The Ides of March

March 15, 2013

• The $6 trillion tab for a 21st-century war with roots in the 20th… and a lineage all the way to ancient Rome
• Vanquished by “Bankistan”: Barry Ritholtz on what the Fed’s member banks hath wrought
• Even the statisticians can’t cover up rising prices now: Dan Amoss on why gasoline prices are outpacing crude
• Second thoughts about Puerto Rico… waiting for the bendy smartphone… an educated guess at solving the “crime of the century”… and more!

  “Beware the Ides of March,” William Shakespeare cautioned in his dramatization of Julius Caesar’s demise. The ides, of course, refers to March 15 on our current calendar. But in Roman times, the calendar was based on a lunar cycle… the ides indicated a full moon.

Kudos, Classical Wisdom Weekly

Whether Caesar was done in on this day in 44 B.C. is a matter of some dispute. The full moon this month will arrive 12 days hence.

Either way, we cite this historical reference with good reason: Five years before Brutus shoved a knife into him, Caesar gave us the term “crossing the Rubicon” — a point of no return — as his forces entered Rome from the north… and set the republic on the road to empire.

  “Woodrow Crosses the Rubicon” is what we affectionately titled Part II of Empire of Debt.

“In the crowded field of contestants for America’s worst president,” we observed, “one man stands out. As a world-improver, his stature is world-class. He was humorless, immodest and self-righteous.

“How did he know the world would be a better place if a Federal Reserve system were set up to control the nation’s money?… What made him think… that World War I would end better if Americans got involved in it?”

Five days from now, we mark the 10th anniversary of an invasion waged against a country with phony borders carved from the Ottoman Empire by world-improving French and British diplomats after U.S. intervention brought about an Allied victory in World War I.

  The latest estimate for the Iraq War’s tab: $6 trillion.

The Costs of War Project at Brown University, released yesterday, estimates the costs to date are $1.7 trillion — not including $490 billion in veterans’ benefits. Throw in resulting interest payments over the next four decades and the figure rises to $6 trillion.

Makes the projected $1 trillion price tag of the Affordable Care Act look trite by comparison, doesn’t it?

“Despite the U.S. military withdrawal,” the report says, “Iraq’s health, infrastructure and education systems remain war-devastated.”

“The $212 billion reconstruction effort,” Reuters reports, “was largely a failure with most of that money spent on security or lost to waste and fraud.”

  Al-Qaida — which had no presence in Iraq before the invasion — now conducts “nearly monthly” attacks in Iraq, says director of National Intelligence James Clapper, and is aiding the rebels trying to bring down the regime next door in Syria.

As is the United States. Today, as it happens, is the second anniversary of the uprising in Syria.

“We know al-Qaida [leader Ayman al-] Zawahiri is supporting the opposition in Syria,” Hillary Clinton admitted during a rare moment of introspection last year before her tenure as secretary of state came to a close. “Are we supporting al-Qaida in Syria?”

“Considering its long-term consequences,” sums up veteran Washington reporter Jeff Stein, “the 2003 invasion of Iraq is beginning to make the Vietnam War look like a foreign policy hiccup.”

  As students of irony, we pause for a moment here to observe a rare and tasty morsel of the wry stuff: The corporate headquarters of Agora Inc., our parent company, are located at 14 W. Mount Vernon Place in Baltimore. It’s known as the Marburg Mansion.

Theodore Marburg was the U.S. ambassador to Belgium from 1912-14. Prior to WWI, the U.S. had “guaranteed” Belgian neutrality in Europe; meaning if either France or Germany invaded the other using Belgium as a corridor, the U.S. would come into the war on the defenders’ side.

In August 1914, as chronicled beautifully in the classic The Guns of August by Barbara Tuchman, Germany invaded France by way of Belgium. Von Kluck’s troops were at the gates of Paris within 33 days, stopping only briefly to water their horses.

The action thrust Marburg into the limelight. Wilson journeyed on multiple occasions north from the White House to meet with him here at his home. According to the Maryland Historical Society, the first draft of the League of Nations was drafted in the library — the same room we use for our editorial meetings.

Click to enlarge. From Empire of Debt

Procedamus.

  “Is there a scintilla of wonder left in your mind that the giant banks are legitimate?” Fusion IQ chief and Vancouver stalwart Barry Ritholtz wondered aloud this morning.

A century after J.P. Morgan and his cronies convinced Wilson and the Congress a Federal Reserve was a swell idea, the firm that bears his name made headlines twice in the last 24 hours…

• JPMorgan Chase was one of two firms — Goldman Sachs the other — that the Fed cited for having inadequate capital. Raising more capital would get in the way of their plans to raise dividends or buy back shares

• A Senate report finds JPM blew off internal warnings and misled investors about the losses it faced from its “London Whale” trades. In the end, the losses topped $6 billion.

In a market economy, a $6 billion loss at JPM would be none of our business, unless we owned shares. But in A.D. 2013, it’s everyone’s business, because everyone is implicitly on the hook.

“Are you willing to accept the truth about these corporate behemoths,” asks Barry — “that they are a horrific combination of economically dangerous, criminally inept, led by pathologically lying CEOs?

“Can you — finally — admit that our bank-created financial crisis of 2008-09 has led us to where we are today?

“Do you understand the only options presented as a result of that — either corporate bankruptcy and nationalization or a completely artificial Fed-driven recovery? (The third option was a Japan-like multidecade recession.) Do you realize that the feeble recovery, the slow, deleveraging-driven process of gradual economic healing, was the result of how our policymakers chose?”

Barry calls out a triumvirate of “bank apologists, corrupted politicians and crony capitalists… They no longer represent the voters of their districts, but instead are the elected representatives of Bankistan.

“And unless we do something — and soon — they will vanquish America.”

[Ed. Note: For 47 ways to count yourself out of "the vanquished," check this out].

  They’ve already vanquished Detroit.

On March 1, Michigan Gov. Rick Snyder declared a state of fiscal emergency for Detroit — asserting the power to appoint an “emergency manager” to oversee the city’s finances and operations. Yesterday, he named attorney Kevyn Orr that manager. Mr. Orr had a hand in the Chrysler bankruptcy proceedings — the ones that hosed bondholders in favor of the unions and other favored constituencies. He also burnished his crony-capitalist credentials with a stint at the FDIC.

“The only winners in the financial crisis that brought Detroit to the brink of state takeover,” begins a Bloomberg article today, “are Wall Street bankers who reaped more than $474 million from a city too poor to keep streetlights working.

“Banks including UBS AG, Bank of America Corp.’s Merrill Lynch and JPMorgan Chase & Co. [there they are again] have enabled about $3.7 billion of bond issues to cover deficits, pension shortfalls and debt payments since 2005, according to data compiled by Bloomberg. Liabilities rose to almost $15 billion, including money owed retirees, according to a state treasurer’s review.”

The $474 million cost, Bloomberg reckons, includes underwriting expenses, bond insurance premiums “and fees for wrong-way bets on swaps.”

Actually, Detroit made out like bandits compared with Jefferson County, Ala. Remember that similar bets on swaps turned a $250 million sewer project into a $5 billion black hole. But then, bribery was involved in that one — for which politician bribees went to jail, but not the banker bribers… most of whom work for JPMorgan.

  The “completely artificial Fed-driven recovery” is not enough — for the moment at least — to drive the Dow above its latest record high set yesterday.

In fact, the index sits a hair below 14,500. Other indexes are down too, but not by much.

  The Fed’s monetary fuel that’s been driving up asset markets is now spilling over into consumer goods — even by the government’s own skewed figures. “U.S. inflation running hotter than at any point in three years,” says MarketWatch this morning.

The consumer price index jumped 0.7% in February, the most since June 2009. The year-over-year number still looks “tame” by Fed standards, at 2.0%.

As with the producer price report yesterday, the big driver was energy — up 5.4% last month. Gasoline was the worst — up 9.1%.

  “What explains the remarkable strength of retail gasoline prices?” asks our macro strategist Dan Amoss. “In the U.S., crude oil production is growing and gasoline demand is flat; yet retail gasoline prices hover at high levels.”

Fortunately, Dan is not without answers: “Low spare refining capacity, rising gasoline exports and a weak dollar largely explain high gas prices. Consider this fact: Over the past three years, 6% of U.S. refining capacity has closed.”

  And then there are the government’s ethanol mandates, which we paid a little lip service to yesterday.

“The pork-filled energy law passed in 2007 didn’t foresee weak gasoline demand,” Dan explains. “The law orders refiners to blend a certain amount of ethanol with gasoline through the year 2022. Thanks to low gasoline demand and rising ethanol mandates, refiners are running up against a ‘blend wall’ of 10% ethanol. Beyond 10%, every company in the fuel supply chain starts panicking about lawsuits related to the corrosive influence of ethanol on conventional engines.

“The value of ethanol credits has soared as refiners fearing the arrival of the blend wall rushed to buy. If refiners don’t blend enough ethanol into their gasoline, they must buy ethanol credits on the open market. A recent Bloomberg Chart of the Day depicted the tenfold rise in ethanol credits in just the past two months:

The investing takeaway: “The bull market in refining stocks may pause. But refiners will react to this boneheaded mandate by pushing through the cost of ethanol credits to drivers, while also boosting gasoline exports to countries without mandates. Both actions would boost U.S. gas prices ahead of the summer driving season.”

The real pain looks headed for another group of stocks we feature in today’s 5 PRO…

  Gold is making another halfhearted attempt at $1,600 as the week draws to a close. At last check, the bid was $1,594. Silver remains mired below $29.

  “It’s a situation that really is stunning the medical community right now,” says Dan Wood of the Medical Board of California. “Everybody begins to question every drug.”

California is home to the nation’s strictest law aimed at tracking down counterfeit drugs. But nearly a decade after it was passed, it has yet to be implemented.

“Fake prescription drugs,” according to the San Francisco Chronicle, “are a growing problem in the United States and around the world.” In 2002, the Pharmaceutical Security Institute reported 196 cases of counterfeit drugs. In 2010, the most recent year available — 2,054.

Phony drugs make up another clue in the “crime of the century” Patrick Cox has unveiled this week… as he’s challenged you to solve the crime and reap the reward. You should have gotten this latest clue in your inbox earlier today. If not, here’s your chance to watch right now…

If you’re still stumped, Patrick will issue a final video release this Sunday evening at 6 p.m. EDT.

  For the record, hedge fund billionaire John Paulson says he won’t move to Puerto Rico.

“While Mr. Paulson has considered real estate investments and has vacationed on the island,” says a statement this morning from Paulson & Co., “he has no plans to establish a permanent residence there.”

As we mentioned Tuesday, Puerto Rican tax law now allows new residents to avoid local and federal taxes on capital gains… as long as they live there half the year and bring along the family. Deal-breaker for his two daughters? We can only speculate…

  Boo. The bendy smartphone will wait a while longer.

Samsung did a huge dog and pony show last night to trot out its Galaxy S4. You can scroll up and down simply by moving your eyes… and you can take darn good pictures with its 13-megapixel camera… but the “flexible OLED” display made of graphene didn’t make it into this model, despite an impressive demo at this year’s Consumer Electronics Show.

“Samsung still has a lot of work ahead,” according to an assessment by Taiwan-based DigiTimes, “especially if it wants to make flexible displays that bend in more places than just at the corners and slightly in the middle.”

There’s still ample time for the graphene story to play out. Stay tuned…

  “Is the heist,” writes a reader submitting a guess to Patrick Cox’s crime-of-the-century challenge, “the purchase of counterfeit parts by the military?”

The 5: You’re getting warmer after watching the second video… but that’s a mere piece of the puzzle. Once again, here’s a link to the third video. Good luck…

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Patrick’s final video will be released Sunday at 6 p.m. EDT. You’ll receive a link in your inbox at that time. Don’t miss out on your chance… after all, we expect a lucrative reward.