I had a chat with Bill Gates, Sr. last night, co-chairman of the Bill and Melinda Gates Foundation, the world?s largest private philanthropic organization. There, a staff of 800 help him manage $30 billion.

The foundation will give away $3.1 billion this year, a 10% increase over last year. Some $1.5 billion will go to emerging nation health care, and another $750 million to enhance American education. The foundation?s spending in Africa has been so massive, that it is starting to have a major impact on conditions, and is part of the bull case for investing there (please click here).

The fund happens to be one of the best managed institutions out there, having sold the bulk of its Microsoft (MSFT) stock just before the dotcom bust and moving the money into Treasuries. Mr. Gates? pet peeve is the precarious state of the US K-12 public education system, where teaching is not as good as it could be, expectations are low, and financial incentives and national standards are needed.

When asked about retirement, he says ?having a son with a billion dollars puts a whole new spin on things.?? Now a razor sharp 87, his favorite treat is the free Net Jet miles he gets from his son Bill every year. In his memoir Showing up for Life, he says a major influence was his Scoutmaster of 70 years ago. Being an Eagle Scout myself, I quickly drilled him on some complex knots, and he whipped right through all of them. The world needs more Bill Gates Srs.

 

 

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we saw in recent years is only the beginning of a 30 fold rise in prices similar to what occurred from 1972 to 1979, when it leapt from $32 to $950.

So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using. To match the 1936 monetary value peak, when the base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp-like by comparison. The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one off events that will never be repeated.

Some 40 years of pent up demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world?s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.

You may have noticed that I have not been doing much trading in gold or the other precious metals lately. That is because they are still working off an extremely overbought condition. Given some time, and a nice little dip in prices, and I?ll be back there in a heartbeat. You?ll be the first to know when that happens.

 

 

I heard a fascinating story from my friends at the US Treasury the other day. Even though unemployment is high, personal tax refunds were plummeting and tax revenues were soaring. What was even more puzzling was that the states with the worst unemployment rates, like California, Nevada, and Florida were seeing the heftiest increases. Weren?t elevated jobless rates supposed to generate less taxable income, not more?

The intrepid sleuths on Pennsylvania Avenue put some financial detectives on the case to solve the mystery. It turns out that with home ownership rates falling, real estate prices doing a swan dive, and interest rates at 200 year lows, taxpayers are losing their largest deductions, causing the tax bills to rocket. During the 2011 tax year deductions fell by some 20%, an enormous move given that there were no serious tax reforms enacted.

It turns out that this has been going on for some years, thanks to the unremitting bull market in bonds. According to IRS data, the home mortgage deduction, which can be worth up to $26,000 per household, fell by 14% from 2007 to 2009. The total number of returns claiming this deduction dropped by 5 million during these years.

Preliminary data show that this write off dropped by another 7.2% in 2010 alone. The windfall could bring in as much as $26 billion in additional federal revenues in 2012. It not just a payday for Washington. The 42 states with income taxes are seeing similar revenue rises, with California by far the biggest beneficiary, where the number of filers claiming a home mortgage deduction declined by 9% in 2011.

What?s more, the gravy train for government green eye shades could speed up from here. If the Federal Reserve modifies and extends its ?twist? policy of monetary easing through the purchase of mortgage securities, interest rates could crater as much as 25% from here. Tax bills would soar accordingly. Budget constrained governments across the country couldn?t be happier.

The home mortgage deduction has been a sacred cow of American politics since it was first initiated in 1913. Whoever though it would self-destruct?

Yes, That is Definitely a Smaller Deduction

Walking through the Capital dome on my way to the House the Representatives, I couldn?t help but sense the presence of ghosts of friends from decades past. There was Tip O?Neill with his ever-present scowl. Ted Kennedy was hurrying off to another meeting, barking orders in his peculiar Boston accent. Mike Mansfield was maintaining his ever aloof and professorial demeanor.

President Ronald Reagan was giving a hearty laugh after retelling the same off color joke for the umpteenth time, turning the faces of the female press crimson. I found the spot where 30 years ago, I ambushed Treasury Secretary Nicholas Brady and got a heads up on the impending bailout of Latin America, financed by, what else, Brady bonds.

I stood briefly to admire the timeless paintings in the filtered light, Washington Crossing the Delaware, the Victory at Saratoga, and the Surrender at Yorktown. My ancestors were present at all three. Then I hurried over to the House chamber, up the wide marble steps, and into the office of the Minority Speaker of the House, Nancy Pelosi.

The Madame Speaker welcomed me into her spacious, high ceilinged office and then immediately reached for my lapel. She touched my Marine Corps pin and said ?Thank you for your service.? I replied that it was a very long time ago and that many more had made far greater sacrifices since. She then launched into a description of her recent trip to Afghanistan where she described to the troops in Kandahar the opportunities and benefits that awaited them on their return.

To open on a light note, I asked her how it felt to be the most powerful woman in history after Cleopatra and Catherine the Great. She replied ?Having the levers of power at hand does have its uses.?

Agree with Nancy and she can be ingratiating and even motherly, taking the opportunity to pour me a cup of tea and offering a cherry Danish. Argue with her and she turns into a pit bull, whipping out well-rehearsed arguments and data so fast it almost knocked me back on my heels.

Pelosi is one of the most liberal Reprentatives in congress. Her multi ethnic constituents in the 8th California congressional district in San Francisco repeatedly return her to office with a resounding landslide. Most locals don?t even know who ran against her. In fact, many of her supporters bitterly complain that she is not liberal enough and compromises too often.

The nation?s greatest concentration of wealth creation is also an easy commute from her San Francisco office, and Nancy is well attuned to technology issues. Apple (AAPL), Google (GOOG), Hewlett Packard (HPQ), Oracle (ORCL), and Facebook (FB), have together created $1 trillion in market capitalization over the last decade.

If the Democrats retake the House in November she will reclaim her former job as House Majority Leader, making her third inline to succeed the president. If not, she will remain a major source of input to the president on economic policy. So I thought it judicious to listen what she had to say. Thin skinned, died in the wool conservatives might want to skip the rest of this story.

As the Supreme Court?s decision on Obama?s health care plan was imminent, I asked for her analysis of the likely outcome. She insisted that basic health care was a right and not a privilege. The Affordable Health Care Act will be a crucial tool to get health care spending under control and cut significantly into the budget deficit.

For business, it is a competitiveness issue, with backbreaking health insurance costs cutting into profitability and leaving managers reluctant to add employees. Foreign competitors bear no such overheads, the cost borne by generous national health programs. Employees here are ?job locked? by the old system, which prevents them from moving or changing careers for fear of losing company health insurance.

Every developed economy that implemented national health care has been able to keep spending to 8% of GDP compared to the 13% now suffered by the US, on its way to 18%. As the most efficient economy in the world, there is no reason why America cannot match these results. The program should also create 4 million jobs extending care to 50 million people.

Pelosi says the constitutionality of Obamacare is ?iron clad? and expects the Supreme Court to rule in its favor by a 6-3 margin. The right of congress to regulate interstate trade is clearly enshrined in the 1803 Marbury versus Madison case. While an activist conservative court may chip away at the act, such as through barring the individual mandate, severability prevents them from throwing out the entire measure.

While full implementation does not begin until 2014, 80 million have already benefited. They include children under 26 added to parents? policies, coverage for consumers with pre-existing conditions, and shrinking the drug benefit ?doughnut? for seniors. Young children who get cancer are no longer treated as having a pre-existing conditions for life. However, Nancy concedes that the administration has lost the public relations battle over the issue.

The Democrats need to win 25 seats in the November election to retake the House. She thinks there is a 50:50 chance of that happening. Even if they fail to regain the majority, the Tea Party?s influence will be greatly diminished, making compromise and deal making much more likely. That could lead to a resuscitation of the ?Grand Bargain? that was nearly reached last summer. This would be a hugely market positive development.

She urged Republicans to ?take their party back from the radicals? who don?t believe in any public role for the government beyond defense. The sole accomplishment of the Tea Party has been to hand control of the Senate to the Democrats by running weak, ideologically rigid candidates in the primaries, most notably in Delaware, Nevada, and now Indiana.

Nancy admitted that when growing up, a career in politics was the last thing on her mind. She was the progeny of the premier Italian political dynasty in Baltimore. Her father was both mayor of Baltimore and a member of congress. Her brother was also a mayor. After spending a childhood handing out campaign leaflets, her rebellious nature prompted her to run a mile from the family business.

It turns out that she ran all the way to California. With her five children nearly grown, she took a post on the San Francisco Library Committee. Then ?one thing led to another? and she ended up in her current job, which she has been working at tirelessly for 25 years.

At her first speech to congress in 1987 she boldly announced that ?I am here to fight AIDS.? A pall cast over the chamber as the members went mute. While the disease was ravaging San Francisco, it had yet to go national. Reagan denied funding for research because he believed the people who got it deserved it, overruling his own surgeon general.

It proved an important time for California to have aggressive representation in Washington. In 1989, the Loma Prieta earthquake hit, and federal funds played an important part in reconstruction. The base closures of the 1990?s cut a wide swath across the state. Almost every military facility in the San Francisco Bay area was closed, where many structures were up to 150 years old, in favor of more modern bases in San Diego and Bremerton, Washington. At one point, an aircraft carrier was used to move the 1,500 personal vehicles owned by transferring troops to save money.

I thanked Nancy for generously carving out an hour from her jam packed schedule and called it a day. As is usual with these high level political meetings, I gleaned a dozen or so valuable investment ideas. I will send out the trade alerts when I see good entry points.

 

 

The Capitol Dome