Are We No Longer Cutting-Edge?

February 9, 2012

• “Alternative currency”... “33% dollar devaluation”... The 5 finds itself in the peculiar position of going mainstream
• What if easy money is doing its job... at least for now? Consumers borrowing again, while companies dip into their cash piles to expand
• Where doom and gloom meets outrageous optimism: Patrick Cox on a “historic transition”
• Bank that forecloses on paid-up homes now kills people still alive... a skeptical physician puts Cox on the spot... and more!

“Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse,” says a report at CNNMoney, “lawmakers from 13 states... are seeking approval from their state governments to either issue their own alternative currency or explore it as an option.”

“In the event of hyperinflation,” warns Glen Bradley, who has sponsored one such proposal in North Carolina “depression, or other economic calamity related to the breakdown of the Federal Reserve System... the state’s governmental finances and private economy will be thrown into chaos.”

And with that we find ourselves in peculiar territory this morning.

We’re on a train to D.C. to meet with fellow conspirators — gentlemen from the ‘left’ and the ‘right’ — who share in the belief gold must be reintroduced to global monetary system. It’s become an unintentional hobby of sorts.

The meeting is classified at the moment, so we’ll reserve comments for another episode of The 5...

But our current mission is only part of what’s making us uneasy.

We begin today’s 5 by briefly exploring what our line of work is all about. Scientists who’ve studied probabilities and plotted them on a chart typically find a bell-curve distribution — in which the most likely events bunch up in the middle of the curve.

But a funny thing happens out at the ends of the curve, where the rare events are registered.

“Scientists have found small bumps and bulges,” explains Bill Bonner. “Things that were not expected to happen very often actually happened more than they thought.”

“’Hundred-year floods,’ for example, happened every 88 years. ‘One in a million’ shots hit their mark every 700,000 or so. Statisticians refer to these odd bulges on the extremities of bell-shaped curves as ‘fat tails.’ Instead of tailing off as they are supposed to, the rare events seem to swell up where you don’t expect them.”

We are in the business of anticipating fat-tail events — while the “mainstream media” sit in the middle of the bell curve. Click the graph to enlarge and you’ll get the idea:



The problem is that since 2008, “fat-tail events” — like the collapse of the U.S. dollar and the dismembering of the Federal Reserve system — have become harder for us to stake out.

We were once derided as “doom and gloomers.”

Now doom and gloom has become downright fashionable. Heck, we see the National Geographic Channel debuted a show last night visiting survivalists in their bunkers... and here we are carrying on with business as usual in the “belly of the beast.”

With all that in mind, we daresay that declaring the mother of all financial bubbles might be passe. Don’t get us wrong: It’s still inevitable the bubble will pop.

But this morning we throw in the towel and make a concession: The monetary mandarins will successfully inflate the bubble a few months longer. And the peace we expect to break out once they’re defrocked of their power and prestige will have to wait for another day.

“The Federal Reserve Open Market Committee (FOMC) has made it official,” writes Daily Reckoning regular Charles Kadlec at Forbes: “After its latest two-day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years.”

And that’s if everything goes according to the plan... based on the Fed’s now-formal target of 2% annual inflation.

Likewise, the Federal Reserve’s latest figures on consumer credit jumped in December — to an annualized 9.3% rate, on top of November’s 9.9%.

We’ve seen nothing like it in 10 years — not since the Fed poured gasoline on the fire first ignited by the tech bust in late 2001 made it possible for automakers to offer 0% financing.

Yes, student loans are a big part of the growth, as they’ve been for many months now. But auto loans are up big, and even credit card use is growing again.

The Wall Street Journal talks to a bank president in Colorado who says loan volume is up because more people now qualify and they’re willing to take on more debt.

The paper also profiled a couple in Pennsylvania financing a new SUV. “We had looked at our budget, and it was something we knew we were comfortable affording,” said Heather Davidson. They’re buying a 2012 Nissan Armada for $57,000.

Presumably they got every bell and whistle available, since the manufacturer’s suggested retail for the base model Armada is $40,275. But hey, why not splurge and trick the thing out? It’s easy payments of $650 a month for the next 72 months, the paper says.

Six years? Oy...

It seems consumers aren’t the only ones feeling flush. All that cash U.S. corporations have been sitting on? It looks as if they’re starting to deploy it.

“I’m feeling better about the U.S. economy than I was 12 months ago, for sure,” says Patrick Ward elsewhere in the Journal. Mr. Ward is CFO at Cummins, the maker of engines for trucks and heavy equipment. His firm is boosting capital spending to double the rate of two years ago.

Last month, we cited a small list of U.S. companies adding factories and equipment domestically — Caterpillar, Ford, GE, Otis Elevator. To that list, you can add Cummins, and the following:

• United Rentals plans to up its capital spending by one-third this year, to $1 billion
• Carlisle Companies, a small conglomerate, is bringing production back from China
• Union Pacific plans to double its purchases of locomotives this year to over $400 million.

Indeed, the Commerce Department says orders for capital goods have finally recovered to pre-recession levels.



Carlisle is an especially interesting case: Higher wages overseas and higher transportation costs are prompting the firm to move tire production from China to Tennessee. “We will still manufacture in China,” says CEO Dave Roberts, “but the idea would be to manufacture product for Asia in Asia, for the U.S. in the U.S.”

This fits in perfectly with Byron King’s “Re-Made in America” thesis. “The fuse has been lit on a recurring phenomenon that is capable of altering America’s fortune — and your personal wealth — for decades to come...”

It’s happened before in the railroad age, the steel age, with the advent of electronics and later with high-tech. “Now, this powerful phenomenon is taking shape again,” says Byron. And it’s going to move into high gear starting in May. That’s only three months from now.

“We are in the midst of a historic transition,” adds Patrick Cox. “Government debt schemes are failing. This is creating remarkable opportunities for investors.”

“It amazes me, in fact, that more people don’t understand this. On those rare occasions when I watch financial shows, I’m always surprised by the never-questioned assumption that up markets are good and down markets are bad. This is nonsense.”

“The name of the game for investors is ‘Buy low, sell high.’ Given the inevitable fluctuations of the market, we know that markets have always gone through this sort of big cycle. They always will.”

Meanwhile, “The world is, once again, realizing it has been duped by fast-talking political scam artists,” he adds. “This is not a new story. In fact, we’ve actually gotten off pretty easy this time.”

“By necessity, market-killing programs will be cut back, freeing investors and innovators to create wealth once again. This liberation of capital will come just as the greatest scientific revolution in history swings into high gear, delivering extended healthy life spans and new levels of wealth.”

“I realize that the economic situation created by our feckless ruling class tends to cast a cold pallor on the world. It is depressing, I admit, but it will pass.”

“The real story going on behind the scenes is an unbelievable number of technological breakthroughs. These are not hypothetical breakthroughs. They have already occurred, but are not yet fully deployed. They will, in turn, drive astonishing progress and growth, as well as enormous wealth for those with the vision to help it along through investments.”

Are you among them? For a very limited time, we’re offering reduced-price access to Patrick’s premium advisory, Breakthrough Technology Alert. Less than one week remains.

The major U.S. stock indexes are up modestly this morning. The S&P 500 has inched its way past 1,350 — territory last seen in early July.

Among the items traders are chewing on this morning...

• First-time unemployment claims fell last week to 358,000. The four-week moving average — a less-volatile figure — is now its lowest since April 2008
• The Bank of England and European Central Bank both decided to leave interest rates unchanged; the BoE will pursue still more “quantitative easing”
• Government leaders in Greece have agreed to more “austerity measures” as a condition of another $170 billion bailout from the EU and the IMF.

We expect the new measures to work at least as well as the previous ones: Greece’s value-added tax (VAT) jumped from 13% to 23% last September. Today there’s word that VAT revenue in January collapsed 19% from a year earlier.

Precious metals are seeing a slight boost this morning. The bid on gold is up to $1,746. Silver has broken the $34 barrier again at $34.28.

By the time you read this, years of systemic fraud will be swept under the rug during a press conference featuring the Justice Department, state attorneys general and executives from five big banks.

Citi, Bank of America, JPMorgan Chase, Wells Fargo and Ally will together cough up $26 billion in penance for the “fraudclosure” scandal... and will be released from any future liability.

If you haven’t been following this closely, here’s the background: During the go-go days of the housing bubble, mortgages were getting sliced and diced into securities so quickly that banks frequently ignored the niceties of properly recording title.

Once the bust hit, banks often foreclosed on properties they didn’t own the note to; indeed, they might have already sold off the note to someone else.

The chain of title is hopelessly fouled up on potentially millions of properties, to the point that — for instance — Bank of America tried more than once to foreclose on homes whose buyers paid cash.

So what does the settlement do to clean up the mess? Nothing.

MERS will remain in business. That’s the electronic registry that the banks (along with Fannie and Freddie) formed to make securitization easier. It still holds title to roughly half of all U.S. home mortgages.

Instead, the bulk of the $26 billion — about two out of every three dollars — will be used to reduce principal for underwater homeowners who were not victims of fraudulent foreclosures, but merely bought more house than they could afford during the boom.

The people who actually lost their homes to fraudulent foreclosures will get a check for $1,800-2,000.

“We’ve now set a price for forgeries and fabricating documents,” quips blogger Yves Smith. “It’s $2,000 per loan.”

“This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent.”

But it’s not enough for Bank of America to foreclose on homes whose owners paid cash. Now it’s managed to kill someone who’s still alive.

Arthur Livingston of Columbia, S.C. was hoping to build a new home. But he ran into trouble when he discovered BofA — where he’s been a customer for 14 years — has been reporting him as dead to the major credit agencies since May 2009.

“I spend every minute I have either sending a message or calling, faxing or just, you know, wondering if it is going to be resolved today,” Mr. Livingston tells WIS-TV.

“We’re working on 100 days now with no resolution” — after he was promised it would take less than 30.

Livingston says he hasn’t hired a lawyer. Yet.

“I would urge you to check at PubMed,” writes a doctor of the anti-inflammatory nutraceutical that’s piqued Patrick Cox’s interest, “and see if you can find a single article published in the peer-reviewed press on this compound.”

“Wikipedia? Sure, but actual places that scientists publish their work? None.”

The 5: “That’s the point,” Patrick responds. “If this compound had been around long enough to have PubMed or Wiki entries, we would be late. I’m talking to the scientists who have done the original research, at Roskamp and Johns Hopkins.”

“There has been peer-reviewed data on mice with Alzheimer’s disease, however, and more is too come.”

“I would not argue with this person. I would say that if they want to wait until everybody else catches on, that’s certainly a valid option.”

Of course by then, the opportunity would have passed you by.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. We’re almost out of lodging space for The Rancho Santana Sessions. But if you move quickly, you can still join us March 21-25 for a comprehensive briefing on all things offshore.

Want to park a portion of your wealth overseas? Unsure about the legal and logistical hurdles? What about investing offshore with an IRA? What are the estate-planning implications?

We’ll untangle all of those issues and more. It’s an intimate gathering — we’re capping it at 30 people — so you’ll have ample time to get answers to your most-thorny questions. And the setting can’t be beat — Nicaragua’s beautiful Pacific coast.

For a list of expert speakers and other essential info, give this a look.

P.P.S. Having now arrived in Washington I find myself — also unintentionally — watching James Grant take part in a panel discussion on the gold standard at the CPAC conference here in Washington.

Four or five years ago, this never would have happened. Another fat-tail event gone mainstream?

Maybe not. Mr. Grant refers to a New York Times article pooh-poohing the notion: “To supporters, gold has been money for thousands of years, and a return to it is the only way to keep politicians from debasing currencies. To most current economists, gold is a commodity, subject to the normal fluctuations of supply and demand. To them, the supply of money should be controlled based on economic principles.”

“Economic principles?” Like, perhaps, deficit spending until the end of time? Do you suppose that is one of them? More tomorrow...
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