How a Bad Economy Can Be Good for You

• Government debt, excess regulation, a sickly dollar… and why Chris Mayer is not discouraged

• Where no gold miner has gone before… A unique microcap opportunity

• Another reason for gold’s $40 drop: John Paulson?

• Consumer deleverages, market celebrates… Huh?

• Latest Chinese moves to consolidate control of energy, metals

  “I don’t think the U.S. economy is in good shape” – Chris Mayer kicks off The 5 this morning with some candid advice he also gave to Capital & Crisis readers.

“I am most discouraged when I consider the bloated and out-of-control federal and state governments. They spend too much. They are in too much debt. They are far too powerful. And I think it is fair to say that current administration is hostile to business. I think the U.S. dollar is a sick currency.”

  But “here is the thing,” Chris continues: “None of this really has much to do with investing. A lousy economy can be a great place to invest. And an economy in great health can be a terrible place to invest. It all depends on prices. All the noshing on economic data doesn’t mean much without some context. You need to know what you get for what you pay.

“On that front, things don’t look so bad. As Barron’s reports, ‘The forward P/E on the S&P Index is below 12, the lowest since the late 1980s.’ Unless profits collapse, the market overall does not look expensive. Many of the big stocks in the S&P 500 trade for 10-12 times their 2010 earnings estimate.

“Keep in mind profits have already collapsed. So while profits are growing now, they are still way below pre-recession levels. We’re working off a low base.

”Beyond this, I think a lot of how you feel about investing comes down to time horizon. I feel pretty good about what we own. I think the stocks we have can create a lot of value for shareholders, often in more ways than one.

“But I don’t know if they’ll work in the next three months. I think long term.” Chris will be in Vancouver in less than two weeks’ time to share those longer-term ideas at the Agora Financial Investment Symposium. (There’s still time to sign up for twice-daily e-mail briefings to learn about all the investment recommendations revealed there in real-time.)

  Here’s an intriguing prospect — exactly the kind of opportunity defies anything in the wider market or the economy — that crossed our desk this week. Our associates at S&A have uncovered a microcap gold miner venturing where no miner has gone before — underwater.

“About a mile below the Pacific Ocean, in a region called Melanesia,” says Phase 1 Investor editor Brian Hunt, “there’s an incredible amount of gold and other rare metals such as silver, copper and zinc. Billions of dollars worth. And one tiny company may soon have the rights to mine and produce it.”

Four of the major gold producers have taken a stake in this company… and so has an international metals firm owned by an investor who took early and highly profitable stakes in Facebook and Gazprom.

We’re alerting you today because Brian and his colleagues have arranged a briefing via conference call to present their findings. It’s scheduled for this Monday. Sign up here, before Monday to gain access.

  Gold is perking up a bit this morning, sitting around $1,208 as we write.

  The effort to find scapegoats for gold’s $40 plunge a week ago yesterday has turned into a circus.

The newest clown candidate is John Paulson. As we’ve mentioned in the past, Paulson & Co. has 30% of its assets tied up in gold, between the GLD ETF and a handful of miners. So he’s a big player.

Turns out his $33 billion firm is more like a $31 billion firm this morning after a wave of redemptions at the end of last month. Investors wanted out after some of his other bullish bets — especially Bank of America and Citi — started looking pretty sickly.

The big drop in gold came on the first day of the new month, leading many to surmise he’s unloading his stash.

It’s as plausible an explanation as any. Especially given yesterday’s fizzle…

  The Wall Street Journal is quietly backtracking on its claim that central banks have “pawned” 349 metric tons of gold with the Bank for International Settlements (BIS) to raise some quick cash.

The BIS issued a statement saying no, it was actually commercial banks that started all these transactions last December, just before the Greece crisis erupted. And no, the BIS is not going to say which banks.

The drama only reinforces the advice of our friend James Turk when it comes to gold: average in and build your position a month at a time so you don’t get whipsawed by gold’s ups and downs as measured in the fiat currency with which you’re stuck doing business day to day.

  There’s no letup in the deleveraging of the almighty American consumer. Collectively, the needy shed $9.1 billion of debt in May, according to the Federal Reserve. Revolving debt (credit cards) fell an annualized 10.5% — the 20th straight monthly decline. Nonrevolving debt (auto loans, student loans, personal loans) fell an annualized 1.5%.

By the standards of conventional wisdom — “consumer spending drives 70% of the economy!” — this doesn’t bode well for “the recovery.” But seriously, what are the chances consumers will continue to pare back debt until they’re actually — gasp — saving again?

When we’re asked by the media if there is any silver lining in this crisis, we most often reply that Americans will eventually rediscover the values that helped build a prosperous society in the first place: thrift, industry and ingenuity. We still believe that’s true, but wonder how long and deep the crisis will have to be before such a profound renaissance does occur.

  Incredibly, the market perked up on the consumer credit news. The Dow was up 50 points on the day when the report came out yesterday afternoon and promptly shot up another 70 points by the close an hour later.

The Dow has gained 400 points in two days… for no earthly reason whatever. The market opened flat this morning.

  Strategic default: It’s not just for middle- and lower-income brackets anymore. In fact, one in seven homeowners with a seven-figure mortgage — a million or more — is “seriously delinquent.” At least that’s according to data crunched by First American CoreLogic for the NYTimes.

Below the $1 million mark, it’s one out of 12 homeowners.

  As we’ve observed, skipping out on a mortgage gives you a lot of spending power you wouldn’t have otherwise… which may help explain how Nordstrom’s same store sales jumped 14% from May to June.

And why Tiffany’s CFO said recently, “Our customers in the U.S. are feeling more confident than a year ago.”

Heh. More confident they can game the system.

  For the record, the U.S. Treasury has decided not to label China a “currency manipulator.” After Beijing made the call a couple of weeks ago to let the yuan float, though not by much, Treasury issued its report on the matter to Congress this week, almost three months late. Yawn.

Not that everything is hunky-dory between Beijing and Washington this morning…

  The rare earth squeeze just got a little tighter. China is slashing its export quota of the metals by 72% for the second half of the year. Since China already accounts for more than 90% of global production of these elements — they’re used in everything from LCD screens to hybrid cars to guided missiles — this is a big deal.

Bloomberg News says the Obama administration is quietly working with business groups and unions to build a case to bring before the World Trade Organization. Uh-oh.

  Meanwhile, the winner of the contest between Russia and the United States for control of energy supplies in the Caspian basin may be — China.

Construction wrapped up recently on an 1,139-mile pipeline connecting gas-rich Turkmenistan with western China. Then last month, Turkmenistan’s president announced construction of another pipeline that will connect to the new one. Sources tell Foreign Policy magazine China is likely bankrolling this.

Thus, China has effectively checkmated Russia — which traditionally exploited Turkmenistan’s gas — and the United States, which was counting on its Nabucco pipeline to supply Central Asian gas to Europe, bypassing Russia.

  China also just signed an $8 billion deal to build an oil refinery in Nigeria. Nigeria is one of the world’s leading oil producers, but its refineries are such a mess that it has to import gasoline, diesel and jet fuel.

No doubt this builds some goodwill whenever the time comes that the Chinese ask Nigeria to sell them oil under a fixed contract, instead of on the spot market. Nigeria ranks No. 4 among U.S. oil suppliers.

(You might not like these developments, but if capital is shifting eastward, your money probably should too. An easy way to do that is to invest in Chinese companies listed on U.S. exchanges. To learn about eight such U.S.-listed companies, read this report.)

  “Considering the Chinese government is a communist and, by definition, a totalitarian regime,” writes a reader with a common belief, “encouraging their people to buy gold makes sense. There may be millions in China buying gold, literally tons of gold in the hands of the people.

“When the worldwide inflation hits hard due to the worldwide deficit spending, the Chinese government will simply confiscate the gold in private hands, tremendously increasing their reserves. They did that when they took over in 1949. It’s a cheap way to tremendously increase their gold reserves. And it is the only reason why they would encourage the private ownership of gold.”

The 5: We’re not sure that’s true, but if you say so.

  “Personally, I am looking for about $975 to get back into gold again. I could be right, and of course, I could be wrong, as it is crazy investment world out there right now. We do have severe deflation right now. Worst I have ever seen in my 41 years in the investment business (now retired). In my opinion, not a good investment atmosphere for gold, in spite of what the Chinese government says.

  “Three weeks ago, our local newspaper,” the reader goes on, “ran a front-page article on the rise in gold and the buying frenzy that was going on. Uh-oh. Time to sell!

“Whenever the news media hit on how well a particular investment is doing, it is time to sell. When the opposite happens and they salivate over how bad an investment is doing, it is time to buy. For years, I went to the annual National Financial Planners conferences. We counted the number of booths for oil drilling, Texas or Southern California apartment projects and even diamonds. Count the booths and sell the item that is most popular or has the most booths. Works every time.

“However, it’s time will come again when the spotlight is off and investors have lost a little money buying in the $1,200 range. Then onward and upward to $2,000 or so when the I.O.U.S.A. government admits it is totally broke and its currency is worthless.”

The 5: Ah, the old “contrarian” magazine cover trick. Still, given the macro climate, we’re inclined to stick with James Turk and accumulate, accumulate, accumulate.

  “Sorry to hear about the loss of your prized black gum,” a reader wrote earlier in the week regarding the big tree around which our deck was built. “The black gum is one of my favorite trees: beautiful shape and wonderful color in the fall. My wife and I planted one about 10 feet tall this spring approximately 35 feet off the front corner of our new home. Hopefully, it lives as long as yours.”

  “If I remember correctly from my years in Maryland some time ago,” writes another, “the gum tree, while good for firewood, is notoriously difficult to split, due to interlocking fibers. Hopefully, you can do the splitting at a rate about as fast as you use it.”

The 5: Despite the heat wave, we’ve split about half of it. Tough going. Because of the fibers, the giant rounds twist and pop on the splitter. Often, you have to split the same line two or three times to tear the fibers free. We’re using an 8,000-lb. hydraulic splitter, which admittedly isn’t quite up to this job. We’ve had to replace the iron rod that holds the ram into place twice already.

  “I have had so many words of wisdom from you,” writes a third, “and from The New Empire of Debt, I am spoiled for choice. Here, however, is my return advice, and it has nothing to do with investments — but it may save your house. If you have an open fire, keep the guard in front when burning black gum wood. As a rule of thumb, any gum tree wood with bark attached can blow a log from the grate.

The 5: Thanks for letting me know. We’ve got lots of maple and hickory, but we’ve never burned black gum before. Luckily, the bark peels away easily as the logs split and we’ll be able to let this pile dry for 18 months before we begin to burn.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. “We’re currently working on your August issue,” wrote Jim Nelson yesterday with a coy twinkle in his eye. “We know it’s a bit early. But we’ve stumbled across an income opportunity like no other. It involves a strategy we haven’t yet talked about, but we did receive plenty of inquiries about from readers.

“We don’t want to give too much away here, but we can say this: If you don’t look into this idea, you are going to miss out on an opportunity of a lifetime.”

That’s a bold statement. We’re on the edge of our seats. Jim hasn’t even revealed his find to us yet. You can get Mr. Nelson’s write-up as soon as we do by signing up for the best value anywhere in dividend-driven investment advisories.

In the meantime, you’ll learn about another income-producing strategy so powerful, Jim calls it “the ‘other’ government-backed retirement program.” Details here.