A $551 Billion Hole

December 10, 2012

• Record food stamp rolls… and three other less-publicized programs that have exploded since 2008
• Twilight of the Chavez era? Dan Amoss on lessons from Venezuela 2012 that Americans are about to learn
• A post-Sandy survey: bumper crop of destroyed cars, resilient lodging sector and the one asset class whose fate might be sealed for good
• Yes, the Founders did anticipate six-toed cats when they wrote the Constitution!
• Redefining the rich and their tax burden… readers’ coinage concerns… and more!

  After a year of indecisive movement, one of the most depressing indicators of all has hit another record high…

The total number of Americans on food stamps in September was 47,710,324, according to the Agriculture Department. The average recipient was collecting $134.29 per month.

Hmmm… That works out to about $77 billion a year.

In the Great Correction era, food stamps are what get all the publicity when it comes to federal poverty programs. The growth looks scary-big on a chart, and there’s a visceral quality to the notion of Americans gathering at a 24-hour Wal-Mart at 11:45 p.m. the last night of the month… waiting for their EBT cards to be reloaded at midnight.

  But there are other federal poverty programs whose rolls… and costs… have also grown big-time since 2008.

• Medicaid. Enrollment has swelled from 49 million in 2008 to 56 million today. Tab: The feds’ share was roughly $240 billion in fiscal 2012 and is set to explode; 16 million more Americans will be added to the rolls by 2019 under “Obamacare”
• Extended unemployment. Two million people collect these benefits, first enacted by President Bush in 2008. These are straight-up transfer payments that kick in after the first 26 weeks of benefits — paid for by employer/employee premiums — run out. These benefits are due to expire at year-end and have thus gotten tangled up in all the fiscal cliff sturm und drang. Tab: $44 billion if extended for another year
• Social Security disability. The number of Americans collecting these benefits has more than doubled… from 4.9 million in 2009 to 10.8 million as of last August. Some of these recipients began collecting when their extended unemployment ran out. Tab: $190 billion in fiscal year 2012.

  Into this dizzying and depressing array of numbers, we add one more: $42 billion. That’s the amount of money generated by letting the “Bush tax cuts” expire on families making over $250,000.

The figure we’ve cited up to now is $70 billion. But buried in a Congressional Budget Office report last summer was the revised $42 billion. (In theory, that number would grow steadily to total $824 billion over 10 years. Right.)

Add up the total spending on food stamps, Medicaid, extended unemployment and Social Security disability… and you get $551 billion. The $42 billion extracted from “the 1%” (more like 3%) would cover 8 cents of every dollar of spending under those four anti-poverty programs.

There’s simply no way the situation can end well…

  Major U.S. stock indexes are up, but not much. The S&P 500 is knocking on the door of 1,420.

For the moment, traders are shrugging off the latest news disrupting the illusion that Europe is fixed: Italian Prime Minister Mario Monti plans to step down, and his lecherous predecessor Silvio Berlusconi is plotting a comeback. Elections are set for February.

Italian bond spreads have blown out. The 10-year yield spiked from 4.53% to 4.89%. The Italian stock market is down nearly 3.5%.

The euro has slipped to $1.29. The dollar index has firmed to 80.3.

  Our favorite Latin American caudillo Hugo Chavez has named a potential successor, straight from central casting…

Foreign minister Nicolas Maduro: Meet the new boss…After winning reelection in October, Chavez is off to Cuba for a third round of cancer surgery — seldom a good sign.

“In 2012,” writes our macro strategist Dan Amoss, “the Venezuelan economy offered us a case study in leftist, Keynesian economic policy. In a vigorous pre-election vote-buying stimulus effort, Venezuela’s government budget deficit ballooned to an estimated 20% of the economy — twice the demand-boosting power of the Obama stimulus. Its central bank printed money, crashing the local currency against the U.S. dollar on black market exchanges.

“Paul Krugman and Larry Summers look on, green with envy that such elegant policy is not happening in the U.S.

“But the Venezuelan version of fiscal stimulus didn’t nudge the economy into a self-sustaining virtuous cycle of spending; it simply stored up trouble for the future.

“Trouble will arrive with a vengeance once Venezuela officially devalues its currency against the dollar. When that happens, chaos will ensue. Consumer prices will explode. Any recovery in capital spending will grind to a halt amidst fears that today’s investments will be repaid with tomorrow’s worthless currency.

“The real case study offered by Venezuela is not yet complete,” says Dan. But the results are already conclusive: “When weighed against the trouble stored up for the future, deficits and money printing solve nothing. There is no free lunch in economics.”

  Precious metals picked up momentum as soon as the spot market opened last night: Gold is up to $1,713, silver to $33.26 — movement that comes despite the aforementioned dollar firmness.

   “There are over 230,000 cars that have been flooded out… total losses” says an on-the-ground account of what Hurricane Sandy left behind. “This is just for [New York City] and Long Island. There are more in Jersey.”

The account comes from Chris Mayer’s father, who’s in the salvage biz after decades in the insurance trade. “There are some beautiful cars here. Brand-new cars. 2013 cars. There are old ones too, of course… I saw two Ferraris. There are literally 50 Corvettes. A Bentley. I heard there was a Model T somewhere.

“These cars will be either broken down for parts or crushed or sent overseas to be rebuilt in Africa, Eastern Europe, Southeast Asia and the Middle East. We’ll be selling these cars into June.”

Not every operator is as scrupulous as Chris’ dad; beware if you’re in the used car market for the next couple years.

  For hotel stocks, a sector Chris has been fond of this year, “the fourth quarter will be weaker than forecasts before the storm predicted, but this does not kill the longer-term hotel cycle.

“Occupancy rates are still rising in the lodging sector. Only a few markets see any significant construction activity. And hotel stocks stand to gain from two years of heavy renovation spending.” Chris’ favorite plays are an important component to the current Capital & Crisis portfolio.

  The outlook might not be so sanguine for oceanfront real estate.

“Property values will go underwater long before property actually goes underwater,” writes Reserve member John Englander in his new book High Tide on Main Street: Rising Sea Level and the Coming Coastal Crisis.

Mr. Englander is not an ivory-tower academic. He’s an oceanographer who’s been to the bottom of the ocean beneath the polar ice cap. And for years, he’s been looking into the causes and consequences of rising sea levels.

In the book, he estimated oceanfront property values would go “underwater” within a decade. After Sandy, he believes the process has already begun.

“We’ve all put a premium on coastal real estate for obvious reasons,” he tells The Atlantic. “But we all assumed, like all land, that it was permanent. … It could be we now are slowly coming to the realization that’s not true.”

True, there’s federal flood insurance — which was expanded earlier this year. But like ever-rising federal poverty programs, it won’t last forever: “Inevitably, governments will not be able to compensate everyone for the risk of assets exposed to rising sea level,” he writes.

“The key questions are when that will happen, how much notice you will have of a change in policy and whether you will then be able to liquidate your asset at a reasonable price.”

  If we held a “Great Moments in the Law 2012″ contest, we’d already have a winner.

When Ernest Hemingway lived and wrote in Key West during the 1930s, he took in some unusual six-toed cats. Now a federal appeals court says those cats’ descendants are subject to the Constitution’s interstate Commerce Clause. Seriously.

Hemingway’s house is a museum these days… and it remains home to about 50 such cats. “As in Hemingway’s time,” reports The Christian Science Monitor, “the cats are allowed to roam and lounge at will in the house and on the one-acre grounds.”

Enter a busybody museum visitor who for whatever reason was concerned about the cats’ care. “The visitor took that concern all the way to the U.S. Department of Agriculture and, literally, made a federal case out of it,” says the Monitor.

Yes, the agency that hands out food stamps also enforces the Animal Welfare Act… so it dispatched inspectors to Key West. They determined the museum must “confine the cats in individual cages each night, or construct a higher fence around the property, or install an electric wire atop the existing brick wall or hire a night watchman to keep an eye on the cats.”

The museum went to court… and lost. “The museum,” wrote Chief Judge Joel Dubina, “invites and receives thousands of admissions-paying visitors from beyond Florida, many of whom are drawn by the museum’s reputation for and purposeful marketing of the Hemingway cats.

“The exhibition of the Hemingway cats is integral to the museum’s commercial purpose, and thus, their exhibition affects interstate commerce.”

Sorry, little fella… You’ll have to go into a cage at nightSurely, it’s the most inventive application of the Commerce Clause since Wickard v. Filburn — the infamous 1942 decision that declared a farmer growing wheat for consumption on his own property ran afoul of the feds’ limits on wheat production.

  “When I write a check to my church or other charitable organizations,” a reader writes, “I am glad to get a deduction since I itemize. I hope the Republicans don’t give in and take it or the mortgage deduction away just so they can say they didn’t raise the tax rate.

“However, if the government really wants to collect more revenue and not raise rates, they should require people that contribute appreciated stock to charities pay capital gain taxes before the shares are transferred.

“How much tax is Warren Buffett going to pay on the $40 billion in Berkshire Hathaway stock that he has pledged to donate to the Bill & Melinda Gates Foundation? How much tax did the Gateses pay on the $25 million that their foundation gave to the William J. Clinton Foundation?

“Besides supporting Obama, didn’t Warren say the rich should pay more taxes? With the long-term capital gains tax for those earning over $250,000 going to 23.8% in 2013, the foundation would still be getting over $30 billion.

“I would be OK with some amount being exempt from the capital gains tax so that that only the superrich are affected.

“Maybe they could take a poll that went like this – Do you think that government should let Warren Buffett, the world’s third-richest person, pay zero taxes on $40 billion just because he is giving it to Bill Gates, the world’s second-richest person? Or should he do what’s right and pay long-term capital gains tax like everybody else that sells their appreciated stock?”

  “If you want to have an efficient coin and currency system,” a reader writes after Friday’s episode, “just go to Australia.

“They price all items to the penny, but don’t use any. All final sales are rounded to the nearest nickel. They also don’t have a A$1 bill, but use A$1 & A$2 coins with a A$5 bill. I thought that it was a very good system when I was in Sydney.”

  “Wait!” a reader implores. “If pennies and nickels are worth as much in value as their metal content, isn’t that effectively what the ‘gold standard’ is all about? The value of metals may fluctuate, but it is not an arbitrary number like that assigned to paper currency.

“Think of how valuable (in relative terms) old pennies will become to collectors once nearly everyone else turns in their pennies for their copper value. The numismatists might be drooling already. Seems to me that the Treasury took the silver content out of dimes dated after 1964, due to its value being greater than that of the 10 cents (which could buy a cup of coffee back then — or a local phone call).

“Maybe metal content should be required for all monetary systems — of course, that takes the power away from the banksters, doesn’t it?”

The 5: True, but there’s a brief window in which you can turn the tables and pocket a substantial gain — up to 228%. Be advised: The window might slam shut as early as this Friday.

Regards,
Dave Gonigam
The 5 Min. Forecast

P.S. “Atlas Shrugged was a warning,” quips John Towers, “not an instruction manual.”

But with large parts of the instruction manual being implemented, Mr. Towers says you must invest accordingly: He shared several ideas over the weekend at the Rancho Santana Sessions.

Watch later today for colleague Chris Campbell’s full write-up of the opportunities laid out by our guest speakers. And if you want access to either audio or HD video recordings of the presentations, you can still sign up through midnight tomorrow.