The $8.5 Trillion Black Hole

  • The meticulous bookkeeping habits of ISIS jihadis…
  • … and the Pentagon’s nigh-criminal neglect of taxpayer funds
  • The part about his “phenomenal” tax plan that Trump left out
  • Developers of nonaddictive painkillers hope to crash a $15 billion party
  • The IPO hype machine in overdrive… another reader who suspects BS from Druckenmiller… the distinguished history of jury nullification… and more!

Say this much for ISIS: They do a hell of a lot better job tracking expenses than the Pentagon.

From The Associated Press: “Receipts from taxi rides, ledgers listing internet usage for the privileged few and random logbooks documenting an ever tighter economy are just some of the documents that ISIS militants left behind when they fled eastern Mosul in the face of advancing Iraqi forces.”

Iraqi troops found the records a few days ago in an abandoned house that was used as an ISIS base. “Slips of paper,” the story goes on, “document taxi rides back and forth to ISIS-held towns across the Iraq-Syria border… Stacks of papers also testify that the group kept close tabs of utilities such as electricity and internet usage. Monthly cards bearing users’ internet names and passwords were filed with the base’s expenses.”

ISIS fighters don’t fool around with their expense account…

If you’re a longtime reader with a good memory, none of that is a surprise.

After all, ISIS had its origins as al-Qaida’s Iraqi franchise before its leaders had a falling-out with the parent organization. In late 2013, we learned about the meticulous bookkeeping practices of al-Qaeda’s African wing. “For the smallest thing, they wanted a receipt,” said a storekeeper in Mali.

“The often tiny amounts are carefully written out in pencil and colored pen on scraps of paper and Post-it notes,” said an AP story at the time: “The equivalent of $1.80 for a bar of soap; $8 for a packet of macaroni; $14 for a tube of super glue.”

Terrorism experts say it was a habit instilled by Osama bin Laden himself — going back to the time he ran his father’s construction company with more than 500 employees. Every one of them was expected to turn in forms in triplicate — for everything, no matter how small.

Contrast the jihadis’ penchant for tracking the most minute expenses… and the Pentagon’s penchant for profligacy.

In 1990, Congress passed a law requiring an annual audit of all federal agencies. The Defense Department was under orders to be audit-ready by 1996. Two decades later, it’s still not.

As of 2013, Pentagon bookkeepers groaned under the weight of no fewer than 2,100 antiquated and error-prone record-keeping systems, most of them incapable of interacting with each other.

On the day before the Sept. 11 attacks in 2001, Secretary of Defense Donald Rumsfeld said, “According to some estimates, we cannot track $2.3 trillion in transactions.”

By year-end 2013, that number had swelled to $8.5 trillion, according to the Pentagon’s Defense Finance and Accounting Service. That’s going back to the original 1996 deadline.

We don’t have a more recent figure… but a mid-2016 report found a $6.5 trillion black hole just in the Army.

In 2009, Congress “got tough” and imposed a new cross-your-heart, hope-to-die deadline for the Pentagon to be audit-ready: Sept. 30, 2017.

But as we’ve pointed out more than once, there were no “or else” consequences attached to the deadline — no fines or jail time for anyone, not even a requirement that some undersecretary of defense read Accounting for Dummies and turn in a three-page book report to the U.S. comptroller general.

It’s not for lack of trying: Over the last eight years, new bookkeeping systems have been planned, only to be canceled later — often after $1 billion or more was spent on each.

Maybe the Pentagon should try scraps of paper and Post-it notes.

So there’s some context for our item on Tuesday about how the Trump administration is asking Congress to tack another $30 billion onto the 2017 defense budget of $598 billion.

But… but… even with that extra money, the newswires tell us the Navy and Marines face “massive readiness issues” that money can’t address right away.


“You don’t reform a bureaucracy that wastes money by giving them more money,” writes William Astore, a retired Air Force lieutenant colonel who’s now a history professor. “It’s like reforming an addict on drugs by giving him more money to spend on drugs.”

But as long as the junkie can score the funds for even more hits… defense stocks will be a profitable bet.

The iShares Defense & Aerospace ETF (ITA) is up 12% in the three months since Election Day — even better than the S&P 500’s 8%. That’s the safe way to play the sector.

But if you have the courage to go for smaller and more speculative plays with far more upside potential… you’ll want to investigate Jim Rickards’ DRONE system. It screens tiny defense stocks with the prospect of multiplying your money many times over with the awarding of a single contract. Check it out at this link.

The major U.S. stock indexes are pushing still higher into record territory. At last check, the Dow has crested 20,200.

Gold took a minor spill overnight but has since recovered to $1,233 — roughly where it was 24 hours ago.

Crude is rebounding from a hit it took earlier this week and is back above $54.

We’re hard-pressed to think of a better case of “Buy the rumor, sell the news” than the stock rally yesterday and today.

The mainstream is chalking up this rally to President Trump promising he’ll unveil a “phenomenal” plan to reform corporate income taxes in the next three weeks. “Lowering the overall tax burden on American business is big-league, that’s coming along very well,” he said.

He left out the part about how Congress will insist on any tax cuts being “revenue neutral” — meaning the lost revenue will be made up elsewhere — perhaps the wickedly complex “border adjustment” scheme. Stay tuned…

“Pain is one of our most common health care problems, and the pain management market is huge because if it,” says Ray Blanco on the science-and-wealth beat.

Opioid painkillers are a $15 billion-a-year market. “But this market is fraught with problems,” Ray reminds us. “Opioids have many side effects beyond deadening pain. They are addictive and cause feelings of euphoria. According to the CDC, opioid overdose-related deaths top 15,000 per year in the U.S. And each day, more than 1,000 people are treated in our emergency rooms due to prescription opioid abuse.

“Opioid drugs work to block pain in our central nervous system’s cells. They do so by interacting with several different kinds of receptors on the surfaces of these cells. These receptors help control pain signaling.

“However, existing opioids also interact with other mechanisms that cause addiction and feelings of pleasure.”

Ray is following the progress of two companies working on drugs that overcome these opioid drawbacks.

“One works by more precisely targeting an opioid receptor called mu,” He explains. “Opioids work by binding to mu… but this drug is designed to bind differently… blocking pain without causing side effects.” Phase 3 trials are underway and due before the end of next month.

“The other drug takes a different approach. It interacts with kappa, not mu, receptors. Since it does not work across the blood-brain barrier, it blocks pain signals from the peripheral nervous system, instead of the central nervous system.

“This means the drug doesn’t get to the brain, which is where opioids cause pleasure and addiction. But it still works by blocking pain at the source nerves where the pain signal is originally generated.”

Several trials are underway for that one. Ray will update readers of Breakthrough Technology Alert on the progress of both.

“Right on cue, the IPO hype machine is in full effect,” says our small-cap specialist Louis Basenese.

As we mentioned in passing a week ago today, Snap — the parent firm of Snapchat — has filed for an initial public offering.

We were unimpressed, and so is Louis. “Even before the S-1 filing was made, I was urging caution. And now I have the data to prove it!

“When we invest in IPOs, we’re investing in the future growth and profits of a company. However, the only thing Snap seems to do well is burn money.

“The trend is not your friend here. It’s accelerating in the wrong direction. Caveat emptor!”

[Ed. note: Louis has uncovered a way to buy proven, blue chip companies as if they were still penny stocks with huge growth potential. He clues you in to these “secret” re-listings when you click here.]

“Kudos to your reader who asked about Druckenmiller’s gold moves,” begins today’s mailbag.

“The term ‘BS artist’ is being kind. I would refer to his public pronouncement against gold as ‘manipulation.’ I’m sure when the filings are published, we will see that he scared enough people to dump their holdings to drop his entry price nicely, and then he has the gall to come back and say just the opposite, trying to spur the price higher once he has re-established his position!

“It would also not surprise me if he was able to wait 31 days to avoid the wash sale rule if he had a loss.”

The 5: Here’s another wrinkle, and we’d forgotten about it until we stumbled across it while searching for something else in The 5’s voluminous archives: Physical gold does not have to be reported on a 13F — only “paper gold” instruments like futures, options and ETFs.

“The Fully Informed Jury Association (FIJA) is group that works to inform potential juries about this right we have as citizens to nullify any law with which we happen to disagree,” writes a reader — building on another reader’s remarks yesterday.

“A jury can nullify a law by refusing to convict based on whatever law that the defendant allegedly violated. The reason could be anything from constitutionality issues, whether the law should be applied in a certain case or if there should even be such a law. Once they enter the jury room, their reasons are their own.

“If you believe in exercising this right, you would very likely be immediately ‘excused’ for just mentioning it. In most courts, if it were to come out that FIJA was discussed in the jury room, it is very likely that the prosecution would move for and be granted a mistrial. There are reports of citizens being jailed for contempt of court just for handing out leaflets across the street from a courthouse.

“The rapidity that any mention of FIJA is squashed is evidence that those involved in prosecution are very mindful of the damage a fully informed jury pool would be to their operations.”

The 5: “America’s Founding Fathers made their case to juries arguing for nullification,” wrote Scott Horton in Harper’s in 2011.

“John Adams, when defending John Hancock in 1771, insisted that the juror has not merely the ‘right’ but actually the ‘duty to find the verdict according to his own best understanding, judgment and conscience, though in direct opposition to the direction of the court’ and its understanding of the law. Conscience should serve as a safety valve, he argued, against unjust laws, or against just laws, unjustly applied…

“Shortly before his death, Thomas Jefferson noted with disdain that judges were working hard to bury jury nullification. It reflected a pernicious ‘slide into toryism,’ he remarked in a letter to James Madison in 1826. In Jefferson’s view, judges and prosecutors who rejected the jury’s right of nullification were betraying the values of the Constitution and instead embracing those of the British Crown.”

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. Because of the substantial reader response, we want to hammer away at a point we’ve made the last couple of days: Everything you know about gold could change between now and Monday.

But only if you watch this video right now. For reasons you’ll see when you watch, we’re taking it offline midnight Monday night.

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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