“Audit the Fed” Moves Ahead, Gross Says Buy This Sector, Investing in Heavy Stones anPublished: November 20, 2009 by RssFeed The 5 min. Forecast
November 20, 2009 11:46 AM by Addison Wiggin & Ian Mathias
 It’s another sunny day of Indian summer here in Baltimore… let’s start with some fitting news: The “audit the Fed” bill is alive and kicking. As we reported earlier this month, Ron Paul’s popular proposal of HR 1207 was gutted by Mel Watt, a congressman firmly tucked in the pocket of the American banking industry. In typical political form, Paul and Congressman Alan Grayson took the language of the original “audit the Fed” bill, turned it into an amendment of a different bill about to come to vote and managed to get the thing approved yesterday by the House Financial Services Committee. Heh… not even an honest bill can get through without some sneaky politics. Should it be passed by the full House and Senate, Paul’s people say the amendment: · “Removes the blanket restrictions on GAO audits of the Fed · Allows audit of every item on the Fed’s balance sheet, all credit facilities, all securities purchase programs, etc. · Retains limited audit exemption on unreleased transcripts and minutes · Sets 180-day time lag before details of Fed’s market actions may be released · States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO.” Bravo.  But just like Indian summer, in the back of our minds, we fear some dark, cold days might be around the corner. The new Paul/Grayson amendment is attached to Barney Frank’s HR 3996, what he calls the “Financial Stability Improvement Act of 2009.” That’s the “too big to fail” legislation we mentioned last month that would, among other things, allocate $200 billion to help the government to seize companies they feel have too much systemic risk.And even if Paul’s amendment still becomes law -- and if the evils in Barney Frank’s bill don’t manage to completely negate it -- there’s no guarantee whatsoever that our government won’t find a way to screw it up. We’re all for lifting the Fed’s veil of secrecy, but as Sen. Jim DeMint put it, “If there's anything worse than a secret Federal Reserve, it's Congress controlling it.”  Here’s another observation from our Charm City HQ: If the housing market has bottomed, it hasn’t happened here. Nearly one in 10 prime Maryland homeowners are behind on monthly payments, the Baltimore Sun reports this morning. That’s about 77,000 homes in our tiny state and a 70% year over year increase. Souring subprime loans -- despite all the scenes from The Wire you might have in mind -- total “only” 48,000.  All of the U.S. is mired in a similar muck, the Mortgage Bankers Association reported yesterday. The national delinquency rate for private single-family and multiunit homes was a record 9.6% in the third quarter. Add in the loans that are already in the process of foreclosure and that rate goes up to 14.4% -- another record. Think about that… one in seven of all U.S. home loans was past due or in foreclosure as of Sept. 30, 2009.“Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP," said MBA's chief economist, Jay Brinkmann. (Amen!) Following that logic, Brinkmann told the press he does not expect this trend to recede until the unemployment rate peaks.  Thus we can’t blame traders for selling their stocks again today. After yesterday’s 1.3% slide, the S&P opened down 0.5%, with the help of an earnings disappointment from Dell and some downgrades in the semiconductor sector. The average individual investor is “damned if you do, damned if you don’t,” laments Bill Gross in his latest monthly letter to PIMCO clients. “Do you buy the investment-grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high-yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2%-yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis?“The New Normal is likely to be a significantly lower-returning world. Diminished growth, deleveraging and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less… “Let me tell you what I’m doing. I don’t have the long-term investment objectives of Berkshire Hathaway, so I’m sort of closer to an average investor in that regard. If that’s the case, I figure, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble. Pricewise, they’re only halfway between their 2007 peaks and 2008 lows -- 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6%, not .01%! In a low-growth environment, it seems to me that a company’s stock should yield more than its less-risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5-6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor.”  The stock market malaise is still good news for the dollar. The dollar index is up a few tenths of a point from yesterday, to 75.9. So you won’t see any new record highs for gold today. An ounce still goes for a respectable $1,140 as we write. “It’s pretty clear that without tungsten, a lot of things in this world will -- literally -- grind to a halt,” notes Byron King. Tungsten is one of a few “technology metals” Byron’s been particularly hot about lately. From airplane windows, to drill bits, to jet engines, to incandescent lamps -- the stuff is everywhere.“Now let’s ask, where’s the world’s tungsten? Here’s a recent pie chart of world tungsten reserves.  “In addition to its large reserve base (57%), China presently controls about 75% of the world’s output of tungsten. Characteristically, China’s national resource policy is to ensure that the long-term needs of its own industrial base are satisfied. In the past three years, the Chinese have begun to reduce export volumes, while at the same time diverting more and more tungsten output to domestic industry or to foreign companies that locate plants in China. “Does that sound familiar? It’s the same thing that the Chinese are doing with rare earths and other elements, like indium. “Here’s where things stand. According to the U.S. Geological Survey, China dominates world tungsten mining and primary processing. Tungsten availability to non-Chinese markets is tightening, and will doubtless continue to decline. Equally important, China is now becoming a major importer of tungsten concentrates and scrap materials. “Ongoing rapid growth in demand within China will ensure that competition for raw materials between Chinese and non-Chinese processors will continue and intensify. So it’s clear that there’s now an urgent need for increased tungsten output outside China.” Fortunately, Byron’s put together a shiny new portfolio he calls St. Barbara’s List. Named after the patron saint of miners, it’s full of the few, little-known diggers that maintain the technological status quo -- including a company he thinks is the “best tungsten play on God’s green earth.”  Speaking of China looking to corner markets, Chinese officials have been extending huge fiscal favors to certain members of Namibia’s government. The story today is that, evidently, the Chinese government has been handing out full scholarships to the young relatives of Namibian higher-ups.Just about every U.S. paper is boohooing the whole affair this morning, as if that level of corruption doesn’t already exist in every corner of the world. We’re a bit more interested in China’s booming interest in the tiny African nation. This is the third time they’ve gotten busted doing dirty deals with Namibia. (There was a botched back-scratching security technology deal that involved Hu Jintao’s son back in July. Before that, a Chinese weapons company got caught stuffing a Namibian general’s bank account with $700,000.) Could it be that China is not after Namibia, but Namibia’s coast?  “Do you think our government will ever confiscate gold bullion?” a reader writes, adding to our flood of recent gold and gold coin questions. “If the government decided to confiscate gold, how would they know how much a person has in their possession? If a person bought gold from an individual, how would the government know what you had in your private stash? Do you recommend safe-deposit box storage?”The 5: We just finished some preliminary talks with Nick Bruyer, CEO of First Federal Coin Corp., who will be hosting our upcoming webinar to help answer these questions. Here’s what he had to say (our paraphrase): The law they passed in 1934 is still on the books. So yes, they could confiscate monetary coins or bullion. But collectible and rare coins have always been exempt from that law. So if you want to own coins and use them as an investment, but fear the government's wrath, collectibles have been and still are a good vehicle. Of course, that’s a very short answer to a complicated question… for his full response, be sure to sign up for the webinar.  “If you hold bullion or coins in a bank safe-deposit box, beware dying,” Byron King adds. “As the saying goes, ‘You can't take it with you.’“When (not if) you die, the bank will almost surely NOT let anyone else into the safe-deposit box unless they're already an authorized user of the box and listed on the signatory card. In many states, after you die, only an authorized representative of the state department of revenue (or whatever they call it in any given state) and/or a court appointed executor may enter the box. And then they can only open the safe-deposit box to make a court-reviewed inventory that is reportable to the revenue department, and in some circumstances to the federal IRS “So clearly, the ‘privacy’ of holding gold in a safe box goes away when you die. If your gold is in a box, it'll become knowledge to the revenue'ers, and possibly subject to inheritance or estate taxes. “Of course, I'd never counsel anyone to evade paying their lawful taxes and just debts. I just want readers to be aware of the pitfalls of keeping gold in a bank safe-deposit box, unless you're VERY comfortable with your partner who has access and trust that person to do the right thing post mortem.” On that cheery note, have a nice weekend. Ian Mathias The 5 Min. Forecast P.S. Don’t forget, we’re hosting a whole other online event next week – this one with the legendary Dr. Marc Faber. He shared with us his views on the real intrinsic value to the U.S. dollar, the truth behind Bernanke’s reign at the Fed and what he thinks is the single best place to invest in the future. He’ll tell you too – for free. All you have to do is sign up and tune in.
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