by Addison Wiggin & Ian Mathias

• Toronto celebrates glories of big government with G-20 meeting… schools closed, barricades, boarded windows
• U.S. states getting desperate… some strange and unethical new taxes from around the country
• Congress picks its battles: Financial reform moves ahead, unemployment benefits to cease
• David Walker on the real threat to the U.S. economy… and it’s not our trillion-dollar deficit

  “I see dead people,” is the famous tagline from the big ’90s movie The Sixth Sense. Poor little Haley Joel Osment is curled up in bed, trembling in fear as all he sees, no matter where he turns, is the dead.

Well, a quick glance through the papers this morning and we want to get back in bed ourselves. For everywhere we turn, we see…

Government!

  We struggle to imagine a greater symbol of government boondoggle than the G-20 meeting, under way this morning in Toronto. BusinessWeek sets the scene:

“Toronto’s core is shutting down ahead of the arrival of world leaders, with at least 36 branches of banks, including Toronto-Dominion Bank, closed. Schools and liquor stores downtown are closed, while law firms such as Osler, Hoskin & Harcourt LLP are shut for the day. The ground floor of an office complex on King Street has been boarded up with plywood to protect against protesters.

“A 12-block section of Toronto’s downtown is surrounded by concrete barriers and 3-meter- (10-foot-) high metal fencing, part of the largest security operation ever in Canada, with 20,000 police and security guards. Starting at 8 p.m. tonight, only people who work in the security zone or are accredited for the summit at the Metro Toronto Convention Centre will be allowed to pass the gates.”

Heh. nothing celebrates the spirit of economic cooperation like citywide school closures, boarded windows and a massive police force.

  Back in the States, municipal governments are finding all sorts of “creative” ways to close budget gaps. You’d do well to pay attention to this trend emerging in a city near you:

• The city of Wichita will soon begin imposing a “false alarm fee,” for which the city government will fine homeowners whose residential security alarms go off accidentally
• The San Francisco legislature has proposed to end its service of euthanizing pets free of charge. The city wants to institute a $25 tax to give your dog or cat the needle, and another $20 charge if you want them to “dispose” of it
• It will now cost Washington, D.C., residents $51 a month to keep the streetlights on at night
• Las Vegas will be taxing amateur sports. City fees will double for all youth an adult sports leagues and summer camps
• Smokers in New York will have to fork over an additional $1.60 per pack, the proceeds of which will flow directly into state coffers
• We’ve honestly lost track of how many states are imposing new fees and regulations on strip clubs.

Even here in “Charm City,” Baltimore city legislators are about to pass a “beverage tax,” or “REVENGE TAX,” as the local Pepsi plant likes to proclaim.

The new tax comes on a wave of morality suddenly sweeping City Hall… you shouldn’t drink soda or beer, they say, so an extra 2 cent tax per bottle is fair. No word on why the new tax applies to bottled water too.

  Still, a word of caution for investors. Even though it looks like there’s a bubble growing in municipal bonds… despite what looks like so many American cities on the brink of implosion… betting against municipal bonds is generally a lousy proposition.

“Shorting municipal bonds, or funds of muni bonds, is a bad idea for most investors,” we advised in the latest beta issue of Apogee Advisory. “Muni pure plays most often pay monthly or quarterly dividends. Short sellers would have to cover them while they wait for their bet to pan out. And the muni breakdown could be months away, if not years.

“Also, when muni funds do suffer, the fallout may not be as dramatic as the housing bust. Take an ETF of Californian muni bonds (CMF). You’d think it would have suffered terribly over the last few years. But it never fell more than 20% during the worst of the credit crisis.

“Even if you manage to pick the right municipal bond to short, and manage to not wither away paying dividends, there’s a perfectly good chance you still won’t get paid. It’s an all-too-common practice for cities and states to rescue failing projects (with taxpayer money) to prevent the repercussions of a bond default. It’s this odd ‘moral commitment’ that set the stage for the famous ratings war between MBIA and short seller Bill Ackman. This is also the reason residents of Jefferson County, Ala., pay $64 a month for the privilege of flushing their toilets.

“In essence, betting against muni bonds directly is expensive, with a small potential payout. Don’t bother.”

What’s a better play? Well, we’re glad you asked. You can find out by becoming one of our Apogee Advisory beta testers, right here. You’ll get this short idea and several more issues free, when you register.

  Turning away from the plight of states… more dead people!

A republic if you can keep it, gentlemen.

The House and Senate have agreed on a vote-worthy (strike that… vote-able) draft of the massive financial “reform” bill. The committees pulled an all-nighter on the 2,000-page bill, delivering their colleagues the final draft -- as well as the above photo op -- at 5:39 this morning.

Quick and dirty: The Volker Rule made the cut, which will strip many banks of their uber-profitable “proprietary trading” desks. Blanche Lincoln’s bit is in, which will greatly restrict FDIC insured banks’ abilities to trade derivatives. The government will be given powers to preemptively dismantle “too big to fail” banks (since the concept worked so well in Iraq). The Fed will erect a new consumer protection agency. The SEC will get more power and funding, as will the CFTC.

We’re told the only moment of unanimous agreement arrived when it was time to name the thing: This one will go down as the “Dodd-Frank Act” for better, or for worse.

Dodd and Frank say they’d like to have the bill signed into law by Independence Day. Nice touch.

  While Congress was busy planning their redesign of entire financial system, they abandoned the campaign to extend jobless benefits. Having already lapsed earlier this month, the Senate formally shelved their bill, leaving the U.S. maximum unemployment payout at 99 weeks.

Thus, by the end of the month, another 1.5 million unemployed will be getting off the dole… in the wrong direction.

Those Republicans (and few Democrats) voting against “said the government can't afford further increases in the budget deficit,” offers The Wall Street Journal by way of explanation, “expected to reach $1.4 trillion this fiscal year, and said that Democrats have lost sight of the economic risks posed by the nation's rapidly mounting total debt.”

Really. And what about Republicans? Where were they during the preemptive deficit years of the Bush administration?

  “Clearly, trillion-dollar-plus deficits are a matter of growing public concern,” David Walker, former U.S. comptroller general and protagonist of I.O.U.S.A., told both of the parties that occupy Congress recently. “It is, however, important to understand that our short-term deficits do not represent the real threat to our collective future.

“The federal government's total liabilities, commitments/contingencies and unfunded promises for Medicare and Social Security more than tripled between Sept. 30, 2000, and Sept. 30, 2009. Medicare alone was over $38 trillion in the hole as of Sept. 30, 2009. This amount increases every year that we delay taking action to reduce health care costs and better target taxpayer subsidies under Medicare's voluntary Part B and Part D programs.

“And while many are rightfully concerned about the serious threat posed by rapidly increasing health care costs, they do not represent our fastest growing federal expense. Believe it or not, interest costs are expected to be the single largest line item in the federal budget within 10 years.

“In addition, with just a 2% increase in projected interest costs, by 2040, the only thing the federal government could pay based on historical levels of revenue to GDP is interest on the mounting federal debt.

“And what do we get for that interest?

“Nothing!”

Do you think either side of the aisle has gotten the message? Oh, we have our doubts.

David will be giving the opening address at our symposium in Vancouver on July 20. Please come if you can. Details and the complete list of speakers here.

  And let’s not assume our GDP will turn out as rosy as the government expects. This morning, the Commerce Department said the economy grew at a 2.7% annual rate in the first quarter -- not the previously reported 3% GDP growth.

That’s the fifth straight lousy government data point this week. Existing home sales, new home sales, durable goods orders, initial jobless claims and now GDP all came up short in the last four days. Not a good sign, we fear.

  Such data are not lost on Wall Street, where major indexes are about to conclude a crummy week. After yesterday’s decline, the S&P 500 is on track to lose about 4% this week.

  Thus, no surprise -- gold continues to rise. The spot price is back up to $1,255 as we write, just a few bucks shy of another record high. Mining companies, like the one you’ll read about below, are beginning to enjoy this ride.

  “It is interesting to try to put a value on gold,” a reader writes, “and your reader’s comments seem thoughtful. If gold is either an investment, or insurance, at what point do you convert its intrinsic value to something else? Certainly, converting to paper IOUs is silly.

“An ounce of gold is exactly one ounce of gold; that is its value. The only realistic opportunity for exchange is to employ some ratio of exchange for silver -- to enjoy the liquidity of silver.”

  “What would happen,” another asks, “if our federal government decided to very gradually and covertly return to the gold standard. Each month, in addition to creating more dollars to inject into the economy, they would create additional dollars earmarked solely to purchase gold bullion for deposit to Fort Knox. Done slowly, but continuously, I don't see that it would create any major disruption to our already failing economy, and over time, it could only be a plus to the value of the dollar (years to decades). What would the negatives to such a plan be?”

The 5: Well… there’s only so much gold in Ft. Knox.

  Last, the eternal gold bug question: How much should one own?

“I once was told not to have more gold than I could swim with,” our last reader writes.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. Ever hear of a little company called NT Mining? They’re a gold mining outfit in northwest Canada. If their stock price is any reflection, they’ve been doing just fine lately:

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Just over a month later, Greg’s readers were cashing out on 71% gains. That’s good livin’, if you can get it.

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