — is about $16.8 trillion.
The total is growing… and so is the percentage of all the liabilities that carry a taxpayer backstop. In 1999, “only” 45% of those liabilities had a federal guarantee. Now it’s 60%.

Even central bankers recognize this is bad news: “When creditors expect to be protected from losses,” says the Richmond Fed, “they will overfund risky activities, making financial crises and bailouts like those that occurred in 2007-08 more likely. An extensive safety net also creates a need for robust supervision of firms benefitting from perceived protection. Over time, shrinking the financial safety net is essential to restore market discipline and achieve financial stability.”
Yeah, good luck with that.
As we’ve pointed out the last couple of days, the mainstream is waking up to the fact another financial crisis is possible. And since the mainstream is always behind the curve, that means now is the time to prepare for that crisis. That’s what makes Jim Rickards’ “House of Cards” thesis so urgent… and why some of our readers paid $6,500 to see him speak this afternoon.
You won’t have to pay anything like that to shore up your finances in preparation for the storm. That’s what the recordings and transcripts of today’s sessions are all about. Here’s where to get yours.
  To the markets… where the Fed announcement tanked the dollar and lit up gold. The dollar index sits near a one-month low this morning at 93.7. Meanwhile the Midas metal has recovered the $1,200 level.
Stocks were little moved by day’s end yesterday, but as we write before the open, index futures are in the green — S&P 500 futures at 2,096.
The big economic number of the day is already out: The Bureau of Labor Statistics says consumer prices rose 0.4% in May. The year-over-year change is back in plus territory at 0.1%. The core rate — excluding food and energy — is up 1.7% year-over-year. Not only is that below the Fed’s 2% inflationary sweet spot, it’s down a bit from the previous month.
The tightening remains overhyped. Heh…
  “I call it the $9 billion secret,” says our Byron King — who will be first to take the podium this morning, after introductory remarks by our fearless leader Addison Wiggin.
Byron will talk about his favorite risk hedges — natural resources and military technology.
“There’s a lot of money in weapons development,” he wrote his readers recently, “even with the war on terror winding down.”
And $9 billion is the amount of money the government spends each year on bullets. Well, bullets of all sizes. “In the current budget,” Byron tells us, “the Department of Defense will spend $9 billion on missiles and other conventional ammunition — think in terms of aerial missiles, smart bombs, artillery shells, aerial cannon rounds, rifle bullets, grenades, mortar rounds, etc.
“Even excluding expenditures on missiles for the strategic deterrent, the nuclear arsenal, you’re looking at more than $7 billion on bombs and bullets, and this is an annual expense. As in… every year.”
Byron’s confident his favorite munitions maker will withstand anything a financial collapse might throw at it. How likely is it Uncle Sam will stop buying missiles, shells and bullets?

With the recordings of today’s sessions, Byron will show you how to bulletproof your own portfolio no matter what happens to the House of Cards. Access here.
  “I believe the biggest upside is often in the smallest companies,” says our Chris Mayer.
Later this morning, he’ll take to the stage to describe his 100-bagger project — stocks that return 100-to-1. But recently, he told his premium subscribers that microcaps are a great source of 100-baggers.
We’re talking companies with a market cap of less than $300 million. That’s at least 40% of publicly traded stocks. “This is a vast area to explore,” Chris enthused. “And somewhere in this mix are tomorrow’s big companies. I’m stating the obvious, but many big companies started out small.”
Starbucks, for instance, started as a single store peddling coffee beans in 1971. Today it has a market cap of $76 billion. Apple? It launched in a garage in 1976 and today is worth $766 billion.
“You get the idea,” Chris goes on. “Small companies can grow to 10x or 20x and still be small. They can even become 100-baggers. Apple today, by contrast, has a $766 billion market cap. I think we can safely assume it won’t go up 10x or 20x, and certainly not 100-fold.”
It might seem odd to discuss 100-baggers at an event like today’s. But Chris’ research project has uncovered 456 of these 100-baggers since 1962. It’s obvious they share one trait in common — resilience. Some of them withstood the 1973 “oil shock.” Others withstood the 1980-82 “double dip” recession. Still others pulled through the dot-com crash and/or the Panic of 2008. A hardy few have been through all of those market shocks.
So it’s not such a crazy idea after all. Chris’ talk will be available on the recordings and transcripts. Are you signed up to receive yours?
  “Interesting commentary on the failed/fraud ‘college’ and the ongoing student loan bubble,” writes a reader, circling back to a recent topic.
“Of course, all student loans are, by definition, subprime, as the borrowers (for the most part) have no assets or work history to affect qualification. But is the failure of one bottom feeder [Corinthian Colleges] and the $3.5 billion spread to taxpayers the real issue or is the footnote in the president’s budget as a reserve for bad debt?
“Better yet, isn’t the real issue that when they transitioned all of the student loans from guarantees by the feds to direct loans from the feds that they could now record the profits on the spreads between the near-zero discount rate and the 6%-plus for which they whack the starving ex-students? Isn’t that change in income how they partially justified the Affordable Care Act on paper and sold it politically?”
  “The student loan fiasco has nothing to do with students,” writes another. “It was always about educational institutions and their importance to the progressive agenda.
“By feeding money into public higher education, they have created an employment boom for leftist college instructors and administrators, government-funded crony capitalism building sprees and a propaganda machine for the production of public school teachers and public-sector social workers who poison the minds of the captive young and poor while supplying funds and bodies to the Democratic election machine.
“It has produced an abundance of unemployable college graduates with junk majors, eliminated the scarcity value of a bachelor’s degree and loaded two generations of students with unmanageable debt that they can neither eliminate through bankruptcy or renegotiate: a windfall for the schools and those who purchase the debt, while pauperizing the population that bought the bill of goods that the liberal establishment was selling.
“It was not always so. I managed to fund my last five semesters at a state college by working weekend nights in a computer room; many of my classmates had a similar story. I graduated with no debt (what an English degree in poetry is worth in the market). I later went on to take a six-month intensive course in computer programing and systems from a for-profit school that was eventually regulated out of existence. I paid my private loan off in two years. No one can do either of those things now.
“In the end, a generation of students has been robbed by teachers, politicians and bankers. Taxpayers will pay for this because we allowed this to happen. The only benefit to society is that these true victims of state-sponsored fraud have learned enough from the experience to be cynical conservatives at an earlier age that any prior generation.”
The 5: As bubbles go, higher education is as big as they get. The consumer price index is up 482% since 1970. But a year’s tuition at a public university is up 994%. That’s even worse than housing or health care — indeed, its own house of cards.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. We’re back tomorrow with a wrap-up of today’s events here at the “House of Cards” Symposium at the Four Seasons Baltimore featuring Jim Rickards.
But our 5 Mins. can’t do justice to all the ideas being shared here today. That’s where the recordings and the transcripts will prove so valuable in the weeks and months ahead. Act now and you’ll get the best available price — it’s valid through midnight tomorrow.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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