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Stunning Debts, Huge IMF Gold Sale, The Trillion Dollar Pension Hole and More!

Thursday, February 18, 2010 22:39

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by Addison Wiggin & Ian Mathias

Scary budget numbers… Placing vain hope in Obama’s “debt commission”
China dumping U.S. Treasuries? Why there’s more than meets the eye
Stocks, gold holding up in the face of bearish news
The trillion-dollar hole… Crisis in state pension plans
“Waiting for collapse” — reader experiences cognitive dissonance; we reply

We have deficits and debts on the brain this morning. The federal deficit for the first four months of fiscal 2010 just clocked in at $430.7 billion. That’s 8.8% higher than the year-ago figure.

We remember that when the annual deficit hit a record high $430 billion under the second Bush administration, we thought the world was going to end and we’d have to “buy guns, ammo, dry goods, go into hiding, cling to God and wait for the country and the rest of world to collapse.” (More from a reader below.)

The national debt now stands at $12.4 trillion. When we finished our final edit of I.O.U.S.A. back in August of 2008, we forecast it would reach $10 trillion and were called gloom and doomers for the effort.

The president’s solution? An executive order this morning establishing a National Commission on Fiscal Responsibility and Reform. This 18-member “debt commission” (10 Democrats, 8 Republicans) has two main tasks…

Cutting the deficit to 3% of GDP by 2015 (it’s currently running over 10%)

Fixing the problems with the Big 3 entitlement programs of Social Security, Medicare and Medicaid.

We applaud the goals, modest as they are. But we hold out little hope a blue-ribbon panel will actually solve anything. Looking back on the 9/11 Commission, it seems its major accomplishments were a best-selling book and a host of new security irritations at the airport.

No wonder the Harvard historian Niall Ferguson sees the crisis currently afflicting Greece and the other PIIGS nations eventually playing out in the United States. “The idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most Western economies. Call it the fractal geometry of debt: The problem is essentially the same from Iceland to Ireland to Britain to the U.S. It just comes in widely differing sizes.

“What we in the Western world are about to learn is that there is no such thing as a Keynesian free lunch.”

Adding to the Greek chorus this week — Sen. Evan Bayh (D-Indiana). After two terms in which he built a reputation as something of a deficit hawk, the Indiana Democrat plans to retire. “There is too much partisanship and not enough progress — too much narrow ideology and not enough practical problem-solving.”

He was especially put off by a standoff over the national debt commission (which is why the president established it via executive order today).

“Within 12 years… the largest item in the federal budget will be interest payments on the national debt,” said former U.S. Comptroller General David Walker in an ABC News story that’s getting considerable readership via Drudge. “[They are] payments for which we get nothing.

“Habitually spending more money than you make is irresponsible,” says Walker. “Irresponsibly spending someone else’s money when they’re too young to vote or not born yet is immoral.”

David Walker, the protagonist of I.O.U.S.A., will join us again at this year’s Agora Financial Investment Symposium in Vancouver. We’ve asked him to fill us in on what’s been happening since we finished filming I.O.U.S.A., the effort to get the deficit commission established and what happened behind closed doors as the muckety-mucks dreamed up the bailout and stimulus plans.

The Vancouver Olympics might be jinxed with malfunctioning torches and melting speed skating tracks, but Vancouver in July is splendid, we assure you — it’s why we come back every year. Early registration discounts are still available.

Is China really cutting its holdings of U.S. Treasury debt? As we told you yesterday, that’s what the numbers show, but “it would be a mistake to take these figures at face value and assume that China is cutting its U.S. holdings,” says Martin Walker, editor emeritus of the UPI newswire.

“For political reasons, China wants to keep the U.S. uncertain about its readiness to continue buying U.S. Treasury bonds and funding the U.S. trade deficit. And for its own economic reasons, as Beijing’s internal policy debate about exchange rates and inflation unfolds, China also wants to keep the markets guessing about its intentions.

“The most important fact is that over 65% of China’s $2.3 trillion in foreign asset holdings is denominated in U.S. dollars, and of that $755 billion is in direct holding of T-bonds. The U.S. and Chinese economies are locked into mutual interdependence. Any Chinese action that undermined the dollar would hurt China’s nest egg.

“And what would China buy instead of dollars? The euro does not look too good, with the Greek crisis, and Japan’s debt levels (and Toyota’s problems) do not make this a good time to buy yen. The U.S. dollar and its T-bonds remain the world’s least bad negotiable asset.”

(More from readers on this subject below, too.)

Wait… what’s this? Wholesale prices jumped 1.4% in January – not the 0.8% mainstream analysts were expecting. Blame it on the cost of energy, light trucks and pharmaceuticals, says the Labor Department.

The real tell will be the consumer price numbers tomorrow, but the pressure is on the Federal Reserve to stick to its promises about an end to quantitative easing come March 31. If the market keeps getting whiffs of inflation like this, the Fed can’t keep buying up mortgage-backed securities indefinitely.

The wholesale price numbers are doing no favors for U.S. stocks this morning. Ditto first-time jobless claims — up this week after a fall last week. The major U.S. indexes opened flat.

Even the news that should be helping the stock market today is worse than appears on the surface. Wal-Mart sales rose 4.6% in the fourth quarter… but same-store sales (the ones open for a year or longer) fell 1.6%. If you’re looking for a sign consumers are ready to start spending again, it’s not here.

Gold is holding up nicely today in the face of news the International Monetary Fund plans to sell 191 tons of gold on the open market. This is the remainder of the 403 tons the IMF announced it would sell last September. You’ll recall India snapped up the bulk of the 212 tons already sold (if you’re curious, Sri Lanka and Mauritius got the rest), but that appears to be the extent of central bank interest at the moment.

Ordinarily, this would seem bearish for gold, but it’s still hanging in there around $1,110 as we write.

“Gold and silver have pulled back in price since late November,” advises Byron King. “Looking ahead, however, I see a price rise for the metals and higher share prices for the miners.” Want to know what Byron’s favorite mining plays are right now? Here’s where to find out.

Call it the trillion-dollar hole. That’s the funding gap state governments have in their pension plans. Amount set aside: $2.35 trillion. Actual future obligations: $3.35 trillion

Worse, the Pew Center on the States, which crunched the numbers to reach this conclusion, says the actual gap is likely bigger — for these reasons:

The study runs only through the end of fiscal 2008 — which in most states was June 30. In other words, most of this is pre-Lehman

Typically, public pensions don’t use mark-to-market accounting; they try to average things out across a period of years using a technique called “smoothing.”

In 2000, half the states had fully funded pension systems. In 2008, only four did — Florida, New York, Washington and Wisconsin. The basket case that is Illinois was worst off, with only 54% of its obligations funded.

“I suspect,” a reader writes, “the reader that argued China is unable to dump U.S. debt because it will collapse its economy and cause social unrest is only temporarily correct. I’ve felt for several years now that China will play nice only until it has enough internal demand and demand from outside the U.S. to support its economy.”

Once it achieves that internal demand, then it will impose its will on the U.S. and will sell Treasuries whenever we refuse to abide by its wishes. It may take another decade or two, but it will eventually happen if the U.S. doesn’t begin a long-term approach to problem solving.”

“Some random snippets of data I’ve noticed,” another reader writes. “Someone else can connect the dots:

“China’s dollar reserves are (were?) twice of its Treasury holdings. The stockpiling binge it went on for iron ore, copper and other commodities, as well as getting ‘a piece of the action’ as has happened here in Australia — it’s got plenty of the world reserve currency for its shopping sprees.

“Its SEC filing of $100 million in December was on top of $9.4 billion equity holding in the U.S. (That we know of.)

“China just edged out Germany as leading exporter. It’s initiated currency swap arrangements with several countries, and one source indicated Brazil is now its biggest trading partner.

”No ‘economic bomb’ necessary, just a long, slow bleed… the days of the U.S. consumer as the engine driving China’s business model have faded.”

“Regarding your issue and China taking Taiwan,” a third comments, “I do not see that happening with physical force — but it will happen, as the Chinese are patient. Here is why:

1) There is a joint U.S./Taiwan defense treaty. I was a U.S. Navy officer in 1971, working for a U.S. admiral on Okinawa. One of the admiral’s hats was the U.S. commander of the Joint U.S./Taiwan Defense Force operating under that treaty that I do not think since died;

2) Interestingly, traveling in China in 2006, I learned the Guilin area in China has always had financial assistance from Taiwan through the whole red Chinese experience, from 1939 on [that came from a tour guide]; the red Chinese knew and never stopped it. Those folks who dominatingly occupied Taiwan in the political split back then were largely from Guilin;

3) The business ties over the last few years have become much more friendly between Taiwan and China; and

4) China is in a 50-year acquisition transition with Hong Kong; a violent act toward Taiwan — which is unnecessary — would jeopardize that transition balance.

“I suspect Taiwan will re-enter the Chinese umbrella long before the Hong Kong transition completes. And there goes our cheaper semiconductor foundation sources, unless the U.S. behaves in a more businesslike, and less warlike, manner.”

“I don’t get it,” our last confused reader writes. “You sell investment opinions to those of us looking for guidance in creating wealth and all your newsletters tease of making big money investing…

“However, after reading most of your authors and daily articles, I’m less inclined to invest and more inclined to buy guns, ammo, dry goods, go into hiding, cling to God and wait for the country and the rest of world to collapse.

“My question is why would I invest in any of your suggestions — or anything, for that matter — when you claim:

The world is coming to an end

All governments are run by idiots

The only good guy is Ron Paul

Gold is the only ‘safe’ investment

Most of Agora’s portfolios currently report more losers then winners

Interest rates are so low that we’re now looking at a bond bubble once rates go up

My house is a bad investment

Stock are falling out of bed as of the first of the year

Taxes are going to go through the roof due to all the debt

Even IRAs aren’t safe from the reach of the government

The government will run and own everything by the time Obama leaves office

Pending hyperinflation will destroy any wealth we do have and crush the economy

And, to cap it all off, in the end (when it does come), all my hard earned money will be worthless anyway

“I guess this is why they call it a ‘Depression.’”

The 5: Unfortunately, you’re not reading very closely. If you gathered 15 Agora writers in a room, which we do during our editorial meetings, you’d learn that they rarely agree on a single idea, theme or suggestion. Our annual symposium in Vancouver is a real hootenanny, too. Fact is, they writers a nappy-headed bunch. But we like it that way. We don’t know where the next best idea is going to come from, so we encourage independent thinking. What you appear to be reacting to is the fact that not a single one of the writers in our stable will suckle up to mainstream opinion.

Neither must you be a subscriber to any of the services. Sure, some of the open positions in the editors’ portfolios are down. What would investing be if you didn’t take risks? Covering the markets from small caps to resource companies, short plays, options and breakthrough technologies, we’re bound to make mistakes. But we’re also willing to stack our advice up against any investment adviser you talk to from your local shop up to the largest investment house on Wall Street.

The world isn’t coming to an end. Just the world as you have known it. You can do what you like with our advice. And yes, buy gold as insurance. Or silver.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. As promised yesterday, here are the details on the first-of-their kind Silver Panda coins issued by the Chinese mint: For the first time ever, China’s mint has certified – in the form of a letter – a small batch of its 2010 issue as “first strike”

Our friends at First Federal Coin obtained worldwide exclusive rights to these government-certified first strikes.

That’s extraordinary enough. But then they went the extra mile and submitted these coins for grading by one of the major grading firms. The ones that came back with the highest grade — MS70 — are now available exclusively to Agora Financial readers through next Wednesday, Feb. 24.

We don’t expect these to last long. So take advantage of your exclusive window and get your hands on these MS70 government-certified first-strike Silver Pandas now.

P.P.S. Also, we’re all booked up for our Reserve-Only “chill weekend” at Rancho Santana in Nicaragua March 24-28. A select group of Agora Financial Reserve members will be joining us for a few days to check out the sun, sand, breezes, views and fresh fruits, among other pleasures. We’ll see you there.

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Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world. Anyone can join. Anyone can contribute. Anyone can become informed about their world. "United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

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