Friday, November 27, 2009

Thanksgiving Thoughts

The Thanksgiving holiday is a wonderful time to reflect on the many things we have always had reason to be grateful for as Americans. One of those things was, of course, the enduring strength of the American economy.

But when it comes to the economy, are Americans reflecting on past glories, not today's reality?

One thing Americans take for granted is that they will always be the richest, most successful people on the planet. Most Americans think that because that is all they have ever known.

And Americans had just what it took to become the richest people on the face of the earth.

They worked hard. They saved their money. They had little government interference. They had the industrial revolution at their backs. And they had a US dollar that was 'as good as gold.'

Free enterprise 'guaranteed' new wealth which was generated from new innovations. And our political system always adapted to the needs of an evolving global economy.

By the time the baby boomers were born, the United States had such a big lead over the rest of the world that it seemed nothing could stop America.

But nothing lasts forever.....

As it matured, the US economy and its political system became more and more rigid and more and more costly.

Look at the US economy today - there are handouts and bailouts everywhere.

Large companies are protected - especially the financial industry which is dipped in honey (taxpayer money).

And the whole population is encouraged to spend, not to save.....

Why save for retirement...there's Social Security!

Why save for Health care emergencies...we'll soon have national health care!

Why bother to save at all...when the Federal Reserve has pushed interest rates to near zero!

All of these government programs are massively inflating our debt which in turn is weakening our dollar...

Just in the past 6 years, the government's unfunded obligations (Social Security, Medicare, etc.) have increased by almost 50% from $79 trillion to about $115 trillion!

During this same time frame, government revenues have increased by only 12%...the numbers just do not add up for the long term.

At some point, the foreign capital which is so necessary currently to keep the country afloat will question whether the US ever intends to pay back its debt.

If that that foreign capital flees, the US dollar will plunge.

And there are already questions being asked by our creditors.....

Ever since the Federal Reserve began 'quantitative easing' (printing money out thin air) earlier this year, the US dollar has already dropped by nearly 15% in value. And the price of gold has shot higher.

If the United States does not get its economic house in order soon, there may be little to be thankful for when future Thanksgiving days come around.

Friday, November 20, 2009

Retirement Blues

There was an interesting quiz called "Have You Learned Your Lessons?" which appeared in last weekend's Wall Street Journal. It was based on a recent report that included surveys of those planning for or already in retirement.

The answers to the surveys emphasized the point that unless US policy makers can get another asset bubble going in stocks and housing, many people, ages 55 and older are in deep trouble.

That "bubble" strategy is exactly what the government has been trying to do - the problem with that strategy is that asset bubbles always burst and when they do - they leave a terrible mess.

According to the National Retirement Risk Index, published by the Center for Retirement Research at Boston College, 44% of US households could find themselves unable to maintain their current standard of living.

I strongly believe that these people will NOT be able to maintain their standard of living because of poor retirement planning.

Let's look at 401k plans, which makes up a large portion of many people's retirement plans. A report from the University of Michigan took a look at a group of 1.2 million workers in more than 1,500 401k plans over a two-year period. The report showed that an incredible 80% of workers made NO changes at all during the two-year period.

This is, to put it mildly, incredibly stupid.....

Individual circumstances probably changed during this time period - age, risk tolerance, overall finances, etc. I cannot emphasize enough - a 401k should be adjusted as your financial circumstances change.

And on top of that, the financial markets certainly changed. Most of these people were probably still locked in to the 'conventional investing wisdom' and had far too many of their assets invested in US stocks.....

And this in a period when US stocks are no higher than they were a decade ago...what a waste of time and hard-earned money!

What is really scary is the statistic showing that the end of 2007, on the eve of the 2008 market meltdown, nearly half of the workers surveyed (ages 56-65) had 70% or more of their 401k in equities...22% had more than 90% of their 401k in equities!

What were they thinking?? Or maybe they weren't thinking?

What ever happened to raising your allocation to fixed income investments as you get older? I guess people just got too greedy.....

Now many of them will have to go back into the workforce in what should have been their golden years.

Friday, November 13, 2009

Tell Me Lies...Tell Me Sweet Little Lies

In a news item that was (unsurprisingly) largely ignored by US media outlets, it was revealed this week that the statistics on global oil reserves put together by the International Energy Agency(IEA) have been "fudged" for years. The IEA is considered to be a very highly-respected agency and they were thought to be THE source for information on the oil markets.

The UK's Guardian newspaper spoke to two whistleblowers at the IEA and what a story they told - According to the whistleblowers, the world is much closer to running out of relatively cheap and accessible oil than what the agency's numbers show.

The agency publicly maintains that oil supplies are plentiful and that production can "easily" be ramped up from the current 83 million barrels of oil per day to 105 million barrels.

Skeptics outside the agency doubt whether even 90 million barrels of oil per day can be acheived due to many major oil fields, such as in Mexico, being in a state of rapid decline. The skeptics expect global oil production to actually begin declining with the next 5-10 years.

And the skeptics may have a point...for example, the IEA is taking Saudi Arabia at its word about its oil reserves. The Saudi reserve numbers have remained constant for many years even though obviously the Saudis have been pumping lots of oil out of the ground for all those many years. Perhaps more telling is the fact that the Saudis have not permitted an independent verification of the Saudis' oil reserves literally for decades.

But why would the IEA risk ruining its reputation and "fudge" their numbers?

According to the whistleblowers, "the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves."

And the whistleblowers go on to say the imperative at the agency "was not to anger the Americans". After all, the US doesn't want Wall Street to lose money in a stock market decline.....

The whistleblowers said, "Many inside the organization believe that maintaining oil supplies at even 90-95 million barrels a day would be IMPOSSIBLE." This is not good news in the light of the rapidly increasing demand for oil coming from the emerging markets. No wonder China has snapped up every oil field they could in recent years...

The whistleblowers went on, "There are fears that panic could spread on the financial markets if the figures were brought down further." And no one wants a financial panic...but won't there be one if we wake up one day and oil is trading at $500 a barrel?

It's just another case of past and current American governments "kicking the can down the road"...hoping a miracle will happen before the country has to face harsh reality.

Tuesday, November 10, 2009

Obama Administration Continues to Back Wall Street Banksters 100%

There was a move afoot at the recently concluded G20 finance ministers meeting to slap a version of the so-called Tobin Tax on major financial institutions around the globe. This tax would be imposed on each and every financial transaction.

I normally do not support new taxes, but this tax was so small it would not be noticeable to individuals traders, but it would be noticeable to the big financial players who trade madly like Goldman Sachs.

British Prime Minister Gordon Brown advocated the tax on financial transactions to support inevitable future bank rescues. I agree with Mr. Brown's statement:

"It cannot be acceptable that the benefits of success in this sector are reaped by the few, but the costs of its failures are borne by all of us. There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards."

Many European nations, such as Germany and France, are in favor of such a tax. The emerging nations such as China and Brazil have no real objection to it.

But - you guessed it - the tax proposal was shot down by the United States. Treasury secretary Tim-the tax cheat-Geithner nearly had a hissy-fit as he voiced his strong opposition to the tax.

And once again, we see that US economic policies are run by Wall Street. Gawd forbid Tim, that a tax be imposed on Goldman and the boyz -- instead of executives getting a $50 million bonus, they may have to settle for a $49.9 million bonus. Poor babies!

This attitude of the United States toward any sort of meaningful financial reform continues to lower the status of the country daily in the eyes of the rest of the world.....

Just follow the dollar on its downward path into the abyss.....

Friday, November 6, 2009

The Treasury Market Bubble

Recall how the US banks bolstered their balance sheets by swapping the putrid toxic mortgage backed debt for US Treasuries?

To me it seemed like a bad idea at the time, but now it seems like a looming disaster.

It looks quite possible that the price of the Treasuries could head south quite dramatically, taking the banks' capital positions down there with it. Aside from seeing more insolvent banks, the real problem is that this would reduce credit flow to business, risking a double dip recession.

The Fed has been propping up the wobbly-looking US Treasury market by purchasing over $750 billion of Treasuries so far. The problem now is that the Fed plans to stop its shopping spree at the end of the month, taking away a substantial amount of support for the price.

Don't forget too that the Chinese are losing their appetite for the stuff as well. If both parties were to stop buying bonds then prices would fall fast.

John Paulson, the owner of hedge fund Paulson and Co has made billions from successfully shorting the US housing market and the UK banks. He has a good eye for something that is about to implode. He told Bloomberg that, "shorting long-term US debt is the only attractive bet going at the moment".

He went on to say, "I always like to think about assets that are likely to experience a breakdown; the only thing I am really comfortable with right now is US treasury securities and US agency mortgage-backed securities...I think they are overpriced and make attractive shorts."

By keeping the Fed funds rate at close to 0%, banks have virtually no choice but to borrow cheap dollars to buy Treasuries and other assets. Traders within the banks have been having a party with it.

Gillian Tett, the assistant editor of the Financial Times wrote this week about a recently retired banker who gave her an interview about what's going on behind banking's pinstriped exterior. He said, "Highly leveraged short term trades are back in vogue as players jostle to load up. When money is virtually free, they feel stupid of they don't leverage up. Any sense of control has been thrown out of the window."

US banks now have nearly 15% of their bank holdings in Treasuries. This has risen rapidly in the last eighteen months from $1.1 trillion to $1.5 trillion. Interest rates will have to start rising at some point, and when they do the banks will be stuck between a rock and a hard place. Their Treasury assets fall in value as the amount they have to pay on their deposits rises.

Despite this conundrum, banks are still leveraged an amazing 10 times the value of their equity. So a 2% fall in the price of Treasuries would be amplified ten times. Bear in mind that US banks have a stack of money in other less "safe" investments as well, such as commercial property. These could fall even faster. On top of this, 43% of total bank assets are in the form of real estate loans, which are not exactly bomb-proof either.

In an article in SafeHaven, Daniel Aaronson and Lee Markowitz discuss this situation really well, and sign off their article with the chilling conclusion. They wrap it up by saying "It is feasible that even without loan losses, the entire banking system would be insolvent if Treasury yields rise high enough."

Tuesday, November 3, 2009

Gold Is King Everywhere But in the US, Where Goldman Is King

There was major news out this week as the International Monetary Fund (IMF) announced that they were selling 200 tons of gold to the Reserve Bank of India. India has joined China and other nations around the globe in diversifying out of the US dollar.

There are only 203.3 tons of gold left that the IMF wants to sell. Look for China, who is trying to get rid of dollars as fast as they can, to be an anxious buyer and step up to the plate and purchase the remaining gold.

The key takeaway here is that many nations, particularly in Asia, realize that the US dollar is quickly turning to toilet paper as the Fed continues to print trillions of dollars out of thin air.

It seems that the only people who don't "get" the appeal of gold are the economists and the numbskulls on Wall Street and in Washington, who still consider gold to be a "barbarous relic". Obviously the Asians do NOT think so.

Instead of doing something wise and prudent in the US, instead here we have the "every man for himself, get rich quick mentality" and just f___ everybody else.

The poster child for the "new" America is once again Goldman Sachs. Traders at Goldman Sachs made $100 million in profits on 36 of the 65 days of the third quarter. And - they recorded only one daily trading loss in the third quarter. This is an impossibility in a normal, non-rigged market!

According to the investigative report from McClatchey, in 2006 and 2007 Goldman Sachs KNOWINGLY distributed $40 billion in supposed AAA mortgage-backed securities that their 'snake oil salesmen' sold to investors such as pensions funds and foreign banks around the globe.

Meantime, Goldman KNEW these securities were really worth something between dead carp and dog s___. And they "bet" massively against their own customers in the CDS (credit default swaps) market without telling the clients who bought that junk they were doing that.

In the old America, this would be considered out and out fraud.

But in the new America, luckily for Goldman Sachs, it has run the executive branch of the US government (and much of the legislative branch) for years. So there is nothing to fear.

What the hell has happened to this country?