NEWS HIGHLIGHTS FOR THE WEEK

This ezine is not intended to be ‘fair-and-balanced.’ Its primary purpose is to summarize developments that underpin our investment philosophy, whether or not they are reported by mainstream media. Although we are hoping for the best outcome for the economy, we are attempting to prepare you for the worst – in case it occurs.

• Now that ObamaCare is law, we are discovering (as Nancy Pelosi infamously projected) what’s hidden in its more than 2,400 pages. One provision has vaulted into the news recently: Section 9006 requires IRS Form 1099s to be filed on all business-to-business transactions exceeding $600 in a one year period, beginning in 2012. It’s stated objective is to squeeze out $17 billion in taxes over 10 years that would otherwise go unreported – so that our spendthrift Congress can fully fund ObamaCare. The $600 threshold is already in force elsewhere in the economy; for example, insurance companies send annual 1099s to agents who have earned $600 or more during a calendar year. Millions of growth-generating small businesses (which generate 80% of the nation’s jobs) will have to deal with additional red tape, issuing an estimated average 200 Form 1099s per year. When a small shop owner buys a new set of tools, he will have to send a 1099, complete with the Taxpayer Identification Number, to the seller and the IRS. The rule cuts across the entire business spectrum – software, office supplies, airline tickets, hotels, rental cars, gas for a truck, janitorial services and so on. It will even affect people who run businesses from their home.

The provision will also apply to sales of gold and silver by individuals back to a bullion shop. Shop owners are squealing, noting that writing a 1099 on so many of the items they buy (Rolexes and jewelry, in addition to bullion) may cause them to close their business. There is also a concern that identity theft criminals may set up shops to extract personal information that would accompany the filling out of a 1099. In my opinion, there is no need to panic – but you may want to use dips in the gold price to top off your portfolio before 2012. Legislation to repeal the section has already been introduced in the House and 20 states have joined in a lawsuit to reject ObamaCare entirely. There is also a possibility that voter angst will replace enough liberal congressmen in November to make repeal of ObamaCare a possibility. Finally, there is also barter,which is growing like wildfire in America.

• Terry Coxon, during an interview regarding “inflation vs deflation,” stated that although current out-of-control government spending isn’t inflationary, it’s setting the stage for future inflation, when money has to be created to pay the government’s debts. “What it does is create a political motive and economic need for inflation. These huge deficits may have slowed the recession that began in 2008, but to keep the recession from worsening, the Federal Reserve will have to prevent interest rates from rising for months or years to come. And to do that, it will have to start printing money to buy up debt instruments whenever the economy starts recovering to keep interest rates down to levels that will not choke off the recovery.

“When the outside world wakes up to the threat of inflation in the US, they will start unloading US dollars, which will suppress the dollar’s value in foreign exchange markets, which will make prices of imports (including oil) go up, and that will be a separate vector feeding price inflation in the US. I don’t think this will happen any time soon, because whereas every other currency is just paper, the US dollar looks like cardboard by comparison.” Coxon said that although our increasing debt load has been largely ignored by bond buyers, “at some point they’ll care. That’s what happened in Greece and Spain.” He also commented that there is no way that the US and other governments can ever pay off their debt, “because the debts are just too large.” Coxon thinks we’re sliding now into the “second part of the double-dip recession” and that within 6 months the Fed will panic and start printing money in earnest – resulting in heavy inflation in a year or two.

• Doug Casey offered Agora Financial symposium attendees five suggestions to repair America: (1) Abolish the Federal Reserve. (2) Urgently disband 95% of government, to return to the original ideas of the Constitution. (3) Withdraw troops from all countries around the world. (4) Abolish the income tax and the IRS. (5) Default on US government debt. “This is an honest way to do it,” rather than “do it subvertly with inflation over time. The chances of this happening are slim to none and slim’s out of town.”
• At the same conference, Barry Ritholz said that it will “take 12 years to absorb all the excess home supply from the boom years.”
• In a harbinger of developments in Greece, Hungary is refusing to accept further EU “austerity measures,” countering that it has been cutting costs since 2006 and has nothing more to give. The Fidesz government was swept into power on a campaign of defiance against both Brussels and the IMF. Wage cuts and harsh fiscal tightening are becoming increasingly difficult to sell to disenchanted electorates.
• China has surpassed the US as the largest energy user in the world, according to the International Energy Agency. It consumed 2.252 billion tons of ‘oil equivalent’ in 2009, compared to our 2.17 billion tons. But Chinese consumers still have a long way to go to catch up with Americans, as this graph illustrates.

• The Senate voted 60 to 40 to extend unemployment pay for Americans who have been out of work for six months or more. Republicans voted against the bill because they wanted unused stimulus money to be used, rather than further encumber the nation with new spending. Once it clears the House and is signed by Obama, it will be the eighth extension of unemployment benefits since July 2008, at a total cost to taxpayers of more than $120 billion.
• The housing market took another step back last month as builders began work on only 580,000 houses, the slowest pace this year and down 2.2% from May.
• TARP inspector general Neil Barofsky reported that Federal commitments for mortgage guarantees backed by Fannie Mae and Freddie Mac increased by $512 billion over the year ending June 30 – swelling US taxpayers’ total support for the financial system to around $3.7 trillion.
• The FDIC closed its 100^th bank (and 1600^th branch) for 2010, with five more biting the dust Friday. Many more operating banks are broke, if fair value accounting were applied.
• In an interesting twist, Dodd-Frank financial reform makes ratings firms liabile for their ratings, so Moody’s, S&P and Fitch are asking investors not to rely on their ratings. Instead, they’re suggesting that ratings by China’s Dagong International Credit Rating Company – which strips the US and some other western nations of their AAA ratings – are correct.

• From the Texas Observer comes disclosure that the “Texas budget mess is now as bad as California’s.” Texas’ estimated shortfall (for its two-year budget) is $18 billion, or about 20 percent of state spending. Compare that to California, with an officially estimated $19.1 billion shortfall for this year – also 20% of state spending. Another important difference is that Texas has $9 billion in a Rainy Day Fund and hasn’t had to start making cuts, whereas California has no reserve and has already started cutting benefits and services. (thanks, Mark, for sending this article)
• Global currencies and the price of material assets are falling against the value of gold. So how many ounces of gold does it take to buy the average house? Statistics released by UBS show that as far as house prices have fallen and as much as gold has risen, today’s ratio is still above the historical average. Note that the ratio was 100 during both high inflation (1980) and high deflation (1930).

• This New York Times article describes changes being planned for Britain’s socialized health care system. The new government plans to decentralize it, putting power in the hands of doctors and patients at the local level – similar to recommendations Ron Paul made during the development of ObamaCare.
• Here’s a picture of a 20 foot deep sinkhole that opened up in a Milwaukee rainstorm and the rescue story of a driver whose Escalade fell in. An increasing number of sinkholes have been occurring around the globe.

GOLD slipped $4 to close at $1,189.30/ounce, as sellers successfully blocked gold at its 10-day moving average near $1210.  Richard Russell: “The probability that short rates will remain at zero for as far as the eye can see is, of course, a plus for gold, since it implies that there’ll be no competition from interest-bearing dollars.” Also, the Fed will have to indulge in additional QE. “The great primary bull market in gold remains intact. What more could holders of gold and gold items ask for?” In June, Russia’s central bank bought another 200,000 ounces, bringing its holdings up to 21 million ounces, nearly double what it held in 2007.

SILVER recovered 25 cents to $18.11/oz. Ted Butler now believes that JPMorgan and other major short-holders have exhausted their ability to drive silver down; he classifies the outlook for silver as 100% bullish (and rates gold 80-85% bullish). Commissioner Bart Chilton has confirmed that the CFTC is going to carry out its mandate to establish, within 180 days, “reasonable position limits” for all traded commodities – including gold and silver. So the days of massive takedowns of gold and silver prices might be nearing an end. After the limits are in place, large naked futures short holders will be “sitting ducks.”

MINING STOCKS rose with the market, with the XAU Index finishing up 3.6% at 173.

NATURAL RESOURCES (measured by the CCI Index) advanced 1.1%% to 484, near the top of its 2010 trading range. Dan Norcini thinks that a ”clean break of the 500 level” will indicate an investor shift ”decidedly in favor of inflation” but until then deflationary caution will prevail. Crude oil rose $2.75 to $78.98/barrel.

STOCK MARKETS piled on 3+%; the Dow climbed to 10425 (just below its 10451 June high) and the S&P rose to 1103. Both are now even for the year. The stock market liked Bernanke’s words (“unusually uncertain”) last week about the economy (actually admitting he doesn’t know what the hell is going on) – and interpreted the remarks as meaning that short rates will remain at zero into the indefinite future. Plus an implication that the Fed will do whatever it takes, including buying bonds, in an effort to keep down long rates and mortgage rates. Richard Russell’s interpretation of the market’s reaction: “a thrilling upside explosion – but no cigar.” The moves that impress Russell are “’organic’ moves that occur on their own without any outside news.”

FIXED INCOME. The dollar (USD Index) finished flat at 82.46. Switzerland is apparently fighting a losing battle to stop massive inflows of funds from investors fleeing sovereign risk in the euro area and the rest of the world. This UK Telegraph  article concludes that the relatively-safe Swiss franc will experience “a violent spike” [upwards] if “global debt jitters return.”

US Treasury 10 and 30 year bond yields rose 6 basis points, to 3.02% and 4.01%.

FREEDOM WATCH 

Don’t miss this. Judge Napolitano gives a magnificent history lesson on the American Revolution, the Constitution, and what is necessary to restore freedom – starting about 4 minutes into this 30 minute speech.

This New York Times article discusses growing awareness of groundwater pollution (including in Texas) by the use of hydraulic fracturing to extract natural gas. Here’s another story, which gets into recent EPA hearings on damage being inflicted by the drilling industry’s bypass of environmental protection rules. And the recent movie Gasland shows tap water being ignited and burning steadily.

Global Warming has been renamed “Climate Change” and the European Parliament is considering criminalizing “climate change denial.”

The Washington Post  reported, after a two year study, that over 1,200 government organizations and 1,900 private companies, involving approximately 854,000 people with top secret security clearances, are engaged in top secret intelligence gathering. Much of the activity is directed toward American citizens and all data is being reported to the Administration – away from the control of Congress.

The new health bill requires everyone’s body mass index (BMI) to be registered with the federal government by 2014. BMI measures obesity; wonder what’s in store for those who are more chunky than US Surgeon General Benjamin?

“The American people will never knowingly adopt socialism, but under the name of liberalism they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” – Norman Thomas

A woman went to a pet shop and immediately spotted a large, beautiful parrot. There was a sign on the cage that said $50.00.

"Why so cheap?" she asked the pet store owner.

The owner looked at her and said, "Look, I should tell you first that this bird used to live in a house of prostitution, and sometimes it says some pretty vulgar stuff."

The woman thought about this, but decided she had to have the bird anyway.   She took it home and hung the bird's cage up in her living room and waited for it to say something.

The bird looked around the room, then at her, and said, "New house, new madam." The woman was a bit shocked at the implication, but then thought, "That's really not so bad." 

When her two teenage daughters returned from school, the bird saw them and said, "New house, new madam, new girls."

The girls and the woman were a bit offended but then began to laugh about the situation considering how and where the parrot had been raised.

Moments later, the woman's husband Eric came home from work. The bird looked at him and said, "Hi, Eric." 

Here’s a funny video from the late great George Carlin, in which he addresses a group of politicians on their lying ways.

A wife woke up in the middle of the night to find her husband missing from bed. She got out of bed and checked around the house, and heard sobbing from the basement.

After turning on the light and descending the stairs, she found her husband curled up into a little ball, sobbing.

"Honey, what's wrong?" she asked, worried about what could hurt him so much.

"Remember, 20 years ago, I got you pregnant? And your father threatened me to marry you or to go to jail?"

"Yes, of course," she replied.

"Well, I would have been released tonight."

Hope you have a great week!

Family Business Office

Scullptures of Native American Scenes (thanks, Jackie, for sending)

These stunningly detailed sculptures may only be made from paper - but they are being snapped up by art fans for tens of thousands of pounds. The intricate creations depict Native American scenes and took up to 11 months to make using a specially formulated paper

Husband and wife team Allen and Patty Eckman put paper pulp into clay moulds and pressurise it to remove the water

The hard, lightweight pieces are then removed and the couple painstakingly add detailed finishings with a wide range of tools

They have been making the creations since 1987 at their home studio, in South Dakota , America , and have racked up a whopping £3 million selling the works of art

The pieces depict traditional scenes from Native American history of Cherokees hunting and dancing

The most expensive piece is called Prairie Edge Powwow which sold for £47,000

Allen said: "We create Indians partly because my great, great grandmother was a Cherokee and my family on both sides admire the native Americans...

...I work on the men and animals and Patty does the women and children" explains Allen

"I enjoy most doing the detail. The paper really lends itself to unlimited detail. I'm really interested in the Indians' material, physical and spiritual culture and that whole period of our nation's history I find fascinating. From the western expansion, through the Civil War and beyond is of great interest to me."

Allen explained their technique: "It should not be confused with papier mache. The two mediums are completely different. I call what we do 'cast paper sculpture'"

..."Some of them we create are lifesize and some we scale down to 1/6 lifesize"

"These sculptures are posed as standing nude figures and limited detailed animals with no ears, tails or hair"

"We transform them by sculpting on top of them - creating detail with soft and hard paper we make in various thicknesses and textures.

"We have really enjoyed the development of our fine art techniques over the years and have created a process that is worth sharing. There are many artists and sculptors who we believe will enjoy this medium as much as we have."

An Indian mother holding her baby is a favourite of many clients