Commentary for the Week of March 8

So accustomed have we become to seeing bullion’s worst days matched lurch-for-lurch by the stock market’s that yesterday’s chastening of gold and silver bulls, if no one else, came as a rude surprise. Up until now, the exhilarating pleasure of watching the stock market get the crap kicked out of it whenever gold and silver were falling was our consolation prize.  Yesterday, however, with gold down nearly $50 at one point and trading $42 lower at settlement, the Dow thumbed its nose at bullion bulls by rising a token 20 points. Ouch! If the Industrial Average instead of rising had fallen as hard as gold percentage-wise, it would have been down by 345 points. And what a lovely day that would have been!  It is so rarely any more that we experience anything resembling a breath of sanity on Wall Street that the spectacle of stocks paying heed, however fleetingly, to America’s darkening economic prospects comes (when it does come) like a bracing blast of fresh air -- akin to being pronounced fit as a fiddle by one’s shrink. Alas, with yesterday’s schizophrenic tallies to ponder, we can only infer that our view of the financial world, particularly of a U.S. economy sinking deeper and deeper into Depression, remains outside the flow of popular opinion. So what of the pasting that bullion took yesterday?  We wouldn’t worry too much about it, at least not yet.  Although Comex February Gold fell $50 to an intraday low of $1375, it would need to drop by a further $58, to $1317, over the next day or two to do any real technical damage to the daily chart (see above). As it happens, the selloff did not breach even a single prior low; we require no fewer than two such breaches to signal the

The savviest financial advisor we know has been buying municipal bonds hand-over-fist, but this time we can’t say that we share his confidence. Our friend Doug is a bear’s bear, an outside-the-box thinker and a full-throated deflationist who has contributed occasional commentaries to Rick’s Picks. Moreover, during the years we’ve know him he has done exceptionally well for his clients in good times and bad, even when his employer was breathing down his neck for going boldly against the crowd. When we spoke with him last week, he’d just put the finishing touches on a large purchase of tax-free munis with effective yields as high as 7.5%.  Wasn’t he worried that such juicy returns implied rather substantial risk? Not at all, he replied. The muni bond markets are so spooked right now, he says, that they are ripe for buying. We wouldn’t quibble with his description of the markets as “spooked,” but we’ll side with the fear mongers on this one, including CBS 60 Minutes.  In a recent segment, the weekly news show reported that as many as 100 U.S. cities could default on their municipal bonds. That's because they’ve spent almost half a trillion dollars more than they’ve collected in taxes, running up current pension shortfalls of $1 trillion in the process. The scary implications of all this red ink haven’t been lost on investors, who have been dumping muni bonds heavily for the last two months. As bond price have fallen in the panic, yields have risen commensurately. 'Rescue' Fallacy Some say the sellers’ fears are overblown and that the actual chance of default by a major city is low. States would come to the rescue before any big cities are allowed to go belly-up, say the bond bulls.  We disagree, since the states themselves are in horrendous

(Fearful of spooking readers and angering advertisers, mainstream news sources have been reluctant to tell it like it is when reporting on the economy. Because they remain steadfastly in denial four years into the Great Recession, touting a recovery that has touched relatively few American lives, it could be a long time before we hit bottom, says Gregg White, a regular contributor to the Rick’s Picks forum who goes by the handle “3 Lions”.  In the essay below, Gregg says the news media will have its hands full trying to put a happy face on things when America’s economic troubles deepen and spill out onto the street, as has already occurred in Europe. RA) The mainstream press and TV business news channels are “paid to be happy” by advertisers and politicians. In some respects they are no different from the official ratings agencies like Fitch, which are also paid to “rate happy.” Having been proven to be worthless over the last several years, the ratings agencies are just beginning to get a bit more realistic – a glimmer of realism, no more. They now know that if they are seriously caught with their pants down again their whole raison d’être will be called into question. The appointment of Ron Paul as the official “hammer” of the FED is another glimmer of hope. At the moment, it is just a small snowball rolling down a mountain, but it is gathering more snow as it rolls. The ratings agencies must have noticed that complacency and deceit are gradually becoming unacceptable. As for the mainstream press, which by and large is bankrupt, a publication’s survival is less likely than a ratings agency’s. Pick up any regional or local newspaper, scan all of the positive editorials over the first three pages, and then turn

Two stories that were played next to each other recently on the front page of The Wall Street Journal serve to illustrate the news media’s schizophrenic reportage on the economy.  On the one hand, there was this chirpy report on employment: “Job Offers Rising as Economy Warms Up”.  Never mind that some estimates put current joblessness at nearly 20%  – more than twice as high as the official figure – or that the statistics behind the headline were squishier than a mermaid’s bath sponge. But there was also this story, providing a very different picture of a U.S. economy that is likely to be burdened for years by the overly generous pension benefits promised to city employees across the nation: “Pensions Push Taxes Higher”. The bland headline dosen't begin to convey the seriousness of the problem.  Some acute examples from Pennsylvania, New York and Illinois were cited in the article.  In Upper Moreland, PA, for instance, annual pension contributions have risen from around $100,000 in 2005 to an estimated $1.1 million in 2011. Spread over a population of just 26,000, that’s quite a hit on taxpayers.  Like countless other municipalities, Upper Moreland had assumed that the juicy investment returns of just five years ago would continue indefinitely, lulling the town into underfunding pensions at a time when they should have been stepping up contributions. If the Journal and other national newspapers seem not to be making an honest effort to put good news and bad news in proper perspective, it is mainly for two reasons. The first is that the need to sell advertising ultimately trumps the need to report the news honestly. We have reams of evidence to support this assertion, having come from a background in journalism ourselves.  In the 1990-91 recession, a reporter friend who had won

(The essay below has coaxed forth quite a response.  We urge you to jump into the discussion with your own thoughts.  RA)  Interviewed by Fox’s Chris Wallace recently, Senator Tom Coburn (R-Oklahoma) made quite a splash in the news, warning that America could suffer “Apocalyptic pain” within the next few years if it doesn’t get debt under control. Coburn’s heart seems to be in the right place, since he is one of the most vocal members of Congress in railing against bailouts that have pushed public debt into the cosmos. But we wonder whether he isn’t a few steps behind the real world in worrying that our standard of living will plunge if America’s budget deficit is allowed to grow.  For in fact, the standard of living has been plunging for several years, to the extent that the middle class can no longer afford health care; that even households with two professional incomes must hock the ranch to put their kids through college; and that Baby Boomers’ retirement plans are either being pushed back by five or ten years or postponed indefinitely. Moreover, for the broad middle class, the situation is likely to grow even worse in the years ahead as strapped cities and towns are forced to raise taxes to cover fixed expenses – especially pension and health care benefits for public employees -- that are difficult or impossible to shrink. Add in the fact that real estate valuations from coast to coast are due to be reassessed downward for at least the next few years, and you begin to see why the deflation that holds the economy in a death grip cannot be loosened no matter what countermeasures are employed. Sen. Coburn says that the U.S. has just three or four years to get its fiscal house in order before

(Here's a man-bites dog story from Cam Fitzgerald, a frequent contributor to Rick's Picks  who lived for a while in Ethiopia. Cam paints a picture of an African nation that will be unfamiliar to many readers; for in fact, even though Ethiopia has only begun to emerge from poverty, its economic prospects are as bright as you will find anywhere on the African continent. To understand why, read Cam's first-hand report .  RA) This is a growth story. A few years ago, I spent some time living in Ethiopia. I was in the suburbs of Addis Ababa, getting to know one terrific family in particular: the mother, who was the real head of the household; the father, Abba, a shoemaker; and his four single daughters, all in their thirties. What could possibly go wrong? OK, I am already getting off track. This is supposed to be an article about Ethiopia’s boom and the inflation that has come in its wake. I call the daughters “my gals” when I talk about them with friends, and we keep in touch almost daily via e-mail.  One is a student, and the other three work: as a translator, a seamstress and a secretary. They all have good educations, speak English and are in every way typical of women you might meet anywhere in the world: the same hopes and dreams, the same troubles with men and the same daily worries about meeting the bills, making ends meet and trying to save. Well almost the same. You see, these women earn a grand total of 2900 Ethiopian birr in monthly income between them. That’s roughly $175 dollars for six people to share -- a fairly typical income in Ethiopia.  However, I never thought of the family as poor during the time I knew them. They own a home,

Just when it looked like the alleged economic recovery couldn’t get any weaker without extinguishing itself entirely, the municipal bond market has gone to hell. And just like in hell, there is no exit – at least none that we can imagine. Here’s why: Municipal and state borrowers who are on the ropes must pay a premium to continue borrowing; this drives their budgets deeper into the red, causing ratings downgrades that in turn raise borrowing costs even more. A vicious cycle, for sure, and it sounds just like much of Europe’s predicament doesn’t it?  Except that, for strapped U.S. cities and states, there is no IMF to pretend to bail them out.  And while Europe’s erstwhile deadbeats, the PIIGS, get plenty of time to work on balancing their budgets through measures of “austerity”  (Merriam-Webster’s Word of the Year, by the way),  U.S. cities and states must bring their budgets into at least a fleeting semblance of rectitude before the beginning of each new fiscal year. We shouldn’t get our hopes too high that this recurring dog-and-pony show will work without eventually causing a taxpayer revolt. If you’ve been following the sordid bookkeeping tactics of such fiscal n’er-do-wells as California, Illinois and New Jersey, you’ll already know that austerity measures that would have been unimaginable just a few years ago have done little to eliminate structural deficits that keep returning like the slasher in a Wes Craven film. The big question is whether the lenders will continue to distinguish “good” borrowers from “bad.” At present they are doing so, charging, for one, the State of Illinois -- the riskiest borrower of them all, with an A1-negative rating -- 1.9 percentage points more than the broader muni market charges for 10-year bonds. For comparison, the borrowing spread for Nevada, which has

(This one has drawn some interesting comments -- nearly two dozen of them as of Monday evening -- so I'm letting it run for a second day. RA) It’s come down to this:  Economically speaking, our very survival depends on how many flat-screen TVs, major appliances, sweaters and pearl necklaces are sold by Christmas.  That, at least, is the apparent view of the mainstream media, whose obsessive focus on signs of a “green” Christmas has more than the usual whiff of desperation about it this year. Do they not trust the simple fact that the stock market has been rallying for nearly 21 months, or that the Dow Industrial Average is currently trading within 19 percent of its all-time high?  If those are not signs of a robust economic recovery, then what would be?  We ask this question facetiously, of course, since no one outside of the nation’s newsrooms could possibly believe that Christmas sales, no matter how strong they appear, are in any way indicative of economic recovery. And no economist other than Keynes (the leftist quack!) or his misguided disciples could possibly mistake a seasonal surge in charge-card consumerism for the growth in savings and capital investment that alone can restore America’s economy to health. Still, old habits die hard, and so we weren’t surprised to see this headline above an AP story about “Super Saturday” featured on Bloomberg:  “Shoppers Crowd the Malls in Christmas Countdown”. The article went on to report that shoppers came out in “droves on the last weekend before Christmas, tackling their gift lists and driving traffic up at malls across the country.”  On what evidence?  The reporter, one Mae Anderson, apparently checked in with Mall of America’s public relations office to substantiate her presumably pre-ordained conclusion. One suspects that mall parking lots would have

Although we wish Federal prosecutors well in their efforts to root out insider trading, we won’t be too terribly surprised if the five alleged insiders charged Thursday in a high-profile case beat the rap. It’s like trying to root out corruption in places like Kazakhstan or Louisiana, where graft is a way of life. A jury of one’s peers in Baton Rouge probably thinks it’s got better things to do than convict someone for anything less than a capital crime. The five men charged yesterday are all connected to a Mountain View, CA, firm called Primary Global Research. The company advertises itself as an “expert network” firm, which is another way of saying they’ve got some well-placed eyes and ears in the corporate world. For a fee – often, apparently, a large one – the firm would patch clients into a teleconference or bring them face-to-face with someone who would not merely be guessing when he quoted current sales figures for, say, AAPL or Dell.  We lived in Mountain View ourselves for four years and never even heard of the company.  Ahh, if only we’d known! We’ve always wondered how the regulators choose their targets. There is so much “good information” out there, and so many ways to come by it, that ten-thousand prosecutors working for a thousand years would not exhaust the supply of potential felons. In the meantime, the real insiders have at times seemed to have gotten away with murder by operating in the open. Bear Stearns, for instance.  The late, great investment firm served for a while as investment banker to Resorts International, the first company to open a casino in Atlantic City.  At the time, we were working in the options pits of the Pacific Stock Exchange, making markets in put and call options on,