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The Daily Reckoning | Monday, August 13, 2012 The $452 billion bubble...coming to a college near you...next year, Safeguarding your portfolio against another “Countrywide-like” collapse, Plus, giving up the guns, farewell thee Whiskey and plenty more... ------------------------------------------------------ Amazing... But True! Tobacco is being resurrected — making it the profit opportunity of the decade. It turns out that one man’s quest to help people quit smoking has led to what could be the most important “accidental” health discovery since penicillin. And for you — it could be the biggest potential “profit bonanza” since Pfizer accidentally discovered Viagra. Discovered by accident: A chemical compound in tobacco that doctors are now recommending to slow aging! BUT because Wall Street inexplicably thinks the biotech firm that owns the patent — and is already selling this miracle product without a prescription — is a nasty, dirty tobacco company, you still have a little time to load up before the truth is finally revealed! Learn more about this amazing opportunity right now, right here. Quote of the Day... “You can have your way, but you can’t have mine.” — Country singer, Miranda Lambert (From “It Hurts to Think”) Eric Fry, reporting from Miami, Florida... Eric Fry In today’s issue of The Daily Reckoning, we bring you a “two-parter” that pains our heart just a bit...both for the content of each of the two parts and for the source of the first one. Beginning at the end, the source of the first part is “Whiskey and Gunpowder” — your California editor’s favorite extinct e-letter, published by his favorite under-employed editor, Gary Gibson. That’s right, folks, after publishing Whiskey and Gunpowder for several years as the outspoken voice of libertarian and anarchist sensibilities, the publishers shut the “Whiskey Bar’s” doors for good two days ago. Despite Whiskey’s groundbreaking editorial content, financial success proved elusive. Ironically, therefore, the free market silenced a voice that several government agencies might have liked to silence a few years earlier. Double ironically, the free market silenced insights that have become more timely than ever, if not downright urgent. So you libertarians and anarchists have lost an ally. But lucky for you, Joel Bowman is still here...and Jeffrey Tucker is still speaking his mind over at LFB. Nevertheless, the team here at The Daily Reckoning is genuinely sad to see Whiskeyclose its doors...and even sadder to see Gary Gibson move along to whatever he does next. (Rumor has it that he will remain within spitting distance, but we’ll see.) So in tribute to Gary’s outstanding work, we’d like to re-publish the bulk of the Whiskey and Gunpowder edition of August 1, 2012...followed by a couple emails from the Whiskeyfaithful that capture the sentiments of the team here at The Daily Reckoning. After that, dry your eyes and take a look at the latest insights from Dan Amoss, editor of Strategic Short Report. But that’s not his only gig. Dan recently joined the team atAddison Wiggin’s Apogee Advisory, for which he penned the insights we present today. Enjoy! Addison’s Apogee Advisory Presents... What to Expect in 2013... Between 2004-2007, Bill Bonner and Addison Wiggin did their best to alert their loyal readers to the dangers of the housing bubble well before the mainstream said anything about it. Well, today, they see something even worse looming just over the horizon. It’s not often our Reckoner-in-Chief agrees to appear on-screen, but this was just too important. Click here (or the image below) to see what they’re talking about now... The Daily Reckoning Presents When They Come For Your Guns, You Will Turn Them Over Jim Karger “When they come for my gun, they will have to pry it out of my cold, dead hands,” is a common refrain I often hear from the Neo-Cons when there is a threat, credible or otherwise, that the US government is going to take their firearms. And, when I hear this crazy talk, I agree with them openly. “You are right. They will pry your gun from your cold dead hands,” which I often follow with the question, “And where will that leave you except face down in a pool of your own blood [in] the middle of the street, just another dead fool resisting the State?” This is not a question they are comfortable with, if only because the intent of their saber-rattling was to imply they would fight to keep their weapons, and win. Nice fantasy. It’s not happening. If the federal government decides to disarm the public, and when the increasingly-militarized rolls down your street after a not-so- subtle request that you kindly turn over your firearms and ammunition “for the common good,” it will be nothing less than suicide by cop to do anything other than what you are told. The militarization of US police forces is ongoing and escalating. Many cities and towns now own tanks, armed personnel carriers, even attack helicopters, and almost all are outfitted with military weapons not available to the general public. And, it is not just your hometown cops who are getting new boy-toys. The military itself is buying up weaponry not just for use in the current or next scheduled war, but to deal with the likes of you, citizens who don’t seem to understand that the Bill of Rights has been overruled, and that specifically includes, but is not limited to, the right to protest and engage in civil disobedience. Also ignored (as if it didn’t even exist) is the Posse Comitatus Act of 1878 which generally bars the military from law enforcement activities within the United States. According to Public Intelligence: “...for the last two years, the President’s Budget Submissions for the Department of Defense have included purchases of a significant amount of combat equipment, including armored vehicles, helicopters and even artillery, under an obscure section of the FY2008 National Defense Authorization Act (NDAA) for the purposes of ‘homeland defense missions, domestic emergency responses, and providing military support to civil authorities.’ Items purchased under the section include combat vehicles, tanks, helicopters, artillery, mortar systems, missiles, small arms and communications equipment. Justifications for the budget items indicate that many of the purchases are part of routine resupply and maintenance, yet in each case the procurement is cited as being ‘necessary for use by the active and reserve components of the Armed Forces for homeland defense missions, domestic emergency responses, and providing military support to civil authorities’ under section 1815 of the FY 2008 NDAA.” And, they are not just arming cops and weekend warriors for domestic purposes. Active duty Marines are now being trained for law enforcement operations all over the world (of which the US remains a part) specifically to deal with civil uprisings, and the US government knows that civil uprisings are coming to a town near you just as soon as the fantasy of a healing economy is shattered, the US dollar fails, and unemployment goes to 30%+ in real numbers. And, to you tough-talking Neo-Cons with your AR-15 rifles and a few thousand rounds of ammo, here is the reality: they will take your guns, and no, all your Second Amendment bluster aside, you are not going to do anything about it. You are not going to take on a platoon of Marines with state-of-the-art automatic weapons and the best body armor you cannot buy protected by armed personnel carriers and attack helicopters unless you choose to die that day — for nothing. You will either be in the country or out, and if you are in, you will stay in and you will comply. That is your choice... for the moment. Regards, Jim Karger Jim Karger is a lawyer who has represented American businesses against incursions by government and labor unions for 30 years. In 2001, he left Dallas and moved to San Miguel de Allende in the high desert of central Mexico where he sought and found a freer and simpler life for he and his wife, Kelly, and their 10 dogs. Karger’s website ishttp://www.crediblyconnect.com A Final “Parting Shot” Gary Gibson We really believe those are your choices. Stay in the US where you will have to submit...or die. Or go now. Your ancestors all fled their own oppressive police states in Europe, Asia or Africa and now it is your turn to get out before they shut the door. There are plenty of much freer places to run to, mostly in Latin America and Asia. We’re finally taking the full plunge ourselves, good patron. Your itinerantWhiskey editor’s itinerary will only include the US for the occasional conference from now on. It was just getting too disturbing for us to consider the US a long-term home anymore. Lucky for us, we already have a non-US citizenship and passport! And our options are open!! If you aren’t quite so lucky...if you’re burdened with a US passport or citizenship...you’ll want to remedy that...and soon. Regards, Gary Gibson Managing editor, Whiskey & Gunpowder Parting Letters to the Editor of Whiskey and Gunpowder: Gary, I am raising four anarchist capitalists, or libertarians, or whatever they call us. One has attained a BA in history — mostly through independent study, distance learning, online courses, and exams for credit. My son has successfully transitioned from homeschooling to college and made the dean’s list his first two semesters majoring in mechanical engineering — while playing intercollegiate basketball. My two younger daughters are still being taught at home for a few more years. For the past several years, Whiskey and Gunpowder has frequently been on their ‘required reading list’. Thank you for the educational material and the encouragement that we are not alone. Keep up the good work! —Bob Dear Gary, Of all the Agora publications I get and read, Whiskey and Gunpowder has been one of my two favorites... This is going to be like losing a good friend. I am saddened at the loss. I am not going to add any other newsletters to the mix. My time is so thin already. I wish you well and I certainly hope that I see (or hear) you come back around in the near future. All the best, William [Editor’s Note: In William’s email to Gary, he mentions that his second favorite Agora publication is The 5-Minute Forecast. Your Daily Reckoning editors determined that William may have misspoken and therefore, deleted that remark]. The “Perpetual Income Machine” is Alive... A simple strategy for you to create your very own “perpetual income machine” right from your home office... And guess what? It only takes you about $50 to start the engine... Once up and running, all you do is sit back and collect “paycheck” after “paycheck” sent straight to your mailbox. It’s so easy a 16-year old girl’s been generating 18% gains a year, on average. Click here to see it in action... Snap! Crackle! Pop!...Goes the Student Loan Bubble! Dan Amoss It’s May 2013 on an ivy-draped college campus. You just graduated with a degree in English. In 2009, you borrowed $50,000 from the US Department of Education’s Direct Loan Program. Job searches for teaching and journalism positions have been fruitless. Within a matter of weeks, you must start making loan payments on a waiter’s wages and tips. On sleepless nights, you fear what defaulting on this loan will mean down the road. Signing up for a huge student loan was a mistake. Both you and the lender had assumed a certain type of job market would exist four years into the future. Your lender — the US government — has long subsidized unsustainable activity. In 2009, economists encouraged politicians to promote even more nonsensical spending than usual. “Spending on something — anything — is valuable and necessary stimulus!” they said. We got government spending in 2009 — spending that worsened imbalances. Now the gap between a self-sustaining economy and today’s stimulus-addicted economy is so wide that policy fixers must commit ever more resources to prop up past spending mistakes. People are smart and adaptive; governments are dumb and reactive. Markets often fail. Supply and demand mismatches bring about rising and falling prices. Assuming we have flexible capital and labor markets, market failures can get corrected quickly. But in today’s bailout-heavy, politics-driven economic system, market failures are not corrected quickly, and are usually made worse. This has huge implications for the government budget — and the investing environment staring us all in the face... Let’s return to the student loan mistake facing the English graduate and why it’s bad news for the future of many investments. According to Labor Department statistics, 1.9 million Americans between the ages of 20 and 24 not in school are officially unemployed. The size of this age group working part time is the biggest since 1985. Unless recent college grads hold degrees in high-demand fields like computer science, engineering or geology, they aren’t finding jobs; they aren’t buying new cars; they aren’t starting families; and they aren’t buying houses, absorbing the excess supply in a sluggish housing market. “We’re smothering aspiration at a very early age,” Candace Corlett, president of WSL/Strategic Retail, recently told Bloomberg News. “Retailers used to be able to count on young adults to be the first to buy whatever was new and to purchase the bigger brands at better stores. Now they can’t afford that, and they’re so comfortable with mobile technology, they’ve become the savviest at getting the best prices.” Those born in the 1980s and early 1990s make up a large demographic bulge; these are the “echo boomers” — the baby boomers’ kids. This generation, after a coddled upbringing, appears to be soft. Many of them have adopted the worst of their parents’ habits during an era of credit excess. And many feel entitled to pursue career dreams regardless of practicality. It may not seem like it now, but we may be witnessing the maturing of a new generation with Great Depression-era values, including thrift, selflessness, stoicism and, most importantly for investors, an attitude that debt is dangerous and saving is “cool.” Harsh job market reality and a tsunami of student loan defaults will alter a generation’s behavior. The real fallout from the student loan crisis will hit in mid-2013, four years after the volume of government-funded student loans surged. Like the infamous option ARMs (adjustable-rate mortgages) during the housing bubble, these loans have precisely timed fuses: Four years after the loans are made, borrowers must start making payments. The US Department of Education has become the Countrywide of student lending. After a lending binge started in 2009, it now holds a massive $452 billion portfolio of student loan receivables, according to Federal Reserve data. This so-called “asset” will become aliability by next year. Thanks to the punk job market, a huge percentage of these loans will go bad or have to be restructured. When that happens, Congress will have to appropriate money to make up for the loan-payment shortfall. What was quietly off budget will soon make a big splash on the federal budget. I expect defaults on government student loans to reach tens of billions of dollars per year starting in late 2013. Like Countrywide, the government is not honestly accounting for its portfolio risks. This $452 billion portfolio doesn’t even include a few hundred billion more in guaranteedstudent loans. The chief accountant of the Government Accountability Office (GAO) wrote a report dated December 2011 on the federal government’s accounting deficiencies: “The deficiencies, for the most part, involved credit subsidy estimation and related financial reporting processes.” In other words, accounting for below-market loan interest rate subsidies is complex, and the government is not adequately disclosing the risks it is taking. What conclusions can we draw for your portfolio? Right now, even professional investors aren’t talking about the ticking time bomb of off-balance sheet student loan defaults. This, along with other unreformed entitlement programs, will swell the federal budget deficit far beyond even the biggest projections. The ultimate losses on the Department of Education lending binge will probably be north of $100 billion. This is bad news for savers waiting for a return to reasonable interest rates on savings. The exploding deficit will force the Federal Reserve to not only keep rates at zero for the rest of the decade, but also to print trillions more dollars in order to buy the Treasury bonds floated to fund these deficits. This scenario argues in favor of a healthy allocation to tangible stores of value, including precious metals and stocks of companies with pricing power. You must be picky in this sideways, grinding bear market, but not go all to cash, in which you’ll lose purchasing power over time. The younger you are, the higher your allocation to noncash investments should be. Companies with pricing power include those with powerful brands, those with lasting competitive advantages, those that haven’t participated in any bubbles over the past decade and low-cost producers of energy and other necessities. On the other hand, you want to avoid the following types of stocks: many in the banking and insurance sectors that will suffer a relentless decline in earnings as high-interest-rate bonds and loans roll off, only to be replaced by assets with lower yields. These stocks may look cheap, but they deserve to get even cheaper in a future of consumer frugality, near-zero interest rates, exploding deficits and persistently high consumer prices. Regards, Dan Amoss for The Daily Reckoning --------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com