The Daily Reckoning December 4th
“Equating tax hikes and spending cuts in the U.S. with a ‘fiscal cliff’ is like calling a spot of exercise and a balanced diet ‘Caloric Armageddon’ for the morbidly obese.”
So quipped The Daily Reckoning’s Joel Bowman yesterday during a flurry of intercontinental emails.
Surely, it’s more entertaining than this: “Stocks and commodities,” reports the Financial Times this morning, “are struggling for traction as investors express renewed concern about the prospects for the U.S. economy amid continual bickering in Washington over the fiscal cliff.”
“The only real problem with the fiscal cliff,” added our investment director Eric Fry, “is that it isn’t two or three times higher. The very term rests on the specious premise that government spending — fed by confiscation from the private sector — is essential to producing growth.”
The big “news” yesterday was that the House Republicans came forward with a budget proposal to counter the one the White House offered on Friday.
Looking at the proposals side by side, we’re underwhelmed… by how little difference would either proposal make. Fair warning: The following analysis is likely to cause your eyes to glaze over.
While you ingest, keep in mind, in the logic of Washington…
- Numbers come in a 10-year increments. Never mind that future presidents and congresses are not bound by the actions of current ones
- ”Spending cuts” are merely reductions in planned spending increases.
First, the White House…
Now, the Republicans…
Divide these numbers by 10 to get a true idea of the impact. We’re talking about a difference between $180 billion versus $220 billion in “savings.” Or in the context of a $1.2 trillion deficit, the big standoff in Washington is about whether the deficit will be trimmed by 15%… or 18%.
(Pardon us while we stifle a yawn.)
The “fiscal cliff” looks exhilarating, by comparison. According to the Congressional Budget Office…
More than half a trillion in the coming year alone. But even then, assuming a $1.2 trillion deficit, we’re talking only about cutting the deficit in half.
A deficit of $600 billion would have set a record in any year before 2009.
“That ‘cliff,’” a reader quips, “is about three feet to the bottom! Let’s just go off it and, hopefully, get a sample of the self-discipline we really need to get our financial house in order.”
Indeed, the political farce reinforces our optimism of late: Maybe we’re getting to “the end” faster than we wrote about a month ago…
The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.
The antique car, specially ordered for the occasion, was waiting for the bride and groom to take them to the party after the wedding. I was among the guests who were more enraptured by the car than by the main event. Absolutely stunning.
It was a Studebaker. At best I can tell, it was a 1940 Commander convertible. I had to look it up: This company was born in 1852 and died in 1967, and produced some of the most visually gorgeous cars in its day. It even made an electric car in 1902! Wartime controls shrunk its margins and led to an industry consolidation that killed the company.
On this Saturday afternoon, this car was still fabulous, after all these years. We stood in a parking lot packed with new models. No one cared about them. We were all obsessing about this old Studebaker. It is rightly named: It commands attention. The shape makes it a work of art. The hood looks like nothing made today. The red leather interior is luxurious.
We stood there in total admiration. We wondered about the gas mileage. It can’t be more than today’s gigantic “light trucks,” but we all agreed that paying more to drive something that cool would be worth it.
Yet it’s not a choice. No manufacturer can make a car like this anymore. Step back from the situation and think about it. In the 1930s, phones were awful, and you were lucky to have one at all. No one today would give up a smartphone for one of those old things. Same with shoes, computers, televisions, ovens, and so much more. No one wants to go back.
With cars, it’s a different matter. Our sense of nostalgia is growing, not receding. But we don’t even have the choice to go back. There will be no more pretty cars. The government and its tens of thousands of micromanaging regulations on motor vehicles will not allow it.
The day before the wedding, I was at the grocery store and saw another amazing car, this one a tiny sports model with roll bars. It just took my breath away, and I’m not even much of a car person. I usually don’t care what I drive. But this one was just too great not to elicit a sense of awe.
I asked the owner where he bought it, what model, what make, etc. This car challenged my impression that all new cars look the same. He said that he built it in his garage. He got the kit from Factory Five Racing.
“You have to build your own car in a garage because no maker is able to sell something like that?”
“You got it.”
These car kits are a way of “breaking bad” in an era of total government control of the physical world. They are a workaround. The law permits hobbyists and antique collectors and used car owners to drive these pretty cars around. But it doesn’t allow carmakers to sell road-legal cars that look just like these.
The old expression goes “If you want something done right, you have to do it yourself.” There’s only one problem: It should not be true in a developed economy. We should be able to take advantage of the division of labor. We shouldn’t have to build our own cars any more than we should have to weave our own clothes. But that is exactly where the regulations have taken us.
Did you ever wonder how car companies can make stunningly great cars that they call “concept cars,” but these cars are somehow never available to you and me? I’ve always been puzzled about this. I figured it was just because the concept cars were too expensive to make. That’s not it. It’s that the regs don’t allow them to exist as retail items.
It hasn’t happened all at once. It’s been a bit at a time, taking place over four decades in the name of safety and the environment. The whole thing began in 1966 with creation of the National Highway Traffic Safety Administration, followed by the Environmental Protection Agency and dozens of others. Every regulator wanted a piece of the car.
Each new regulation seems like it makes sense in some way. Who doesn’t want to be safer and who doesn’t want to save gas?
But these mandates are imposed without any real sense of the cost and benefits, and they come about without a thought as to what they do to the design of a car. And once the regs appear on the books, they never go away. They are stickier than code on a patented piece of software.
Now the endgame has arrived. Try as they might, manufacturers have a terrible time distinguishing their cars from each other’s. Car homogenization has become something of an Internet meme. It turns out that all new cars more or less look alike. I had begun to notice this over the last 12 months and I thought I was just imagining things. But people playing with Photoshop have found that you can mix and match car grills and make a BMW look just like a Kia and a Hyundai look just like a Honda. It’s all one car.
Truly, this cries out for explanation. So I was happy to see a video made by CNET that gives five reasons: mandates for big fronts to protect pedestrians, mandates that require low tops for fuel economy, a big rear to balance out the big fronts, tiny windows resulting from safety regulations that end up actually making the car less safe, and high belt lines due to the other regs. In other words, hysterical concern for safety and the environment has wrecked the entire car aesthetic.
Never mind that safety and the environment create contradictory results. The more gas you save, the lighter the car and the more likely it is to kill you in a crash. Corporate average fuel economy (CAFE) regs have certainly killed many people. Similarly, the more safe it is, the more gas it uses, as a general principle. Meanwhile, the gas itself is being ruined with corn additives that shorten the life of the engine.
These regulations are responsible for the disappearance of the station wagon and the domination of the car market by huge vehicles that can be classified as trucks, which are regulated according to a different standard. That’s right: Regulations designed to encourage fuel economy have done exactly the opposite by pushing people out of cars and into SUVs — which just so happens to be exactly what the big three manufacturers want. It is not surprising that the most consistent voices against CAFE standards have come from abroad, not from Detroit.
No one set out to wreck the diversity, functioning, and beauty of our cars. But that is precisely what has happened, as the political and bureaucratic elites have asserted their own value systems over the values of both producers and consumers. They are the masters and we are the slaves, and we are to accept our lot in life.
Consider the point about pedestrians. How many lives has a high front end really saved? No one knows. But the regulation itself seems to rule out the possibility that drivers and pedestrians can work out problems for themselves, without regulatory intervention. In other words, we are being treated like children. Wait, not even that. We are being treated as if we have no brains at all.
The situation is very serious. Some 30 years ago, futurists imagined that cars of the future would be stunning and beautiful and would bring total joy to driving. Consider, for example, this Triumph that was said to be the “car of the future.” That future has been entirely wrecked.
Regulators made it the car of the past, a dashed dream that had to die to make way for the weird, homogenized stuff we are permitted to buy today.
Americans used to take pride in our cars and laugh at the horrible cars produced under socialism in, for example, East Germany. The Trabant will go down in history as one of the worst cars ever. But as we look back at it, at least you could see out the windows and at least the plan seemed to put the interests of the actual driver above Mother Nature and the nondrivers. The socialist central planners had a bit more sense than the American regulators.
In the end, if the goal is to protect the peds and the Earth, you can do no better than mass transit and the bicycle. We all know that this is what they are after. Last year, the Obama administration announced new fuel economy standards to be obeyed by 2025 that no gas-alone car in existence can comply with. These standards will vastly raise the price of the car and force into existence a world in which cars are all electric or plug-in hybrids. (Read the gory details here.)
Everyone rightly condemns bailouts and cronyism that sustain unsustainable industries. But here is the truth. If the corporate fat cats in the car industry and the unions that dominate them didn’t have political pull, the abolition of the car would probably be an already accomplished fate. As it is, the car is allowed. But it is not allowed to develop, not allowed to take a shape that consumers would like, and not allowed to function like an actual economic good.
The car was the foundation of the second industrial revolution. Encroaching government is robbing it of its future. We once dreamed of a flying car. The regulators are putting us in the position of just dreaming about returning to the glory days of the 1970s. That’s just pathetic.
Original article posted on Laissez-Faire Today
Ed. Note: In yesterday’s reckoning, Doug shared with us his thoughts regarding the degeneration of the once-freer republic into a police state. [You can read it here if you missed it]. In today’s installment, Doug outlines some specific points to make his case.
Doug: Let’s take these in order. First:
Assassination of US citizens: “President Obama has claimed, as President George W. Bush did before him, the right to order the killing of any citizen considered a terrorist or an abettor of terrorism.”
Of course the very concept of terrorism is highly malleable, with over 100 definitions floating about — as we’ve discussed. But apart from that, it’s now accepted that the president and his minions have the right to kill almost anyone. This conceit will get completely out of control after the next real or imagined major terrorist incident.
Louis: This reminds me of the extraordinary powers given to government agents to battle the War On Some Drugs — like the RICO statutes — which have now been turned against ordinary citizens who have nothing to do with the drug trade.
Doug: Exactly. Once you give the state a power — for whatever good reason you imagine it needs it — it will use that power for whatever those in charge feel is in their interests. And those in charge are never saints.
Indefinite detention: “Under the law signed last month, terrorism suspects are to be held by the military; the president also has the authority to indefinitely detain citizens accused of terrorism.”
This was a precedent set by Guantánamo, where scores of the accused continue to rot without even a kangaroo-court trial.
Arbitrary justice: “The president now decides whether a person will receive a trial in the federal courts or in a military tribunal, a system that has been ridiculed around the world for lacking basic due process protections. Bush claimed this authority in 2001, and Obama has continued the practice.”
As the government becomes more powerful, it’s completely predictable that everything — including the justice system — will become ever more politicized. And government very rarely relinquishes a power it’s gained. I particularly like the Supreme Court ruling in April 2012 that allows anyone who’s arrested for anything — including littering or jaywalking — to be strip-searched.
Louis: Note to readers: you can’t hear Doug’s voice, but I assure you that his use of the word “like” is sarcastic.
Doug: Just so. Moving right along:
Warrantless searches: “The president may now order warrantless surveillance, including a new capability to force companies and organizations to turn over information on citizens’ finances, communications and associations. Bush acquired this sweeping power under the Patriot Act in 2001, and in 2011, Obama extended the power, including searches of everything from business documents to library records.”
Privacy is now a completely dead concept, from both a legal and a practical point of view. If you want to retain privacy, you now have no alternative to relocating outside the US.
Louis: Or any advanced Western country. I’ve read that there are more surveillance cameras per square mile in London than anywhere else.
Doug: I’ve heard that too. The opposite being true in rural Argentina is one of the things I like about it. Back to the list:
Secret evidence: “The government now routinely uses secret evidence to detain individuals and employs secret evidence in federal and military courts. It also forces the dismissal of cases against the United States by simply filing declarations that the cases would make the government reveal classified information that would harm national security…”
“National security” essentially amounts to nothing more than government security, which amounts to cover for the individuals in the government. Nazi Germany and the USSR were national-security states. As I’ve tried to explain in the past, once a critical mass is reached, it’s impossible to reform a government. I believe we’ve reached that state in the US.
War crimes: “The world clamored for prosecutions of those responsible for waterboarding terrorism suspects during the Bush administration, but the Obama administration said in 2009 that it would not allow CIA employees to be investigated or prosecuted for such actions. This gutted not just treaty obligations but the Nuremberg principles of international law.”
Torture by field operatives under the stress of combat is one thing; torture as official policy is something else again. But torture is now accepted in the US. Worse, there are far more serious war crimes than torture being committed in the name of the US that are going unpunished.
Louis: This is, after all, a far darker version of the same US government that deliberately infected black US citizens with syphilis just to see what would happen, and sent US citizens of Japanese descent to concentration camps during WWII.
Doug: Exactly. The next point is:
Secret court: “The government has increased its use of the secret Foreign Intelligence Surveillance Court, which has expanded its secret warrants to include individuals deemed to be aiding or abetting hostile foreign governments or organizations. In 2011, Obama renewed these powers, including allowing secret searches of individuals who are not part of an identifiable terrorist group.”
You no longer live in a free country when there’s zero privacy for citizens, but 100% secrecy for the government and those it employs.
Immunity from judicial review: “Like the Bush administration, the Obama administration has successfully pushed for immunity for companies that assist in warrantless surveillance of citizens, blocking the ability of citizens to challenge the violation of privacy.”
The government has outsourced some of its functions — not least the use of contractors in war zones. Increasingly, being associated with the government gives you a “get out of jail free” card. In the USSR they called this a “krisha” — a roof.
Continual monitoring of citizens: “The Obama administration has successfully defended its claim that it can use GPS devices to monitor every move of targeted citizens without securing any court order or review.”
Bad as this is, it’s just one example. There’s also the use of domestic drones, and hundreds of thousands of cameras that take pictures of everyone everywhere.
Extraordinary renditions: “The government now has the ability to transfer both citizens and noncitizens to another country under a system known as extraordinary rendition, which has been denounced as using other countries, such as Syria, Saudi Arabia, Egypt and Pakistan, to torture suspects.”
Yes, if someone is kidnapped, there’s plausible deniability if the torturing is done abroad by a third party. And they’re likely to have even fewer compunctions.
Louis: That’s a pretty depressing list, Doug.
Doug: And this is just the beginning. As I’ve said before, I don’t call the shots — just try to tell the truth as I see it. The point is that you couldn’t assemble a list like this even 15 years ago. But now it’s part of the firmament. Worse, it’s going to grow. As the economy turns down over the next few years, the people — acting like scared chimpanzees — will ask the government to “do something.” And it will. The trend is going hyperbolic.
Louis: I can’t argue… and I agree it is not likely to be stopped. So if this is a sure trend, are there investment implications?
Doug: This just goes to reinforce what I’ve been saying for some time. As great as a US citizen’s risk is in the marketplace these days, the greatest single risk to their wealth and health is the government. People simply must internationalize to diversify their political risk. I can’t stress that strongly enough.
Louis: Would you go so far as to say that being a taxpayer in the US now is like being a Jew in Germany in the mid-1930s?
Doug: That’s a good analogy. It’s costly and upsetting to uproot, but the risk if you don’t is unimaginably worse. And I would warn people in other countries to take the same precautions. All of these nation-states are dying dinosaurs that will cause a lot of damage as they thrash about in their death throes. No place is completely safe, but you improve your odds by not putting your eggs all in one basket.
Louis: Okay, I guess we’ve covered that plenty of times. Is there a “police-state play” — any investments one could make before the new Iron Curtain slams down? Handcuff manufacturers?
Doug: Nah — they have those plastic zip-binder things now; they’re so cheap that I doubt the manufacturer can even make big money in volume. But I do remember a speech I attended in the ’90s given by William Bennett, the ex-Drug Czar, who recommended investing in prisons. I excoriated him as a sociopath at that meeting — but he was right. However, that ship has sailed; it’s hard to believe the US can incarcerate more than the current 2.3 million people. Besides, I find it morally offensive to capitalize on what I consider to be criminal enterprises. No, for now the only absolutely crystal-clear imperative is as above: You’ve got to have a Plan B ready in case you need to get out of Dodge — and you need it pronto.
And to those who celebrate Thanksgiving, I urge you to remember that it was hard work and the freedom to profit from it that created the bounty the pilgrims celebrated. It was this enterprising spirit and the liberty to exercise it that was the heart of the idea of the America That Was — the idea that made America great. Those corrupt politicians who have been undermining these values for so long and the willfully ignorant ideologues who support them are responsible for turning this country into the United (Police) State of America. They should be criticized and opposed at every opportunity.
Louis: Okay, Doug. Thanks for another challenging but enlightening conversation.
Doug: My pleasure.
Shhhhh. Don’t let the market know, but there’s more reason to worry this morning.
Today’s news falls under the same, growing category of fiscal cliff fallout.
“Manufacturing in the U.S. unexpectedly contracted in November as orders dropped to a three-month low and exports slowed” Bloomberg reports.
Why the added emphasis on this otherwise mundane report? Let’s have a look…
Whether or not the bush-era tax cuts are eradicated and we descend from the fiscal cliff, there are decisions being made RIGHT NOW that take into account a world with less disposable income.
You see, manufacturers, much like individuals planning for retirement or savings, are beginning to plan for next year. And with less perceived money flowing from the wallets of Americans in 2013, some manufacturers are pulling back.
Yesterday’s survey from the Institute of Supply Management (ISM) is our first shred of hard proof. The ISM report compiles data from top manufacturing company managers. And yesterday’s ticker read-out was the lowest it has been since summer of 2009.
In short, this data signals a slow-down in overall manufacturing. And the reason for the slowdown was stated in plain words: “Respondents [to the ISM survey] said fiscal cliff fears are weighing on business investment and hitting manufacturers” CNN Money reports.
File that tidbit away, dear reader: fiscal cliff expectations are pilfering fuel from American manufacturers.
There’s likely more to come, too.
Checking back in on the markets, the Dow Jones Industrial Average is a mere 85 points lower than it was on November 6th (back when no one knew the outcome of the election.) Today with Obama perched for a second term and Americans staring down the barrel of “taxageddon”, there simply isn’t enough downside built in!
Who knows, maybe I’ll eat some crow when the smoke clears in mid-January. But right the fundamentals just don’t add up.
That said, let’s cover a few more ways to protect yourself in the face of this market downturn.
The Three (Remaining) Best Ways To Protect And Grow Your Wealth
Yesterday we discussed two of our best investment options – in particular America’s new bounty of oil and gas. Today let’s get to brass tacks and hit three more ways to traverse the fiscal cliff!
You may not be surprised to hear me say gold and silver are the next two items that should be on your radar in the next 45 days (heck, they should always be on your radar!) In that 45-day timeframe, though, I believe we’re going to see, at least, the start of a great buying opportunity for both metals.
Gold holds support right now above $1,700, but even the Midas metal will endure a haircut if the fiscal crap starts to hit the fan. Same goes for silver above $33.
What’s the 45-day metal forecast? Hear me out…
Recall, back in 2008-2009 you couldn’t get away from the “flight to safety” trade and the “fear” trade.
Flight to safety pertains to a proverbial “run for the exits!” mentality. This trade has investors fleeing equities and commodities and heading towards bonds and dollars. It’s the exact scenario that played out at the end of 2008.
Also, beginning at the tail end of 2008, there was the fear trade. Once government stimulus spending cranked up, fears of inflation sparked renewed interest in precious metals. This is what fueled gold from a low around $750 (in November 2008) to a high over $1,900 in 2011.
With potential fiscal cliff fallout in our future, we could soon see a redux of both trades. Luckily we’ve got our 2008 playbook in hand, so we can take advantage of any pullback.
If we see fiscal fallout in the next month, surely the overall market along with commodities could take a hit (albeit on a much smaller scale than in 2008.) We could see gold head towards $1,500 and silver under $30.
But don’t expect those bargain prices to stay long. Let’s use what we learned in 2008 to your advantage and pick up some metal on the cheap. This is trading-101 stuff, but it could be a great payout if we play our cards right.
Gold and silver always remain a buy – it just depends what sticker price you want to pay.
Don’t Forget The Powder!
I hate fiat currency as much as the next guy, don’t get me wrong.
But in today’s market – with the Dow off less than 100 points from its pre-election prices – there’s good reason to keep an eye on the downside.
Also, as you may know, I like to keep you up to speed with what I do in my own portfolio.
Well, recently, I set a little investment cash on the sidelines. I scrubbed my d-list portfolio and cut back where I could. The point being, right now I’m sitting on, say, 20% cash. That’s normally money that I wouldn’t dare take out of inflation-protecting hard assets. But today’s market fundamentals are warranting a little outside of the box thinking.
It’s a win/win if you ask me. If the market shrugs off the fiscal cliff and America continues its energy renaissance, we’ll still be positioned to play it.
But if the market does take a 10% dip – you know, a month of blaring headlines about congress, massive tax hikes, worse-case-scenario talk, impromptu government action – then (then!) we’ll have some spending money on bargain assets.
Stay tuned. When something goes on sale you’ll be the first to know.
Keep your boots muddy,
Original article posted on Daily Resource Hunter