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Mad Hedge Fund Trader

The Death of Gold, Part II

Newsletter

I have been pounding the table trying to get readers out of gold since early December. Now, my friend at stockcharts.com, Mike Murphy, has produced a stunning series of charts showing that this may be more than just a short-term dip and another buying opportunity.

Mike explains that a number of traditional chart, technical, and intermarket signs are flashing serious warning signals. At the very least, we are going to test $1,500 an ounce sometime soon. If that doesn?t hold, then $1,250 is in the cards.

To make matters particularly fiendish for traders, we may see a false breakdown through $1,500 first, well into the 1,400?s, that sucks in tons of capitulation sellers before an uptrend resumes. It is a scenario that will be enough to test even the most devoted of gold bugs.

At risk is nothing less than the end of a bull market that is entering its 12th year. The shares of gold miners suggest that the demise of the bull market is already a foregone conclusion. The index for this group (GDM) has breached major support once again and is looking for a new four year low. Since this index usually correlates very highly with the barbarous relic, the grim writing is on the wall.

A strong dollar does not auger well for gold either. Look at the chart below, and you see the dollar basket (UUP) has punched through to an eight month high. Until two weeks ago, this was primarily a weak yen story. But since then, both the euro (FXE) and Sterling (FXB) have collapsed, adding fuel to the fire. And it is not just gold that is feeling the heat. The entire commodities space has been the pain trade, including oil (USO), copper (CU), and other hard assets.

There are a host of reasons why the yellow metal has suddenly become so unloved. The largest holder of the gold ETF (GLD), John Paulson, is getting big redemptions in his hedge fund, forcing him to sell. This is why the selling is so apparent in the paper gold markets, like the ETF?s, but not the physical.

India has suddenly seen its currency, the rupee, drop against the greenback. That reduces the buying power of the world?s largest gold importer. With years of pernicious deflation ahead of us, who needs a traditional inflation hedge like the yellow metal?

Here is the final nail in the coffin for gold. Look at the last chart of the Federal Reserve Bank of St. Louis?s measurement of the broader monetary base. It shows that it has exploded to the upside in recent months. In the past, gold matched the rise in the money supply step for step. Now it?s not. If a market can?t rally on fabulous news, which it has obviously failed to do since the last QE was launched in September, then you sell the daylights out of it. That is what most traders believe.

The screaming conclusion here is that traders are pouring their money into stocks instead of gold. Now, paper trumps gold. Conditions for the barbarous relic will, therefore, probably get worse before they get better.

Ben Bernanke affirmed as much last week when he told Congress that quantitative easing would continue unabated for the foreseeable future. That means rising stocks and flat bonds, all of which are bad for gold. The bottom line here is that when gold makes its first run at $1,500, I am not going to jump in as a buyer.

GOLD 2-27-13

GDM 2-28-13

USD 2-27-13

SPX 2-28-13

INDU GOLD 2-27-13

Adjusted Monetary Base

Weekly December, 2011 to February, 2013
Adjusted Monetary Base
Reserve Bank of St. Louis

Gold Man

Suddenly Going Out of Style

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Mad Hedge Fund Trader

The Real Estate Market in 2030

Diary, Newsletter

A number of analysts, and even some of those in the real estate industry, are finally coming around to the depressing conclusion that there will never be a recovery in residential real estate. Long time readers of this letter know too well that I have been hugely negative on the sector since late 2005, when I unloaded all of my holdings. However, I believe that 'forever' may be on the extreme side. Personally, I believe there will be great opportunities in real estate starting in 2030.

Let's back up for a second and review where the great bull market of 1950-2007 came from. That's when a mere 50 million members of the 'greatest generation', those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962. There was a chronic shortage of housing, with the extra 30 million never hesitating to borrow more to pay higher prices. When my parents got married in 1949, they were only able to land a dingy apartment in a crummy Los Angeles neighborhood because he was an ex-Marine. This is where our suburbs came from.

Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million generation Xer's who earn less than their parents, marking down prices as fast as they can. As a result, the Federal Reserve thinks that 35% of American homeowners either have negative equity, or less than 10% equity, which amounts to nearly zero after you take out sales commissions and closing costs. That comes to 42 million homes. Don't count on selling your house to your kids, especially if they are still living rent free in the basement.

The good news is that the next bull market in housing starts in 20 years. That's when 85 million Millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer's. By then, house prices will be a lot cheaper than they are today in real terms. The next interest rate spike will probably knock another 25% off real estate prices. Think 1982 again.

Fannie Mae and Freddie Mac will be long gone, meaning that the 30 year conventional mortgage will cease to exist. All future home purchases will be financed with adjustable rate mortgages, forcing homebuyers to assume interest rate risk, as they already do in most of the developed world. With the US budget deficit problems persisting beyond the horizon, the home mortgage interest deduction is an endangered species, and its demise will chop another 10% off home values.

For you millennials just graduating from college now, this is a best case scenario. It gives you 15 years to save up the substantial down payment banks will require by then. You can then swoop in to cherry pick the best neighborhoods at the bottom of a 25-year bear market. People will no doubt tell you that you are crazy, that renting is the only safe thing to do, and that home ownership is for suckers. That's what people told me when I bought my first New York co-op in 1982 at one tenth its current market price.

Just remember to sell by 2060, because that's when the next intergenerational residential real estate collapse is expected to ensue. That will leave the next, yet to be named generation, holding the bag, as your grandparents are now.

XHB 3-1-13

House Fire

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Mad Hedge Fund Trader

Testimonial

Testimonials

Great job on the trade service & I appreciate it.? Your impartial approach to the market continues to set you apart. ??Your commentary & services have taught me a great deal & I look forward to continuing to follow & learn from both in the future.?Thanks in advance for any insights you care to lend!

Kevin
Tampa Bay, Florida

BusinessJohnThomasProfileMap2-2

0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2013-03-04 09:31:132013-03-04 09:31:13Testimonial
Mad Hedge Fund Trader

March 1, 2013

Diary, Newsletter, Summary

Global Market Comments
March 1, 2013
Fiat Lux

Featured Trade:
(TRADE ALERT SERVICE CLOCKS 26% GAIN IN 2013)
(A CONVERSATION WITH THE BOOTS ON THE GROUND),
(DINNER WITH NOBEL PRIZE WINNER JOSEPH STIGLITZ)

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Mad Hedge Fund Trader

Trade Alert Service Clocks 26% Gain In 2013

Diary, Newsletter

The Trade Alert Service of the Mad Hedge Fund Trader has posted a 26.01% profit year to date, taking it to another new all time high. The 26-month total return has punched through to an awesome 81.06%, compared to a miserable 15% return for the Dow average during the same period. That raises the average annualized return for the service to 36%, elevating it to the pinnacle of hedge fund ranks.

My bet that the stock markets would move sideways to up small during the month of February has paid off big time, as I continued to run sizeable long positions in the S&P 500 and the Russell 2000 (IWM). In the end, the Dow gained only 80 points for the month, an increase of only 57 basis points. My substantial short volatility positions are contributing to profits daily. I booked nice profits from holdings in American International Group (AIG) and copper producer, Freeport McMoRan (FCX). I also prudently doubled up my short positions in the Japanese yen.

It has truly been a month where everything is working. Even my short positions in deep out of the money calls on the (SPY) are substantially contributing to my P&L. While the (SPY) has been going up, it has not been appreciating fast enough to hurt the position. In the meantime, I have been able to dodge the bullets that have been killing off other hedge funds, including those in gold (GLD), oil (USO), and commodities (CORN), (CU).

All told, the last 18 consecutive recommendations of the Trade Alert Service have been profitable. I have eight trades to go to beat this record. Watch this space.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

TA 2013 Performance

TA Performance Inception

BusinessJohnThomasProfileMap2-2

 

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Mad Hedge Fund Trader

A Conversation with the Boots on the Ground

Diary, Newsletter

I have spent many hours speaking at length with the generals who ran our wars in the Middle East, like David Petraeus, James E. Cartwright, and Martin E. Dempsey. To get the boots on the ground view, I attended the graduation of a friend at the Defense Language Institute in Monterey, California, the world's preeminent language training facility.

As I circulated at the reception at the once top-secret installation, I heard the same view repeated over and over in the many conversations swirling around me. While we can handily beat armies, defeating an idea is impossible. With the planet's fastest growing population, Muslims are expected to double from one to two billion by 2050, the terrorists can breed replacements faster than we can kill them. The US will have to maintain a military presence in the Middle East for another 100 years. The goal is not to win, but to keep the war at a low cost, slow burn, over there, and away from the US.

I have never met a more determined, disciplined, and motivated group of students. There were seven teachers for 16 students, some with PhD's and all native Arabic speakers. The Defense Department calculates the cost of this 63-week, total emersion course at $200,000 per student.

They are taught not just language, but also the history, culture, and politics of the region as well. I found myself discussing at length the origins of the Sunni/Shiite split in the 7th century, the rise of the Mughals in India in the 16th century, and the fall of the Ottoman Empire after WWI, and this was with a 19 year old private from Kentucky whose previous employment had been at Wal-Mart! I doubt most Americans her age could find the Middle East on a map. Students graduated with near perfect scores. If you fail a class, you get sent to Afghanistan, unless you are in the Air Force, which kicks you out of the service completely.

As we feasted on hummus and other Arab delicacies, I studied the pictures on the wall describing the early history of the DLI in WWII, and realized that I knew several of the participants. The school was founded in 1941 to train Japanese Americans in their own language to gain an intelligence advantage in the Pacific war. General 'Vinegar Joe' Stillwell said their contribution shortened the war by two years. General Douglas McArthur believed that an army had never before gone to war with so much advance knowledge about its enemy. To this day, the school's motto is 'Yankee Samurai'.

My old friends at the Foreign Correspondents' Club of Japan will remember well the late Al Pinder. He spent the summer of 1941 photographing every Eastern facing beach in Japan, successfully smuggled them out hidden in a chest full of Japanese blow up dolls and sex toys. He then spent the rest of the war working for the OSS in China. I know this because I shared a desk in Tokyo with Al for nearly ten years. His picture is there in all his youth, accepting the Japanese surrender in Korea with DLI graduates.

Defense Language Institute

Cadets - running

 

Soldier

I Guess I Should Have Studied Harder

https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Defense-Language-Institute.jpg 353 354 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2013-03-01 23:02:432013-03-01 23:02:43A Conversation with the Boots on the Ground
Mad Hedge Fund Trader

Dinner with Nobel Prize Winner Joseph Stiglitz

Evening VIP

The great thing about interviewing Joseph Stiglitz over dinner is that you don't have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.

The unfortunate thing is that you also don't get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of the Glass-Steagle Act in 1999, which kept commercial banks out of the securities business. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz's own work on 'information asymmetry,' which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, usually the seller. I have heard investing oracle, Warren Buffet, tell me the exact same thing.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that, not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created and multiplied risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush's response was to unleash an extreme form of 'trickledown economics,' with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends to foreign counterparties. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The ?once in a 100 year tsunami? argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $887 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of congress. The 40% of the stimulus that was tax cuts was saved or put into Treasury bonds and created no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. Any major spending cuts will produce 'Hoover' outcomes.

Well, I don't get to chat at length with a Nobel Prize winner every day, so I thought I'd give you the full blast, even though I had to leave a lot out. For a dinner that I could actually eat, I walked next-door for a Big Mac meal and supersized the fries.

Joseph Stiglitz

 

https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Joseph-Stiglitz.jpg 248 361 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2013-03-01 23:01:572013-03-01 23:01:57Dinner with Nobel Prize Winner Joseph Stiglitz
Mad Hedge Fund Trader

February 28, 2013

Diary, Newsletter, Summary

Global Market Comments
February 28, 2013
Fiat Lux

Featured Trade:

(SUNDAY WITH PRESIDENT JIMMY CARTER)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2013-02-28 09:29:392013-02-28 09:29:39February 28, 2013
Mad Hedge Fund Trader

Sunday With President Jimmy Carter

Diary, Newsletter

When I heard that our 39th president, former governor of Georgia, and Nobel Peace Prize winner, Jimmy Carter was coming to town, I moved heaven and earth to meet him.
I served in the White House Press Corps as the The Economist correspondent during the latter part of his term, and was dying to get answers to issues that were then classified, or unknowable.

It was tense and politically charged, but a highly productive time. He signed a treaty handing back the Panama Canal, brokered the Camp David accords between Israel and the Palestinians, signed the SALT II Treaty limiting nuclear weapons with the Soviet Union, and normalized diplomatic relations with China.

Then the good will created by these accomplishments went up in smoke when Iran seized 52 hostages by storming the American embassy in Tehran, an ordeal that lasted 444 days. It was a national nightmare and a very dark time for America. That smashed his reelection chances in 1980, and paved the way for Ronald Reagan to ascend to the presidency.

Hostages

During the seventies, his administration was looking for an American who spoke fluent Japanese and knew Japan?s steel industry inside out. It turned out that I was the only one, having covered the industry on a daily basis for the Sydney based? Financial Review.

I was offered an appointment as Deputy Assistant Secretary of the Treasury for International Affairs, which I turned down because the pay was too low ($15,000 a year for a G-14). It was the biggest mistake I ever made, leaving millions of future potential lobbying fees on the table. Such are the errant ways of youth.

Carter showed up to our meeting in a modest grey suit, red tie, and a thinning mane of pure white hair. He was animated, with a relaxed sense of humor, but answered his questions with rapid-fire succession. Not only was he fully briefed on developments in every country of the world, he personally knew the leaders of many. Touch on issues he deeply cared about, and he responded with fire and brimstone.

One of the great things about interviewing old ex-presidents is that either the events in which they have confidential knowledge have passed their statute of limitations, or they can?t remember if they were classified or not. So having an extended conversation can be very interesting, to say the least. Such was the case with my two hour talk with Jimmy Carter. I will try to summarize what he said.

The former president argues that the United States is now the most unchallenged superpower in history. It is not only the most powerful nation on earth, but in all of human history.

However, despite this unprecedented strength, the country is pulling back from the ideals that made it great in decades past. Once the leader on the environment, we now lag far behind Europe. By using drones to assassinate Americans abroad, we are disavowing the Geneva Convention. Our commitment to human rights has wavered. Half of the 160 prisoners at Guantanamo Bay have never been charged, and are effectively serving life sentences. We now have the largest prison population in the world, up sevenfold in 30 years.

Gitmo

We are the most warlike nation in modern history, and have almost continuously been involved in combat for the past 70 years. The long list of adversaries includes Korea, Lebanon, Vietnam, Cuba, Cambodia, Laos, Grenada, Panama, Nicaragua, Iraq, Serbia, Kosovo, Afghanistan, Iraq again, Somalia, Libya, and most recently Yemen. Next on the menu are Syria, Iran, and Mali. The leadership of many countries live in terror of us. Such a long history of conflict reflects a serial lack of desire to negotiate on our part.

We have retreated from our domestic principles as well. The concentration of wealth at the top continues unabated, with the top 1% seeing a 400% rise in net worth, while the rest of us have seen declines. College tuition has soared from 4% to 10% of family income. Poverty has risen by 31% in just the past five years.

Massive infusions of money into the political system have created a hopeless gridlock in the government, making it impossible to do anything about our problems. His own presidential campaign in 1980 cost nothing, as it was entirely financed with public money. In 2012 both parties spent $6 billion.

Most of this money went into negative TV advertising that so poisons the atmosphere that the winners refuse to talk to each other when they get to Washington. Carter thinks that the Supreme Court?s Citizens United decision, open the way for unlimited anonymous corporate donations, was ?stupid.?

The native of Plains, Georgia said that it was not clear that Iran had decided to develop nuclear weapons, but they certainly had the means to do so. Even if they had such an offensive capability, it is unlikely they would ever use it. Israel has over 200 operational nukes, and the slightest hostile move by Iran would result in them being wiped off the face of the earth. Iran has no desire to commit national suicide.

Nor does North Korea, which has to face America?s 5,000 nuclear bombs. The Clinton administration had a peace treaty written up and ready to sign with Kim Il Sung in the late nineties, ending 45 years of hostilities. Then George W. Bush got elected president and he threw it in the trash. That panicked the North Koreans into a crash program to develop nuclear weapons and intercontinental missiles. The first successful test occurred in 2006.

Kim Il Sung

Carter is a regular traveler to the Hermit Kingdom in order to keep back channels open, where he sees starving children as the cruel face of our economic sanctions. He still believes that North Korea would dump its nukes if we reoffered the peace treaty, when the proper initiatives were taken.

Carter has been visiting China since 1949, when his sub made a brief stop just before the Nationalist collapse. He personally knows the new leader, Xi Jinping, well, and thinks the Middle Kingdom will never pose a military threat to the US. The Carter Center has monitored elections in 650,000 towns and villages there for the past 15 years, where the communist party is not active.

He sees our largest trading partner moving towards full democracy over time. He is assisting in implementing the country?s first Freedom of Information Act. In fact, China has the world?s most rapidly growing Christian population today, with total numbers soon to exceed 100 million. They are also the planet?s largest publisher of the Bible.

Jimmy Carter

The former president is discouraged about developments in Israel, where the Benjamin Netenyahu administration seems hell bent on colonizing the West Bank as quickly as possible. This eliminates the possibility of a two state solution, which the Palestinians and every other country in the Middle East have already said they would sign on to.

Carter sees the Arab Spring as a hugely pro-American development, as every country in which it has unfolded has moved from dictatorship to democracy. But don?t expect every country to elect a leadership in our image. Of course, Egypt is going to choose the Muslim Brotherhood, a country that is 90% Muslim! The new Mohammed Morsi government was the most moderate of several alternatives, and should work well with the US. (He has a PhD in engineering from one of my alma maters, the University of Southern California).

Muslim Protesters

What makes Carter such an interesting person to speak to today is that he has become the most active and hard working ex-president in history. For the last 31 years he has run the Carter Center , a well funded non profit that promotes global peace, advances public health, monitors international elections, and promotes women?s rights.

The Carter Center has just monitored its 93rd foreign election, in the West African country of Sierra Leone. It has almost completely eliminated Guinea Worm, cutting the number of global cases from 3.5 million to only 542. It has treated 75 million cases of trachoma and 12.8 million cases of river blindness.

Cataracts

Despite his strong anti-war stance, Carter insists that he is not a pacifist. He has served on two battleships and three submarines, and came to office with more military experience than any other modern president after Eisenhower.

Jimmy Carter grew up on a farm in rural Georgia during the Great Depression. Childhood diversions included raising a great number of different birds and animals, and searching for pottery fragments left by ancient Indians who once inhabited the land.

He wanted to become a naval officer from the age of five, following in the footsteps of an admired uncle in the US Asiatic Fleet of the twenties and thirties. That led him to Georgia Tech, Annapolis, and eight years in the Navy. His specialty was nuclear engineering, and he served on the Seawolf, America?s second nuclear submarine.

Jimmy Carter - young

Carter?s memory for numbers was nothing less than stunning for someone born in 1924. When he was growing up in Plains, his father charged him with managing the black tenant farmers. He became a second son to many families, often sleeping over in ramshackle shacks sharing bed bug bites.

He paid daily wages of $1 for a man, 50 cents for a woman, and 25 for a child. Finally, the workers went on strike because they were starving. His father threatened to fire everyone to show that organizing labor was futile. But he gave them the quarter raise they needed after the following New Year so they could eat. It was definitely another time and another place. When I told Carter I wanted to be like him when I was 88, he laughed.

I had to ask him about Argo, the Iran hostage rescue movie nominated for Best Picture at the Academy Awards. He said that it greatly overplayed the role of the Americans. After being turned away by the British embassy, the Canadians ended up doing 90% of the work, and bore most of the risk in the effort to spirit six Americans out of the country.

Ben Affleck

If it were discovered they were hiding Americans, they too would have been overwhelmed and taken prisoner. To observe the letter of the law, the Canadian Parliament met in secret for the only time in its history to give the approval. The facts aside, Carter said Argo was a wonderfully entertaining movie.

That was spoken like a true diplomat.

Jimmy Carter - headshot

 

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Mad Hedge Fund Trader

February 28, 2013 - Quote of the Day

Quote of the Day

?When former president, Jimmy Carter, once addressed a graduating class in Japan, they suddenly broke out into wild laughter. He later insisted that the interpreter tell him what he said. After much prodding, he confessed ?I said the president has just told a joke, and you must laugh.?

Jimmy Carter - fullshot

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