With each New Year, predictions thought out to be sagacious and sometimes offbeat are advanced by the gurus of Wall Street. The consensus this year seems to be that an improving economy will enable the stock market rally to continue but then be vulnerable in the second half to pressures from a rising dollar and higher interest rates, which probably ensures the opposite might happen. With levity the object, The Conservative Economist provides herewith an implausible alternative to the usual fare from the financial establishment, half in jest and half serious, which disturbingly seems possible in these unsettled political and economic times:
- In 2010 the financial markets continue to heal. Goldman Sachs stock more than triples, topping $400, based upon speculation that carbon credit trading will be a major new profit source. In the meantime, access to cheap capital and a continuing bull market provides it with enormous cash flow. It takes over Berkshire Hathaway in complex deal that takes into account the ability to cancel billions of dollars of derivatives undisclosed by either entity until after the deal is consummated. Buffett retires. Most top Goldman executives step down, and many move into key government positions. Similarly, as a precondition for the deal, many outgoing government administrators are promised key management roles that they may assume once the 2012 election cycle is complete. In recognition of the potential for carbon trading, Al Gore is placed on the firm's Board of Directors, but he is "forced" to sell his carbon trading investments to AIG, and these contain opaque structured investment vehicles ("SIVs") potentially worth trillions of dollars should environmental regulation tighten. New taxes that favor rail transportation in the guise of environmental conservation cause a surge in Berkshire's anticipated profits from the newly acquired Burlington Northern. Analyst Meredith Whitney becomes bullish, and makes Goldman her top pick again.
- A series of horrendous scandals racks the United Nations, which comes under intense financial pressure. The UN merges with the IMF, is initially named UNIMF, but later this is simplified to "United Earth." The new organization sells off its gold to developing nations, including China. Some is sold in below market price transactions, with the gains booked and swept into numbered accounts of despots. In keeping with Soros' call to pay for carbon credits with the sale of gold that backs SDRs currently held by the IMF, funds indeed go to that cause. However, there is also a call to finance a major increase in international aid, including the bail out of Eastern European nations and large European banks with credit exposure in the area, which also involves cleaning up the financial transgressions of the United Nations. These monetary transfers provide an opportunity to direct funds to politically influential causes and persons, utilizing avenues developed by Russian mobsters and enabled by their cronies in certain central European banks. The head of the new effort, which is named "Gold for Rice," is chosen to be Kojo Annan.
- As part of the stimulus initiative, a deal is announced that US government will encourage the export of clean western low sulfur coal to China, enabling it to reduce pollution and exchange dollars for US exports. Dubbed "Coal for Credits," its beneficiaries are George Soros and Warren Buffett, whose mature coal and railroad franchises are rejuvenated. In the next few years reduced emissions from China and the implementation of new environmental initiatives will be cited as having reversed global warming, and in fact temperatures will fall through the next few decades, continuing the most recent trend.
- Al Gore, flush with carbon trading profits, announces a massive donation to the merged United Nations and IMF, which he promises to make once his SIVs are monetized. Along with Ted Turner, he is appointed as one of a series of new czars vested with significant powers. In the next few years, the new entity mandates strict carbon emissions policies. The heavy investment in developing nations' capital equipment and environmental land easements is paid for with gold sales which get leveraged by ample credit provided by large U.S. banks and some European financial institutions. A new management structure supplants most of the authority formerly held under the United Nations constitution. Many of the incoming czars are appointed indirectly by ACORN, which announces its new global orientation. The position of Global Morality Czar is reserved for Reverend Wright, who converts to Islam in order to appeal to worshippers in a broad number of faith traditions. As he begins to root out discrimination and call for a global system of reparations for the ill effects of colonialism, he declares, "The West's chickens have come home to roost!"
- The Democratic controlled Congress passes legislation dubbed "Making Savings Pay," wherein the government will loan $50,000 at 2% to each adult in the U.S, including illegal immigrants, for establishing new savings accounts available only to those with incomes under $100,000, with some scaled down benefit above that. Those who open accounts can invest $25,000 of the loan proceeds into a structured product developed by the annuity departments of Berkshire, AIG, Citigroup and a selected number of major banks and insurers. The remaining $25,000 would be encouraged to be spent, stimulating the economy. The contract would escalate in value, and be guaranteed by the government to rise to the $50,000 loan terminus value by maturity, and by decree these new leveraged "savings" accounts would never have negative equity.
The Fed will tightly restrict those permitted to manufacture the new structured product in order to limit "risk," but strong incentives will exist for marketing by investment advisors. Advertising by such advisors will be subject to regulatory review. Only discussion of the flexibility to "spend the savings" and the benefits to the national economy would be permitted, thus not cluttering the political benefit with investment advice. If citizens opt to close IRA and medical savings accounts, their balances can add to the $50,000 limit on a one-time basis, and these funds will be matched by additional government funds consisting of the new structured investment product, but with a maximum contribution of $250,000. A heated debate ensues whether to permit the spending of half these additional contributions into the accounts, since this would favor wealthier account holders. A compromise would be reached which would enable spending to be taxed through an offset to deductions in the individual tax code. By 2013, one year after the next presidential cycle, IRAs and medical savings accounts will be phased out.
- By the middle of 2010, consumer spending gets moving again, aided by the release of hundreds of billions of stimulus dollars unspent in 2009 and the innovative new "Making Savings Pay" program. Near the end of 2010, the Fed announces guaranteed zero percent interest rates for long and short dated debt, surprising financial experts who think that the Fed would withdraw stimulus before mid-term elections. Although this triggers a new wave of topping expectations for the stock market, in fact it confirms actions already underway throughout the year by the Fed to reduce long-term interest rates. Debt-laden companies are able to refinance copious amounts of bonds at low interest rates, and the term "junk bond" falls from the lexicon. Stocks of most large financial institutions rally sharply when leveraged spreads placed to benefit from a flattening yield curve pay off. Surprisingly, debt rises to well over 400 percent of GDP by 2011. Hedge funds are regulated out of existence, which triggers massive short covering.
- The Bush tax cuts are allowed to expire, causing the topmost bracket rate to drift up to 39.6 percent from its current 35 percent. Changes to the alternative minimum tax begin to severely penalize upper bracket taxpayers. Mortgage expense deductibility for homes worth over $500,000 is eliminated, and health insurance premiums and benefits are tinkered with to preserve medical freedoms, but in practice these dramatically redistribute income.
- When the federal budget deficit soars out of control relative to its manageable $1.5 trillion level established in 2009, the administration announces the closing of the U.S. Postal Service. Sporadic incidents of rogue violence in package sorting centers are averted when jobs for the USPS's bloated headcount of nearly one million are provided in the TSA, but the newly formed citizen militia refuses to consider USPS candidates. Al Gore announces that his invention of email made the venerable institution dating back to the Pony Express obsolete. Having lost much of the senior vote due to the new health care legislation, the Democrats propose to give away a free stripped-down government designed laptop assembled by the lowest bidder to any men, women or children earning less than $100,000 and provide training in how to send and receive email. Senator Harry Reid declares that "competition will be good for the computer industry." Apple's stock initially tanks, but recovers when investors fall in love with its new iDrool device that targets seniors and features a slightly larger touchscreen and doubles as a hand warmer.
- Inflation begins to rage in China, India, Brazil and other countries which have experienced substantial growth in bank loans. In response, their citizens begin to hoard gold and silver, contributing to an increasing price in terms of all world currencies.
- West African nations form a free trade zone and a synchronized currency arrangement backed by gold after continuous discoveries in the region's greenstone belt and rising demand for the metal. The low tax rates in these countries combined with tax holidays stimulates a migration of multinational businesses into the region. Employment grows and West Africa begins an upward economic ascent following the lead of the BRIC nations. Certain large coastal cities vie to be next Hong Kong or Singapore.
- Tiger Woods takes over a large financially troubled Las Vegas casino operator, restructures it, and attracts major new capital from wealthy Hollywood entertainers and billionaires to use the experience of the Nevada management teams to invest in a tropical golf and gambling paradise in West Africa, which he names "Tiger's Lair." Working with co-investor Donald Trump, he sets up a new airline, Swingers Air, to shuttle beautiful women from the Las Vegas strip to Africa to build the employment base and to transport gamblers with an enticing offer of free airfare with a minimum gambling tab of $1,000. Rachel Uchitel's hospitality management career is launched, and she demonstrates considerable talent for attracting high rollers to the resort. Adding to the spice is her hiring of Jaimee Grubbs, Joslyn James, and other former Tiger mistresses as a special marketing team whose star appeal would be enhanced by the catchy appellation, "the Dirty Dozen," complimented by scanty desert fatigue duds sure to appeal to Middle Eastern men. With unabashed hedonism as its chief attraction, it outdraws Dubai in attracting Middle East high rollers and is an instant hit.
- After nuclear missile attacks from Iran, Israel is overrun militarily and its people flee. Military support initially appears likely when U.S. carriers circle ominously in the Mediterranean, but the United Nations and its key national constituents are uninterested in anything more than a humanitarian effort to rescue and transport refugees.
- As a result of the fall of Israel and sporadic ancillary combat within neighboring states to establish control among Shiite and Sunni factions, oil prices spike to nearly $300 per barrel, but they plunge to $30 per barrel before stabilizing at $90 per barrel. Revelations emerge through Drudge and the New York Post that a coordinated effort between the U.S. and Arab states began in the months before the crisis to stock extra tankers of crude for transit to U.S., European, and Asian refineries.
- While oil trades at $30 in the aftermath of Israel's fall, the temporary oil glut exposes Ponzi schemes at hedge funds when their leveraged commodity trades sour. Gold falls in sympathy and the dollar rises, but within weeks, pressures on financial institutions wipe out equity at banks and brokers, requiring FDIC fund replenishment and Fed reserve injections. This calls into question the safety of deposits and further bolsters the case for gold, especially overseas, where portability is suddenly valued.
- Jewish emigration to the United States and West Africa surges once questions about where American aircraft carriers will disembark refugees. Significant tension develops between Muslim-oriented nations such as Mauritania and more populous states. Senator Joseph Lieberman is assassinated upon his return to America after a fact-finding mission to the area, and rumors circulate that CIA operatives had a hand in the deed. A commission to investigate is chaired by Janet Reno, who declares that there is no basis for a conspiracy, but individuals close to Dick Cheney are subpoenaed and several are prosecuted for unrelated matters. Her commission recommends dissolution of the CIA under the political cover of the incident, but a restructuring is the eventual outcome. For years competing theories will be advanced, echoing the aftermath of the JFK murder.
- Per Janet Reno's guidelines, within the Department of Homeland Security a new citizen's militia is formed and headed by the individuals who may have orchestrated the shooting, who actually were part of an elite unit within that department instead. Its ranks are among the most highly paid of all government workers, benefitting from secret nontaxable accounts. It gets staffed by certain former military that are intensely loyal to the new leadership. Reno suggests that Retired General Wesley Clark take the job of running the new department, which he readily accepts. He actively recruits from top military officers threatened with announcements of massive military downsizing.
- The Reno investigation will eventually give birth to a new government agency named the Internet Protection Commission, whose charge will be to root out subversive discussions such as those which will be discovered as having been threatening to Senator Lieberman in advance of his demise. Eventually the passage of the Internet Protection Act will empower the investigative wing of the new civilian militia force to enforce self-regulation of the internet. Internet publishers will be required to file monthly reports and analyses of their content and host auditors on their premises to check over documentation, which will include a requirement for web sites to provide evidence they have continually monitored other sites that were linked to their own site. Gold web sites will be singled out as particularly subversive, especially if they speak of central bankers in negative tones or if they are seen as spreading false rumors about market manipulation or runs on the dollar or banking institutions. Negative discussions of company fundamentals, usually in concert with short selling, will be included in potential offenses, setting up the recruitment of SEC and FINRA personnel. The operation will be touted as self-funding, requiring user fees for internet publishers and the levying of fines for transgressions, which will typically be issued for paperwork not being in order. Streamlining the regulatory process will be the mandatory sharing of admin passwords with government staff. They in turn will make these available to the hacking department, which will be free to plant subversive material that may be discovered by auditors later. Their role will be unnecessary in the sensational prosecution of Jim Willie. SEC Commission Chairperson Mary Shapiro will be named the first commissioner of the auditing unit.
- In the wake of the attack on Israel, Obama cuts a deal with Muslim nations to immediately withdraw from Afghanistan and Iraq, citing changed conditions that are overwhelming to the capabilities of the U.S. military. He secretly brokers a settlement which would end all terrorist attacks in the U.S. for five years, which had escalated prior to the strike on Israel. In concert with these actions, the U.S. develops plans to close most of its 114 large locations and nearly all of its 7,000 other presences in 135 countries. However, R&D continues, and most large contractors relocate their headquarters to the Washington D.C. area.
- The passing of Fidel Castro is followed unexpectedly by that of his brother Raul. Having been snubbed by Hugo Chavez, Obama makes American influence in Cuba a high priority, offering massive aid to resuscitate the island nation. He personally visits Gitmo and signs over the ownership of its land to Cuban representatives, capped with a cigar smoking celebration. Funds are appropriated to build a museum on the Gitmo site in remembrance of the heroic actions of revolutionaries in the Americas, North and South, with an entire wing devoted to associates of Obama. Real estate developers with ties to the Rezko organization are afforded an investment preference very early in the reconstruction of the Cuban economy, and Swingers Air obtains a lucrative allocation of gates in Jose Marti International Airport. Coca-Cola announces its headquarters will relocate to Havana, citing a ten-year tax holiday and a monopoly on Cuban cane sugar output, which causes its stock to skyrocket. Buffett, a large owner, makes billions.
- With the improved tone of the U.S. economy, the increased wealth experienced by those with the new "Making Savings Pay" accounts, a Middle East no longer in conflict, savings from reduced military spending, and evidence that global warming solutions are working, the Republican party breaks apart into two factions. Its intellectuals desert it and join the Libertarian party, which surprisingly garners 11 percent of the 2012 presidential bid, but just a handful of seats in Congress. The enormous appeal of Sarah Palin solidifies 28 percent of the vote for what remains of the Republicans. The intensity of rebellion among tea party participants is felt, although it remains a non-violent crowd. Millions of young female babies are named Sarah. After the 2012 election, a permanent majority of the Supreme Court is established by left-leaning justices, and significant new interpretations of constitutional law are triggered. Eventually the Libertarian wing ascends to power when the second wave of credit expansion reverses, triggering deflation and the end of fiat currency. By 2016, Palin strongly supports a gold backed dollar, reuniting conservatives under the Libertarian banner, and another Alaskan gold rush begins.
Author of Endless Money: The Moral Hazards of Socialism
Editor, The Conservative Economist
Long and short equities. Long gold, gold derivatives, and gold equities including many with significant West African mining operations.
My apologies to Senator Lieberman for his use in a hypothetical scenario for humorous purposes. His political courage is admired, and the author would be deeply saddened by the unfortunate military developments contemplated that might precipitate such an occurrence.
Disclosure: no holdings of GS or BRK.B; Long and short equities. Long gold, gold derivatives, and gold equities including many with significant West African mining operations.