David Galland (Casey Research):

After a relaxing Thanksgiving break, I anticipated to return to work in a lighter frame of mind. However, the following item from FOX News crushed that hope right away:

Lawmakers Propose ‘War Surtax’ to Pay for Troop Increase in Afghanistan

Two top Democrats say they want to impose a new tax on the wealthy to finance any increase in U.S. troops for the Afghanistan war. 

Rep. David Obey, D-Wis., chairman of the purse string-controlling House Appropriations Committee, is calling the idea a “war surtax.” He said that just as the federal government is expected to pay for its proposed intervention in the health care sector with new taxes, any escalated involvement in Afghanistan should come with a payment plan. 

“If we have to pay for the health care bill, we should pay for the war as well … by having a war surtax,” Obey told ABC News in an interview that aired Monday. “The problem in this country with this issue is that the only people that has to sacrifice are military families and they’ve had to go to the well again and again and again and again, and everybody else is blithely unaffected by the war.” 

Readers of my free missive, Casey’s Daily Dispatch, know I’m vehemently opposed to the doomed adventure in Afghanistan. On that front alone, the idea of a war tax is like a shard of glass in my eye.

But it’s even worse than that. It shows just how degraded this country has become – picking the pockets of the productive is now pretty much the only remaining source of funding the administration and its allies can imagine. 

Just to be sure we keep this in perspective: At this moment, if you earn more than $250,000 a year (which isn’t what it used to be, given the steady erosion of inflation over the last 30 years), you will pay federal income taxes of about 35%, no estate taxes, and a 15% capital gains tax should the money you put at risk in the market return a profit.  

As soon as next year – if the government moves up the expiration of the Bush tax cuts, as I very much expect them to – the top tax bracket will go to 39%. On top of that, the current healthcare legislation will add a 5.4% surcharge. Then, add in the Democrats’ proposed 5% war tax. So straight up we’re talking 49%.

Then there’s a near doubling of capital gains taxes, from 15% to as high as 28%. And, of course, the return of the estate tax.

But that’s just for starters, because everywhere you look states and municipalities are raising taxes and fees, and attorney generals, taking a page out of Caligula’s playbook, are casting about for their next deep-pocketed victim.

At the end of the day, the top tax rate in the U.S., starting as early as next year, will soar way over 50% of income. While further number crunching is required, it is a very safe assumption that top income earners will soon be paying over 65% of their income in taxes.

Which is to say, if you are in a top tax bracket, every penny you earn between January 1 and August 25 will go straight into the coffers of one layer of government or another.  

And this while more than 40% of Americans pay no income taxes at all.

This is just another symptom of the single biggest problem now facing the U.S. (and for that matter, the world): the ballooning size and cost of government. And there are no speed bumps in sight.

Even so, endless complaining won’t really do anything other than raise the blood pressure. So, what can we actually do about it? Some ideas:

1. Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government – and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC – the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.

As I write, gold has again broken to a new, non-inflation-adjusted high. As with all markets, it will fall back now and again, but the trend is very much up.

2. Buy gold shares. The leverage in the high-quality gold shares can boost your returns by a factor of 2X to 10X, and more. Again, there will be setbacks, but shares in the right companies with the right projects will trend higher and higher until the Mania phase kicks in, and then things will get really interesting.

3. Be smart about taxes. Keep an eye on Pelosi’s tax trap – if you have appreciated assets that qualify for long-term capital gains, consider selling them before year-end to lock in the lower capital gains tax. Likewise, if you run a business and you can pull any income into this year, versus next, consider doing so.

4. Diversify globally. Why do it? The short version is that it’s a big world out there, and there are a lot of places that are incredibly beautiful, safe, and unbelievably inexpensive. For many non-U.S. citizens, expatriating means you’ll pay no income tax, but even if you are a U.S. citizen, there are substantial tax benefits in moving offshore. And what you can save in cheaper everyday living allows you to live like royalty, for a fraction of the cost. Which means you can save more.

Personally, I favor Argentina. Some years ago I went on a three-year quest to find paradise on earth, and Argentina was ultimately the hands-down winner.

5. Recognize the bureaucracy for what it is. These are not “public servants” but rather an entrenched interest group that is actively engaged in a systematic effort to look after itself, with no regard for the damage it’s doing to your family finances and to the country.

Now, there are two schools of thought as to how you deal with the bureaucrats. My dear friend and partner, Doug Casey, would tell you to take every opportunity to let the bureaucrats know you hold them in low esteem. For example, by asking airport security personnel how old they were before they realized they wanted to make a career out of pawing through people’s underwear.

The second approach is to accept that the bureaucrats, backed by the voting masses, hold most of the cards at this point. Poking at them with a stick risks unnecessary aggravation and worse. So, keeping a low profile and going about your business is certainly a rational choice.

Of course, there’s no better way of maintaining a low profile than moving to another country where you’ll be welcomed as a visitor and not viewed as a serf.

Is there no hope? One obvious scenario is for the Democrats to lose control of either the House or the Senate come next November’s elections, thereby returning the nation to some form of political gridlock. The best of all worlds, in my view. And the way things are heading, this is now a certainty.

But before you get overly excited about the prospects of a political solution, don’t forget the role the Republicrats have played in bringing the nation to this sorry state over the past several decades. If you’re holding out for an outbreak of capitalism or other signs of fiscal sanity once Republicans regain some modicum of political power, you are delusional. They may package their programs in different-colored paper, but when you rip away the wrappings, you’ll find the same statism and the same promises of a chicken in every pot.

Look after yourself – no one else is going to do it for you.

Gold has just hit a new record-high… and the small-cap Canadian explorers with good-sized deposits are sure to be dragged along into the stratosphere. In the current issue of Casey’s International Speculator, Editor Louis James names eight junior gold miners that – due to their top-quality assets – are destined to become takeover targets for the big players in the gold industry.

Get in today and watch your investment double or triple tomorrow, completely risk-free with our 3-month, 100% money-back guarantee. Learn more here.

Just when you thought the bond bubble was being saved for another day…

The government managed to auction $39 billion worth of 5-year debt yesterday… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week — yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.

So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today, which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.

The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today… might be worth keeping an eye on.
The proceeds of some of those bond sales will go straight tothe U.S. Postal Service, which is on track for a record $7 billion deficit this year. That’s more than double last year’s loss.

Postmaster General John Potter bumped up his previous projection by a billion bucks yesterday, citing the growing expenses of six-day delivery and employee retirement/health care plans. Potter and his team are scrambling to cut costs left and right — from a yearlong hiring freeze to early retirement offers to branch closures. But we wonder… will it even matter?

The Government Accountability Office recently labeled the USPS a “high risk” federal program, and while we’re hard-pressed to think of any risk-free government program, we’re inclined to agree.

The Postal Service is facing a perfect storm of business risk: The business is already loaded up with debt. Minimum wage and benefit costs are rising while revenues are plummeting. For example, they are expected to handle at least 27 million fewer pieces of mail this year than in 2008. Is there any business in America that isn’t looking to cut shipping costs? (There’s this new technology we’ve heard about called “e-mail.”)

Then there’s UPS and FedEx, two worthy private-sector rivals. And what about Peak Oil? A summer of 2008 redux could cripple the whole industry. Above all, the USPS is run by the government… c’mon.

Snail mail might not be dead, but we suspect the USPS is going the way of Amtrak, at best.
They can’t even deliver our mail without losing money, yet the public looks to the government to manage our health care? Oy…
“Personalized medicine will revolutionize the medical field with a huge array of technologies,” reports our breakthrough technology analyst Patrick Cox.

“We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.

“This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, we are often denied incredibly effective therapies simply because they are not universally effective.

“This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven’t precisely known how a particular drug’s chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup.

“This is rapidly changing. Just a few short years ago, the human genome was first mapped. The genome, as you know, is the entire collection of genetic code that defines us at a biological level. Now scientists are studying single genes and their individual expressions.

“It is meaningful, from the investor’s perspective, that Dr. Francis Collins, the head of the Human Genome Project, has just been selected by the Obama administration to head up the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.

“Incidentally, Collins has stated that genomics is currently where the computer industry was back in the 1970s — at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the ’70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies. Those who did so, despite claims that it was too risky or early, were made rich.”

Want to learn more, including how to get in on the ground floor of this blossoming tech? Check out Patrick’s Breakthrough Technology Report.
No debt woes or health care debates can stand in the way of today’s stock rally. Major indexes opened up 1% this morning and are sitting on 2% gains as we write.

On what news? Heh… mostly Goldman Sachs, which upgraded GE from “neutral” to “buy.” Other than a slightly better-than-expected earnings report from Motorola and a not-so-terrible jobless claims number, that’s it.
“And after months of research, development and testing,” says one of our small-cap analysts, Jonas Elmerraji, “the Small-Cap Recovery Index is finally ready to be put to work.

“Historically, penny stocks lead the stock market out of recession. Small stocks are nimble and able to adapt — and a recovery in our sector is usually a telltale signal to mainstream investors that it’s a bit safer to test the waters of the market.

“So we’ve created an index to forecast market recovery. The index is made up of 100 small caps from a number of different industries. Each stock is equally weighted, but we’ve chosen to weight some industries more than others (by including more stocks from certain sectors). We gave more potency to industries that either signal to us that growth is under way (based on experience) and/or have a bigger impact on the economy. For instance, retail, the biggest sector of the U.S. economy, is also the biggest industry in our index.

“Our database collects fundamental data on the companies as well as market data and combines it with economic indicators like savings rate and employment numbers. Every day, the database spits out a number that represents our index on that given day. We’re still in the process of collecting data to get a statistically significant range to start making inferences from.

“Right now, we’re waiting to get a statistically significant amount of data before we go public with the index. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.”

Since forecastin’ is our business, we’ll be keeping an eye on this one… stay tuned.
Today’s stock rally has put the kibosh on the dollar. The greenback had been on the rise this week, given the return of market pessimism. But the dollar index came to a screeching halt today, around 79.5. That puts the pound at $1.65, the yen at 95 and the euro at $1.40.
“We have established a number of longer-term positions based on a weakening euro scenario,” says our currency trader Bill Jenkins.

“The euro has made several efforts at the 1.4300 mark, but has never been able to hold above that. As a matter of fact, given the rebuffed price action from early this week, the euro may be setting up an impressive double top on the hourly chart.

“We suspected something was afoot when Monday’s release of the U.S. housing numbers didn’t even elicit a yawn from the currency market. In case you missed them, here’s the skinny: Economists expected new home sale to be up by 3.8%. The actual number was 11%! That is a HUGE upside surprise.

“Since many forecasters presume that the U.S. housing market must recover before anything else positive happens, the numbers should have shot the risk currencies to the moon.

“But they didn’t budge. Why not? In a word — reluctance.

“The housing numbers should have inspired investors to believe that the recovery is well under way. The very fact that the market refused to respond is telling us that there is some real hesitation about pushing this risk rally further.

“The euro fell to a key support level, the 1.4120-30 area. Over the next few days, we will look to see if it drops below there. If so, a violation of that level would have the euro looking down toward 1.3750. Should that become the case, we may be looking at a double top on the daily chart, which would portend a deeper slide.”

If you’d like to trade this trend, look no farther than Bill’s Master FX Options Trader.
What other currencies of the world are mispriced versus the dollar? Here’s one clue:

“The index is based on the idea of purchasing power parity (PPP),” explains The Economist, “which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap.”

Of course that’s a pretty simple study of PPP, which is probably why it’s so interesting. But as Bill Bonner often notes, things have a way of “regressing to the mean.” We won’t be too surprised if China slowly grows more expensive while Scandinavia comes back down to earth. Great Britan is a good example of this tendency… just a year ago, the Big Mac Index claimed the pound was 25% overvalued versus the dollar.
Commodities are on the rise today. The stock-buying spree has added $3 to crude oil, now at $66 a barrel. And the dollar’s reprieve has stopped gold’s decline. The spot price is up $10, to $940 an ounce.
“The government has started a ‘cash for clunkers’ program,” writes a reader, “to encourage car sales into the slumping U.S. economy. This program may cause some people to buy cars today, instead of next year, but what does that do to next year? The program may give a bump up in car sales this year, but can’t we expect a slump next year? Wouldn’t it be better to have level sales, even if they are low, rather than a bump today and a crisis tomorrow?

“Seems to me the government better be ready to issue the car companies more bailout funds next year. Perhaps the ‘clunkers’ are the car companies, rather than the older cars that qualify for the program. At the end of the day, we have two ‘clunker’ programs: The ‘cash for clunkers’ old car program and the ‘cash for clunkers’ car companies that are too big to ‘NEVER’ fail.”

Source:  Bond Bubble’s Back, USPS in Trouble, Healthcare Tech, Short the Euro and More!

• Unemployment claims unexpectedly rose yesterday (Thursday), asthe number of U.S. workers filing new claims jumped by 15,000 in the week ended June 20 to a seasonally adjusted 627,000, the Labor Department reported. The four-week moving average of initial claims, a less volatile measure, rose to 617,250 from 616,750, signaling the U.S. job market is stagnant.

• U.S. gross domestic product (GDP) contracted at a 5.5% annual rate in the first quarter after plunging at a 6.3% pace in the fourth quarter of 2008, the Commerce Department said yesterday (Thursday). That means the U.S. economy just went through itsworst eight-month period in more than 60 years, according toMarketWatch. The government last month estimated GDP fell at a 5.7% pace in the quarter ended March 31.

• American International Group Inc. (NYSE: AIG) will repay part of its $40 billion debt to the U.S. government with $25 billion of preferred stock in two businesses Reuters reported. The two businesses – American International Assurance Co Ltd (AIA) and American Life Insurance Co (Alico) – will also be positioned for initial public offerings, should market conditions permit. AIG lost more than $99 billion in 2008 and U.S. taxpayers have committed up to about $180 billion to its rescue.

• Palm Inc.’s (Nasdaq: PALM) losses grew but it beat Wall Street’s revenue estimates for its quarter ended May 31. The company reported a net loss of $91.5 million, or 78 cents per share on revenues of $86.7 million. That compares to a net loss of $41 million, or 40 cents per share on revenue of $296.1 million for the same quarter last year. Analysts were expecting a loss of 62 cents per share on revenues of $80.6 million.

• Memory chipmaker Micron Technology (NYSE: MU) suffered a wider loss but beat analyst estimates for its quarter ended June 4. The company posted a net loss of $290 million, or 36 cents per share on revenues of $1.1 billion. That compares to a net loss of $236 million, or 30 cents per share on revenues of $1.4 billion in the same period the year before. Consensus estimates placed the loss at 43 cents per share on revenues of $1.1 billion.

• A key senator said the health care proposal submitted to Congress by the Obama administration could cost as much as $1 trillion, but Republicans added there was no agreement on even the outlines of a bill, The Associated Press reported. “We have options that would enable us to write a $1 trillion bill, fully paid for,” Sen. Max Baucus, chairman of the Senate Finance Committee, told reporters. Baucus’ comments came one week after analysts estimated earlier proposals would cost $1.6 trillion over 10 years. While Baucus gave no details, others told The AP changes made in the proposal would lower the cost of government subsidies for those who cannot afford insurance, as well as scale back a planned 10-year series of rate increases for doctors serving Medicare patients. Almost 50 million Americans are without health coverage.

• Michigan has won a competition with two other states to buildGeneral Motors Corp.’s (OTC: GMGMQ) next subcompact car, based on the Chevrolet Spark, The Associated Press reported. The win will save about 1,200 jobs at the factory in Orion Township, which was due to close this year. All 17 members of Michigan’s congressional delegation sent a letter to GM last week saying that the state’s economic woes — including an unemployment rate that hit 14.1% in May — made the project important for Michigan.

Source: Investment News Briefs Friday June 26,2009