“In the event of hyperinflation,” warns Glen Bradley, who has sponsored one such proposal in North Carolina “depression, or other economic calamity related to the breakdown of the Federal Reserve System… the state’s governmental finances and private economy will be thrown into chaos.”

And with that we find ourselves in peculiar territory this morning.

We’re on a train to D.C. to meet with fellow conspirators — gentlemen from the ‘left’ and the ‘right’ — who share in the belief gold must be reintroduced to the global monetary system. It’s become an unintentional hobby of sorts.

The meeting is classified at the moment, so we’ll reserve comments for another time.

But our current mission is only part of what’s making us uneasy.

We begin today by briefly exploring what our line of work is all about. Scientists who’ve studied probabilities and plotted them on a chart typically find a bell-curve distribution — in which the most likely events bunch up in the middle of the curve.

But a funny thing happens out at the ends of the curve, where the rare events are registered.

“Scientists have found small bumps and bulges,” explains Bill Bonner. “Things that were not expected to happen very often actually happened more than they thought.”

“’Hundred-year floods,’ for example, happened every 88 years. ‘One in a million’ shots hit their mark every 700,000 or so. Statisticians refer to these odd bulges on the extremities of bell-shaped curves as ‘fat tails.’ Instead of tailing off as they are supposed to, the rare events seem to swell up where you don’t expect them.”

We are in the business of anticipating fat-tail events — while the “mainstream media” sit in the middle of the bell curve. Click the graph to enlarge and you’ll get the idea:

The problem is that since 2008, “fat-tail events” — like the collapse of the U.S. dollar and the dismembering of the Federal Reserve system — have become harder for us to stake out.

We were once derided as “doom and gloomers.”

Now doom and gloom has become downright fashionable. Heck, we see the National Geographic Channel debuted a show last night visiting survivalists in their bunkers… and here we are carrying on with business as usual in the “belly of the beast.”

With all that in mind, we daresay that declaring the mother of all financial bubbles might be passe. Don’t get us wrong: It’s still inevitable the bubble will pop.

But today we throw in the towel and make a concession: The monetary mandarins will successfully inflate the bubble a few months longer. And the peace we expect to break out once they’re defrocked of their power and prestige will have to wait for another day.

“The Federal Reserve Open Market Committee (FOMC) has made it official,” writes Daily Reckoning regular Charles Kadlec at Forbes: “After its latest two-day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years.”

And that’s if everything goes according to the plan… based on the Fed’s now-formal target of 2% annual inflation.

Likewise, the Federal Reserve’s latest figures on consumer credit jumped in December — to an annualized 9.3% rate, on top of November’s 9.9%.

We’ve seen nothing like it in 10 years — not since the Fed poured gasoline on the fire first ignited by the tech bust in late 2001 made it possible for automakers to offer 0% financing.

Yes, student loans are a big part of the growth, as they’ve been for many months now. But auto loans are up big, and even credit card use is growing again.

The Wall Street Journal talks to a bank president in Colorado who says loan volume is up because more people now qualify and they’re willing to take on more debt.

The paper also profiled a couple in Pennsylvania financing a new SUV. “We had looked at our budget, and it was something we knew we were comfortable affording,” said Heather Davidson. They’re buying a 2012 Nissan Armada for $57,000.

Presumably they got every bell and whistle available, since the manufacturer’s suggested retail for the base model Armada is $40,275. But hey, why not splurge and trick the thing out? It’s easy payments of $650 a month for the next 72 months, the paper says.

Six years? Oy…

Addison Wiggin
for The Daily Reckoning

Of Fat Tails and Fashionable Gloom and Doom originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Recall from yesterday’s 5 that in his monthly letter, Gross groused that near-zero interest rates would hamstring developed economies and even “give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

In a follow-up interview, Gross was asked to pick between Obama and Romney in a hypothetical general election matchup. He begged off the question, and then proceeded to turn the name of the good doctor into an adjective.

His attempt to elaborate was thin on specifics, but interesting: “I think both parties have basically done the same thing… Both parties have followed a policy that hasn’t promoted long-term investment in the United States. And I think, ultimately, we need to produce things, as opposed to paper.”

Say it ain’t so…

From Washington state, we see the emergence of a group of rogue legislators whose activities might be worth watching.

Reps. Matt Shea and Jason Overstreet are sponsoring a bill affirming the legal tender status of gold in the Evergreen State.

That alone isn’t remarkable. Similar moves are afoot in other states, and it’s now the law in Utah… although as we noted at the time the practical effect is limited.

What really got our attention is that Messrs. Shea and Overstreet are among five sponsors of a bill standing up to the National Defense Authorization Act — or as it’s come to be known around our office, the Repeal of Habeas Corpus Act.

The Washington State Preservation of Liberty Act condemns the law’s provision for detention of terrorism suspects indefinitely and without charge. And it goes a step further, prohibiting state and local employees — including Washington National Guardsmen — from cooperating with federal officials enforcing the law.

We have no idea whether the bill will pass or, if it did, what the practical impact would be. But in another strange item getting our attention this morning, we have a good idea what the worst-case scenario would look like.

“In the next couple of years,” writes our friend John Robb at Global Guerrillas, “the number of advances in technology, deployments, use cases and awareness of drones will be intense.

“In five years, they will be part of everyday life. You will see them everywhere. Not just one or two drones. SWARMS of drones.  Tens. Hundreds. Thousands. Millions (potentially if the cost per unit is small enough).”

Mr. Robb then points us to this video of “experiments performed with a team of nano quadrotors at the GRASP Lab, University of Pennsylvania.”

Imagine a swarm of these descending on the Washington state Capitol building…

Using drones, “A small number of people in Washington, D.C.,” writes Mr. Robb, “can control/operate a vast 24/7 killing field for very few $$.

“Even a mildly radical post to a blog, Facebook or Twitter (particularly if it could lead to a flash mob or an Occupy-style protest) would invite inclusion on the drone assassination list (in that case, the occasional flash of a car being blown up by a drone patrolling a highway and IDing a listed driver will become common).”

Bill Gross and the rogue legislators in Washington are on notice.

Addison Wiggin
for The Daily Reckoning

Taking Back Habeas Corpus originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

There’s talk of a halo effect from the pending IPO of Facebook, which could file the paperwork as early as today.

Oy… Talk about “riding on a smile and a shoeshine,” to borrow from Death of a Salesman.

“You have 500 million people,” we wrote 13 months ago, the last time we deemed Facebook worthy of our attention, “playing Farmville and Mafia Wars and telling the world how wasted they got last night… but what makes them worth an average $100 in market value?

That was based on a presumed market cap of $50 billion.

We pose the same question today… only now, with 800 million users, and a presumed market cap that’s doubled to $100 billion, that “value” has grown to $125.

“The $10 billion IPO alone,” writes our Greg Guenthner, “easily places Facebook among the largest offerings of all time — and the biggest U.S. internet IPO by leaps and bounds.

“For some perspective, Google’s 2004 IPO netted the search engine (and now-Facebook rival) what now seems like a paltry $1.2 billion.”

For further perspective, consider the biggest U.S. company by market cap is Apple — valued at $425 billion, according to the latest figures from FactSet. Number two is Exxon Mobil at $403 billion.

Apple produces computers, phones — tangible stuff. Exxon Mobil produces oil, natural gas — tangible stuff.

Facebook produces… eyeballs to deliver to advertisers.

And coming out of the gate it will be valued at nearly 25% of the nation’s biggest companies with decades, if not a century, of track record.

The giddy reaction makes us long for some of the most tangible stuff of all this morning. And we’re evidently not alone…

The owner of the world’s 16th largest gold reserve has finished up the process of repatriating its overseas holdings. The final shipment of Venezuela’s gold bars arrived at the Caracas airport Monday.

Its transport to the central bank was the occasion for a motorcade broadcast on state TV. “In two months, we’ve brought 160 tons of gold valued at around $9 billion back to Venezuela,” said central bank chief Nelson Merentes.

President Hugo Chavez ordered the operation last August, cleaning out its vaults at the Bank of England and J.P. Morgan Chase, among others, as a precaution against turmoil in the financial markets. “The repatriation of our gold was an act of financial prudence and sovereignty,” Merentes said.

Meanwhile, the owner of the world’s 8th largest reserve is beefing up its holdings.

Iran’s gold reserves now total 907 metric tons, according to a Tehran Times report citing Yahya Ale-Eshagh, who heads the Tehran Chamber of Commerce, Industries and Mines.

The average purchase price, he says: $600 an ounce. At current prices, Iran’s gold is just under 10% of its total foreign exchange reserves.

“We don’t have any shortage of foreign currency or gold to meet the local demand,” Mr. Ale-Eshagh said. Music to the ears of President Ahmadinejad, we presume…

They might be idiots, but they’re no fools…

Ordinary Chinese couldn’t get enough gold for the Lunar New Year. Sales volume at Beijing’s biggest gold markets — Caibai and Guohua — totaled $95.3 million.

That’s nearly 50% more than the year before, according to the Beijing Municipal Commission of Commerce.

We were at Caibai last May. The place was mobbed… early on a Tuesday morning.

And now? “You can hardly even see the gold bars, necklaces and pendants in the display case,” said one shopper looking for gold bracelets for his granddaughter. “You have to quickly decide whether to make a purchase, or it will be taken away by others,” he told China Daily.

They’re no fools either…

“Gold is no longer owned only by a privileged few,” according to Caibai assistant manager Guan Qiang, “ but has become a new investment channel open to all.”

In fairness, some Americans seem to recognize gold’s value: In fact, it’s flying out the door of the U.S. Mint.

The Mint sold 127,000 ounces of Gold Eagles in January. That’s the highest monthly total in a year… although no doubt sales were goosed by the availability of fractional sizes, which ran out at the end of last year.

Silver Eagle sales totaled 6,107,000 — the second-highest month on record after January 2011.

Heck, even Pimco chief Bill Gross is coming around to gold. “Recent central bank behavior, including that of the U.S. Fed,” he writes in his latest monthly missive, “provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.”

“Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

Welcome to the club, Bill.

Addison Wiggin
for The Daily Reckoning

Gold in the Face of Facebook originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

We begin another week pulled in two directions: In one direction lie unresolved failures in policy… and the mayhem it has wrought in the financial system. In the other lie breakthroughs in energy and biotechnology.

There’s no real point in wagering on which of these trends will ultimately “win out.” It’s entirely possible the system can fly apart even as scientists and entrepreneurs stick to their knitting and achieve great new things.

The stress we alluded to last week is borne of the fear that the former — i.e., Hellish Financial Crisis Is on Its Way — will prevent the benefits of the latter from ever seeing the light of day.

If that happens, well… then… in the immortal words of the Mogambo Guru: “We’re all freakin’ doomed!”

Until such an event, however, we’re left to our own devices. We’ll continue to do what we do each day. We’ll follow the breadcrumbs. Let’s get started and see where they lead today…

“TARP is not over,” Christy Romero, acting inspector general of the Troubled Asset Relief Program, reminds folks of the program through which she derives her own power, prestige and paycheck (PPP).

Congress authorized $700 billion. $413.4 billion was paid out. Only $318 billion’s been paid back, according to a new report from Ms. Romero.

So much for the shrill lecture delivered last fall by CNN’s Erin Burnett to an Occupy Wall Street protester: “Taxpayers actually made money on the Wall Street bailout.” But what would you expect from someone engaged to an executive at Citigroup?

Getting the rest back will be no easy task: For starters, General Motors stock would have to more than double from $24.28 to $53.98.

Another trend that’s “not over,” we note, is bank shutdowns. The FDIC swooped in and closed four banks Friday night. (Yes, it’s the return of our own watch list for failed banks and the feds’ attempts to save them…)

Two of Friday’s victims are in Tennessee, where the last bank failure took place in 2002. The others are in Florida and Minnesota.

That makes seven banks for the month of January — an annual pace of 84. Close to last year’s total of 92, but lagging 2010’s peak of 157. (Who knows, maybe things will pick up in the spring!)

There is one notable increase: the FDIC’s “loss ratio.”

Of the 92 bank failures last year, FDIC losses totaled 20% of the failed banks’ assets. So far this year, it’s 32.9%… nearing TARP territory.

The deleveraging of the U.S. consumer is “not over” either.

The monthly “income-and-spend” figures from the Commerce Department reveal consumer spending was ruler-flat between November and December. Consumers, indeed, got their shopping done early.

Personal income, on the other hand, grew 0.5%. Gee, what a bunch of tightwads Americans have become.

“The capacity for households to carry on to be the engine of growth that they have been in past recoveries is simply not there,” says economist Carmen Reinhart of the Peterson Institute.

She points to figures showing that in the third quarter of last year, household debt totaled 86% of GDP. That compares with 47% as Americans climbed out of the “double dip” recessions in the early ’80s.

By the way, that same Commerce Department report features the “core personal consumption expenditures,” the Fed’s favorite measure of inflation.

Last week, you may recall, the 2% “inflation target” ceased being an “unspoken agreement” and became “official policy.” According to the numbers, the year-over-year increase in December was 1.8%. So in the estimation of the monetary mandarins, there’s still not enough inflation in the system.

Addison Wiggin
for The Daily Reckoning

Trends that Won’t End originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Wikipedia and several other sites are “blacked out” to protest the Stop Online Piracy Act, or SOPA — an odious piece of legislation that would allow domain names to be erased from the web without due process of law.

Accidentally run afoul of the bill’s copyright provisions — an incredibly easy thing to do — and the home page of your website might look something like this:

Not that this is deterring members of Congress determined to get the bill passed.

“Due to the Republican and Democratic retreats taking place over the next two weeks,” says its sponsor, Rep. Lamar Smith (R-Tex.), “markup of the Stop Online Piracy Act is expected to resume in February.”

“It’s D.C. versus Silicon Valley in the SOPA fight,” observes colleague Greg Grillot. “You have Google, Mozila, Wikipedia, Reddit, Firefox and Boing Boing against it. And how many D.C. shills for it?”

“It’s a true war: the last bastion of creative/productive ingenuity in America versus the swamp of D.C.’s parasitic, industry-conflicted bureaucracy.”

Is D.C. winning?

Last year, Census data revealed Washington moved past San Jose as the wealthiest U.S. metropolitan area.

Meanwhile, we see the House will likely vote today against raising the debt ceiling, which Uncle Sam is once again hitting.

It’s purely symbolic: Under the debt-ceiling deal reached last August, the president need merely notify Congress that he’s going to raise it; it’s up to both houses to vote against it. With the Senate under the control of the Democrats, that won’t happen.

The $1.2 trillion increase coming soon should be enough to tide over Uncle Sam until… oh, right around Election Day. And that increase would have to be passed the old-fashioned way.

Next crisis, please…

“While Washington has spent the last year (and much of the last quarter-century) fighting about the national debt, most of our leaders have blithely ignored America’s staggering level of household debt,” writes American University history professor Andrew Yarrow.

Time was Americans observed National Thrift Week along with Ben Franklin’s birthday, which was yesterday. Now Americans are once again raiding their savings to get by.

“In an ominous sign for America’s economic growth prospects,” Reuters reported yesterday, with no reference to Ben Franklin, “workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts.”

Indeed, the savings rate has fallen back to December 2007 levels — right when the official “recession” began.

Addison Wiggin
for The Daily Reckoning

Embattled Washington: From SOPA to the Debt Ceiling originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Alas, so much for the latest euro-driven meltdown.

After the close in Europe on Friday, Standard & Poor’s downgraded nine European countries, including heretofore AAA-rated France. Then on Monday, as a coup de grace, it downgraded the eurozone rescue fund.

But if S&P was trying to send a message, nobody listened.

European bond yields have come down. European stock indexes have stabilized, and many are rising.

Meanwhile, the holiday-shortened trading week has begun with major U.S. indexes up close to 1%. The S&P 500 might break 1,300 at day’s end.

For a glimpse at the seamy underbelly of 21st-century Europe, look no further than Hungary. It belongs to the European Union, but is yet to adopt the euro currency.

The ruling party there — elected in 2010 with a two-thirds majority — has cheesed off leaders in both Brussels and Washington big-time. So much so that this morning Bloomberg reports the EU is threatening the nation with a lawsuit.

Among the “sins” of Prime Minister Viktor Orban, as recounted by Rep. Ron Paul’s foreign policy aide, Daniel McAdams: “…using his mandate to bring the Hungarian central bank under the oversight of elected officials, rather than remain the purview of highly paid bureaucrats who more often than not do the bidding of their foreign counterparts at the expense of those who pay their salaries.”

“It is not quite an ‘end the Fed’ movement in Hungary, but it certainly could be seen as a move to curb the seemingly limitless power of an unelected Hungarian Ben Bernanke.”

But Orban has his limits: With Hungarian bond yields soaring, a Moody’s downgrade to junk status, and the forint sinking 15%, he sent an envoy to Washington last week to seek a bailout from the International Monetary Fund. He might have to bend on the central-bank law to get that bailout… and stave off the EU lawsuit.

Viktor Orban: Case study in what happens when you cross the eurocrats…

Meanwhile, “The price of a bailout to Hungary’s creditors,” McAdams writes, “will be a new austerity program on its population. It seems the government is in a panic and will agree to anything for IMF assistance, but they would do well to have a look at Greece, where IMF ‘reform’ is producing its usual results.”

“Why should the current population be squeezed to death to repay the endless borrowing by the communist regime in the 1970s and 1980s? The great Bill Bonner suggested last year, ‘Why Greece Should Default and Go Broke With Dignity.’ He could be writing for Hungary as well.”

Addison Wiggin
for The Daily Reckoning

S&P’s Message Falls on Deaf Ears originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Welcome to another Friday the 13th… Where if things aren’t exactly scary, they’re definitely surreal.

The Fed performed its ritual year-opening document purge overnight… unveiling the transcripts from Federal Open Market Committee (FOMC) meetings in 2006.

The account of The New York Times is so remarkable, we allow it to speak for itself: “The officials… gave little credence to the possibility that the faltering housing market would weigh on the broader economy.”

“We just don’t see troubling signs yet of collateral damage, and we are not expecting much,” said New York Fed chief Tim Geithner, who now afflicts us as Treasury Secretary.

We pause here to note that in December 2004, we posted a report called The Total Destruction of the US Housing Market.

It was the only conclusion we could draw after seeing an internal Fannie Mae document revealing the firm’s exposure to the derivatives market. So provocative was the report that Fannie pulled the document off the Internet and fired the poor guy who wrote it.

Back to the Times: “The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”

Might we submit the problem was a more basic one: Hubris. Or as Friedrich Hayek called it, The Fatal Conceit.

“The power and responsibilities of the Federal Reserve… are premised on the idea that somehow its managers know something that we do not,” writes Laissez-Faire Books executive editor Jeffrey Tucker. “This is the essential error of the central bank’s planning powers.”

“It’s… embarrassing for economics,” grouses University of Pennsylvania econ professor Justin Wolfers to the Times. “My strong guess is that if we had a transcript of any other economist there would be at least as much fodder.”

Yeah, probably.

More surrealiciousness: A CNN alert just flashed on our desktop announcing that the Obama administration plans to elevate the Small Business Administration to a cabinet-level agency.

Whether the agency will do anything to make it easier for small business to stay in business… we suspect is another matter entirely.

Major U.S. stock indexes are down today… and in keeping with the surreal Friday the 13th theme, there’s no obvious reason.

JPMorgan’s profits are down 23% year over year… but that’s no surprise. Rumors swirl that S&P is about to downgrade Austria. And maybe France. Maybe as early as today. Or not.

In any event, the Dow and the S&P are both down about three-quarters of a percent.

The U.S. trade deficit ballooned by 10% in November, according to a report out this morning from the Commerce Department.

At $47.8 billion, the gap was wider than any of the guesses submitted by dozens of economists to Bloomberg.

It’s the first time in five months the trade deficit grew. Blame it mostly on rising prices for (imported) oil.

Addison Wiggin
for The Daily Reckoning

The Basic Problem With the Fed originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The longest, most-boring financial crisis in history continues.

For laughs, let’s tote up the damage:

• The Dow is down nearly 1%. Other US indexes are down more, others less
• Banks dragged down European stock indexes. Spain closed down nearly 3%, Italy 3.5%
• The euro is down to $1.279 — a level last seen in September 2010
• The dollar index is approaching 81 for the first time in a year
• The yield on a 10-year Treasury note is back below 2%
• Oil is down about 1%, to $102.21

No single euro-story is driving the action:

The Italian bank UniCredit plans to offer new shares at a steep discount to raise capital. Spain’s government said that nation’s banks need to raise 50 billion euros in new capital. A French bond auction generated less demand than you’d expect considering the rating agencies insist on rating France AAA.

In other words, there’s nothing especially new or alarming… just scattered reminders that the dust bunnies of Europe can’t be swept under the proverbial rug.

Gold isn’t escaping the fallout. It dipped below $1,600 just after Comex trading opened… At last check, it’s recovered a bit to $1,607. Silver clings to $29 by a few slender pennies.

“What we learned in 2011,” wrote Bill Bonner on Tuesday, “was that when a Great Correction pinches, the dollar is the salve of choice — not gold.

“When investors fear losses, they turn to the dollar for protection.” They will continue to do so a while longer, Bill surmises: “We’ll probably see a further correction in the gold price…perhaps down to $1,200. Or perhaps it will stop at $1,400.”

“2012 should see more trouble from Europe, and therefore potentially more dollar buying,” adds Peter Schiff — who now sells bullion in addition to running a brokerage.

“But,” he cautions, “what is important to understand about these circumstances is not the scale of the moves but the direction of the trend.”

Even with the dollar riding high, “it’s still down over 30% over the last decade as measured by the generous US dollar index,” says Mr. Schiff. “Gold, by contrast, is up over 350% in that period.

“Of course, past performance does not guarantee future results, but the fundamentals have not changed.” Indeed, one day, it will dawn on nearly everyone that no fiat currency is safe, including the dollar.

But we’re not there yet. Not by a long shot. It goes back to our friend Doug Casey’s crack about how something that’s inevitable might not be imminent.

For all of today’s “risk-off” weakness, gold stocks are holding up remarkably well. The HUI index is off a quarter percent, a hair below 520.

“In this environment, to make the big money,” says our old friend Rick Rule, “you need to enter [gold] stocks that aren’t institutional momentum favorites. Those stocks aren’t going to work.”

Instead, you need to look for “the kinds of stocks that are going to be sold to the Rio Tintos and the BHPs and the Newmonts and the Barricks of the world. The buyer this year is going to be the industry.”

Thus, “the impetus for the market in exploration stocks this year will be takeovers. The companies that have done a good job, although they may not find traction among institutional or retail investors, will be taken over by larger mining companies.

“These larger companies have both the need to replace production and the financial strength to complete the takeovers and to build out the discoveries that have been made by the juniors.”

As a result, Rick sees the majors paying substantial premiums for the juniors — more than you’d normally see.

“If the industry sees $2 billion in discounted free cash flows and they see a market cap of $600 or $700 million, they are willing to pay $1.3 billion to secure net-present value. So it’s possible that you will see 70%, 80% or even 100% premiums in bad markets, for good assets, in select names.”

Options traders are already sniffing this out: Early signs of a rally in small-cap gold stocks are showing up. According to figures from Trade Alert, open interest in call options on GDXJ — the gold junior ETF — reached a record 222,300 contracts as of Tuesday.

Starting a week earlier, “Options traders have demonstrated conviction in a turnaround, setting up multiple new positions that profit from gain over the coming months,” reports the Dow Jones Newswire.

What’s more, the put-versus-call ratio is the lowest since mid-September.

Interesting activity for an ETF that, as we noted yesterday, dropped 38% during 2011.

Another catalyst Mr. Rule sees: New gold discoveries.

“It’s my belief that we are going to re-enter a discovery cycle and I would be surprised, frankly, if we didn’t have four or five names that made 50- or 100-fold returns on pre-discovery market capitalization.”

In fact, Rick finds the coming period analogous to the mid-1990s… when names like Diamond Fields shot up from $4 to $160… and Arequipa Resources catapulted from 30 cents to $30.

Addison Wiggin
for The Daily Reckoning

Another Good Year for Gold and Gold Stocks? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Daily drink specials — i.e., happy hour — have been banned in Utah.

Volunteer Little League and Pop Warner Football coaches in Colorado must now undergo annual training. Georgia set new safety requirements for golf carts driven on streets.

Welcome to 2012 — Maybe the Mayans were onto something

It’s not that the 40,000 new laws — state and federal — that hit the books yesterday for the first time are outrageous… it’s the sheer quantity that’s alarming.

With the extension of the payroll tax cut, a few more pages are added to the federal tax code, too.

We haven’t been able to unearth the new total… but as of July 1 last year, the Standard Tax Reporter — a database of the tax code maintained by the firm CCH — stood at 73,536 pages.

That’s equal to 62 copies of Atlas Shrugged. It is also nearly three times the size of the tax code in 1984 — when the total stood at a more “manageable” 26,300 pages.

Yet the most-onerous new law signed with little fanfare on New Year’s Eve: The funding bill for the Pentagon in 2012… also subjects US citizens to indefinite detention on the say-so of the president.

“With Americans distracted with drinking and celebrating,” writes George Washington University professor Jonathan Turley, “Obama signed one of the greatest rollbacks of civil liberties in the history of our country.”

According to Bruce Fein, a Reagan-era Justice Department official, Section 1021 of the law “empowers the military to detain for life without trial any American citizen captured in the United States whom the president maintains is ‘substantially support[ing]… al-Qaida, the Taliban or associated forces’ engaged in hostilities against ‘coalition partners’ of the United States.”

Unfortunately, “None of the key terms in Section 1021 are defined to constrain the president’s power to disappear Americans into dungeons at Guantanamo Bay or elsewhere.

“The words can mean whatever the president, like Humpty Dumpty, wants them to mean. ‘Substantial support’ might be said to include any criticism of the United States government for flouting the Constitution in combating international terrorism.”

Apart from a movement in Montana to recall the state’s US senators, both of whom voted for the measure, the reaction to the news was… well, “apathetic” seems an understatement.

Regards,

Addison Wiggin
for The Daily Reckoning

The Crushing Weight of New Laws and Federal Tax Codes originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Even after last week’s stock market rally (which pushed dividend yields lower), the stocks of America’s four AAA companies still yield about 3%, on average, which is not quite as high as the yield on 30-year Treasury bonds, but still much higher than the yield on every Treasury bond of 24 years or less.

So you’ve got an opportunity here to forgo the dubious promise of a bankrupt nation and to invest, instead, in some of the strongest companies on the planet — those that are most capable of expanding, those that are most able to respond to government caprice and move operations wherever they need to move them, those with the most cash on their balance sheets. These are the companies that are going to lead the global economy for the next 10, 20, 30 years.

The story is much the same throughout the developed markets of Europe and North America.

In England, the FTSE index yields almost 4%. Ten-year British government bonds yield less than 3%. In France, The CAC 40 index yields 5.0%. Ten-year French government bonds yield around 3%. In Germany, the DAX yields 4%. German 10-year bonds yield 2%. In the US the S&P 500 dividend yield — at 2.08% — is higher than the 10-year Treasury yield for only the second time since 1958.

In fact, many, many world-leading American companies now pay dividend yields higher than long-dated Treasuries.

As James Grant framed this contrast in the Oct. 7, 2011 edition of Grant’s Interest Rate Observer, “Better the common equity of an adaptive and profitable American enterprise — say, Molson Coors (NYSE: TAP/A) — than the inert emissions of the US Treasury…Today, the stock is quoted at 39… at 11.1 times earnings with the yield of 3.25%. Meanwhile, the utterly unadaptive 10-year note of Timothy Geithner’s negative-cash-flow Treasury is quoted at 1.83% [now 2.03%].”

Grant also highlights Campbell Soup (NYSE:CPB) as a compelling alternative to long-term Treasury securities. At the current quote of $33, Grant observes, this blue chip stock is selling for about 13 times trailing earnings and yielding 3.5%. “Campbell, which traces its corporate ancestry back to 1869 and which incorporated in 1922, early on conceived the bright idea of draining the water from canned soup. The shipping expense thereby saved was enough to allow a price reduction to a dime per can from 30 cents.”

The company has flourished ever since. “From 1955 to the present,” Grant points out, “dividends have grown at an 8.9% compound rate.”

Now, I realize that dividends sound very boring — kind of like watching paint dry… I can almost hear you saying, “C’mon, Addison! This isn’t the Great Depression! I don’t want to invest for dividends, clip bond coupons and store canned peas in my basement. I want something that’s high-growth. Something sexy.”

My answer to that is: Sexy sometimes sneaks up on you.

What if I had told you on Jan. 1, 2000, to sell all your tech stocks — those highflying stocks that were doubling and tripling every few months — and to spread the proceeds equally across three very boring investments: gold, 10-year Treasury bonds and stodgy old dividend-paying stocks — like the ones inside the Vanguard Dividend Growth Fund (VDIGX), the mutual fund we highlighted in Apogee.

You would have looked at me as if I had lost my mind. You might have even felt sorry for me and tried to offer me some intelligent investment advice. But with the benefit of hindsight, we know what happened next.

The high-flying tech stocks that comprised the Nasdaq Composite Index crashed…and still have not recovered their losses, even after all this time. The Nasdaq is down 28% since the end of 1999. Even the “blue chip” S&P 500 stocks are down 15% during that time frame… until you add back those boring dividends.

With dividends included, the S&P 500’s 15% loss flips to a 6% gain. That’s still a miserable return for an entire decade, but it illustrates the point that dividends matter. In fact, for long periods of time in the stock market’s history, dividends have been the only thing that mattered.

Without dividends, the S&P 500 index would have produced a loss for the 25 long years from August 1929 to August 1954. Then again, without dividends, the S&P 500 produced a 5% loss during the 13 years from September 1961 to September 1974. But with dividends included, the S&P’s loss became a 46% gain.

If you think that’s just a bunch of “ancient history”, think again. During the last 12 years — from early November 1999 until this very moment — the S&P 500 has produced a loss…unless you include dividends.

The moral of the story is simple: Dividends matter. In fact, they may even be a little bit sexy. Over the course of the last half-century, dividends have contributed more than half of the stock market’s total return — 56%, to be exact.

So what happened to all that boring stuff you could have purchased at the dawn of the new millennium? Well, the Vanguard Dividend Growth Fund delivered a total return of 50%, 10-year Treasuries produced a total return of 162% and the “barbarous relic” gold provided a dazzling total return of nearly 500%. Average return of the three investments: 236%!

We would expect the Vanguard Dividend Growth Fund to outperform their low-dividend or no-dividend counterparts over the next few years…and to greatly outperform the return of long-term government bonds. As James Grant observes, “Better the common equity of an adaptive and profitable American enterprise than the inert emissions of the US Treasury.”

Regards,

Addison Wiggin,
for The Daily Reckoning

Dividends Are Sexier Than You Think originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.