Charley Reese

Although I have never posted anyone else's writing in this blog before, today I am going to make an exception.  Rather than just including a link, I am posting Charley Reese's entire column from March 24.  He understands the whole story.

The Bungled War

by Charley Reese

We have passed the five-year anniversary of George W. Bush's bungled war in Iraq. What has it gained the American people? I'm afraid the answer is nothing. Let's look at the accomplishments.

We delivered a new ally to Iran. We lost nearly 4,000 American lives and suffered another 29,000 wounded. We spent $400 billion, by Pentagon accounting. We increased the federal deficit to $9 trillion. We've made the Middle East more, not less, unstable. American prestige is in the trash can. Oil is more than $100 a barrel. The military is strained to the breaking point, so we are now recruiting high-school dropouts and people with criminal records. The American economy is on the tipping point of disaster. Bush's disapproval rating is at 65 percent.

Iraq is by no means stable. The destruction of infrastructure and loss of life in Iraq have, many say, permanently wrecked the country. The so-called rebuilding of Iraq has, from the beginning, been a cluster-blunder marked by greed, corruption, no-bid contracts and incompetence. To a large extent, we have lost our economic independence. Most of the brands you see advertised on television are Japanese; most of the stuff we buy is made in China. We are the biggest debtor nation in the world. The product of our public education system sucks when compared with most of the industrial world. If it weren't for foreigners with Ph.D.'s in the sciences and engineering, many of our faculties would be lacking enough warm bodies to teach. You might think about that before you gripe about Muslims. The dollar has lost so much purchasing power, foreigners are beginning to demand payment in euros.

We've had some incompetents as president. I've always thought Jimmy Carter was the champion incompetent, but by golly he's been dethroned by George Bush. The Chinese, the Japanese and the Russians think we are stupid. They may be right at the present time, but America's ace in the hole has always been the ability to change. We do not face a single insoluble problem.

However, since all of our problems are self-created, we are going to have to change ourselves in order to solve them. I won't say, as Henry Hull said in an old movie about Jesse James, that the first thing we have to do is take all the lawyers out in the street and shoot them down like dogs. I will say we should close about three-quarters of the law schools in the U.S. We already have a surplus of lawyers, far more than any other three nations combined. Lawyers do not create wealth; they transfer it from their clients to themselves.

On the other hand, engineers and scientists, of which we have a shortage, do create wealth. I once argued that a new American missile should be sited on law-school campuses on the grounds that their destruction would at least provide a silver lining to a nuclear war. Lawyer-politicians in Washington, however, thought cornfields in the Middle West were more expendable than law schools. Therefore, one thing you can do is make a solemn pledge to never vote for a lawyer running for public office.

We also need to regain the civic courage that our ancestors had. That means the courage to face tough questions without regard for the special pleaders who claim they will be "offended" if you discuss it. It means the courage to demand of the schools that they educate and not entertain students. It means the courage to demand that students study and study hard, because learning is hard work. It means the courage, if necessary, to toss the television and the electronic games in the garbage can. And it's necessary if parents can't control the amount of time their children spend on these time-killers.

Lastly, we should all post on our refrigerators the immortal words of Pogo Possum when he said, "We have met the enemy and he is us."

Nothing has changed

The fundamentals for gold and silver are, if anything, better than they were a week ago, before Bear Stearns collapsed.  A major broker-dealer goes bust, the Fed cuts interest rates by 75 basis points, and the precious metals go down??  That might be perfectly normal in some Bizarro world, but it doesn't make sense to me.

This is what I believe really happened.  Bear Stearns had a large position in gold, and a huge short position in 10-year Treasuries.  The Fed/JP Morgan liquidated both positions, driving gold (and silver) down, and the U.S. up, at least a little, when it should have been down sharply.

The proof of the pudding is in the price of silver.  It closed at $17.21 on Friday.  Yet coin and bullion dealers all across the country are reporting shortages of physical silver.  It's not that they don't want to sell silver, they just won't sell it for $17.21.  They know about the games being played on the COMEX, and that $17.21 price is pure BS.  On Friday I searched through several dozen transactions on eBay and the lowest price I could find in a completed auction was about $21/oz.  Most auctions went for $22-23, and some were even higher.  This morning I received an e-mail from J. Daniel Rare Coins offering $20 to BUY silver eagles.  Heaven only knows what they plan to sell them for.  I would guess it won't be $17.21.

A lady walks into a butcher shop to buy hamburger, and the butcher says it's $1.75/lb.  The lady complains that the butcher down the block sells it for $1.50/lb.  So he asks her, then why don't you buy it from him, and she says because he's out of it.  So the butcher says, "Lady, when I'm out of hamburger, I sell it for $1.25!"

Hang on to your silver and silver shares.  This too shall pass. 

4-digit gold

Today for the first time ever, gold reached $1,000 per ounce.  So it reached my 2008 benchmark with 9 1/2 months to spare.  The bad guys drew a line in the sand at $985 gold and $20 silver, and both of them got blown away.  What's next?  Well, you have to get to $1,000 before you can get to $2,000.

Oil reached $110/bbl today, and silver nearly $21/oz before it pulled back.  The Fed just "created" $200 billion worth of liquidity (I don't want to call it money) to purchase dodgy securities that banks can't sell and don't want on their balance sheets because they are worth little or nothing.  So I see more inflation, and higher gold and silver prices ahead.

All is well at my favorite stock, Silver Standard.  The Pirquitas mine construction is well underway, and there are no issues to keep it from completion in the 4th quarter.  By this time next year, the stock should be re-rated from developer to producer, so it looks severely underpriced in the mid-30s.

The company held a conference call yesterday, so I had the chance to ask the president about the Snowfield project.  This is a gold deposit with 3.5 million ounces of gold defined, which is great, but I wanted to know if the company intended to monetize the asset or take it into production.  The response was what I hoped for, that it would either be sold or operated as a joint venture, but the company would continue to focus on providing leverage to the price of silver.  It is a rare thing to find an exploration company that makes a successful transition to an operating producer, but this company is on track.

The Guennol Lioness

Which country had the best performing stock market in the world last year?

Answer: Zimbabwe, up 12,000%.

But since the Zimbabwe dollar trades at 25 million to the U.S. dollar, it doesn't mean very much.  You can be a billionaire in Zimbabwe and still be impoverished.  That is an extreme example of inflation.

Of course in America that could never happen.  Our stated inflation rate runs 2-3% per year at the most.  In reality, the inflation rate is more like 8-10%, but there are very good reasons for understating inflation.  Millions of Social Security recipients and Federal retirees have their pensions increases tied to the inflation rate.  So if you understate the CPI, you save a lot of money.

In addition, the Gross Domestic Product is computed by backing out inflation.  So if the economy grew at 6% in nominal terms, you deduct the official 2% inflation rate, and conclude that the real rate of economic growth was 4%.  Then everyone yells, "Horray!" and buys lots of stocks.  In reality, the inflation rate was 8%, so that 6% nominal growth translates to a negative 2% economic contraction.  The simple fact is that the economy has been in recession for at least the past two years.

You would never know this from listening to the cheerleaders on CNBS.  The financial analysts assure us that all is well.  If you've tried to buy groceries or gas lately, you know better.  Or health insurance or college tuition or anything but a big-screen TV.  But the official CPI is constantly reformulated to remove food, energy costs, or anything else that might be going up.

To make matters even worse, the anemic growth of the past seven years was accomplished only at the expense of enormous monetary and fiscal stimulus.  The M3 money supply (if the govt would publish it) was climbing at the rate of 16.7% in February, an all time high.  Zimbabwe, here we come.

What little growth we have seen since 2000 was underpinned by massive consumer spending made possible by mortgage refinancing.  Anyone with half a brain could have seen that this was unsustainable, but it wasn't until last year that someone actually stopped to ask whether a crappy one-bedroom condo in a bad neighbrorhood was really worth half a million dollars.

So now the Fed has to lower rates to reliquify the banks.  The banks have to be able to borrow short at 1% to lend longat 4% (doesn't that have disaster written all over it, and didn't they learn anything from the 70's?) to make enough money to stay solvent.  By the way, that thing you saw falling off a cliff was the value of the U.S. dollar.

Which brings me to the Guennol Lioness.  This is a miniature sculpture, barely 3 inches tall, and its legs are broken off.  But when Sotheby's auctioned it in December, it was expected to realize $14-18 million.  That's in U.S., not Zimbabwe dollars.

It actually sold for $57 million.  I don't know what its historical significance is, but unless that little thing can cure cancer, it ain't worth $57 million.  No, we don't have any inflation.

George F. Bush, you're doing a fine job.

Back to the Future

This entry concludes my historical silver game.  As I write this, silver trades at $20.36, having already met my target for 2008, and then some.  It is one thing to reference history events, but no, my crystal ball will not try to predict events 28 years in the future.  Predicting the Giants to upset the Pats in Super Bowl 42 was the absolute limit of my forecasting power.

As silver continues its parabolic rise, one has to think about the possibility of a short squeeze.  With platinum above $2200 and palladium pushing $600, and most of the base metals near all-time highs, it is clear that silver and gold are still undervalued, even at these levels.

The analysts and pundits who say silver has gone parabolic, and this uptrend is unsustainable are correct.  At some point there will be a sharp decline.  It could start tomorrow, or when silver reaches $25, or perhaps silver will run all they way to $30 before we see a significant sell off.  But in the long run, demand for physical metal will overwhelm the games being played on the COMEX.  I think the danger of being out of the market and missing the rest of the bull market is much worse than the potential of even a waterfall decline in the short term.

As they say, get in, sit down, shut up, and hang on!

The end of Flight Service

Effective today, Oakland Flight Service will only provide preflight weather briefings; no other services.  No inflight services, no en route flight advisory service, no flight data, no NOTAMs, no coordinator, no air-to-ground services at all.  The facility is part-time now, which isn't so bad (no more midnight shifts) but from now all everyone will do is to brief pilots.  Hour after hour, day after day, month after month, nothing but briefing.

That ought to do wonders for morale.  It is amazing how LockMart has this uncanny knack for doing everything wrong.  The equipment still doesn't work, the employees at OAK are now glorified call-center reps, and Flight Service has lost half of its traffic by giving the pilots poor service.

Not that LockMart cares.  If fewer pilots are calling in, the company has a better chance of answering the phones and radios in time to meet their performance levels and get their bonuses.  Back in the FAA days, the administrator claimed the system needed to be fixed because it cost more than $25 to provide a pilot weather briefing.  They told us that competition with the private sector would make us more efficient.

First of all, that $25 figure was completely bogus.  It ignored all of the radio contacts, NOTAMs and so on.  I guess we provided all of those for free.  I wonder what the cost per briefing is now, since half of the traffic is gone.  Chances are it's at least $25, and rising.

Not content with driving the pilots away from Flight Service, I'm guessing that LockMart's next moves will be 1) Make part-time briefing-only facilities out of the other "legacy" facilities, and 2) Eventually close all of those facilities and move everyone to the three hubs.

And given the bean-counter mentality at LockMart, they may also decide that since the specialists only provide weather briefings, and no other services, their pay should be downgraded.  After all, why should they get paid so much just to answer the phone?  For that matter, why bother paying the rent and utilities on 19 stations when you only need the three hubs.  And they call this "equal or better service."

So if a pilot takes off from Oakland, and calls Oakland Radio to activate his flight plan, the voice on the radio that answers as Oakland Radio will be a specialist in Prescott, Arizona.  But don't worry, he will have studied the area knowledge for the west coast.  He might even know where the coastal range is, and that some of those low lying stratus clouds may have mountains inside them.  During the summer months, there are some are some very hard clouds here in the Bay area.  But if anything happens, it won't be LockMart's fault.  They will blame the specialist, and you can take that to the bank.