Everybody Does It!

February 5, 2013

• Justice Dept. sues S&P, S&P pleads ignorance: a comical postscript to the housing collapse
• Official budget deficit falls below $1 trillion, real deficit skyrockets to $6.6 trillion: John Williams on what gives, Eric Sprott on why it matters
• Revealed: White House standards for drone killings… and how nearly every federal politician could have a target on his back
• Just in time for the Chinese New Year: Rent-a-boyfriend!… a firsthand account of the blowback from the gun buyback in Seattle… showing the math on Patrick Cox’s performance… and more!

  Whaddya know… It’s a new entrant to our ever-expanding “No One Saw This Coming!” file. Only now, instead of an exercise in covering one’s backside, it’s a legal defense.

By now you might have heard the news: The Justice Department is suing Standard & Poor’s for putting its AAA blessing on mortgage securities packed with crappy subprime loans doomed to failure.

  “A DOJ lawsuit would be entirely without factual or legal merit,” S&P responds. “It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market.”

Well, they have a point.

Back in the day it was only “doom and gloomers” like us who dared to suggest housing prices don’t always go up. In 2004, the year we carried the playfully facetious headline “The Total Destruction of the U.S. Housing Market,” the FDIC declared, “It is unlikely that home prices are poised to plunge nationwide, even when mortgage rates rise.”

The following year, future Fed chief Ben Bernanke told CNBC, “We’ve never had a decline in house prices on a nationwide basis.”

“At the time,” writes Doug French in an essay for tomorrow’s Daily Reckoning, “the government’s top economic minds thought everything was A-OK with housing. They were wrong. They were mistaken. Most everyone was. Now the its lawyers, using 20/20 hindsight, figure S&P analysts weren’t mistaken, but instead were carrying out a fraudulent scheme to harm not just investors, but the entire world economy.”

  “Curiously,” Mr. French continues, “the U.S. government has no issue, yet, with Moody’s Investors Service or Fitch, both of which provided the same gilt-edged ratings for mortgage securities during the boom.”

A function, perhaps, of the fact that the S&P downgraded U.S. sovereign debt in 2011, while the other two continue to declare Uncle Sam AAA? (We’ve chronicled the feds’ chronic harassment of second-tier rating agency Egan-Jones, which downgraded the government not once, but three times — most recently here.)

“The entity in question,” says Mr. French, “has made promises well beyond the $16 trillion of its official debt and is currently running a $1.5 trillion annual deficit. It has the ongoing character flaw of not being able to control its spending.”

  This just in: The Congressional Budget Office is out with its updated deficit projection for 2013. We’re on track for the first sub-$1 trillion deficit in five years!

  If only. The true budget deficit has swelled to more than six times the official figure.

Wrap your mind around this: Uncle Sam racked up $6.6 trillion in new obligations during fiscal 2012, according to John Williams of ShadowStats.com — who recently picked apart the 2012 financial statement of the United States Government.

This document applies generally accepted accounting principles (GAAP) to the budget — instead of the phony-baloney practices that would condemn anyone who used them in the private sector to a long stay at Club Fed. The Treasury Department usually tries to bury the report by releasing it between Christmas and New Year’s, but this time, it was delayed by the fiscal cliff drama.

Using GAAP, Uncle Sam has to take into account its future obligations for Social Security and Medicare. Thus the $6.6 trillion deficit. That’s alarming enough — more alarming is how the number exploded in 2012:

Why the increase? It reflects, says Mr. Williams, “deteriorating economic conditions, some likely more realistic reporting on the liabilities tied to the Affordable Care Act (ACA), also known as Obamacare, and possible consolidation of troubled entities, such as Fannie Mae and Freddie Mac into the federal government’s numbers.”

  A $6.6 trillion deficit “represents about 45% of annual GDP,” reckons Eric Sprott, CEO of the Canadian asset management giant that bears his name. “And this year, the real deficit might be double digits.”

“We know where this is going,” he told us in a recent interview. “We know they can’t meet their obligations — which means somewhere along the line, either government-pensioned employees, someone on Social Security, someone who thinks they’re going to get health care, they’re not going to get it. And that’s fairly predictable.”

The day that realization hits is one of several scenarios we discussed in which “a breakdown of the financial system brings people to gold and silver.” We’ll share those scenarios in this month’s Apogee Advisory. If you’re not a subscriber yet, here’s where you can become one.

[Ed. Note: One week from today, Mr. Sprott will be joined by two of his most trusted colleagues -- John Embry and our friend Rick Rule -- for a "virtual round table" on precious metals. They'll dig deep into questions like whether the Western central banks have any gold left in their vaults... and why investors are buying just as much silver (measured in dollars) as gold. If you're interested at all in precious metals, you don't want to miss it. To register, follow this link.]

  Well, at least now we know what the government’s criteria are if they’re going to kill you with a drone. At least we think so.

The “most transparent administration in history” has been tight-lipped about its kill-list criteria. Now NBC News has gotten its hands on an unsigned, undated “white paper” from the Justice Department. It says it’s lawful to kill a U.S. citizen without charge or trial if…

• “an informed high-level official” of the government says you’re a “senior operational leader of al-Qaida or its associated forces”
• you pose “an imminent threat of violent attack against the United States”
• and your capture is deemed not feasible.

Significantly, there need be no intelligence that shows you’re engaged in an active attack plot. The paper lays out what it calls a “broader concept of imminence.” It’s the Bush Doctrine of preventive war, brought down to the personal level.

Hmmm… We think back to Osama bin Laden’s speech right before the 2004 election, the one in which he said he aimed for nothing less than “bleeding America to the point of bankruptcy.”

Heck, that’s two presidents and hundreds of current and former congress members who could be considered al-Qaida accomplices, no?

  The total number of Silver Eagles that exited the U.S. Mint in January was 7,498,000.

We already knew the total would be a record when the Mint ran out of supply in mid-January. A new batch arrived last week and raised the total even higher.

Gold Eagle sales were no slouch either, at 150,000 ounces — the highest monthly total since mid-2010.

  This morning, however, the spot price of gold sits at $1,669 — a few bucks less than where it began the year. Silver has slid a bit to at $31.73.

Blame it in part on a strengthening dollar. With the latest euroscare we alluded to yesterday, the dollar index has bounced hard off Friday’s 79 level to 79.7. The euro, which hit $1.37 on Friday, is back to $1.353 at last check.

  Major U.S. stock indexes have recovered a fair-sized chunk of yesterday’s losses. The Dow is only two points away from 14,000 again.

  The issue of underfunded pensions is finally getting some press. On the front page of yesterday’s Wall Street Journal, we find: “Low Rates Force Companies to Pour Cash Into Pensions.”

Like any saver with a conservative, bond-heavy portfolio, low interest rates are hurting returns. And like retirees, company-sponsored plans are saving more to make up for the loss of interest income. Ford, for instance, contributed $3.4 billion to its pension — not much, considering it’s still underfunded by $18.7 billion. Between cash contributions and pensioner buyouts, Ford spent as much in 2012 on meeting pension promises as it spent building plants, buying equipment and developing new car models.

Much to the disappointment of the manipulators at the Federal Reserve, few pension funds and retirees are going to flee bonds and bid up stocks; most will respond to lower interest rates by saving more – the exact opposite response the Fed wants to see. Heckuva job, Mr. Bernanke!

 In China, renting a boyfriend online is getting a whole lot easier.

Seriously. This is why you read The 5 every day, isn’t it?

According to Agence France Presse, men in China will pretend to be your significant other for the right amount of yuan.

These services “address the most traditional of values: respecting their elders, meeting their demand to find a mate and bringing him home for the country’s biggest holiday, the Lunar New Year… More than 300 results appeared on the popular shopping website Taobao.com to rent a pretend partner ahead of the Lunar New Year holiday…”

“If they haven’t found a partner yet, when they go home, parents will nag them or send them on blind dates or find someone to introduce them to people” says Meng Guangyong, a 29-year-old “boyfriend broker.” He rents himself out too.

Just how much will Mr. Right-for-a-Night run you? That’s up for negotiation:

“The menu one fake boyfriend offered online was exhaustive. Chatting: 30 yuan ($5) an hour. Eating a meal, bill paid by renter: 50 yuan an hour. Chatting with elders: free. The package for a whole day: 1,000 yuan… one advertiser priced at 10, 20 and 500 yuan per display of affection… Once they have hashed out an agreement, Meng said he encourages pairs to meet and try to develop a rapport.”

It’s like a real-life Chinese version of the The Wedding Date. The takeaway, Meng says, is that you “can hearten parents over Lunar New Year but also bring each other a little joy… especially with Valentine’s Day following four days later.”

  “What a circus!” a reader from Seattle writes from the scene of our recent account of the “gun buyback” there.

“I watched our local news coverage of this ballyhooed liberal miracle, meant to aleve Seattle of all of its guns, no questions asked. They gave people who submitted their weapons $20, $40 and $100 gift cards for assault weapons. I, like the gun dealers who were across the street, was seriously thinking of joining the gun-buying mob, in need of a AR15 to add to my gun collection.

“The gun dealers were shouting at people in line, asking certain patrons to come to the ‘dark side’ and saying ‘We will pay you a lot more, and it will be in cash!’ All that was missing was ATF and IRS agents!

“Even more amusing was the moms and grandmas with their stories of these hand-me-down rifles and shotguns. Geez, grandpa is turning over in his grave because you gave away his favorite squirrel gun. Now we’re ridding the streets of Seattle of those awful illegal weapons!

“But the biggest attraction, though, was the nut with the rocket launcher. Funny thing. What you didn’t hear or see was he didn’t get a dime. He was he was being hustled by the gun dealers. But the news failed to mention that the Seattle Police just confiscated the damn thing from him. Surprisingly, he didn’t end up with a nice pair of brass bracelets, courtesy of Seattle’s finest. I’m sure that nut is on some Homeland Security list now!

“Not surprisingly, I didn’t see one gang-banger or felon with huge guns (biceps) and prison tats in line with their MAC 10′s and the sort!

“By the way,” he adds, “Greg Guenthner’s recommendation of Smith & Wesson was one sweet deal last year. Keep ‘em coming, Greg!”

The 5: Ah yes, 158% gains in just shy of a year. Yes, he’ll keep ‘em coming. (Not one of Greg’s readers yet? You can remedy that here.)

Regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “How about, just for kicks, “posting Patrick’s record of returns if one had taken him up on all his stunning breakthroughs and bombshell announcements,” a reader dares us.

“My guess is it’s worse than giving money to the big banks or Obama and hoping to get a profit! Please??”

The 5: Actually, it’s an excellent time to review Patrick’s track record, since he’s been on the team five years this month.

In that time, he’s recommended selling six of his positions. Not one sold for a loss, and the average gain was 168%.

Are some of his open positions down? Sure. But as we’ve said before, the only possible way anyone could have booked a loss on one of his recommendations… is to sell it before he says it’s time to sell. His open positions are all “high-conviction”… loaded with the potential for triple-digit gains at worst and life-changing gains at best.

His favorite high-conviction play of the moment is also his most controversial. As always, the final decision is yours.