Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.

 

 

November 6, 2011
Issue 172  -  Possible Outcomes
 
 
While I fully expect the United States financial system to collapse, it's not the only possible outcome.  I thought I'd take this week's blog to try and assess the other roads we might travel.  The first thing that must be determined is timing.  You can be completely correct about what is going to happen but be wrong about the time frame and end up broke.  Think back to those in 1998 who predicted that the stock market would crash and made big bets but had to wait two years and survive a huge rally. (many didn't)  Therefore the timing is very important.  In that vein all of my outcomes are based on the likelihood they happen in the next three years. 
 
Status Quo
 
 
This has a decent chance of happening, about 1 in 5.  This scenario would mean we don't have any noticeable difference in our lives or markets.  While I view this as unlikely, the powers that be have enough control that this may actually happen.  I believe some of the permabears seriously underestimate the power of the elites.  The markets would trend up in a slow dither in this case without much in the way of gains, especially after subtracting out the true inflation rate.  Best possible outcome but that would not avoid the final collapse.  Don't bet on this one as there are too many hurdles to climb: (from GATA)
 

Bill H:

addendum to yesterday.

To all; I wanted to expand a bit on the piece I wrote yesterday regarding the national debt. Remember the numbers, roughly $65,000 owed for every man, woman and child for the "funded" obligations and slightly less than $400,000 if you include the "unfunded" debt. We now have 45 million people (I wish I could say all "citizens") who eat from food stamps and roughly the same number who are considered below the poverty line. All told, nearly 1 of every 2 people in the U.S. receive some sort of benefit whether it be food stamps, Social Security, Medicare, rent subsidies or whatever which only leaves the other half to pay for.

My point is this, obviously $400,000 per person is not a problem for the top 1% to come up with but what about the rest? Maybe the top 5% COULD come up with this kind of money but would they? What would they have left? And even the top 10%, if they liquidated everything they owned would it amount to $400,000 per person? OK, let's use just the "funded" debt numbers, $65,000 per person. This amounts to a 20% deposit on a $300,000+ house right? Still a pretty significant sum. Many, many middle class (or once were) people are now struggling month to month and paycheck to paycheck. Their home values have collapsed and many now (25%+-) have negative equity in their biggest asset (now a liability). In many cases (more, much more than we really think) even a one or two week stoppage of income will tip personal finances over the edge!

What I am trying to get at here is that I believe we, as a nation, are much closer to the abyss and walking a much finer line than is commonly thought. I mention this because it really does look like the economy is again in recession (I'm not sure we ever exited), another turn down in the economy is going to tip many "hangers on" over the edge. Don't get me wrong, the banking system is insolvent but is not admitted to this because they do not mark to market. Municipal, state and federal government are hopelessly insolvent unless they can "borrow more". Everything is insolvent but I wanted try to put the big problem in the perspective of the individual.

I wanted to expand on these thoughts because the OWS (occupy Wall Street) movements are swelling but there is no real singular message, complaint or demand. They just know that their standard of living has deteriorated and are correctly blaming the banking system. What I don't believe "the banking system" has taken into account is what I wrote above. Basically the general standard of living has been hollowed out and there is no longer any "fat" to live off of. I truly believe that the U.S. middle class (what's left of it) has stretched itself as far as is possible to maintain "the lifestyle" and TPTB have forgotten that in order to steal something, their constituents must HAVE something! In other words, TPTB have sheared the sheep and there is no wool left, it's already gone!

The above is merely a "micro look" at the system, the "macro look" is the other end of the scale, sovereign governments. ALL of this, from individuals to sovereigns are required to maintain a financial system. By definition however, we have arrived at the end of the "fiat" line. As it is now, other than the top 1% wealth, NOTHING is solvent and no one is maintaining their standard of living. The "hope" I'm sure is that the decline will be slow and managed, as evidenced by demonstrations I highly doubt this pathway will be tolerated. I do want to mention that this top 1% will change in the future, it will primarily be occupied by the "1%" or less of Americans who now store their wealth in precious metals! Regards, Bill H.

 
 
Option #2 -  Muddle Through
 
 
The first time I heard this term was from John Maudlin, a hedge fund guy who writes a weekly long missive.  He contended that we would have stagflation for years on end.  This would entail a very sluggish economy with high, consistent unemployment and inflation that is in the 3-4% range.   This is possible but I view it as only a 20% chance.  This is an ugly outcome as there is no resolution, only pain.  Without wringing the excess out of the system, which a depression/recession does, we can never truly get back on solid footings.  Evidence for this outcome:
 

Food stamp use reaches record 45.8 million

posted at 6:20 pm on November 2, 2011 by Tina Korbe 

A new report posted today by the U.S. Department of Agriculture shows a record 45.8 million Americans received assistance through the Supplemental Nutrition Assistance Program in August — 1.1. percent more than in July and 8.1 percent more than in August 2010.

That new record is not surprising: The number of Americans receiving food stamps has reached new highs every month except one since December 2008, according to Bloomberg. Spending on the program also reached a record $6.13 billion.

On the one hand, part of the increase has to be attributed to the high unemployment rate of 9.1 percent. On the other hand, joblessness can’t be the entire explanation.

Anyone who has seen “the EBT rap” knows food stamps aren’t exactly what they used to be.

“Sandwiches, chips, Snickers, Twix … I’m eating good … Potato chips … A big box of Oreos … Cereal, Kix … My EBT, My EBT … Walking down the Ave, there’s food I got a hunger for … I just want some Jam … Walking down the aisle, cuz I just want some ham … Wham!” Mr EBT raps. ”It’s the EBT, it’s not Food Stamps … Breakfast time the cheese is melted … if I don’t have my card I use someone else’s …”

“Mr. EBT” says he intended his rap to be a parody of welfare abuses. Still, that doesn’t change that it captures this truth: As the program is currently constructed, no real incentive exists to move beyond government assistance to a life of work and personal responsibility.

In consequence, more people enroll, but equivalent numbers don’t “graduate” from the program. So, not surprisingly, government spending on SNAP has doubled just since 2008:

That’d be fine if the government could afford it. Unfortunately, just as individual Americans most need government assistance, the government is least able to provide it. The deficit and debt are already at unsustainable levels and act as a major drag on the economy and job growth. Yet, in the coming years, the government is set to spend more than ever on welfare anyway. SNAP is just one of more than 70 welfare programs and those programs are projected to cost taxpayers $10.3 trillion over the next decade. It’s all a vicious cycle.

So, what does that mean? Should the government just turn off the spigot, even as Americans pay the price for the government’s power-trip spending of the past? If the government helped to create the sluggish economy, shouldn’t it support citizens through it, as it works to reignite the country’s economic engine?

Yes — but it should do so responsibly. Both the architects of government programs and the recipients of government assistance should be held accountable for the way in which they use other people’s money. The Heritage Foundation’s Katherine Bradley and Robert Rector have a few ideas as to how the government can continue to help those in need, while also reforming the welfare system. Among them: As soon as the recession ends, restore welfare spending to pre-recession levels; limit future growth to the rate of inflation; and apply work requirements to other federal welfare programs.

Moral of the story: The government does taxpayers and assistance recipients a disservice when it fails to incentivize work and perpetuates dependency. Even in the midst of a slow economic recovery, the government should look for ways to slow the growth of the welfare state.

 
As more and receive a dole, there is just no way to grow the economy, which means our third outcome is more likely:
 
Recession 2
 
 
 
This is the most likely outcome to me.  I'd say about a 50% chance.  Under this scenario, the economy slumps back into negative territory which means stocks slump too.  The economy is currently too weak for additionaly strong growth and the artifical stimulus that has been supporting us is becoming less and less effective.  Exhibit A:
 
Home prices heading for triple-dip

By Les Christie

October 31, 2011: 5:37 AM E

NEW YORK (CNNMoney) -- The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv (FISV), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv's chief economist.

Should home values meet Fiserv's expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst.

The first post-bubble bottom was hit in 2009, when prices fell to 31% below peak. The First-Time Homebuyer Credit helped perk prices up by mid-2010, but by the time the credit expired, prices fell again.

In the second dip, which was reached last winter, prices were down 33%before staging a mild rally that was artificially spurred as banks slowed the processing of foreclosures following the robo-signing scandal, which found that loan servicers were rapidly signing foreclosures without properly vetting them.

Now that the scandal is mostly resolved, lenders are speeding more cases through the foreclosure pipeline and back onto the market, weighing on home prices even further.

Earlier this month, RealtyTrac reported the first quarterly increase in foreclosure filings in three quarters. Even more discouraging: new default notices were up 14%.

There's also a "shadow inventory" of homes in foreclosure that have yet to go back onto the market.

The specter that those foreclosed homes could flood the market at any time and drive prices significantly lower is a huge concern, said Mark Dotzour, an economist for Texas A&M University. "That's the elephant in the room," he said, noting that there are 6 million home currently in shadow inventory.

Biggest losers

Many of the regions that will be hardest hit were already beaten up during the previous two dips.

Naples, Fla., for example, is expected to take the biggest hit of any metro area, a price drop of another 18.9% by the end of next June, according to Fiserv. Home prices in the area have already fallen 61% from the peak.

Other cities expected to be hit hard include the not-so-lucky Las Vegas, which is expected to see home prices fall another 15.9% for a total loss of 66%; Riverside, Calif., is projected to fall another 14.8% (for a total decline of 61%); Miami is expected to decline by 13.2% (total loss: 57%), and Salinas, Calif. could drop by another 13% (for a total loss of 66%).

There will be some winners, however, led by Madera, Calif. and Carson City, Nev., which will each gain 15.5%. That's some consolation for hard-hit residents: The average home in each of these metro areas has lost more than half its value.

Other metro areas Fiserv expects to recover nicely are Yuma, Ariz. (up 9.5%), Yuba City, Calif. (9.2%) and Farmington, N.M. (8.3%).

Slow recovery ahead

Even after the housing market begins its comeback in mid-2012, the recovery is predicted to be modest at best. Nationwide, Fiserv is projecting that home prices will climb just 2.4% between June 2012 and June 2013.

A few individual metro areas will do better, with 31 of the 385 markets Fiserv monitors expected to pile up double-digit gains. Another 71 markets are expected to post increases of 5% or better.

Many of the markets that will record the biggest increases are vacation or retirement communities that had taken some of the biggest hits during the bust.

The biggest "winner" will be Ocala, Fla., with a 22.4% spike for the 12 months ending June 30, 2013. Ocala was one of the hardest hit communities in the U.S. over the past several years, with home prices falling some 50%.

Others anticipated gainers will be Napa, Calif., which Fiserv projects will improve by 20.9% over that same period; Panama City, Fla. (an estimated 18.2% jump) and Bremerton, Wash. and Carson City, Nev. (both expected to see home prices climb 17.9%).

Some cities will continue to fade, however. Fort Lauderdale, Fla.'s forecast is for a 9.2% drop through next June and another 6.7% the 12 months after that. Its neighbor, Miami, will endure 13.5% and 5.2% declines, respectively.

This type of outcome for housing just doesn't allow for a growth in the economy and is why I'm betting on this outcome.  Make sure you have sufficient reserves to survive a layoff and that you have some gold and silver for extreme outcomes which leads to a last possible destination for the U.S.:
 
Armageddon
 
 
This is the least likely outcome at 1 in 10 but I do believe this will happen someday, just maybe not in the next 3 years.  Our fiat money system is just built on air and could collapse at anytime.  This outcome has a completely new government and is basically a "reset" of the system.  When this happens, gold and silver will be kings.  I do hope you have accumulated some of the metal for insurance.  If not, the price will be higher in the future as the competition for these limited resources is growing: (thanks to Hugh)
 
Chinese Silver Investment Going Parabolic

By Dan Collins11/01/2011

When 1.3 Billion people start investing in something…you might want to pay attention.

Chinese investment in silver has exploded since last year, with the trading volume going exponential. The China Daily reported today that the trading volume of silver forwards on the Shanghai  (SGE), China's only exchange for the precious metal, surged 751 percent year-on-year in 2010. Meanwhile, the volume in September of this year was more than six times that of the same period in 2010.

Chinese commercial banks are now selling silver to investors in the hundreds of tons. One example is the Industrial and Commercial Bank of China Ltd (ICBC), China's biggest lender which launched paper silver trading for individual investors in August of last year. The other large Chinese Banks have also introduced silver trading. The trading volume of ICBC's paper silver products alone reached 300 tons in the first half of 2011, almost four times the figure for the whole of 2010. That's right, one Chinese bank alone sold 300 tons or over 10.5 million ounces of silver in only 6 months. In only their first year of trading, ICBC bank alone will sell over 20 million ounces of silver which alone would represent over 2% of the total amount of silver mined on earth for the entire year.

The key factor to pay attention to is that most of these silver purchases are forward contracts and not the actual physical silver. What happens when Chinese investors demand physical silver instead of paper silver?

Modern day commodity markets are characterized by a continuing divergence between the "paper" and the real "physical" markets. The Chinese silver market is no different.

Most commodities trading takes place between parties than have no physical supply of the materials. In the Silver market, the distortion between the physical and paper markets is extreme. Every day in the global markets, $50 Billion dollars of silver can be sold daily by parties that actually own no silver. The global silver market will trade 1 billion ounces daily in global markets which is more than the entire amount of silver mined each year, which is close to 900 million ounces.

Demand for precious metals in China is skyrocketing. High inflation and a lack of investment options are the main culprits. With new housing regulations bringing housing investment to a standstill, investors are looking for new ways to invest cash. The housing market looks to go down and the stock market is widely viewed as corrupt and risky. Gold and silver are becoming increasingly popular.

China’s net imports of silver hit a record high in 2010 with the volume quadrupling to a total import amount of 3,500 tons. This is a major shift as China was previously a net exporter.

In China, silver has served historically as the main medium of exchange in China. It was an official currency in China as far back as the Han Dynasty (206BC-220AD). Silver Ingots were used to horde wealth and Silver Taels were produced by the government to function as currency or to back a paper currency. The Chinese word for "Bank" is literally translated as "Silver House".

Chinese silver trading is largely a paper market today. Chinese Banks are selling paper silver in massive amounts which will no doubt continue to double or triple year after year. These paper silver contracts are redeemable in silver bars at the banks yet the banks do not have the silver. Chinese investors are often fickle and enjoy hard assets. What kind of short squeeze will develop when Chinese banks are forced to go onto the open market and buy physical silver to support Chinese investors when they switch from paper silver to physical silver?

What is the Mandarin term for "The mother of all short squeezes"?

 
Positions
GORO (closed $23.50, flat, average price paid $6)
Mexus Gold (closed $.10, down $.018, average price paid, $.22)
 
Mexus had an update this past week:
 

11/04/2011

Submarine Cable Operations

Mexus Selling Cable!

The Mexus tug and barge arrived in Washington State on October 31, 2011. Our sales representative, Power Com, has potential purchasers evaluating the cable and preparing bids at this time. The cable pulling equipment operated very well and above expectations, however, there were external problems which limited our capability to properly salvage a large volume of cable. The weather and sea conditions were the largest challenge to conducting efficient salvage operations. Based on the knowledge and information acquired through this initial salvage effort the determination has been made to purchase a ship with a carrying capacity of approximately 1.5 million pounds and operate at greater depths in open water under adverse weather conditions. The target submarine cable is approximately 30 pounds per foot, therefore, storage requirements will require a ship of this magnitude for recovery of the target cable. Mexus has already replaced its smaller survey boat with a 42' former US Coast Guard vessel powered by twin Cummins engines which is capable of operating in open water and conducting survey data acquisition to 1000 feet in depth. This vessel will be working offshore Washington and Oregon coasts later this year to survey and identify our larger and more profitable targets.

Caborca, Sonora State, Mexico

Mexus Produces Gold!

Mexus placer gold recovery project is producing gold at this time. Mexus is adding larger equipment to the facility to increase the overall efficiency of the milling process. In addition, two larger haul trucks are scheduled to arrive in Caborca on November 11, 2011.

Mexus intends to begin a diamond core drilling program in anticipation of receiving a geological report under the standards of 43101 on the Caborca hard rock area adjacent to our placer operation by November 14, 2011. The core drilling program will initially be situated at the Julio underground mine on 100' centers and to a depth of 300'. The Julio underground mine at the 100' level has previously produced assays as high as 5.5 ounces per ton gold. Mr. Paul Pelke, Geologist, of Reno, NV has been retained to oversee the drilling operation and will be preparing the geological report. The hard rock core drilling target area is approximately 1 square mile based on surface observations and soil evaluations.

Mining and recovery facilities for the hard rock target area are expected to include an open pit operation with an underground high grade operation at the same time.
 
This is encouraging in some respects but I must say I'm a little disappointed.  After large plans for pulling cable all summer, they only ended up pulling a couple weeks.  It turns out that pulling this cable is more difficult then first thought and especially when the weather is poor.  As it stands now, it appears that the company is selling its current barge to upgrade to a larger one.  This is being done so they can attack the larger 4" cable which will be much more profitable.  As with any small company, this is a crap shoot.  There is no telling when they will be pulling cable again although they are planning to pull further south so winter will not be a show stopper anymore.
 
On a more positive note, they are mining gold:
 
 
When I orginally found this company I was only interested in the cable.  Now that they are actually mining, a not so easy feat in the given short time frame, I am beginning to look at these operations.  At present there are no estimates of how much gold they could produce.  IF they could produce just 10 ounces a day, which is not a complete impossibility with the grades they are claiming, this company could have over $6.5 million dollars of revenue a year.  With such a small company value, this will move the price much higher.  Based on the equipment in place on the video I believe there is a chance of this happening.
 
So where do we stand with Mexus?  As I cautioned multiple times, this is a risky company with a potential large payoff.  I still believe that but have tempered my expectations down to the $1-1.50 range.  From our current price, that would still be huge payoff.  As far as investing here, only use funds you can afford to lose completely.  Any shares picked up under $0.15 give a large enough potential payoff to take a chance.
Alexco Resource Corporation - AXU (closed $7.86, down $.30, recommended at $7.90)
Stocks (Current status, short, short initiated October 15)
 
I still believe the risk is greater for a large fall than a large gain.
Physical Gold (Closed $1749, up $11, average price paid $395)
Physical Silver (Closed $34.64, down $.76, average price paid $5.31)
 
Here's one that almost anyone who is a kid at heart can relate to...the longest hot wheels track ever built. Over 2000 feet!  I believe the boosters used to keep the car going are about $80.  Expensive hobby.  Have a great week!