Holiday Mirth, Economic Myth

December 6, 2012

• Holiday shopping drives economic growth? Bah, humbug… Time for some Yuletide cheer, 5 style!
• Gold mired below $1,700… but Guenthner says there’s another level to watch that’s more important
• Cash from trash, and other investable insights Chris Mayer is bringing to the Rancho Santana Sessions
• Home sweet home, until the bulldozer arrives: Cautionary tales from Jersey to Bordeaux
• “Fiscal cliff” vs. “austerity measures”… taxing political contributions… and other reader musings

  “Commerce and religion and patriotism are all part of what we have come to know as the holidays,” opines Leigh Eric Schmidt, a humanities professor at Washington University in St. Louis.

“Consumption during the holiday season has come to have a kind of patriotic quality in the United States,” he tells The New York Times.

And it didn’t start with George W. Bush — who, as it turns out, never did tell Americans after Sept. 11 and in the midst of the 2001 recession to “go shopping.” What he did say in December 2006, as it was obvious to everyone the housing market was rolling over, was this:

“As we work with Congress in the coming year to chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century, we must also work together to achieve important goals for the American people here at home. This work begins with keeping our economy growing. …and I encourage you all to go shopping more.”

“Party on!” we ad post-epochally.

  As with many unintended phenomena in America, the idea that we can consume our way to wealth rooted itself firmly during the administration of the 32nd president of the United States, Franklin Delano Roosevelt.

“FDR,” says Harvard historian Lizabeth Cohen, “and many who advised him, felt that the best route out of the Depression was putting money in consumers’ pockets so they could, in a sense, buy us out of the Great Depression.”

In 1939, he went so far as to move up Thanksgiving that year by one week — from Nov. 30 to Nov. 23 — thus extending what’s come to be known as the “holiday shopping season.”

Eighteen months later, he acknowledged the scheme failed. “The experiment had not worked,” The New York Times reported in May 1941. People bought no more in 1939 than in 1938, extra shopping days notwithstanding.

  The myth that consumers can spend their way out of a recession goes along with a half-truth repeated every time the media reports retail sales figures.

“Consumer spending drives nearly 70% of economic activity,” said a CBS News report when the numbers came out last Friday.

Well yes… if you consider the formula for GDP to be a valid measure of “economic activity.” Which, for various nefarious reasons we explored yesterday, it’s not.

But far be it from us to bust economic myths this holiday season. Our friend John Papola makes the point far more entertaining… and helps puts today’s 5 in the holiday mood:

Program note: We’ve recently teamed up with John and his crew at Emergent Order for several video projects. Among them is our documentary project Risk!. They’re going to help us take Risk! over the finish line. We plan to begin airing episodes of the new film early in 2013… stay tuned!

  The major U.S. stock indexes are in need of some Xanax this morning, but the Dow is holding the line on 13,000.

  First-time unemployment claims fell again last week, but the “Superstorm” Sandy-related gyrations are still in play: The four-week moving average moved up a bit to 405,750.

This will be the final jobs-related number before the Bureau of Labor Statistics (BLS) regales us with its first postelection monthly unemployment report tomorrow.

We won’t even hazard a guess at how the market might react. Yesterday, Citigroup announced it was letting go of 11,000 people (who will undoubtedly cut back on their holiday shopping). An ill omen for the company’s prospects? Hell no. Traders appeared to see it as a long-overdue round of cost-cutting. Shares of C jumped more than 6%!

Heh.

  Gold is meandering around the level where it tumbled a little over 24 hours ago. At last check, the bid was $1,696. Silver’s at $33.11.

“Everyone’s watching $1,700 — I get it,” says Greg Guenthner, examining gold from a technician’s standpoint.” Investors love round numbers, and gold has been tiptoeing on both sides of $1,700 for months now

“But short-term support is actually $1,680 for gold. So give it some leeway before you decide to get all worked up about it. And even if it breaks this mark, gold would have a ways to go before I’d sound any alarms…

“If gold gives back all of its gains since the summer and thinks about retesting $1,550, then it might be time to start questioning its multiyear uptrend.”

[Ed. Note: Only a few hours remain for you to join the 21-Day Trading Challenge led by Greg and Jonas Elmerraji. The average hold time for their trades is 21 days... and it was all the time their readers needed to bag 30% gains on Research In Motion -- the down-but-not-out Blackberry maker -- only last week.

Through midnight tonight, you can still take the challenge -- with no obligation. You can paper trade to see if you're comfortable with Greg and Jonas' trading style. Here's where to get started: Take advantage before the challenge closes tonight.]

  “The average American creates more than seven pounds of trash every day,” writes Chris Mayer from a sunlit porch in Nicaragua.

“Still, how to put that in perspective? Edward Humes, author of a new book titled Garbology, writes: ‘Each of our bodies may occupy only one cemetery plot when we’re done with this world, but a single person’s 102-ton trash legacy will require the equivalent of 1,100 graves.’

“Much of the garbage winds up in landfills. But landfills are not popular. So the number of landfills has gone from about 8,000 to below 2,000 in the last 30 years. The remaining landfills are filling up fast.”

Chris gleaned these facts from a quarterly shareholder letter put out by Compound Capital Management. Earlier this year, Chris ventured to Nashville to meet with its two principals to talk trash. Turns out both they and Chris are high on a company that essentially burns trash to generate electricity. It’s a core holding in Capital & Crisis, Chris’ entry-level newsletter.

  Compound looks at companies the same way Chris does: “We continue to concentrate on those businesses that have high recurring cash flows in industries that are recession-resistant,” writes Compound’s Joe Altman. “Our objective is to wait until those businesses are available at low multiples of cash flow and large discounts to the true replacement costs of the assets backstopping the company’s balance sheet.”

For a fund that launched at the worst conceivable time — 2008 — the results have delivered a 17.2% annualized return. “Put another way,” says Chris, “if you had put $1 million with them at the start, you’d have $1.7 million today.”

Mr. Altman is among the featured speakers this week at round two of The Rancho Santana Sessions. He’ll spotlight some of his favorite plays — names, tickers and all — accumulated from his exhaustive research and worldwide travels.

Other speakers include John Towers of Personal Wealth Advisers and Vancouver veteran Brad Farquhar of Nomad Capital, who has a new opportunity open to U.S. investors.

Chris Mayer will be there too… along with our investment director Eric Fry and The Daily Reckoning’s managing editor Joel Bowman.

We’re sorry you’re not joining the party in person on Nicaragua’s stunning Pacific frontier… but you can still access the insights and opportunities that make the journey an acceptable tax wri… ahem… that will come forth when the Sessions begin tomorrow.

We have a crew recording high-definition video. Access to these recordings is still available for a few more hours at the lowest possible price. It goes up tonight at midnight. To secure your recordings as soon as they’re ready — there’s an audio-only option, if that’s what you prefer — follow this link.

  It’s bad enough the government tears down your home. But when you don’t even know who to complain to…

That was the situation facing Nick Maria. Two weeks after Sandy blew through New Jersey, evacuees were allowed back in to retrieve their belongings. Which was a tall order for Mr. Maria, since his entire summer house was gone.

“The township didn’t know what happened,” he told a local TV station. “I called the governor’s office and asked the assistant what happened. She said to me, ‘Are you sure your house is gone?’ I said ‘Miss, you misplace your pen or pencil. You don’t misplace your house.’”

The TV station called around and discovered it was the New Jersey Department of Transportation. “The structure in question… was pushed off its foundation and jammed against another house that had come to rest in the middle of the street,” says a DOT statement. “The two houses had sandwiched a utility pole.”

Um… so what about the belongings inside? His golf clubs? His wife’s diamond earrings?

No one knows… or no one’s saying. (Fortunately, he’s fully insured.)

  But lest you think Americans have a monopoly on bureaucratic bungling and unintended consequences, we present an 18th-century French chateau that was bulldozed… “by mistake.”

“The mayor’s office in Yvrac said Wednesday that workers who were hired to renovate the grand 13,000-square-meter (140,000-square-foot) manor and raze a small building on the same estate in southwest France mixed them up,” reads the sterile wire-service prose.

The workers? Really? Not a faulty permit? No one knows… or no one’s saying.

The Chateau de Bellevue in Bordeaux… in better times, that is.The Russian businessman who bought the place says he’ll build a precise replica on the site.

  “I continue to wonder,” a reader writes, “why higher taxes and spending cuts are called a ‘fiscal cliff’ here in America and ‘austerity measures’ in Greece/Spain/Europe.

“There, they are the cure for what ails bloated government, and here, they are a plague that will somehow destroy us all.

“Anyone with half a brain cell can see that our government needs to raise taxes and cut spending to get the debt under control, so why are the changes in law to take place on Jan. 1, 2013 so demonized? Is it just the sheer size of the raise/cut? None of the ‘raises’ in taxes are actually raises, but just a return to the tax law of a decade ago. Was our country at the bottom of the cliff 10 years ago?”

The 5: Not even 10 years ago. The “fiscal cliff” only brings us back to 2009 levels of bloatedness… a year after we debuted I.O.U.S.A.!

  “Putting a 50% tax on all political donations would go a long way towards paying down the deficit without taxing the middle class,” another reader suggests.

[Hmmm....]

“The truth,” a third declares, “is that most of the wealthy make their money ‘in the financial markets,’ and make no jobs at all — or, at least, none that are worthwhile. Tax them to death — who cares?!

“A low flat tax is suitable for those wealthy who are actually productive in their enterprise, and thereby create jobs and real wealth. Now all we have to do is figure out how to distinguish one from the other…”

  “The question for the wealthy,” writes a fourth “in particular, the Wall Street crowd and the bankers, is: Did they acquire their wealth illegally?

“Or did they study all the new rules and regulations, including tax laws, that the people in Washington create every year, to find opportunities for themselves?

“I think you should look to Washington for an answer as to how these people were able to do what they have done. Corruption of our elected officials will lead to our demise much quicker than the people who keep their profits.”

  “Shouldn’t that GDP formula,” a reader writes after yesterday’s episode, “be MINUS government spending, since whatever the government spends is taken from the total economy in taxes and other confiscations, not added to it?

“At best, government spending should simply be ignored in the calculation. It’s a net zero.”

  “I have been a faithful reader for a number of years. For the most part, I have been in hearty agreement with what you write. That is all.”

The 5: Aw, no “but”? No “I dare you to print this”?

Thanks for reading!

Addison Wiggin
The 5 Min. Forecast

P.S. Final reminder: Access to Jonas and Gunner’s excellent 21-Day Trading Challenge closes tonight at midnight. If you want access to plays like 30% in three weeks that a select group of readers was able to bag on Nov. 26, here’s where to act.

P.P.S. “An intelligent hell is better than a stupid paradise,” wrote the French poet and novelist Victor Hugo.

“Unfortunately,” adds our own Chris Campbell, “Mr. Hugo wasn’t around long enough to experience the better of both worlds, Rancho Santana… the smartest paradise on Earth. At least this week it is.”

More from Chris later today, as the Rancho Santana Sessions are about to begin… Keep an eye on your inbox. And as a reminder, the price of recordings from the Sessions — both audio and high-definition video — goes up at midnight tonight. You can still secure the best price right here.