Category: Politics and the Economy

"My friends, we live in the greatest nation in the history of the world. I hope you'll join with me as we try to change it." -- Barack Obama

Why does he want to change the greatest nation in history? To what?

Question asked on 04/25/2008 at 06:40 AM :: Comments to date: 0

Category: Politics and the Economy

The recent troubles involving investment banks, J.P. Morgan and the Federal Reserve are not understood by most people in the media, on Wall Street, in the banking industry, at
colleges or by private investors. There has been more wrong information and wrong comments about what recently
transpired than I can recall ever hearing about any similar event in the past 40 years. I want you to understand the full information needed to fully grasp the meaning of what has been going on. So here goes:

The root causes of recent problems have been visible since last August. Then in September the Fed held its annual
gathering of financial leaders at Jackson Hole, Wyoming. Axel Weber, president of Germany’s Central Bank, told the
gathering that: “The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside of the traditional banking sector.”
A review of the gathering by Knishna Guha appeared in the London Financial Times. It included these observations:
“Some Federal Reserve policymakers privately see comparisons between the current distress in credit markets
and the bank runs of the 19th and early 20th Century, in which savers lost confidence in banks and demanded their
money back, creating a spiraling liquidity crisis for institutions that had invested this money in longer-term assets. The scenario ultimately led to the creation of the Federal Reserve System as a lender of last resort. However, the tools that modern central banks possess to address liquidity problems can only address such runs inside the traditional banking system, and do not directly touch the NON-BANK FINANCIAL SECTOR which has been hardest hit by the current credit crisis. Mr. Weber’s analysis highlights the dilemma facing central banks, which cannot channel funds directly to the non-bank financial sector.” (End quotes,)
The Federal Reserve System does in fact have powers to lend money to the non-bank financial sector. Dr. Ben Bernanke had discovered them years ago while reading the fine-print of the 1913 enabling Act for the Fed.
BEFORE I GO INTO HIS ACTIONS, I THINK IT IS NECESSARY TO GO BACK IN HISTORY TO EXAMINE BRIEFLY THE FACTS THAT LED THE PRIVATE BANKING INDUSTRY AND THE CONGRESS TO CREATE TODAY’S FEDERAL
RESERVE SYSTEM, WITH ALL OF ITS POWERS.
Place yourself back in time, to New York City on October 21, 1907. Another of the periodic runs on
banks that had plagued the U.S. since before the Civil War had just been digested and apparently stopped by a
committee of Bankers, led as usual by J. Pierpont Morgan.mind to a task few if any dared oppose him. Late that day,
a brilliant young banker named Benjamin Strong, whom Morgan had borrowed for the occasion from Banker’s Trust
Co., reported back to him that the books of Knickerbocker Trust – the key player in the dangerous run unfolding –
were in such poor shape that Strong could not tell whether Morgan should move to save that Trust Company.
But Strong had learned that the directors of the Knickerbocker Trust had assembled that evening at one of
the city’s premier restaurants, and had left the door of their private dining room wide open. Observers had gathered at the open door to listen as the directors loudly bragged about their wild speculative gambles, using depositors’ money. Word of this dinner party spread fast in New York City. By the time the Knickerbocker Trust opened its doors the next morning, double-wide lines of depositors waiting to withdraw their money spread out for blocks in two directions. The Trust directors, in panic, made a phone call to Pierpont Morgan, begging for cash loans so they could stay open. He told them he would not help them. And he didn’t. It took just three hours of a run to snuff out the life of that huge Trust Company.
Trusts had once been the most conservative of financial institutions. They were not banks and really had no claim
for support by banks. But on that day, Strong and Morgan discovered that there were interlocking directorships between Trusts and Banks. That was only the beginning. The trusts had become deeply involved in new kinds of investment schemes involving gigantic leverage, something previouslynot customary in the banking world. The downside risk uncovered by Morgan was frightening to all whom he let in on it. He kept the news away from the New York Times, which was poking around the fringes of the story and running front-page articles. He was afraid panic could quickly spread like an out-of-control forest fire and threaten to destroy the U.S. banking system.
So Morgan chose the soundest Trust Companies and immediately set in motion a rescue operation. He pledged
millions of dollars to guarantee their deposits, but in return he extracted a promise that they would get out of any
speculative ventures and not go into new ones. At first the news of his actions only frightened more people into rushing to get their money out of their bank accounts. Morgan put out a call for assistance. John D. Rockefeller responded with millions. So did President Theodore Roosevelt, who directed the Treasury Secretary to draw down the government’s stock of small bills and deliver them to Morgan. But the Panic refused to end. The Rockefeller cash was soon gone and so was the Treasury’s supply of bills. Morgan dipped deeper into his own pockets (he had a
fortune worth $400 million) and he successfully talked other bankers into supporting every Trust Company that Benjamin Strong decided was a good risk. The runs broke out here and there for a number of weeks. The amounts withdrawn kept getting smaller. The stock market was rising again (It had crashed to a low on the day the Knickerbocker Trust went broke). And by March of 1908 the Panic was fully and finally over. But the nation’s financial structure had been threatened in ways never seen before. Private Bankers and Congressmen began to hold discreet meetings to discuss creation of a lender of last resort — a new bank that could save the system from collapse in an emergency.
They all knew two things: One, the new bank would have to be very powerful in order to replace the great Pierpont
Morgan, who had been protecting America for years but was no longer a young man. It would have to be granted
substantial day-to-day power to regulate, control and even issue money. But the larger overall power and control was to be left in the hands of Congress. That is because the founding American constitution placed full and total power over money in the hands of the Congress and ONLY the Congress. This government-chartered private bank would have to be empowered as a lender of last resort, which meant that it had to be allowed to create money. That feature was missing in 1907 and had been desperately needed. And two, it would have to be a private bank sheltered under the protection of the federal government but still mostly independent of the government and especially beyond the reach of the Treasury and the President. That is one fear that had been in America from its founding days. And so the Federal Reserve System was conceived.
It was to be decentralized, another American feature. There would be twelve regional Federal Reserve Banks, each independent in most ways but tied into an interlocking system.The New York Fed was to be given the most power and the President of the New York Fed would in fact preside over the system. (Benjamin Strong was given that job and title, and served until an illness took his life at a young age in 1928, leaving the Fed leaderless as it stumbled into the Great Depression. Without Strong’s steady hand, Wall Street in 1929 had broken out into an orgy of speculative lending and borrowing, with tragic results. It has to remind you of the way, under the permissive Greenspan, Wall Street firms – especially non-bank investment banks – left their traditional roles and traded with gigantic leverage on their own account, and everyone plunged into speculative devices unknown only a half-dozen years earlier.)
The final touch in 1913 was purely American. The twelve private regional Feds were to be owned by the commercial banks in their territory. The boards of directors to be divided into three groups. The first was to be chosen from the biggest banks in each district. That would mean that in Texas Oil Money might dominate. In the Midwest it would be farming. In the Northeast it could be financial affairs. There were two more groups of directors, with small banks having directors’ seats reserved for them. The Congress set up a small Board of Governors in Washington, led by a Chairman. That Board was not considered important in 1913, the year the Fed opened for business. One year later, World War One broke out in Europe and Washington began a climb in power that has carried us to the situation today. Ironically Dr. Ben Bernanke, as chairman of the Board of Governors in Washington, is a big fan of Benjamin Strong, and through Strong and now Bernanke the anti-speculative, anti-leveraged finance ideals of Pierpont Morgan still live,
That is why Bernanke dared act as boldly and decisively as he did when he had J.P. Morgan acquire Bear Stearns. Just as the Trust Companies were not banks, neither are investment banks. And just as Strong discovered that an interlocking series of directorships meant that the collapse of one bank in 1907 could pull down the whole banking system, so too did Bernanke come to realize that derivatives had sent Bear Stearns tentacles reaching out to so many banks and investment banks in America, Europe and Asia that were they allowed to fail the bankruptcy court might be forced to take actions that threatened the whole Western World.
In stepping into the world of Investment Banking, which Congress may now add to his regulatory domain, Bernanke
was able to send the word out across the country – he would protect them against their enemies who wanted them
to fail, but in return they had to pull back from the long list of dangerous speculative activities that had been growing
fast in the years of Greenspan. Thus I feel the bottom is in place - marked by the closing of Bear Stearns, and
very soon we will witness a new Age of solid growth in America, possibly led by the most conservative finances
since the 1950’s.

Question asked on 04/22/2008 at 03:26 AM :: Comments to date: 0

Category: Politics and the Economy

I am a businessman who loves the stock market and trading. There are highly paid consultant economists out there that predict what is happening. The press picks up on it and adds a flair to sensentationalize the worst or sometimes the best. Remember the press is publishing what sells newspapers and magazines. That is the extraordinary sensationalized high profile happenings. When people are hurting due to the economy the press picks up on it after there are all time new highs of bankruptcies or foreclosures. Don't you think the people that are part of that statistic already know that which they have been personally through for the past year.
So I am a business man who sees a soft economy in my business but it is not in a total recession. The economy is adjusting to higher raw material prices and passing on the costs which is causing inflatiion. The Fed is doing everything it can to keep the economy from going into a depression caused by the housiing bubble bursting and the sup=prime mess and the credit problems.
More on the Fed - A LOT OF MONEY HAS BEEN CREATED BY DR. BEN S. BERNANKE, CHAIRMAN OF THE BOARD
OF GOVERNORS, FEDERAL RESERVE SYSTEM. YOU WILL SEE HOW BERNANKE, WHO IS THE SKIPPER OF AMERICA’S ECONOMY, HAS RESPONDED TO PANIC CONDITIONS BY PUMPING IN $200 BILLION OF M2 MONEY SO
FAR THIS YEAR. THE M2 UPTREND IS ACCELERATING. IF WE ARE RIGHT, DR. BEN PROBABLY INTRODUCED ANOTHER $200 BILLION OF MONEY IN THE SHAPE OF M3 MONEY. THIS IS NOT USUALLY AVAILABLE TO THE PUBLIC OR SEEN BY THE PUBLIC. IT IS IN THE FORM OF LARGER CD’S, WHICH CAN BE USED AS BANK
RESERVES. (OR A BACKING TO THE JP MORGAN BAILOUT OF BEAR STERNS) IT IS PART OF THE UNDERLYING
STRENGTH OF THE ECONOMY. THIS BRINGS US TO THE FIRST PART OF DR. BEN’S TERM IN OFFICE. HE HAS CREATED A TOTAL OF ONE TRILLION DOLLARS OF M2. QUITE LIKELY THAT IS BACKED UP BY ANOTHER TRILLION DOLLARS OF INVISIBLE M3 MONEY. THIS IS WHY I BELIEVE THE BOTTOM IN THE ECONOMY IS IN.
DON'T LET THE PRESS MOKE YOU WORRY ABOUT A WORLD-WIDE MELTDOWN.

Now what I want you to do to help everyone in your close contact is let them know that the world and the USA is going to come out of this recession soon and be prepared for it. Pass on to your inner circle of friends who invest in the maeket this web site and recommend they read this blog.

Now is the time to be adding to your metals because of all the money that has been created has to go after goods which causes inflation.

BERNANKE IS ON THE JOB – AND WILLPROTECT YOU!
INCIDENTALLY, BERNANKE HAS BEEN A BIT
MORE CAUTIOUS WHEN IT COMES TO
CUTTING INTEREST RATES. DR. BEN HAS
WRITTEN EXTENSIVELY ON THE
INTERACTION BETWEEN INTEREST RATES
AND THE ECONOMY. MY CLEAR IMPRESSION
IS THAT HE FEELS MONEY SUPPLY IS FAR
MORE CRITICAL THAN INTEREST RATES
WHEN IT COMES TO PROMOTING GROWTH.

Question asked on 04/21/2008 at 02:49 AM :: Comments to date: 0

Category: Politics and the Economy

Every recession we’ve had in the last 95 years was due, at least in part, to the Federal Reserve.
The explanation is simple really. The economy is far too complex and dynamic for the Fed to accurately project where it will be a few years from now.
And to make matters worse their most effective tool for controlling the economy – interest rate adjustments - can take six to eighteen months to work their way through the economy. In other words, the only way the Federal Reserve can save the economy from a recession is to know it is coming at least six to eighteen months in advance.
Even with the tools the Fed has, this is virtually impossible. And it’s the main reason why they’re so late responding to the economic cycle. Here’s a quick scenario:
If the Fed thinks the economy is growing too fast, they’ll keep interest rates high. The longer they keep rates high, the more the economy slows down. In fact, the Fed usually won’t lower rates until they see signs of an economic downturn. By the time they see these reports, the recession is almost completely underway and the Feds first interest rate cut won’t be felt for another six to eighteen months!
The best way to think about how the Fed can help us in an economic downturn is like this: They try to make sure recessions don’t turn into depressions.
So don’t get lured into making bullish bets because you think the Fed can save us from a recession. They just don’t have the power to do that.
The last lowering of the interest rates is adding gasoline to the fire. The fire of inflation. The Fed has done the right thing 8 months ago starting on 8/16/07. They kept pumping money and lowering interest rates to keep the mortgage and bank companies from imploding like 1930. So I have to give them great thumbs up. But the piper we will pay this timie is inflation. Where in the 1930's the Piper was deflation and contraction. So what do you put your money in now to make inflation work for you? Gold and Silver.

Question asked on 04/19/2008 at 07:26 AM :: Comments to date: 0

Category: Politics and the Economy

Since it's Income Tax time, here's something about your Taxes.
This is interesting. Just compare the taxes.
Source: www.taxfoundation.org/publications/show/151.html

Taxes under Clinton 1999 Taxes under Bush 2008

Single making 30K - tax $8,400 Single making 30K - tax $4,500

Single making 50K - tax $14,000 Single making 50K - tax $12,500

Single making 75K - tax $23,250 Single making 75K - tax $18,750

Married making 60K - tax $16,800 Married making 60K- tax $9,000

Married making 75K - tax $21,000 Married making 75K - tax $18,750

Married making 125K - tax $38,750 Married making 125K - tax $31,250

If you want to know just how effective the mainstream media is, it is amazing how many people that fall into the categories above think Bush is bad for them and Bill Clinton was the greatest President ever.

Question asked on 04/14/2008 at 06:04 AM :: Comments to date: 0

Category: Politics and the Economy

Is The Fed Making A Bigger Problem Than It's Solving?
When the 1990s boom came to an abrupt end, the U.S. appeared to be heading for a tough recession. To prevent it from happening, Alan Greenspan pushed interest rates all the way down to 1%. It was a close call, but the economy pulled back from the brink and started a slow recovery.
Some economists are not happy that the recession was avoided. They argue that downturns are needed to correct the abuses and bad investments that accumulate during booms. The critics say that by keeping the recession at bay six years ago, the problems continued into the current upturn and became much worse.
If the critics of the Fed's actions are correct, the current bailout will push our economic instabilities ahead once again, and make the next downturn an even bigger threat. At some point, the problems will become so bad, the Fed won't be able to put them off anymore and we will have a very serious downturn.
The argument that the Fed is creating more problems than it's solving has some merit. However, it doesn't have much immediate value for investors. As the current economic slowdown comes to an end, there will be a lot of money to be made. The best plan is to get your share of the loot and evaluate the future when it becomes easier to see.
I feel the problems will surface in the year 2009 because of the elections. It doesn't matter who is elected President because the economy still moves along with or without the Fed intervention.

Question asked on 04/06/2008 at 06:44 AM :: Comments to date: 0

Category: agricluture

Some of Henry Ford’s ideas were way ahead of their time. In fact a few ideas were so far out that they went nowhere, but not for lack of merit. For example, Ford was always looking for ways to save money on the costs of materials but without sacrificing quality, design integrity or safety. From his childhood background on a farm, and because many of his customers were farmers, Ford was deeply interested in agriculture. Ford often commented that crops could grow quickly, “as compared with lumber or especially iron ore.” So Ford funded a laboratory to assist farmers to find a way to use crops in industrial applications. Ford hired a highly regarded chemist named Robert Boyer to run the lab, where dozens of workers researched industrial uses for farm crops such as cantaloupes, carrots and beets.
Among other crops, Henry Ford was a great promoter of soybeans. In one marketing effort that Ford intended to impress his farmer-customers, every vehicle that Ford sold came with a bushel of soybeans on the front seat. And during the Great Depression, Ford entertained visitors at luncheons in which every course contained locally grown soybeans. The Ford menu included tomato juice with soybean sauce, soybean cookies and soybean candy for dessert.
But Ford used soybeans to do more than just amuse visitors at lunch. Ford was looking for projects that combined industry with the output of agriculture. Among other things, Ford had an abiding interest in developing soybean-based plastics. Throughout the 1930s Ford pioneered the use of soybeans in plastics that he used in his automobiles. The soybean components included plastic parts (even body panels), seat covers and paint. Ford’s soybean-automobile project culminated in August 1941, when he patented an automobile made almost entirely of soybean plastic, attached to a tubular welded frame.
Ford’s soybean-car weighed 30% less than a car made of steel. Even better, the plastic panels did not rust. And an array of experiments concluded that they were ten times as durable as steel. Ford claimed that plastic panels made the car safer than traditional steel cars because the car could roll over without being crushed. Ford hoped that the new soybean plastic would replace metal, which was in short supply in the years just before World War II as the U.S. government was building up the country’s navy. Furthermore, Ford’s soybean-car ran on grain alcohol — yes, ethanol — instead of gasoline.
Ford’s engineers were building a second soybean-based car when the U.S. entered World War II in December 1941. Because of the war, the federal government suspended all U.S. automobile production for the duration of the conflict. Thus Ford’s soybean-based car experiment languished. Almost all of the Ford Company’s resources were directed towards war-related production. Indeed, in one gigantic undertaking Ford converted the massive facility at Willow Run, Michigan to building B-24 bombers. At one point during the war, the Willow Run plant rolled a brand-new B-24 — made of over 140,000 separate parts — off the assembly line every hour. This was a far cry from building automobiles — made of soybeans or otherwise. By the end of the war in September 1945 the idea of a soybean car had simply fallen through the cracks.
Henry Ford died in 1947, aged 84. And we can only speculate about what might have happened if Henry Ford and his company had continued to pursue the idea of a car made out of soybeans, and powered by ethanol

Question asked on 03/14/2008 at 06:36 AM :: Comments to date: 0

Category: Quote of the Day

Pride goeth before a fall.

By Mr. Eliot Spitzer.

Wall Street cheered on Monday when the news came out.
Mr. Spitzer did good in the beginning but later became a victim just like all of his old targets.
A perfect case where money doesn't corrupt but power eventually corrupts.

Question asked on 03/13/2008 at 05:39 AM :: Comments to date: 0

Category: Politics and the Economy

On Thursday, Richard Russell from Dow Theory, noted that the cover of the latest issue of BusinessWeek has recession all over it. The magazine-cover indicator says if an idea is popular enough to make the cover of a national magazine, it's either over already or it's not going to happen. This sounds a little flimsy, but it's not to be taken lightly, especially when it comes to the big, overarching trends.
People will see that the recession will be over in March. Another reason, it is a political voting year. Politicians are doing all that they can to stimulate the economy to get it out of the reccession.

Question asked on 02/07/2008 at 07:13 AM :: Comments to date: 0

Category: Politics and the Economy

"Public opinion always wants ‘easy money,’ that is, low interest rates."

Ludwig von Mises

"Almost all the fathers of socialism were members of the upper middle class or of the professions."

Ludwig von Mises

"The more ‘adequate’ we make relief, the more people we are going to find willing to get on it and stay on it indefinitely. The more we try to make sure that everybody really in need of relief gets it, the more certain we can be that we are also giving it to people who neither need nor deserve it."

Henry Hazlitt

Now what is the government trying to do? Save us from the excesses of our greed. Hard work and the sense of accomplishment allows people to create wealth and happiness. Being given money debases the drive to work hard and sets a stage for more dependence upon hand outs. This is the continuing evolution of debased currencies and inflation by governments for the benefit of the masses. So the only hard asset that keeps it value relative to the other goods and services is gold and silver.
This is a parallel to the 70's. Gold will continue to go towards the $2000 mark before it is finally tamed to settle back to the new bench mark of $1000. Hang onto your metals and stocks.

Question asked on 02/01/2008 at 07:45 AM :: Comments to date: 0

Category: Politics and the Economy

In The Financial Times this week the inside headline is "Markets ask if the Fed was duped?" It seems that a rogue trader (interesting how a lone trader who loses a lot of bank money is always a rogue) lost Societe Generale $7.1 million (4.9 million euros). Seems he knew how to override the risk control systems, had other employees' passwords, and built up a massive long position which was down about $2.2 billion by the time SocGen management found out. He produced the losses in just a few weeks. SocGen started selling everything to cover the loss on Monday morning, and the markets moved away from them, growing the loss to the $7.1. That constitutes a bad day at the trading desk.
Some suggest that it was the very selling by SocGen, which was 10% of the market trades, which caused the downside volatility. It seems the European Central Bank knew early on about the problems at SocGen, but the Fed got caught by surprise. The Fed holds an emergency FOMC meeting ahead of the scheduled meeting this week, and makes a shock and awe 75-basis-point cut. I can tell you that shocked a lot of very sophisticated traders and managers that I talked with here in Europe.
Everywhere I went I was asked, "Why an inter-meeting cut?" The Financial Times wrote, "The question being asked now by some in the markets is: was the Fed duped into a clumsy and panicked move by the clean-up operation for Jerome Kerviel's [AKA rogue trader at SocGen] mammoth losses for the French bank?"
Barry Ritholtz was on CNBC with Steve Lissman and Rick Santoli and they suggested that the Fed responded to the volatility in the stock markets with the rate cut and that the Fed is now responding to the traders in the S&P futures pit.
Let's read Barry's take when he finds out that the volatility may have been the result of our rogue trader, in a blog entitled "Fed's Folly: Fooled by Flawed Futures?":
"Was it a misunderstanding of their mandate, inexperience, or just plain hubris?
Regardless, it took only 2 days to learn just how ill-considered the Fed's emergency market rescue plan was: To wit, a fraudulent series of losses led to a major European bank unwinding a huge trade: Societe Generale Reports EU4.9 Billion Trading Loss.
SG's $7.1Billion dollar unwinding led to panicked futures selling on Monday and Tuesday.
"Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cut was not to insure the smooth functioning of the markets, but rather, to guarantee prices.
As we have been saying for the past two days, this is not the Fed's charge. They are supposed to be maintaining price stability (fighting inflation) and maximizing employment (supporting growth) -- NOT guaranteeing stock prices.
"I guess the European Central Bank has it easier: Their only charge is to fight inflation: 'maintain price stability, safeguarding the value of the euro.' Tuesday's panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days. Failing to understand what their responsibilities are is bad enough; allowing themselves to be bossed around by futures traders is inexcusable.
And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete."

First, for years one of my central premises has been that we have to remember that when a normal human being is elected to the board of the Fed, he is taken into a secret room where his DNA is altered. Certain characteristics are imprinted. Now, he does not like inflation and hates deflation even more. He sees his role as making sure the financial market functions smoothly. He does not care about stock prices when thinking about rate cuts.
Then what was the reason for the cut if not stock prices? Why an inter-meeting cut much larger than the market was expecting next week, just seven days later? What was so urgent that we needed a shock and awe rate cut a week early?
I am not sure if panic is the right word, but I think very deep concern is also a little understated. It has to be something serious for an inter-meeting cut.I believe the monoline insurance companies like Ambac and MBIA are in worse shape than most realize, the counter-party risk in the $45 trillion Credit Default Swap market is much worse than we realize, and the exposure by various banks to their problems is much larger than currently understood. The Fed understands this, and realizes that they have been behind the curve but need to catch up.
If you are a bank or regulated entity, and you have mortgage-backed securities that have been written by a AAA company, you can carry that debt on your books as AAA. But as the companies get downgraded, you have to write down the potential loss. Quoting from a recent note from Michael Lewitt:
" 'MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (CDOs that own other CDOs, or mortgages piled on top of mortgages, or, to quote Jeff Goldblum's character in Jurassic Park again, 'a big pile of s&*^'). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped to under $10.00 per share.
" 'The bond insurers' business model is irreparably broken. In HCM's view, it will be all but impossible for these companies to raise capital at economic levels for the foreseeable future and certainly in enough time to work out of their current difficulties. The performance of MBIA's 14 percent bond issue will prove to have been the death knell for this business. The market needs to come to the realization that the so-called insurance that these companies were offering is not going to be there if it is needed. The fact that these companies were rated AAA in the first place will remain one of the great puzzles of modern finance for years to come.'
"You can bet that the $8 billion in CDO-squareds is gone. It is a matter of time. MBIA's market cap is about $1 billion [it is now at $1.74]. Current shareholders will be lucky if they only get diluted 75%."
Think this through. MBIA is still rated AAA. Ratings downgrades are just a matter of time. Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers, according to analysts at Barclays Capital.
Banks will need at least $22 billion if bonds covered by insurers, led by MBIA Inc. and Ambac Assurance Corp., are cut one level from AAA, and six times more than that for downgrades by four steps to A, as Paul Fenner-Leitao wrote in a Barclays report published today. Barclays' estimates are based on banks holding as much as 75% of the $820 billion of structured securities guaranteed by bond insurers. (Source: Bloomberg)
The stocks of MBIA and Ambac have risen on speculation of take-overs or a rescue. But MBIA is going to have to cover that $8 billion of CDO squareds. With what cash? MBIA makes about $5 billion a year. It will take almost two years' earnings just to deal with the losses from CDO squareds. Not to mention the subprime mortgage exposure.
But what if the above-mentioned are downgraded to junk, as was ACA when it could not raise capital? As the downgrades on various mortgage assets and the CDOs continue to increase, the ability of these companies to deal with the problems is going to come under increasing question. The losses at major banks could be much worse than $122 billion if they are downgraded to the same junk level that ACA was.
And that is just the credit default swaps (CDSs). What about the trillions that are guaranteed by banks and hedge funds? There are a total of $45 trillion CDSs outstanding.
No one is really sure who owes what and to whom, and what is the risk that there may be no one to pay that CDS when it comes due? The entire mess is going to have to be unwound in the coming quarters. It may take a year or more.
I think the concern that there is the potential for a much worse credit crisis than we are currently experiencing is what is driving the Fed. They are looking at the problem from the inside, and realize that they simply have to engineer a much steeper yield curve to allow the banks to make enough profits so that they might be able to grow their way out of the crisis over time.
If I am wrong and the Fed was responding to the stock market, then we will likely not see a cut this next week. But if we get another 50-basis-point cut, as I think we will, then it means the Fed is responding to concerns about the credit crisis. And we will get another cut the next meeting and the next until we get down to 2% or below.
A 50-basis-point cut takes the rate to 3%. It they had cut the rate by 1.25% next week, the market would have collapsed. Better to do it in two leaps is what I think they are thinking. We will see. And it is not just the Fed that is concerned

Question asked on 01/27/2008 at 06:32 AM :: Comments to date: 0

Category: Politics and the Economy

Please do me and yourself a favor. Pass this article or website on to your friends and relatives so that when you start to lilsten to the next year of political BS you will know the truth about taxes and who pays what.

The Tax Foundation recently released an analysis of the Internal Revenue Service's income tax data for 2005 (latest available). Let me repeat just a small part of that Tax Foundation analysis:
America's richest 25 percent of taxpayers paid about 86 percent of all federal income taxes in 2005, despite earning only 67 percent of the nation's income... The highest-earning 1 percent alone - those earning more than $364,657 - paid a staggering 39.4 percent of all federal income taxes... That means the top 1 percent of tax returns paid about the same amount of federal income tax as the bottom 95 percent of tax returns combined.
This data for 2005 is not really new. The top income brackets have always paid the majority of income taxes.

Here is the data from the IRS for 2005:
Taxpayer
AGI Brackets Average %of AGI Paid Share of Total
Income Taxes Paid
Top 1% 23.13% 39.38%
Top 5% 20.78% 59.67%
Top 10% 18.84% 70.30%
Top 25% 15.86% 85.99%
Top 50% 13.84% 96.93%
Bottom 50% 2.98% 3.07%

[Note: The Average Percent of AGI paid in taxes for each of the Taxpayer Brackets listed above is calculated by taking the sum of all income tax paid by individuals in each bracket in 2005, and dividing it by the total adjusted gross income of all such individuals. For example, based on 2005 income tax data from the IRS, the top 50% of taxpayers had total adjusted gross incomes of $6.544 trillion, and paid total income taxes of $906 billion. Thus, $906 billion divided by $6.544 trillion equals the 13.84% tax rate shown above.]
Based on the Internal Revenue Service's own data, the rich do in fact pay a higher percentage of their adjusted gross income in income taxes, by far, as compared to those in the lower income brackets. The top 50% of taxpayers pay 4.6 times the percentage paid by those in the bottom 50% on average. Someone in the top 10% pays 6.3 times the percentage paid by those in the bottom 50% on average.
Keep these numbers in your head for the next time a liberal tells you that the rich don't pay enough in taxes. The top 50% already pay almost 97% of all income taxes paid, whereas the bottom 50% pay only about 3%. And let us not forget that the top 50% create virtually all of the jobs in this country, and make the economy strong, yet the libs want to tax them even more!
If you want to see the 2005 IRS income tax data and tables, click on the following link to see the full story from the Tax Foundation: http://www.taxfoundation.org/research/printer/250.html.

Democrats Plan To Hike Top Tax Rate To 65%

The three leading Democrat candidates for president - Hillary Clinton, Barack Obama and John Edwards - have all made it known that, if elected, they will consider raising taxes on "the rich" in order to fund their various programs, including nationalized health care. And as discussed above, the rich are now defined as any individuals making $150,000 or families making $200,000 or more per year.
In the recent Democratic presidential debates, Hillary has avoided stating just how much she would raise taxes on the rich, but candidates Obama and Edwards have told us what they plan to do, and you're not going to like it. They have done so in discussions on the subject of how to save Social Security.
Both Obama and Edwards have rejected the notion of cutting Social Security benefits or raising taxes on the middle class to fix Social Security's unfunded costs. Instead, both Obama and Edwards have actually proposed plans for raising the income tax paid by those making over $200,000. To many moderate voters, this probably makes plenty of sense.
The question is, how much would taxes have to go up on the rich ($200,000 or more in annual income) in order to fix Social Security going forward and fund the Dems' plans for national health care? According to a front-page article in last Thursday's Investment Business Daily:
"To bring in enough money to close Social Security's shortfall and make good on the $2 trillion in IOUs in the trust fund would require an annual tax increase in excess of 25 percentage points on those earning over $200,000... [Emphasis added, GDH.]
Combining this tax hike with the reversal of President Bush's tax cuts for high earners - as all of the top Democratic contenders have called for to help pay for their health care plans - would raise the top rate on work income from 35% to about 65%."
What, you haven't heard of this? Of course you haven't. The mainstream media is not about to tell us that the three leading Democrat candidates plan to skyrocket income taxes on those making over $200,000. Heritage Foundation senior fellow David John reacted to the Dems' proposed tax increases as follows:
"It's easy to say, 'We'll just assess a small tax on the rich. But when you start to add up the cost of (Democratic plans for) health care, Social Security, the (elimination of) the alternative minimum tax, you run into some astonishing tax increases." [Emphasis added, GDH.]
I suggest you start paying more attention to these Democratic presidential debates and be aware of just how deeply these liberals plan to raid our pocketbooks. Even worse, if the Dems are successful in hiking taxes to such levels, there will be no guarantee that they will actually use the money to fix Social Security - they might just spend it.
Finally, can you imagine the negative effects that a top tax rate of 60-65% would have on the economy and job creation? History has shown that at such excessive tax rates, high income earners find ways to limit or reduce wage and salary compensation. Some wealthy individuals will actually work less, or not at all, rather than pay 60-65% tax rates.
I know some conservatives who are so disgusted with the Bush administration that they say they will vote for a Democrat in 2008, just to send a message. I hope they're ready to see their income taxes almost doubled if they do!

Question asked on 11/29/2007 at 03:14 AM :: Comments to date: 0

Category: Politics and the Economy

Iraq May Cause USA to Go Green
EVERYDAY, AMERICANS FOCUS ON COUNTLESS problems that have arisen due to the war in Iraq. One of the clear problems we’ve come across has been the supply and price of the world’s oil. No matter what side of the issue you’re on, it’s hard not to notice the effect this conflict has had on our number one source of fuel.
Iraq, under Saddam Hussein, was one of the world’s largest oil producers. Many experts predicted that with Hussein out of power, Iraqi oil production would only rise. This has not been the case. If anything, the war with Iraq has significantly harmed the production of oil and raised the price to record levels. Tensions in the area continue to grow, and recently the threat of an invasion by Turkey sent the price to its highest mark.
So that’s the bad news. Despite what many people think, there actually is good news coming from Iraq. This is news that should delight the very people who have been opposed to the war from the beginning. According to Gallup, the majority of Americans who oppose the Iraq war are Democrats. The same can be said for the majority of Americans who believe global warming to be a major problem. Based on those facts, it may be safe to assume that the same people who oppose the war are the ones asking for changes when it comes to global warming. Many of these people want the government to do something significant about this problem, but the free market should be figuring it out for them.
As more and more people talk about global warming, millions are looking for alternative forms of energy that are cleaner and more environmentally friendly than oil. The technology for alternative fuels is there. The solutions are just way too expensive.
Take hybrid cars, for example. Right now, the Honda Civic sedan starts at $15,010. The popular family vehicle gets 36 miles per gallon. The hybrid version of the Civic starts at $22,600. The hybrid operates at 45 miles per gallon. Clearly, owning a hybrid will have you fueling up fewer times a year and is better for the environment. But are the savings in gas consumption and environmental effects worth it for the average customer to pay over $7,000 more for the “green” vehicle? Based on an average of 12,000 miles driven per year and paying $3.09 for every gallon of gasoline, the savings you get by choosing the hybrid car are only $207 per year. It would take over 33 years to make up for that extra cost. That hardly sounds worth it to me.
One of the only ways these hybrid cars will become more affordable and then be used by more people will be if oil prices begin to rise. The higher oil gets, the more affordable by comparison environmentally friendly alternatives will become. Not only will rising prices balance the differences between oil and alternative energies, but the more expensive oil gets, and the greater a national emergency it becomes, the more incentives to improve energy technology rise.
The incentives will also rise when further political pressure is put on the government. When that happens, subsidies for alternative energy programs will increase. If political unrest continues in the Middle East and the countries that control OPEC refuse to step up production, Americans will have no choice but to curb their use of oil and will then be forced by the market to become part of the ecological solution.
You can already tell that the issue of government subsidies for alternative fuel is one that companies in the energy business are pushing for. According to the National Venture Capital Association, startup companies that focus on clean technologies attracted more than $800 million in venture capital last quarter alone. That shows that there are plenty of investors willing to put up their money hoping the winds are changing toward clean products.
In fact, just last week, the world’s most famous environmentalist, Al Gore, became a partner in Kleiner Perkins Caufield & Byers, a successful venture capital firm that backs many eco-friendly startup companies. Kleiner Perkins claims that Gore will be an integral part of the running of the firm, but many believe that he will be used for his vast connections in Washington. If Gore can help get more subsidies from the government, the money that a firm like KPCB stands to make could be huge. And of course, the politicians that will provide those subsidies will also be answering to the concerns of their constituents. If the price of oil becomes the biggest problem facing Americans, you can be sure that Congress will attempt to do something to appease the voting public.
What stands in the way of these companies is the threat that oil could somehow become cheap again. What if the U.S. leaves Iraq and tensions in the world begin to ease? What if that led to Iraqi oil production on the levels we saw before 2003? If such a thing would happen, then the American people would continue to drive their gas-guzzling cars and polluting the environment. That is the exact opposite of what many global warming activists want.
Of course, this rationale sounds absurd when compared with the money that could have been saved had we not gone to war. That money could have been used by the government to directly subsidize alternative energies sooner. But would they have used it that way? Probably not. Governments usually tend to respond to problems only when they become a crisis.
This goes to show you that by creating an oil crisis, the government may finally be able to solve it. It may be hard to swallow, but believe it or not, people interested in America cutting down on its use of oil and stepping up cleaner initiatives may have George W. Bush and the Iraq war to thank.

Question asked on 11/26/2007 at 06:40 AM :: Comments to date: 0

Category: Politics and the Economy

Here's a new reason to be wary of investing in Asia...
The preference of Asian families to have male children will eventually lead to the downfall of the economy. That's what the United Nations is arguing. Many Asians see male offspring as a type of insurance policy that will help support them in old age. In China, 120 boys were born for every 100 girls in 2005. Men are on pace to outnumber women by 23 million in India and 26 million in China by 2030.
The UN fears better technology will only increase sex selection, and leave millions of sexually repressed men with no outlet. The UN believes the societal imbalance will lead to human trafficking and prostitution, which is already on the rise. This will lead to the Mafia infiltrating the Chineese and Indian power structure. When that becomes too corrupt yoou will end up in anarchy. This is a very long time frame but inevitable.

Question asked on 11/03/2007 at 03:56 AM :: Comments to date: 0

Category: Politics and the Economy

By Richard Russell

We're dealing with a situation that has no precedent in world history. We have a situation where 20 central banks on the planet are all under political pressure to keep their respective currencies competitive. No nation (despite what they may state for publication) wants a strong currency. A "cheap" currency allows for competitive exporting. A cheap currency also places a nation's assets on the bargain table. And that, of course, is the case with the US today. The "bargain" dollar has turned the US into a veritable "candy store" for much of the rest of the world. In terms of real estate, corporations, tangibles located in the US, everything looks like a bargain to a businessman or an overseas investor.

The fact that the world is now operating on a fiat currency basis has placed the planet on an endless inflationary escalator. The culprit is the phenomenon of "competitive devaluations." If a given nation's currency becomes noncompetitive ("too strong"), that nation's central bank creates more of its own currency and with that newly created currency -- it buys dollars. This strengthens the dollar in terms of the nation's own currency, rendering that nation's currency competitive again, at least in terms of dollars.

However, this process has no automatic brake which would serve to bring this endless currency production to a halt. As a result, the world has become an ever-expanding ocean of fiat currency. The term for this process is well-know in financial circles, it's called -- monetary inflation. If this process continues (and it is continuing), monetary inflation always produces price inflation. Today we are experiencing both monetary and price inflation. We see indications of price increases everywhere --from the price of bread to the cost of a college education, from the price of a man's shirt to the cost of a hotel room in New York or London or Paris or Dublin.

I believe the cheap-dollar phenomenon has a great deal to do with the fact that the Dow and the leading US stocks are rising while the secondary stocks and the advance-decline lines are lagging. However, I also note that the majority of US stocks, as gauged by the various advance-decline lines, are now heading higher. Thus, the advance-decline lines are still lagging, but like the Transports they've been moving IN THE RIGHT DIRECTION, and that is bullish.

Aside from the US government's ridiculous manipulations and lies, the true inflation rate in the US is probably running at about 7%. With the yield on the bellwether 10-year Treasury note at 4.67%, US interest rates are now negative. Negative interest rates are bullish for investors. They mean that borrowing has become both cheap and profitable. Negative interest rates also tend to be inflationary.

The world trend now is to move out of fiat currencies and into something tangible, something of essential value that can't be printed or created by pressing a button. Thus, the dollar (fiat currency) cost of everything from gold and silver to diamonds to platinum to classic art to collectibles to coast real estate is rising.

Thus hard assets.

Question asked on 10/30/2007 at 06:16 AM :: Comments to date: 0

Category: Politics and the Economy

Read the following Quote

Don't "cut" my taxes anymore. I can't afford it.

According to the IRS, Americans coughed up a record $2.568 trillion in taxes in 2007, or 6.7% more than in 2006. The Wall Street Journal places this figure in historical perspective: Federal receipts have climbed by $785 billion since the 2003 investment tax cuts, the largest four-year revenue increase in U.S. history.

So the tax cuts allowed Americans to make more money so they could pay more taxes.
Tax cuts are good and they stimulate the economy.
Anybody that believes that we need higher taxes is wrong.
What we need is less government spending.
When you go vote this fall remember to vote for the candidate that believes there should not be any tax increases because it is better for the economy.

Question asked on 10/16/2007 at 06:36 AM :: Comments to date: 0

Category: Politics and the Economy

In the 1930s. The Great Depression kept taking its toll. The U.S. economy kept limping along, like a wounded foot soldier graveling through the mud and blood-soaked barbed wire, inching his way home to the trenches along the Western Front under the ill-fated cover of a cold, blustery February night.
The world's newest empire kept clinking and clanking. Americans were broke, and they didn't know why. They wanted answers…they wanted a solution. These were desperate times. They called for desperate measures.
Like the Lord to Moses, Lord John Maynard Keynes caught the frequency of Grandpa Franklin's ear. The oracle of modern economics believed the policy prescription destined to save the modern market economy lay in the provident hand of government - more specifically, monetary policy (increasing the money supply) and/or fiscal policy (increasing government spending). Emphasis on the word "and."
FDR quickly swallowed the pill. He then passed the bottle down Pennsylvania Avenue. The distinguished gentlemen of Capitol Hill caught wind of the cure. However, Roosevelt (and just about everyone else) forgot to digest the second (crucial) part to Keynes' magic prescription. Governments fully embraced the idea of running deficits during economic down times…They just conveniently neglected to run surpluses (pay back the debt) in good times.
But who can blame them? What elected official in his right mind stands up before his Washington brethren and demands we turn off the spigot? Who in their right mind does not want to encourage more business expansion - and a greater illusion of fiat prosperity - than would otherwise be justified? And who knows or cares that a 1940s dollar is only worth roughly 5 cents today?
As Bill Bonner points out, "The goal here - as with all government programs - is to produce the desired benefits while pushing the costs onto someone else. That's how politics works. You promise something…and you force someone else to pay for it. You rob one Peter voter…and spread the loot among the Pauls."
Rene A. Wormser once wrote, "No government can operate with a monetary system consisting only of fiat money without sustaining gross economic turmoil and eventually facing a tragic day of reckoning. A fiat money system prompts legislative profligacy and, inevitably, produces inflation."
Wormser had a point. He had a very good point. Deficit financing and government intervention have taken their tolls. Less we forget, 50 or 60 years, which in a man's life means a good bit of existence, are only the blink of an eye in the life of a nation. Fifty or 60 years is even less so in the life of an empire…at least a successful one.
So here we are 60-odd years later with our sweat-soaked American wages, adjusted for inflation, tangibly lower than they were in 1970. We not only make less, but we spend more…much, much, more. From 1999-2007, household debt went up more than all the debt that households had previously accumulated in the 220-year history of the United States.
If that wasn't enough, by the end of 2005 the most recent Bush administration had borrowed more from foreign governments and banks than the previous 42 U.S. presidents combined.

The Government's broke… It's citizens are broke.
It's a sad fact, but today, approximately one-third of all Americans have no savings at all. The typical baby boomer holds a total of $60,000 in net worth. At a 5% after-tax fixed-income return, Johnny baby boomer will earn $3,000 a year, or $250 a month, or $8.33 a day. McDonald's must have seen this coming. The dollar menu may be all he has. So goes the true "McDonaldization" of America.
But wait! There's always Social Security. Whoa, Johnny gasps…Thank goodness Washington took care of that.
It's no wonder we find ourselves here. Americans' total spending last year alone exceeded their earnings by a mere $41.6 billion dollars. And that's not the most difficult task when one considers that the average number of credit cards per U.S. household is now 12.7.

The Real "American Dream"
It didn't used to be this way. Some 60-odd years ago, keeping your head above water meant saving a dollar.
In the 1940s, when my grandfather bought shares of companies such as General Electric and Alcoa Aluminum, his main goal never involved generating a fortune overnight - only making sure he had enough income for tomorrow.
You see, my grandfather was the child of a dying generation… A group of people for whom the Great Depression was much more than a chapter or two in the 13th edition of some unmarked high school history book.
Today, most kids in America will learn the basic facts of the Great Depression, but the most valuable piece of knowledge - a realization that's essential to all Americans today - won't appearin their textbooks, not even as a footnote.
My grandfather emerged from the Great Depression humbled…his "American Dream" intact, but tempered by the precious wisdom that nothing material in this world is infinite. For every "dream," there also exists the opposite, equally possible, scenario.
That's what we're facing today, dear reader. With each passing day, we add $2.43 billion to our record-high national debt, and the dollar continues to fall in value, further eroding our already insufficient retirement savings…
What are most Americans doing about it?
They're consuming even more, even if that means dipping into their savings or taking on debt they'll never be able to repay.
Why?
Because it has to do with an economic struggle… an innate and uniquely American fear of being left behind (or, even worse, completely left out)…It has to do with an individual's fight for their particular piece of the proverbial American pie.
Our political icons constantly remind us of achieving the "American Dream" and becoming an "ownership society," as if to say you can do better, achieve more and, thus, find happiness.
Its roots go back to the great bull market that followed World War II. That glorious economic expansion gave birth to America's first legitimate middle class…a group of people whose last names were scribbled onto university rosters for the very first time.
Every American family could now have a house with a yard, a new Oldsmobile or even a Cadillac Coupe de Ville…The "American Dream" was reborn and recast, unfettered by the cautionary tale not even one generation old.
If you couldn't keep up with your neighbors, then new companies such as Visa and MasterCard could help you out.
Madison Avenue hit its stride and showed the "Joneses" where to use their new plastic…And here we find ourselves today, back where my grandfather and his peers found themselves 60 years ago…blindly teetering on the precipice of another American nightmare.

Paying Uncle Sam's Tab
But there are a select few in the current generation…a handful of Americans with plenty of money for Washington to get its hands on. They're an elite group…They're the top 1%. They hold membership in the club of Americans who control 90% of the nation's total wealth.
So it's no wonder that the proposal to rescind America's "estate tax" fell three votes short on the Senate floor last summer.
It's true that the estate tax generates a little more than 1% of all tax revenue. Furthermore,the tax only affects 0.5% of Americans. Most Americans probably never think of Uncle Sam's majority stake in Granddaddy's estate.
But those affected care a great deal. They potentially face a 55% levy on transferable assets. And a majority of this money has already been taxed in one form or another.
Think of it this way… Warren Buffett, whose net worth is estimated at $52 billion, faces a $28.6 billion dollar bill from the IRS at some point in the not-so-distant future (we note Buffett plans to donate the bulk of his fortune to charitable organizations sans tax). Now, it's pretty well known that Buffett frowns upon the practice of passing great fortunes from one generation to the next. Steel magnate Andrew Carnegie also supported the notion.
President Theodore Roosevelt, cousin to FDR, instigated the whole idea. He argued that the transmission of vast fortunes between generations threatened to create a permanent aristocracy and, moreover, ruined the characters of the undeserving heirs.
He may have a point.
But many of the world's wealthiest families fail to share this sentiment. In fact, they spend great sums of money avoiding "the bill." According to the Joint Economic Committee, "The $23 billion in revenue it raises is illusory, since estate tax avoidance activities likely generate equally large revenue losses under the income tax."
Say what you want. I sometimes tend to wonder if those Americans who ardently support the tax would feel the same way if they were the ones about to cut the $20 million check. Most Americans wince having to cut the $2,000 dollar interest-only mortgage check.
Anyhow…While the 20th century history books exalt the purveyors of active government intervention…names like Atlee, Wilson, Monnet, Roosevelt and Lord John Maynard Keynes, I'm offering you this: the legacy of the other Sir John…Sir John James Cowperthwaite.
Thanks to our Sir John, not all governments profess the noble virtues of massive wealth redistribution. Some governments simply can't afford to. They lack the abundant natural resources to effectively pull off the stunt…they lack the proverbial amber waves of grain that support inefficient, activist government agendas.
Ducking the Estate Tax
Money will always flow where's it's treated best. And I think you'll be hard-pressed to find any other place in the world that treats money better than Hong Kong.
The highest tax bracket doesn't surpass 17%. Individuals are assessed on only annual employment income. Dividends and capital gains are not taxed. And like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions.
When you consider Hong Kong provides arguably the world's greatest municipal services in a relatively crime-free environment, you'll be challenged to find a more favorable tax policy anywhere in the world.
And in a similar fashion to low personal tax rates, Hong Kong's estate tax holds a maximum rate of 15% on assets exceeding US$1,350,000. So when Li Ka-shing, the world's 10th richest man, looks to pass his $18.8 billion and growing, he'll do so under very favorable circumstances.
And here's the kicker.
Hong Kong recently repealed its inheritance tax on property. Consequently, many Hong Kong property owners (unfortunately, U.S. citizens who own Hong Kong property are still taxed under inheritance laws) are now able to pass down real estate assets without any tax liability whatsoever.
Let me say that again.
Real estate assets may be passed down generations without any tax liability whatsoever.
It's no wonder 21 billionaires call Hong Kong home. And I would venture to guess that it won't be long before many more do the same.
Hong Kong is the land of the rich. And I'm not just talking a few scattered billionaires. One in seven adults living on Hong Kong Island can claim the exclusive title of being a HKD millionaire. In fact, according to a Citibank-commissioned survey reported in the South China Morning Post, Hong Kong millionaires have roughly $4 million ($512,821 USD) in liquid assets, on average. And of those assets, one-third of that amount sits in common low-yielding bank accounts.

Hong Kong will become a tax haven for the new class of super rich. Its skyline competes with Manhattan, its weather is comparable with Miami's, public safety and infrastructure outclass anything you'll see here in the United States. Disney has just moved in across the harbor on Lantau Island, and Macau, the Las Vegas of Asia, is just a 45-minute boat ride away. What's not to love?

Prime locations in Central, Admiralty and Causeway Bay, the heart of Hong Kong, will only continue to command premium prices for years to come.

It's Time to Buy

As we stated in the Aug. 24 weekly alert, Beijing just announced that it would permit mainland Chinese citizens to invest in the Hong Kong stock market. The proposal allows Chinese citizens to open accounts at the Tianjin branch of the Bank of China and then sell renminbi (RMB) and buy Hong Kong dollars without limit for the purpose of buying shares in Hong Kong.
This is probably the most important financial development in China since its entry into the World Trade Organization in 2001.
This policy will release roughly $2.2 trillion in Chinese household savings from the depths of mattresses and low-yielding savings accounts ona path to find better returns. And that path goes in one direction only: Hong Kong.
As we said before, talk about a windfall for the Hong Kong market. As Zhao Xiao, a professor of Beijing's University of Science and Technology, said, "Remember, if all Chinese money can go to Hong Kong, then many global firms will favor listing in Hong Kong."
Countries have no friends, only interests

Beijing's decision to restrict mainland savings to the Hong Kong market should not come as too much of a surprise. This should go a long way in easing speculative pressure on the Shanghai A-share market while simultaneously keeping Chinese wealth with Chinese companies. This is the natural step as Beijing gradually begins releasing capital account control toward the eventual full convertibility of the renminbi.

Some of the world's greatest stocks call the Hong Kong stock exchange home. These multibillion-dollar companies have offices all over the world. Their names may be foreign, but their products and services certainly aren't. These are the companies that bring the "Made in China" label to a Wal-Mart near you. These are the companies that own some of the world's greatest real estate. These are the companies that plan to build the infrastructure that will service more than one-third of the world's population.
And if that weren't enough, most of these stocks currently trade at bargain basement prices. The reasons vary…In many respects, Southeast Asia still carries the "emerging market" risk label. Remember, the region has been forced to hurdle one major setback after another. In addition to Japan's prolonged economic recession, Southeast Asia has faced a crippling financial crisis as well as the 2003 outbreak of severe acute respiratory syndrome (SARS). Each event has been a major drag on Asian economies.

Feeding the World's Next Real Estate Boom

Right now, Asia is building…It's orchestrating a building boom like none other. It's building the essential roads, bridges, tunnels and skyscrapers its economies will require to prosper.
Buying commercial real estate in Asia today is a lot like investing in American real estate at the end of World War II.
You may (should) remember the Levittowns that shot up across the United States over 50 years ago. These carefully planned neighborhoods provided affordable housing for the thousands of young soldiers returning home from the war. But more importantly, these planned neighborhoods served as the new model for America's booming middle-class suburban lifestyle.

The expanding Asian middle class continues creating a similar demand. Except Asian countries aren't peppering the landscape with tree-lined streets and two-and-a-half bedroom, one-and-a half story ranch houses. High-rise apartment complexes are the new Levittowns of Asia.
Asian developers are utilizing this high-rise housing model for one specific reason: Land is scarce. It's very scarce.
Most Asian economies lack the expansive terra firma we in the West find so readily abundant.
Take Singapore, for example…It's roughly 3.5 times the size of Washington, D.C., with an economy greater than New Zealand's and a growth rate double that of the United States.
Land is and always will be the most valuable asset in places like Kuala Lumpur, Shanghai, Tokyo, Taipei, Hong Kong and Singapore. These Asian cities lack the land for urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte and Atlanta.

So when you can't build out, you build up. And that's exactly how these Asian economies are making their magnificent growth possible. And the property development groups will be the ones turning this necessity into a reality.

Question asked on 10/15/2007 at 07:32 AM :: Comments to date: 0

Category: Politics and the Economy

Technology to enable a mind-machine interface. It’s just taken a great leap forward.
This is a new step for the future of a new technology. Just like computers wer started in 1930's but IBM didn't get big untill 1960. Thirty years just to get it profitable.

But a new technology shows the promise of enabling true machine-assisted telepathy. That’s pretty extraordinary in itself.
Scientists at Wadsworth Center have developed a "brain computer interface (BCI).” It can identify brainwave patterns precisely enough to translate them into letters.

Team member Peter Brunner recently demonstrated it at the European Research and Innovation Exhibition in Paris by spelling "B-O-N-J-O-U-R" purely through the power of thought.
Potential beneficiaries include 16 million sufferers of cerebral palsy and five million victims of spinal cord injury. Stroke victims are another group who may benefit.

Eventually, it will allow users to control machinery, such as wheelchairs, via thought, perhaps even ultimately pilot vehicles such as cars.

It takes about 15 seconds to type a single letter (or select a command). Though very slow by normal standards, this represents a major advance for persons such as Stephen Hawking, who are literally prisoners in their own bodies.

The system works by displaying a menu of choices. It highlights each in succession. When a particular brainwave shows heightened attention or interest, it interprets that as a selection.

Over time, the system adapts to the particular brainwaves of the user. Future versions may perform faster.

Already, it is finding practical application. One neurobiologist reportedly uses it to write grant proposals.

Although true instantaneous telepathic communication of thoughts is still years away, we can see the first glimpses in this technology. Meanwhile, I expect licensure of this technology to give a competitive advantage to some wheelchair maker and an innovative manufacturer of consumer products such as electronics.

Question asked on 10/07/2007 at 03:38 AM :: Comments to date: 0

Category: Politics and the Economy

The downside of the interest rate reduction is rising inflation. It will take a few months for the problem to show up but it appears to be inevitable. There is simply no way to add billions of dollars to a slow economy and not expect them to have an impact.

One way the rate cut is making inflation worse is by reducing the value of our dollars. Within two days after the Fed's action, the dollar fell sharply against most foreign currencies. The lower purchasing power of the dollar will soon begin to push prices up for nearly all imported goods.

Prices of Chinese imports are likely to go up the most due to that country's rising production costs. Soaring energy and commodity prices are behind most of the increases. Higher labor costs are also having an impact. The bottom line is countless consumer goods are becoming more expensive.

I was looking for a down market but this will give the market one more boost. Then when inflation kicks in the market will fall again like it was in July and August. The market does not like inflation.
Still hang on to your metals stocks because with inflation that is the way to play the commodity market.

Question asked on 09/30/2007 at 06:44 AM :: Comments to date: 0

Category: Politics and the Economy

The dollar reaches new lows. The housing market shows no sign of a bottom. Oil almost touches $84 before backing off. Interest rates go up after the Fed cuts. So naturally the stock market keeps climbing. But then, consumer spending came in strong, employment looks like it may be ok, inflation (at least by one measure) came in below 2%.
This is a quick summary of this past week. Sounds very ominous and confusing. The government tries to tell you there is not much inflation. Try stretching your dollar today. A kid out of Law school today starts at $140,000 to $160,000 on the East and West Coast. If that is inflationary I don't know what is. Oh yeah that loaf of bread for $2.00 and it isn't even a special kind.
Investing is looking at the overall economy and determining where to put your money for the future.
Now there are alot of cliches and sayings out there which are true.
History repeats itself. True but not exactly. So if you study history and look at the causes and the effects of certain happenings you can become familiar with the potentential outcome of events that happen which cause a reaction that affects the market. Very logical and very easy. Right.
The other cliche is "Buy low and sell High". Another very true statement about how to make money in the stock market. On the street they say they don't ring a bell when the market tops or bottoms to tell you when the market turns. But there are a lot of chart patterns that will tell you historically what has happened and you can play those technical indicators. One of the best technical indicators in the chart patterns is the double and triple top.
The Spx and the Dow are setting up for that. So that is the game plan. You are either going to be pro-active or reactive in your trades. Proactive now is to sell your stocks and short the market. This is also imprudent for 99% of all investors, because investing is a long term strategy of methodically building wealth over time due to compounding. Being reactive is selling when the pain is too great and you don't want to lose your investments. Either method is used by everyone other than a long term investor like Warren Buffet. He still owns his Coke stock that he bought in 1955.
So what does this all mean today. This decade is about asset inflation. Invest in long term inflationary assets which are gold and silver now. Do it now before you wish you had a year from now. As I emphasized on the first sentence of todays news, the low dollar, is the cause of the gold in dollars to inflate. Gold and silver will rise in dollars relative to the other currencies due to the weak dollar.
Tired of reading about gold and silver? I just want to let you all make some money.

Question asked on 09/29/2007 at 07:34 AM :: Comments to date: 0

Category: Politics and the Economy

It's too early to break out the party whistles, but it appears the bottom of the liquidity scare has passed. The September 18 reduction in interest rates from 5.25% to 4.75% is already filtering through the economy. The cost of everything from mortgages to credit cards is starting to come down.

Of course, there was never really a shortage of money. What went missing for awhile was the confidence to loan it out. The Fed's rate cut helped as much on that score as it did financially. That's particularly true since Mr. Bernanke let it be known that further cuts will be forthcoming if they are needed.

There is still going to be clean up from the credit crunch but the idea that the Fed is willing to take care of the problem builds confidence in the business leaders.

This will allow them to go forward with plans and spend capital budgets. This will continue to feed the inflation fires.

Question asked on 09/28/2007 at 06:36 AM :: Comments to date: 0

Category: Politics and the Economy

I only feel it fitting to remember 6 years ago today how the world stood still watching the horror of destruction by the terrorist.
No one new what or why it was happening. The terrorists are committed to destroying our way of life.
It is hard to comprehend why anyone would think that they are not our enenies.
The USA was attacked and thousands of unsuspecting civilians lost their lives.
We must remember this and remember and thank the military for their continued dedication for making our shores safe. Since 9/11/01 the US has not been attacked due to our security efforts, commanded by the President of the USA, George Bush.
He is a very unpopular President due to the war. He still has no choice but to continue the on going battle.
It won't matter which President comes to power the threat of terrorism will always try to destroy our way of life.
God Bless America and all who defend it.

Question asked on 09/11/2007 at 08:21 AM :: Comments to date: 0

Category: Politics and the Economy

You get what you pay for.
What a true saying. China has always been cheap.
They can produce cheap. They have come a long ways but the backlash for recalls will be painful for them and a bonus for American industries.
An article in a New England paper listed all the recalls of products made in China and then they interviewed a number of people who said that they now scan the box for each product to see if it was made in China. They refuse to buy it then. One US toy manufacturer says that they are swamped with orders. I believe this is going to be a growing trend for awhile.
Starting with affluent consumers the story will be buy American.
The next decade will not belong to China after all. It will belong to a resurgent and strong America.
Wall Street will eventually catch up with this reality and then you should be into the large cap American stocks.

Question asked on 08/26/2007 at 04:44 AM :: Comments to date: 0

Category: Politics and the Economy

Donald Trump went on TV and warned that we may be heading into something worse than a recession unless Fed Chairman Bernanke cuts interest rates very deeply. The impression Trump left was that he wants Greenspan back.
That, of course will not happen. Bernanke has dealt with this by cutting the rates 1/2% which is a big cut.
Bernanke will deal with the situation in a responsible manner.

The economy will stagger a bit, then stablilize, then grow again. This process will take about 1 year.

The population of 21 to 28 is growing and these are the people that will start to buy the houses and bring this real estate slump back out of the doldrums. They will be the people that will spend more as the baby boomers go into retirement.
So for the long term don't panic.

Question asked on 08/24/2007 at 04:27 AM :: Comments to date: 0

Category: Politics and the Economy

The following is an article about what the fed did back in 1998 when there was another crisis in the credit market.

How will the Fed address the looming liquidity crisis stemming from the subprime debacle primarily, and from the abused Yen carry-trade, lax lending practices, and excess liquidity, generally? Asha Bangalore, Vice President and Economist at the Northern Trust Company, believes that given the actions taken by the European and Japanese banks in response to credit and liquidity concerns in the markets by an infusion of €200 Billion, and ¥600 Billion, respectively, the Fed will also take the customary action of cutting interest rates to assuage the market at the October 30-31 Fed meeting.

There have been two major events during the week -- the FOMC meeting and the global liquidity crisis. Starting with the FOMC meeting, the Fed left the federal funds rate unchanged at 5.25% on August 7 as expected. The policy statement acknowledged the turmoil in credit markets but abstained from hints about the next move. The FOMC continued to present inflation as the predominant risk but at the same time noted that "downside risks of economic growth" have risen. Our most likely scenario with regard to the federal funds rate has not changed. We continue to predict that the next move is a lower federal funds rate at the October 30-31 FOMC meeting. Incoming economic data such as the July employment report, declining auto sales, and soft consumer spending are early signs of weakening economic conditions. Economic conditions per se have not deteriorated substantially to bring about an emergency action from the Fed but there is a small chance the global liquidity crisis will translate into an emergency federal funds rate cut.

Moving on to the global liquidity crisis, central banks have taken appropriate action to provide liquidity to financial markets in the last two days of this week. The wide reach of the subprime mortgage turmoil in the U.S. was visible on August 9 when three hedge funds of a French bank had problems and triggered a liquidity crisis. The European Central Bank put out this small fire by providing funding of over $200 billion to ensure adequate liquidity in the financial system and it issued a formal announcement indicating that it stands by to provide funding at the current policy rate. The Federal Reserve's participation was comparatively small on August 9 and it made a formal announcement on August 10 noting that it stands willing to provide funds through its discount window.
Historically, the Fed has lowered the federal funds rate for economic-growth reasons and to manage financial market crises, which could spillover into economic activity. The 1998 Long Term Capital Management bail out is the most recent crisis when the Fed lowered the federal funds rate to prevent instability in global financial markets. At this time, credit spreads widened sharply. The yield spread between junk bonds and the 10-year U.S. Treasury note shot up around 200bps in a short span.
This credit spread rose from 469 basis points in the last week of August 1998 to 661 basis points in the week ended October 16. The Fed lowered the federal funds rate 25 bps to 5.25% on September 29, 1998 at the regularly scheduled FOMC meeting citing that "the action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically." The Fed cut the federal funds rate once again on October 15, 1998, an unscheduled event, to 5.00% indicating that "growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future. Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation." The Fed eased monetary policy conditions once more by cutting the federal funds rate another 25 bps cut to 4.75% at a scheduled FOMC meeting on November 17, 1998. The FOMC statement after this rate cut read as follows: "Although conditions in financial markets have settled down materially since mid-October, unusual strains remain. With the 75 basis point decline in the federal funds rate since September, financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued." Following the 75 bps cut in the federal funds rate, the Fed held the funds rate unchanged until June 30, 1999, when it raised the federal funds rate to 5.00%. Of importance to note at this juncture is that the economy was growing at a robust clip with no imminent threat to economic growth.

Fast forwarding to the present time, credit market spreads have widened in the past few days. The yield spread between junk bonds and the 10-year U.S. Treasury note has risen from 326 bps on July 10 to 403 bps on August 8. There is a liquidity problem at hand that central banks are addressing in an appropriate manner.

However, there is a major difference in the economic situation in 2007 compared with 1998. The economy has grown below potential for four quarters with temporary factors providing a boost to economic growth in the second quarter of 2007. We expect the economy to grow at a 1-1/2% pace in the second half of 2007. The market consensus is for slowing economic conditions in the rest of 2007 compared with a 3.4% increase in the second quarter. In addition, households are financially strapped to maintain consumer spending, early signs of which were seen in the anemic 1.3% annualized increase in consumer spending in the second quarter. The housing market recovery is not visible on the horizon and business capital spending is unlikely to add significantly to GDP. This leaves government spending and exports to offset weakness in the other sectors. Economic growth in the rest of the major economies is impressive but their respective central banks are tightening, which is not supportive of strong growth in exports of the U.S. economy. In other words, betting even for a moderate expansion in business activity in the U.S. is far fetched.
Considering the difference in economic circumstances in 2007 and 1998, the Fed is in a tough spot to maintain economic growth at the current federal funds rate.
The Fed response, whatever it may be, will be indicative of how Bernanke and company view their role. Will we get a Bernanke put or a return to a more orderly business cycle without the encouragement to constantly take on more risk, knowing the Fed will come to the rescue if there is a problem. Stay tuned.

Question asked on 08/14/2007 at 07:40 AM :: Comments to date: 1

Category: Politics and the Economy

According to Robert Sheehan, the managing partner of the law firm of Skadden, Arps, Slate, Meagher & Flom, there is a tsunami coming in the bankruptcy arena. Mr. Sheehan made his comment before the recent stock market gyrations of the past couple of weeks, but he was merely looking ahead to what he, apparently, views, in his legal opinion, as the inevitable outcome of what has been going on in the U.S. economy these past several years.

The New York Times article to which I am referring profiled an attorney named Richard Levin, who practices primarily in the field of bankruptcy law. Among his other accomplishments, Mr. Levin served from 1975-1978 as counsel to the U.S. House Judiciary Committee, where he helped to draft much of the present U.S. Bankruptcy Code. Mr. Levin has had a distinguished career in the bankruptcy field and was recently hired away from his previous law firm, Skadden Arps, where he had been a partner for a decade, to join the old-line New York firm of Cravath, Swaine & Moore. This is symbolic, if not significant, for reasons we will discuss below.

The Ultimate Go-to Firm

In a profile published on July 25, 2007, the authoritative Dow Jones’ Daily Bankruptcy Review described Cravath as “the ultimate go-to firm,” and further noted that Cravath “has perhaps the most demanding hiring standards” of any New York law firm. So it says something loud and clear that Cravath is hiring the guy who literally “wrote the book” for modern bankruptcy practice in the U.S., to include drafting the 1978 amendments to the U.S. Bankruptcy Code. Combine this with the fact that Cravath previously had no significant bankruptcy practice in recent decades (actually, Cravath reorganized Westinghouse after the Panic of 1907 and assisted with many railway reorganizations over the past century), although many of its fine attorneys have appeared often in the bankruptcy courts of many federal and foreign venues and jurisdictions. But it is fair to say that Cravath was not known lately as a “bankruptcy firm” in any respect. Rather, Cravath focused much of its large-caliber legal effort on what is called “transactional” work, such as putting together large merger and acquisition deals, or dealing with matters before the U.S. Securities and Exchange Commission (SEC) and similar foreign entities. The blue chip client list of the white-shoe Cravath law firm includes such powerhouse organizations as IBM, Xerox, Merck, Novartis, the board of directors of TXU, Credit Suisse and the Carlyle Group.

A Continental Shift

The New York Times article noted that “Cravath’s move, in the words of one bankruptcy lawyer in New York, was ‘a continental shift,’ a recognition by an old-line firm, however belatedly, that bankruptcy had moved beyond the days when it was the purview of collection lawyers chasing debtors to the courthouse.” Having practiced a good deal of bankruptcy law in my misspent youth, I take exception to that last characterization. Bankruptcy law is far more complex than just “chasing debtors to the courthouse.” Still, the point is that within the past decade, many law firms like Cravath did not offer bankruptcy services to their clients. (There are lots of client-conflict issues, among other reasons.) Top-line firms likely would have referred the bankruptcy work out to other firms.

But things change. Bankruptcy has become a serious, and certainly respectable, form of law practice now, and can be a large moneymaking part of a major law firm. For large-scope bankruptcy cases, billing rates at some law firms are in the realm of $750 (and more) per hour of attorney time. Yes, that is quite pricey. And the bankruptcy judges seem to approve the fees, too. So let’s put 2 and 2 together. Large mainline, white-shoe law firms are building up their bankruptcy practices because they expect a lot of that kind of “debtor-chasing” business to come through the doors in the near future and pay out big fees. And what else does the future hold?

Loaded up With Debt

First, let’s catch up to the present. During the past few years, there has been a major change in corporate reorganizations. Prompted by the availability of easy -- if not cheap -- credit, many companies have loaded themselves up with debt. The debt was used for everything from making acquisitions and alliances to paying bonuses to managers to buying back stock options and outstanding shares. (On rare occasions, U.S. firms even use the borrowed money to build a new plant or factory, or to buy new equipment. Really, it has been known to happen.) At many business schools, they refer to this process of financial decapitalization as “the discipline of debt.” (And no, we won’t go there just now.)

Much of this new debt was then repackaged by the loan underwriters into other forms of financial instruments and flipped, sold and resold down the line to a myriad of buyers who may or may not have understood the nature of the risks they were assuming. There are few ironclad guarantees in this world, but I can almost surely guarantee you that when the loans go bad and the time comes to litigate over who is not getting repaid, the jilted creditors will deny up and down at depositions that they understood the nature of the risks. The creditors will claim, with straight faces, that they were lied to, misled, defrauded. Don’t believe me? Want to bet?

Enter the God of Insolvency

As with many things in life, it is nice when all goes well. But then again, things do not always go well. So when the god of insolvency enters upon the stage and drops his thunderbolts upon these deeply indebted firms and they “breach a material covenant,” as the saying goes, they often wind up attempting a financial workout or visiting the clerk’s office of a U.S. bankruptcy court to file their petition and the utterly critical first day motions. And just so you know, filing for bankruptcy is not something that you do when you have “no money.” It actually requires quite a bit of money for a business corporation to operate successfully in bankruptcy. Thus, strange as it seems, it helps to file for bankruptcy with money in the bank and receivables coming in (called “cash collateral”), or at least some sort of backup lender who is bold enough and willing to fund your operations after the bankruptcy petition is filed.

Welcome to the Future

So welcome to the future, where the smartest of the smart law firm money is betting that many more business firms will be visiting the bankruptcy courts of the land. This is why the big law firms are beefing up their bankruptcy rosters. This is part of the takeaway point for this week’s update. But how do these law firms think that they will get paid?

In many ways, hedge funds and private equity firms have turned the corporate bankruptcy process into another form of return-driven market. Among other things, these cash-rich entities have come to view the bankruptcy process as a marketplace for assets they can purchase at distressed prices, although many of the higher-quality assets have tended to command premium prices in bankruptcy sales of recent vintage. For this reason alone (and there are others), the presence of hedge funds and private equity firms has significantly transformed the process of bankruptcy. They have brought new money to the table, and deep pockets.

But in a world where you have debtors in possession of bankrupt corporations, and creditors getting stiffed up and down the line, and lawyers and related professionals charging large fees, and deep-pocketed buyers waiting at the fringes to buy assets or participate in recovery plans, you will have many new and previously unexplored legal issues. Professor Douglas Baird of the University of Chicago Law School recently noted that “We are about to go into a period of bankruptcy history where there are going to be lots and lots and lots of really unclear issues.”

Lots and Lots and Lots

Note that Chicago’s professor Baird said there will be “lots and lots and lots” of those “really unclear issues.” That sounds to me like a lot of unclear issues, and a lot of headaches for people who are standing too close to the coming bankruptcy tsunami. And that is why you, as investors should stay away from indebted companies with poor cash flow. That is why we have companies like Goldcorp (GG: NYSE), with no debt. I like well-managed companies with real assets in hand, such as ore in the ground or oil and gas reserves, or companies that make real things in real plants and factories. And I like to see little or no debt, certainly in this economic environment.

Finally on this topic, I hope that none of you ever has to see the inside of a bankruptcy court. The big bankruptcies are raw and brutal, and proceed in a meat-grinding sort of way. It reminds me of the case of Jarndyce v. Jarndyce, if you have ever read Charles Dickens’ great book Bleak House . Don’t go there if you don’t have to.

Question asked on 08/12/2007 at 06:18 AM :: Comments to date: 0

Category: Politics and the Economy

(Wallich was no latecomer to this view. He served on President Eisenhower’s Council of Economic Advisers. After stepping down, and having seen a stream of opportunist Ivy League economics professors convince Washington that economic “growth” was America’s patriotic duty, Wallich wrote a short book. The Cost of Freedom recognized growth as a very good thing, but not when government boosts the growth. Such a “forced draft economy” compromises individual freedom.)

Authoritarianism can be invisible. The government’s employment of the substitution effect in the consumer price index is an affront to the people it represents. The clandestine nature of such maneuvers should not be overstated. The unread Boskin Commission Report makes its methodology clear: “Pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The [CPI] is designed to account for this type of consumer substitution between CPI item categories."

The American people have been forewarned of this duplicity. Yet it is still impossible for a nongovernment employee to calculate the effect of substitution. The Bureau of Labor Statistics does not reveal which items are jettisoned. For all we know, the government may be substituting peanut butter cups for pork. In a tangential sense, it already is. The biggest single cost in raising a pig for slaughter is feed. Corn, part of the traditional meal, is too expensive. According to The Wall Street Journal , pigs now feast on a diet of trail mix, licorice, peanut butter cups, cheese curls, Cocoa Puffs, and Tater Tots.

Such substitutions as beef for pork are crystal clear compared with another Boskin Commission CPI-shrinking maneuver: “Just as consumers change the goods they purchase in response to changes in relative prices, as in the beef and [pork] example, so do they change the location where they make their purchases. The opening of a new discount store outlet may give consumers the opportunity to purchase at a lower price than before.” The consumer may -- and certainly does, in the government’s calculation -- choose to drive an extra 10 miles to save 30 cents for a gallon of milk (this lower price no doubt programmed into the CPI), but the time wasted is not an explicit cost. Nor the cost of gas.

The diminishing dignity of the American people cannot be calculated. Kathleen Parker wrote in the Chicago Tribune about call center hell (not her description). She spoke to someone in India “named Kapil pretending to be Karen…Anglicizing names is one of the tricks of the trade these days as more and more customer services are outsourced to other countries.” History may not repeat, but Parker describes what Wallich observed in the 1920s and the 1970s. Once again, the strong are smart enough to understand that inflation “introduces an element of deceit into most of our economic dealings.” Contracts are no longer made to “be kept in terms of constant values” but one party understands this better than the other. Here is a concrete example of Wallich’s abstract description of monetary inflation as an “unpredictably shifting [measure] of weight, time or space…”

Parker goes on: “The corporate insult of hiring foreigners is compounded by the pandering of passive-aggressive non-Americans. Between robots and foreign operators -- and the powerlessness most consumers feel -- American business has robbed its citizen-customers of their dignity.” Hopelessness also demeans the shopper who stares at the butcher’s counter in despair -- personal character wobbles from constant disorientation, but the government is here to help.

The companies employing Indian call centers cannot be wholly faulted: Costs have soared. There seems to be a common impression that “offshoring” is a recent phenomenon. Yet the corporate flight has been a nonstop, one-way transfer since the gold standard entered its death throes. (Readers may decide whether this is coincidental or not.) By 1969, many wage settlements called for 30-35% increases over a three-year contract period. As dollar devaluation whipped into high gear, Time magazine reported: “Manufacturers decided long ago to serve foreign markets by building plants overseas, rather than by exporting. The multinational corporations will profit from devaluation.” From manufacturers to call centers -- and now security analysts in India make buy-and-sell recommendations for Wall Street firms -- first, blue-collar workers fell behind. Then, the middle class gasped for breath. Now, the money class is suffering. The team from Gavekal -- they of the acclaimed platform company -- noted, “It has never been so expensive to be rich.” Costs for the rich have been “bid up to astronomical prices.” This is their Brave New World.

The current debate about the rising divide between the rich and poor may be an argument whose time has passed. Maybe a forward-looking presidential candidate could upstage the competition by asking: “Are we all getting poorer together?”

“Lenin was certainly right,” affirmed John Maynard Keynes. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

The invisible costs of inflation may be more ruinous than prices we can read at the butcher’s shop.

Question asked on 08/08/2007 at 06:16 AM :: Comments to date: 0

Category: Politics and the Economy

Inflating the Substitution Effect
Inflation is reported -- and thought of -- as the percentage increase in prices or the declining value of money. This is visible. But it is only one side of the story. What follows is an exploration of inflation without reference to prices.

On June 28, 1978, Federal Reserve Governor Henry C. Wallich addressed the graduating class at Fordham Graduate School of Business in New York. Inflation was on everyone’s mind and Wallich was forthcoming. “Inflation,” he informed the young and idealistic graduates, “is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and the aged.”

How is this so? Wallich explained inflation, “is technically an economic problem. I mean the breakdown in our standards of measuring economic values, as a consequence of inflation.” The strong are smart enough to understand that inflation “introduces an element of deceit into most of our economic dealings.” Contracts are no longer made to “be kept in terms of constant values,” but one party understands this better than the other. Contracts during a period of inflation are made with monetary terms “unpredictably shifting measures of weight, time or space…”

General Mills understands this. The maker of Wheaties and Lucky Charms has passed on the rising cost of grains without raising retail prices. It tried to increase prices in early 2005, and sales of some cereals fell by 5%. This time around, it is attempting if not a deceitful maneuver, one that is clever. According to the Minneapolis StarTribune.com: “Customers will actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent.” The price increase is murky, but evident.
Wallich grew up in Germany and survived the 1923 hyperinflation (excellent training for any central banker). In his adopted country, Wallich watched the deterioration of product quality during the inflationary 1970s. A 1966 Lou Harris Poll found that 75% of respondents thought American goods were of “good” or “excellent” quality. By 1971, this had fallen to 47%. In 1977, 27% would not buy the products they made. And so it is today. In May, The New York Times submitted a pier-front report from Madeira Beach, Fla., the “grouper capital of the world.” Its reporter found that “seven of 24 [restaurants] were passing off cheaper imported fish -- tilapia…hake…painted sweetlips [and other fish with names too gruesome to mention] -- as grouper.”

Fishing restrictions are one problem, but more so are higher fuel costs and condominium development that is “taking over the waterfront.” Here we find the nexus of higher energy costs, cheap money, bad food, and exploitation. Since unlimited credit gave every Florida fisherman the wherewithal to buy a waterfront condo, there is no place to moor a boat. This is not just a local problem. The Holbrook Community Foundation in Harpswell, Maine, is raising money to save Holbrook’s Wharf, a fishing pier for decades. The foundation was “fearful the property would be sold and converted to what locals call a ‘McMansion.’” This is not an idle fear. The Portland Press Herald reports: “Just 20 miles of Maine’s 5,300-mile coastline is classified as ‘working waterfront,’ and much of that is vulnerable to development that could limit access further.” From personal observation, poorly constructed condominium projects have replaced former Maine fishing villages that fade from memory.

Wallich warned that inflation substitutes government for liberty: “Inflation becomes a means of exploiting labor’s money illusion.” Among the winners, from the mouth of this public servant, is government. “It allows the politician to make promises that cannot be met in real terms, because, as the government overspends trying to keep those promises, the value of the benefits it delivers shrinks.” This creates a “diminishing ability of households to provide privately for their future…One may indeed ask whether it is not an essential attribute of a civilized society to be able to make that kind of provision for the future.” Wallich went on to emphasize that “the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government.” So we have the public panic concerning Social Security and health insurance today.

Wallich continued. Inflation “creates a vacuum in the private sector into which the government moves.” Today, the tendency is to expect government to solve the health insurance dilemma. Yet the visible effect of greater government involvement in health care has been higher costs and a suffocating bureaucracy of paperwork. The Federal Reserve governor worried that the consequences of inflation would be “a shift also in the third dimension, away from democracy and toward authoritarianism.” Wallich’s question was more than theoretical. The German, post-World War I hyperinflation wiped out the middle class, the consequences of which were not Arcadian.

Continued Tomorrow.

Question asked on 08/07/2007 at 06:14 AM :: Comments to date: 0

Category: Politics and the Economy

A quick chat about trade deficits seems timely. Starting with the notion that they are inflationary, right?

Well, technically, they don't have to be. That's because, in the absence of government intervention, all a trade deficit should mean is that the people of one country are willing to trade their money for something on offer by the people of another country.

In the 1800s, the U.S. ran big deficits and did quite well because our country was full of opportunity and promise, so foreigners invested here, more than we invested there.

The problem comes when a government, say China, steps into the picture and deliberately suppresses its currency to attract businesses to certain sectors of its economy--for instance, city dwellers. That causes an aberration, the result being a lot of U.S. dollars shipping out to China in exchange for all manner of consumer goods... dollars that the Chinese have then turned around and invested in U.S. Treasuries.

It's All Political... and Politics Are Fickle

The massive deficits with China are unstable because, rather than being the result of open trade, they are based largely on political decisions made by a handful of people in the Chinese government. In time, those people--or their successors--may decide that there is more advantage to spending the dollars. Or they will be forced to do it. Say, to appease other segments of the economy now penalized by the higher cost of foreign goods. Or they might have to spend the dollars to pay the cost of a war or to bail the country out of a financial crisis.

Regardless of the reason, at some point the political advantage of spending those dollars, rather than hoarding them--which the Japanese did to their detriment in recent decades--will reach a tipping point after which those greenbacks will come flooding back to the market, devastating the value of the dollar on foreign exchange markets.

The dollar has already, since 2002, lost about 26% of its value. Of course, a good deal of the pain that depreciation has caused to the wallets of foreigners has been offset by the interest they earned on their Treasuries. But treading water is one thing, and standing by while your pile of cash starts to go up in the flames of a monetary crisis is another.

Viewed from another angle, over time it isn't the trade deficit that is inflationary. Rather, the trade deficit is effectively a subsidy provided to the U.S. by China ... a subsidy that comes from the Chinese having used the river of dollars provided by U.S. consumers to buy the unbacked paper of the U.S. government. That has allowed U.S. interest rates to remain artificially low and forestalled inflation in the U.S. It is as if China is building up a big bank of inflation points. Sooner or later, they are going to spend those inflation points.

Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government--that of the U.S.--have been accumulated in such massive quantities for the reserves of other governments. And we're not just talking China but virtually the world. And the world is getting nervous.

To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:

"Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies."
The whole matter of trade deficits is, unfortunately for investors not paying attention, just one of far too many aerosol cans now roasting in the fire. When they start exploding, you'll want to be safely hiding behind a wall of gold and silver.

In the final analysis, every day gold goes up and gold goes down, with the movements based on any number of inputs. To avoid being panicked one way or the other, a long-term perspective is required to see these fluctuations in their proper perspective. And, despite all the jagged fits and starts these past few years, and all the nay saying along the way, three years ago, gold was trading for $393 an ounce... 40% lower than it is today.

And the better gold shares have offered exponentially higher returns than that.

While now is the time to begin accumulating your gold and gold share positions--if you have not already started doing so--how will you know when things are about to get really "interesting"? The observation that it is not when the trade deficit is rising that you should be concerned, but when it starts to contract... because that is a sign that the flood of greenbacks is starting to return home.

Question asked on 08/02/2007 at 06:40 AM :: Comments to date: 0

Category: Life

Nassim Taleb's new book, The Black Swan is a remarkable work and suggest that any serious student of the market read this book.

A few thoughts on this book follow.

"The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events."

"But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer - our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecasts errors, but our absence of awareness of it. This is all the more worrisome when we engage in deadly conflicts: wars are fundamentally unpredictable (and we do not know it). Owing to this misunderstanding of the casual chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance-like a child playing with a chemistry kit.

"...To summarize: in this (personal) essay, I stick my neck out and make a claim, against many of our habits of thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable according our current knowledge) - and all the while we spend our time engaged in small talk, focusing on the known, and the repeated. This implies the need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug. I also make the bolder (and more annoying) claim that in spite of our progress and growth, the future will be increasingly less predictable, while both human nature and social "science" seem to conspire to hide the idea from us."

So, the above quotes will help put the later predictions into context. By definition, we cannot know the future. Yet we go through the exercise. And even though we should know that we will probably be wrong, there is a value on the process if done with the proper amount of cautious optimism tempered by reality.

I think about the future not just to look for opportunities to invest but primarily as a thought process to assess wherein lies the risk. The first task of an investor is to manage risk and only then to seek attractive returns. We make predictions about the future so as to think about risk and to seek places for opportunity. And then every so often, we re-assess our predictions in the light of new information and adjust our risk controls and objectives.

So as you read my predictions they are nothing but a gathering of historical data analyzing the data for a best fit scenario for historical repeatability. This is known as experience with knowledge.
Therefore with knowledge you use it for the experience and with experience you gain wisdom about all that you been through. The more you read and learn about other peoples experiences the better you can make judgements about what to do.

My favorite Quote is ;

"That which has been is that which will be. And that which had been done is that which will be done. So there is nothing new under the sun...." Solomon.

Question asked on 08/01/2007 at 06:56 AM :: Comments to date: 0

Category: Politics and the Economy

There is one ancient technology that could provide clean, renewable energy for the planet’s 6.6 billion people.

Geothermal energy has been used for centuries. It helped provide the Vikings with heat and hot water when they settled in Iceland, and it is still a widely used energy source. Geothermal energy produces more than 25% of the power in Iceland, and is used to heat a majority of the homes in the Scandinavian nation.

But that’s in Iceland. For the rest of the world, it will take a little innovation. A 2006 report issued by the Massachusetts Institute of Technology claims that it would be possible to affordably generate 100 gigawatts of electricity or more by 2050 with a $1 billion investment. But it will take a technological boost to make this possible.

For the rest of the world where volcanic activity is minimal, there are two options to extract steam from the earth: water pumping and drilling. Water mixed with chemicals can be pumped into the ground to enlarge the natural cracks and passageways, creating big enough steamholes to effectively run large turbines.

Then there’s drilling. Thanks in part to our never-ending quest for oil, drillers have developed the equipment and techniques to drill farther into the Earth’s crust than ever before.

If we can tap into the deep geothermal wells all over the world, the result will be clean, cheap, reliable power. And that’s an old technology we can live with.

California’s New Energy Boom

Meanwhile, a little closer to home… The state of California and electricity love to make headlines together. It seems there’s never enough juice to go around on the West Coast. But all of this could soon change, thanks to a renewed interest in an efficient, green energy source.

Geothermal energy accounts for about 9,300 megawatts of the world’s electricity. That adds up to 60 million people in 24 countries who are getting their power from the Earth’s heat.

In the United States, more than 2,800 megawatts of electricity from geothermal plants supplies four million people in Alaska, California, Hawaii, Nevada and Utah. Six percent of California’s power comes from geothermal sources, where 15 new projects are under development.

Progressive, nuclear-free California is the perfect place for geothermal expansion. The state of California will require 20% of electricity sales to come from renewable resources by 2010. In 2006, 15% of all electricity used in California came from geothermal, wind, solar and small hydro.

On top of this, The Geysers in Northern California is the largest geothermal development in the world. And there’s one small company that’s paving the way for geothermal expansion.

You may be familiar with Calpine Corp. (CPNLQ: OTC BB). Calpine became the world’s biggest geothermal power provider in the late 1990s after completing the largest IPO ever for an independent energy provider in 1996.

This alternative energy star declared bankruptcy in 2005 and was eventually de-listed from the NYSE. And as this former giant rebuilds the competition is lining up to take Calpine's place. These companies are all start up companies and are too risky to make an investment in yet because they would go bankrupt if oil drops to $50 a barrel over a long period of time. You say how will that happen? Oil is now $76 a barrel.

Well remember oil was $10 a barrel in 2000. It was $36 a barrel in the late 70"s. It was $3.00 a barrel in the early 70's.

Question asked on 07/22/2007 at 07:33 AM :: Comments to date: 0

Category: Politics and the Economy

We haven't had too much in the news from the Middle East. The media must be getting bored of the constant grind. It is too everyday now. Once in a while there is a small outbreak that would have made alot of news. But the same old problems are festering and the factions are regrouping to make their move for power when the US Presidential elections start up in full force.
The following is from a summary in a British newspaper.

Fighting between Hamas and Fatah, the Palestinian National Authority's two dominant factions, has culminated with Hamas gaining control of the Gaza Strip. Fatah and Hamas, along with Israel, have strategic goals they will work to achieve in the days ahead.
The lates