Saturday, December 25, 2010

Politics and the Environment

Whatever happened to global warming?

It seems that the political caravan has moved on. Climate change is yesterday's story.....

The politicians and lawyers in the US now believe that today's big threat to the globe comes not from burning too much oil, but from BP. They are looking to litigate and legislate the company and others out of existence.

The Deepwater Horizon crisis was a reminder that politicians can handle only one challenge at a time. Instead of a challenge, it should have been an opportunity for President Obama to draw a clear picture for the American public.

He should have drawn the straightforward conclusion between the inevitable environmental hazards of drilling for hydrocarbons miles below the ocean floor and America's insatiable appetite for oil.

The reason the Deepwater Horizon was there is because the United States consumes a quarter of world oil production even though it has only one-twentieth of the world's population.

These same factors come into play in global warming. Whether you believe the science behind the global warming debate or not, there is one definite fact.

That fact is that if the world's richest nation and biggest oil consumer is not ready to curb greenhouse emissions, no other nation will make the switch to a low carbon economy either.

President Obama said that the United States must exercise leadership by example. Well, reducing US oil consumption would mean less deep-sea drilling and less risk of another blow-out. It may encourage other governments to follow a similar path of conservation.

But such a path, with a sizable drop in US oil consumption, is extremely unlikely.

Of course, the United States is not the only country to back away from actions to tackle global warming.

The Pain in Spain

Leaders around the world, already preoccupied by the aftermath of the financial crisis and recession, are in some cases having to impose painful public spending cuts.

In Europe for example, keeping the euro intact and shoring up Greece and other wobbly economies has left little time or money for green policies.

And in Europe, Spain may be the poster child for wanting it both ways on energy and climate.....

Spain is the biggest per-capita global producer of wind energy and home to the world's biggest wind power operator. It is also a very significant player in the global solar power market.

But now Spain wants to double its subsidies for domestic coal-fired power plants. The Spanish plan centers on giving preferential access to the wholesale electricity market for power plants that run on domestic coal.

At the same time, the Spanish government wants to retroactively cut previously agreed tariffs for its 20 billion euro photovoltaic solar energy sector by 30 per cent. Such a move will be devastating for investors in leveraged solar photovoltaic projects.

The Spanish electric utility sector isn't thrilled about the move either. It will force utilities to switch from cheaper imported coal to more expensive domestic supplies.

It is worth noting that Spain's economy is in awful condition. Unemployment is running at 20 per cent and austerity measures imposed include a cut in public sector wages and a rise in the sales tax. So it's not surprising that the government wants to stop electricity bills from rising and create domestic coal jobs too.

These measures are expected to involve about 2 billion euros of government aid over a four-year period. The measures are fully supported by Spain's prime minister – Jose Luis Rodriguez Zapatero – who just happens to come from the Spanish coal-mining region of Leon.

Spain Is Not Alone

Spain is not alone in wanting it both ways.....

In May, intense lobbying by the UK coal power industry won a four-year reprieve for its old coal-fired plants, These plants were due to close in 2014.

This is despite the country having committed to an EU target of 15 per cent renewable power by 2020 and reducing carbon emissions by 34 per cent by 2020. Targets which it now will miss.

And then there is China, which is rapidly building its renewables capacity. Also increasing furiously is its coal burning, buying up of fossil fuel assets and overall energy consumption.

Which brings us back to the United States...where the “clean tech race” won't hamper the growing consumption of highly polluting unconventional oils, such as from the tar sands of Canada.

The conclusion drawn from all of this should comes as no surprise to anyone.....

Governments everywhere, it seems, will go to great lengths to ignore long-term problems and just 'kick the can' down the road. As long as it means not upsetting their constituencies in the short-term.

Saturday, December 18, 2010

New Inflationary Era for Consumers

Many people have failed to take note of the quiet warnings from consumer products companies. These companies are saying that most food and clothing items are going to cost, give or take, 5-8 per cent more next year.

It seems that long forgotten food and clothing inflation is back with a vengeance due to rising input costs. Input costs such as wheat and cotton, which have risen by nearly two-thirds and three-quarters respectively in the past six months.

Some executives in the consumer goods industry are even warning that a major change is occurring. They say that a generation that has grown up with food and clothing deflation – courtesy of China's arrival as a manufacturing powerhouse – must now get used to the opposite.

They must get used to paying more for the clothes they wear and the food they eat. Why? Because of the emergence of billions of consumers in nations such as China.

The chief supply officer for Unilever, Pier Luigi Sigismondi, said “Current agrocommodity market inflation is a consequence of lower production yields and unprecedented increases in demand from Asia.”

There are also other reasons for rising agricultural prices as Mr. Sigismondi pointed out, “Additionally, the world is losing arable land at a rate of about 40,000 square miles a year. That is land being used for biofuel production, while climate change is eroding away topsoil. Farmers will need to produce more food with less land.”

Agricultural Commodities Inflation

A closer look at agricultural commodity prices shows that they have surged in the past months to peaks last seen at the height of the 2007-08 global food crisis.

The rise comes on the back of a string of drought-induced crop failures in major cereal exporters such as Russia. Other nations, from the United States to Indonesia, are reaping smaller than expected harvests of crops including corn, wheat and palm oil.

With demand booming as developing nations such as China and India emerge from the global economic crisis, the shortfall is denting reserves.

The price spikes mean that this year the total amount that countries pay for imported food will exceed $1 trillion for only the second time ever, according to the United Nations. The 2010 bill is up nearly 15 per cent from last year. And it is within a whisker of an all-time high of $1.038 trillion set during the global food crisis in 2008.

The UN Food and Agriculture Organization's benchmark food price index tracks the wholesale cost of wheat, corn, rice, sugar, oilseeds, dairy products and meats. Last month it stood at more than 20 per cent higher than a year ago. The index has only been higher during a brief period in mid-2008.

The organization paints a worrying outlook for 2011. It warns that unless farmers “expand substantially” their planted acreage and weather is favorable, the world should “be prepared” for even higher prices.

Most in the agricultural industry agree with that assessment. The belief in the industry is that even bumper crops will not cut prices a lot because global inventories of most agricultural commodities are so low.

The Effects on Manufacturers and Consumers

Rising agricultural commodity prices have a definite effect on consumer products companies. They face a dilemma. They must deal with higher input prices while seeking to protect their profit margins and without scaring off consumers with large price rises.

Diversified food producers spend about one-third of their sales on raw materials, including packaging. That means they face higher costs of around 5-6 per cent. This is broadly in line with guidance for cost inflation of 4-5 per cent from General Mills.

However, some companies are pushing through even larger price rises. Three months ago, Kraft Foods responded to higher coffee bean prices with an 11 per cent increase in the cost to retailers of its Maxwell House brand. Many retailers passed this price increase directly on to consumers.

Other consumer goods companies are trying to avoid passing on higher input prices by employing various methods. These methods include hedging commodity prices, paring costs, substituting lower-priced commodities, and reformulating their products.

Of course, substitution doesn't always work. Take clothing, for example. Many manufacturers are substituting synthetic fibers for cotton. But that has now pushed up the price of many synthetics, with polyester estimated to be up by a double-digit percentage.

No wonder then that many clothing companies are warning that the price of clothes is expected to rise by a figure approaching double digits early next year.

Then we have some manufacturers reformulating their packaging to give the appearance of no increase in price to consumers. So your cereal box may look the same and your cereal may taste the same, but for the same money you bought only 8 ounces of cereal instead of the 12 ounces you bought last year.

Consumer products manufacturers are nervously watching how consumers react to all of this. After all, most of the extra costs due to higher agricultural commodities will eventually get passed on to consumers.

Inflation in agricultural commodities looks set to continue for the foreseeable future. So this generation of consumers will just have to get used to the higher prices.

Saturday, December 11, 2010

The Federal Reserve's Mission

Most Americans have very little understanding of the Federal Reserve. At most, some may know that a guy (Ben Bernanke) who looks a little like Lenin controls US interest rates.

But there is a lot more to the Federal Reserve. It is also the creator of US money and the prime decider of who gets bailout money.

Thanks to independent (some say socialist) Senator from Vermont, Bernie Sanders, we got to see what the Fed is up to. He insisted on learning where the Fed's bailout money went. How un-American!

It turns out that tens of billions of dollars went to firms in the US that pretended they needed no help.

Goldman Sachs, for example. Goldman went to the Federal Reserve 212 times between March 2008 and March 2009, according to Fed documents. The company collected nearly $600 billion!

Citigroup...Morgan Stanley...General Electric. They were all in on the Fed's gravy train.

In total, the Federal Reserve put out $3.3 trillion worth of credit, buying up speculators' bad bets.

Not surprisingly, the price of bad credits rose in price due to the Fed's buying spree. So the Federal Reserve can now say that it hasn't lost a penny.

That Ben Bernanke sure has a sense of humor! The Fed neglects to mention that it can never sell all of this bad debt which would collapse in price.

Naive people think that the Fed is supposed to pursue corrupt operators. But now the Fed is at the center of the racket, handing out money to its powerful Wall Street cronies.

But this should come as no surprise. Most people don't know - the Federal Reserve is a private bank, even though it serves what is supposedly a public interest.

But it is neither owned or controlled by the federal government. The Fed is controlled by the banking industry, which are its main shareholders.

The Federal Reserve's stated mission is to give the US a trustworthy currency and to promote full employment. There's that sense of humor again...since its inception in 1913, the US Dollar has lost about 95% of its value.

The Fed's real mission is to make sure the banks stay in business and make a profit. It does this simply by transferring money to the banks.

How does it get the money? It just prints it up! Who pays the bill? Eventually, taxpayers and citizens do when the newly printed money reduces the value of their old money.

Oh, to be a banker in the United States instead of a common peon.....

Saturday, December 4, 2010

The US-China Green War

A recent report from Ernst & Young showed that America has lost its spot at the top of the renewable energy ladder to China. So it comes as no great shock that the US government has picked the clean energy industry as the latest battleground in its cold war with China over currencies and trade.

The Obama Administration recently announced that it would proceed with an investigation into China's support for its renewable energy industry. The results of the investigation could eventually lead to litigation at the World Trade Organization.

What's at issue is Chinese government support for its 'green' industries such as wind turbines, solar energy products, energy-efficient vehicles and technologically advanced batteries.

China Going Green

Basically, the American government is trying to punish China for putting an emphasis on developing green industries. Something Washington has talked about for decades, but did little about it.

In contrast, the Chinese government has put its money where its mouth is. Even recently, officials have spoken of lavishing more investment on both better grid infrastructure and clean-tech industries. The investment figures being bandied about are comparable to the country's $600 billion stimulus after the global financial crisis.

The Chinese government has made the move toward a greener future the core of much of its policy-making. China's leaders see greener energy as a huge opportunity to push forward their economic restructuring agenda.

China has pushed hard to closing older industrial facilities and building bigger, more efficient ones. But, in addition, the Chinese government's aim is that green industries will spring up to provide fresh sources of economic growth.

In fact, of the nine key emerging industries ordained by Chinese policymakers, six are green technology-related.

One of those key industries where China has already had success is wind power equipment. China's appetite for such equipment has more than doubled in each of the past four years. And it is on course to beat its official target of 30 gigawatts of installed wind power by 2020. The country also looks likely to surpass the US as having the most wind power capacity.

It is a similar story in the solar power industry. The Chinese have proved adept at mastering new techniques and producing on a large scale. The result is that they have driven costs down fast and grabbed a large share of the market away from their American competitors.

The US Slips to Second

So why has the United States fallen behind in the green technology war? One major reason is the Silicon Valley approach to developing new energy technologies.

One prime example is the solar power industry where Silicon Valley promised to create a new, world-beating industry. But the shine has come off that promise.

Several years ago, venture capitalists were throwing money at new solar start-ups. Most of the start-ups were trying to apply a new technology based on printing thin layers of exotic new materials onto cheap substrates. The resulting panels are less efficient than silicon at converting sunlight to power. But they were expected to be far cheaper to produce and install.

However, many of the ideas backed by venture capitalists were nothing more than expensive and time-consuming “science projects”. As a result, many thin-film solar companies are finding it hard to reach the mass production levels needed to achieve the economies of scale necessary to compete.

The result of all this venture capital investment? A bunch of “me-too” companies that can't compete globally.

In addition, Silicon Valley vastly underestimated the adaptability of its competitor – China. China was using older technology based on making solar panels using silicon cells. Silicon Valley confidently thought its push into solar using thin-film technology would leave its Chinese competitors in the dust.

But that really hasn't worked out. First Solar is the acknowledged world leader in thin-film solar technology thanks to its mastery of a material known as cadmium telluride. Yet even it is starting to feel the competitive strain from China.

The US Government Blows Hot Air

The other main reason the US has fallen behind China in renewable energy is lack of government action. In the United States, there has been much talk about green energy industries. But little real concrete government action to support the industry.

Many in the American renewable energy industry are actually angry at the US government. They are angered by what they see as the administration's belated recognition that the US industry's competitive position has been eroded, after years of relative neglect.

Mike Eckhart, president of the American Council on Renewable Energy, spoke about the Obama Administration's investigation. He said “The Chinese did what they said they were going to do, and the US didn't. The fact that the US didn't support its renewable energy industry in the same way that other countries did is no grounds for complaining now.”

And while the US points to “unfair” Chinese is interesting to note that in the US, Chinese companies can make no headway. For instance, just three Chinese wind turbines in total have been sold in the United States. And the towers and blades for those were US-made. I guess it all depends on what your perspective is to determine the definition of “unfair”.

Saturday, November 27, 2010

General Motors Pension Plan Problem

General Motors is currently being excitedly touted by Wall Street salespeople as a real opportunity for small investors. What a joke!

However, these sales people are conveniently ignoring one very big problem GM has – its giant pension fund.

As stated in my prior article, General Motors' pension fund is the largest private sector pension plan in the world with approximately $100 billion in liabilities.

Let's reiterate the essential flaw in the entire GM rescue. In order to keep the United Auto Workers union happy, the pension plan was transferred completely untouched to the 'new' General Motors.

GM is making no contributions to the pension fund now. But the company says it may have to put in $4.3 billion in 2014 and $5.7 billion in 2015. GM added that it will “possibly” have to add more funds in the future. Make that definitely!

Think about it...GM's second-quarter earnings were the highest since 2004. Even so, first-half operating income was only $2.9 billion. Double that for an annual figure and prospective pension plan payments would barely be covered. This leaves nothing to actually run the company.

Pension Plan Assumptions

General Motors' stated pension deficit is “only” $27 billion. However, GM is using the same flawed, optimisitc thinking that many US entities use in calculating pension costs. GM is assuming that its pension fund assets will return at least 8.5 per cent a year.

A closer look at GM's pension fund shows annual payments to its pensioners of $9.3 billion. On fund assets of $85 billion, that means GM actually needs a return on its pension fund of 10.9 per cent a year.

Investing the pension fund safely into US Treasuries would yield only $2.2 billion, leaving an annual shortfall of more than $7 billion. The planned $4.3 billion and $5.7 billion contributions will not plug the gap in GM's pension fund. At best, the company will kick the can down the road a ways.

It comes down to a numbers game for General Motors. At last count, the company had 531,500 pensioners and only 87,500 active workers in the United States. In other words, each worker has to support six pensioners. And that calculation leaves out the 83,500 people who have left the company and have yet to retire.

General Motors' pension plan situation is almost like a badly-run hedge fund with leverage working against the company. GM really will be run mainly to try to support the pension plan, with selling cars as a sideline business.

Speaking of hedge funds, GM's pension fund does look a bit like one. Pension consultant John Ralfe calculates that only 35 per cent of the fund's assets are in investment-grade bonds, either Treasury or corporate. The rest is spread across stocks, real estate, hedge funds, private equity funds, etc.

Investors thinking of investing into GM need only to look at the current dire situation that many US states such as Illinois are in. Illinois is being bled dry but its pension plan which is only 40 per cent funded.

Look at it another way – what GM is doing is the exact equivalent of taking out an unaffordable mortgage, then making insufficient annual payments on the premise that “something” will turn up before the repayment date. As many homeowners have found out, that simply does not work.

Bottom line - for investors contemplating an investment into General Motors – don't! Its pension plan liabilities will sink it again. GM's “comeback” is not as rosy as Wall Street is suggesting.

Saturday, November 20, 2010

The New General Motors

The stock market had a big rally on Thursday of this past week. It was due mainly to the successful initial public offering (IPO) from General Motors.

The auto company began trading again as a public company after filing for bankruptcy and being bailed out by Uncle Sam. The money realized from the IPO will add to the $9.5 billion already paid back to the US government by General Motors.

But GM will still owe the taxpayers plenty...Investors will recall that GM became 'Government Motors' after the multi-billion bailout from Uncle Sam.

The IPO's initial success is largely due to the fact that the IPO was priced to sell. After all, neither the company nor its majority owner – the US government – could afford to see the IPO flop. After the IPO, Uncle Sam's stake in the carmaker has fallen to about 40 per cent from its prior 61 per cent.

But is General Motors really much different from the company that went into bankruptcy?

General Motors restructured its operations and finances in last year's $60 billion government bailout. Thanks to the restructuring, GM in 2010 posted net profits and positive cash flow for the first three quarters of this year.

There are positive factors going for GM, such as its $33 billion in cash at the end of the second quarter. In addition, it will enjoy $45 billion in tax-loss carry-forwards which will shield its earnings from the IRS for awhile.

GM is still a major player in the auto industry. GM will hold on to its spot this year as the world's second-largest automaker after Toyota Motor.

And perhaps most importantly, General Motors is playing up its growing international business. GM sells more than two-thirds of its vehicles outside of North America.

In particular, the company emphasizes that it plans to continuing strengthening its international presence in emerging markets. GM has the top combined market share (13%)across the BRIC emerging markets of Brazil, Russia, India and China.

But GM is struggling in Europe. And its market share in the United States has slipped by nearly a point over the past year to 19 per cent in January through September.

However, the real “sword of Damocles” hanging over General Motors is the company's long-term pension obligations.....

The optimists on GM are quick to point out that the bankruptcy eliminated much of the company's debt. True enough, but they are ignoring the company's massive pension obligations.

General Motors' pension fund is the largest private sector pension plan in the world with approximately $100 billion in liabilities.

The essential flaw in the entire GM rescue was that, in order to keep the United Auto Workers union happy, the pension plan was transferred completely untouched to the 'new' General Motors.

GM is making no contributions to the pension fund now. But the company says it may have to put in $4.3 billion in 2014 and $5.7 billion in 2015. GM has said that it will “possibly” have to add even more funds in the future. Investors should change the word possibly to definitely.

That huge pension liability is a red flag. It may land General Motors right back in bankruptcy court some day down the road.

The future outlook for the 'new' General Motors may not be as rosy as the company, the government and Wall Street suggests. It looks likely that the 'new' GM may end up looking a lot like the 'old' GM.

Saturday, November 13, 2010

The Currency War Continues

By the end of this past week, the stock market seemed to be a little spooked. Perhaps it was the sighting of that missle off the coast of California.....

Rumor was that the missle was fired by Ben Bernanke as a big blow in the ongoing global currency war. Maybe it was filled with freshly printed dollar bills and on its way to China.

All kidding aside, the United States is exporting inflation to China and other emerging markets quicker than you can say Mao Tse Tung. And as mentioned in last week's article, the rest of the world is not happy about the Federal Reserve's massive money printing.

The latest announcement by the Fed of another $600 billion, brings the grand total of "magic" money creation to $2.3 trillion printed in the past 24 months!!

No wonder that US Treasury Secretary Timothy Geithner was laughed out the room at the G20 summit when he said that the US was not "intentionally" trying to weaken the US dollar.

The German Finance Minister said that "The United States has lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies."

Minister Schauble went on: "It's inconsistent for the Americans to accuse the Chinese manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money."

For good measure, he added that the US Treasury and the Federal Reserve were "clueless".

Speaking of China...its debt ratings agency Dagong downgraded US debt. In speaking of the downgrade, it had this gem: "It is likely for the current loose monetary policy to postpone the occurence of difficulties. Yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst."

The list of countries goes on - the UK, France, India, Brazil, etc. The rest of the world is growing tired of the US trying to dump its problems on the rest of the world by printing dollars, thereby creating global inflation.

Perhaps the US should consider austerity measures like the UK has taken instead of creating massive new government entitlements. A "diet" and some belt-tightening is the right prescription. But also the most unlikely one.

Saturday, November 6, 2010

Emerging Markets and the Federal Reserve

Most investors are by now well aware that the Federal Reserve's QE2 has set sail, to the tune of $600 billion.

In simple terms, the Fed has announced that it will “create” another $600 billion out of thin air with which to purchase a like amount of longer-term Treasury bonds by the middle of next year.

However, there is no truth to the rumor that Ben Bernanke will be writing an updated global version of Dale Carnegie's classic self-help book “How to Win Friends and Influence People”.

Mr. Bernanke's policies may be influencing people on Wall Street, but he is certainly not winning any friends globally. Especially in emerging market countries. The very strong perception there is that the Federal Reserve is trying to export the US woes overseas by printing so many dollars.

The 1997 Asian Crisis...In Reverse

Thanks to the Fed's QE2, there is now even more money sloshing around the global financial system in search of higher returns than available in the US.

What we are seeing right now in the global financial markets are echoes of the 1997 Asian crisis. But in reverse. The economies targeted by speculators are now those that are strong, not ones that are weak.

That period of panic in 1997 saw speculators swamp developing markets with sell orders. Once again today, we see many emerging countries trying to block overseas speculators.

But this time from buying their assets and currencies, not selling them. This is the exact opposite of 1997.

Easy credit policies in the US have further fueled speculation in the currencies of developing economies in strong balance-of-payments positions. And the largest speculative prize of all remains an anticipated upward revaluation of China's renminbi, followed by other Asian currencies.

Emerging Markets Tightening

But the emerging countries are not standing by idly, waiting for the tsunami of US dollars and speculators to devastate their economies. They are taking action.....

The Financial Times calls it QT2. The QT stands for quantitative tightening.

These are measures taken by emerging market countries to counter the effects on their economies of vast capital inflows – that tsunami of Federal Reserve paper.

As the US dollar falls and developing nations see speculators pushing up their exchange rates, more and more countries are discussing stringent restrictions on incoming capital flows. A string of governments in Asia and Latin America have either already implemented, or are considering implementing soon, capital controls to stem the nasty side effects of inflows.

Emerging markets are affected in several ways by the so-called US dollar carry trade. For investors not familiar with what a carry trade is, here is a basic definition. A carry trade can be described simply as when money moves from a low interest rate environment to a higher interest rate environment.

Such speculative inflows contribute little to capital formation or employment. But they do price a country's exporters out of foreign markets. And such inflows can be suddenly reversed if speculators pull out, disrupting trade patterns.

According to a recent research note by HSBC, loose monetary policy in the United States will lead to capital controls across the developing world. In other words, capital controls will follow the weak dollar as inevitably as sunset follows sunrise.

Emerging markets are struggling with what HSBC calls the “impossible trinity”. This is an inability to allow free flows of capital while simultaneously maintaining a grip over interest rates and exchange rates. HSBC went on say “The more the west pursues quantitative easing, the more the emerging world, via capital controls, will pursue quantitative tightening.”

Danger to the US

There is a real long-term threat to the United States from all the Fed's quantitative easing. The danger is that the world breaks into two competing financial blocs. One bloc would still be centered on the dollar. The other bloc centered on the emerging nations. Particularly the large nations such as China, India, Brazil and others.

Tentative steps in that direction already occurred last year. China, India and Russia among others took early steps to use their own currencies for trade, rather than the US dollar.

China took a simpler path last month when it supported a Russian proposal to start using the renminbi and the rouble for trading between the two countries. China has also negotiated similar deals with Brazil and Turkey.

It looks like more and more of the developing countries will be moving down a similar path very soon to protect their own currencies and their economies.....

If these countries do implement such policies, it will have been largely due to US policy short-sightedness. A policy designed to please Wall Street speculators and conducted without concern for its effect on emerging economies around the globe.

This policy may ultimately isolate the United States, the dollar and its users from the rest of the globe. And to the long-term detriment of the United States and its citizens as America will no longer have the central role in the global economy.

Saturday, October 30, 2010

Fed Decision Day Approaches

Next week may be an important turning point for America. It holds a very key date.....

No, not Election Day - Tuesday, November 2nd, where Americans for the most part get to choose between two sides of the same coin.

The key date is Wednesday, November 3rd, when the Federal Reserve announces to the world the details of QE2, the second round of its quantitative easing or money printing.

The first round of massive money printing occurred during the peak of the financial crisis. It can be summed up as a lifelife for American policymakers and their Wall Street banking cronies, but it was a disaster for the American public.

Not only did the Federal Reserve nationalize the banks' losses but more importantly Mr. Bernanke's money creation efforts have seriously undermined the viability of the US Dollar.

As any student of history knows, there is no such thing as a free lunch. By creating additional trillions of dollars out of thin air, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardizing the country's currency and its future.

And look where the money is going...To Wall Street and its new way of making fast money - high frequency trading. High frequency trading now accounts for about 70 percent of the daily trading volume on the stock exchanges.

Their specialty is speculating..they trade stocks as if they were playing slot machines. According to an estimate from Raymond James analyst Patrick O'Shaughnessy, the holding period for stocks is mere seconds, around 11 seconds.

Whatever happened to actual investing and holding stocks for years? Wall Street just spends all day gambling, grabbing a penny or two on millions of shares of stocks and on thousands of individual stocks.

These are the people that the Federal Reserve is gambling the future of the Dollar and our nation on. I don't know about the readers, but I find that deeply troubling.

From an investment standpoint, that tells me to keep doing what I have been doing, especially if we see a correction downward in prices.

And that is to move into real assets - commodities and commodity producing companies and into other countries, especially emerging markets, and into other currencies like the Australian Dollar where savers can still get a decent rate of return, due to higher interet rates, on their money.

Saturday, October 23, 2010

More Wall Street Bad Behavior

It should not come as a surprise to anyone that if you reward behavior, even bad behavior, you will get more of the same.

Wall Street banks "misbehaved" so badly that it put the entire global economy at risk.....

They created securities which they knew was filled with near-worthless mortgages and other 'gems', paid off the ratings agencies to rate the securities as ultra-safe AAA, had their 'snake oil' salesmen selling these pieces of garbage all over the globe, then actively bet against their clients that the securities would go down in price.

All of this was done in the name of making billions of dollars for themselves, while leaving the taxpayers holding the bag for billions of dollars worth of bailouts.

And Wall Street's punishment? Nothing but a slap on the wrist. Wall Street paid a few millions in fines (which they can earn in a few hours of trading, since they are front-running trades) and got "reform" which was no reform at all.

The result? More bad behavior from Wall Street banks - improper and perhaps fraudulent foreclosures on peoples' homes.

Several large US banks were forced to halt foreclosures in a few dozen states that require banks to go to court to repossess delinquent borrowers' homes

This occurred after it emerged that the documents were being rubber-stamped by "robo-signers". Robo-signers were bank "officials" who signed up to 10,000 forms a month while hardly glancing at them.

The banks and their defenders say that this is all a bureaucratic technicality and much ado about nothing.

What a bunch of BS! The fact that the major Wall Street banks regard court proceedings to repossess homes so lightly is a worrying reflection on Wall Street's ethical standards. Or more precisely, the lack of them.

At worst, the banks may have been lying to courts over a vital safeguard in property law - the sanctity of documents.

The hope is that the courts will take a very dim view of this. And the individual states too...the attorney generals in all 50 states are investigating the matter.

Hopefully, the states will hold the banks' feet to the fire. Show Wall Street that its contemptous approach to their legal responsibilities is unacceptable.

Saturday, October 16, 2010

The Stock Market Rally Continues

The rally in US financial markets continues unabated as Wall Street continues to party in anticipation of the Federal Reserve's purchase of $1 trillion worth of assets.

In other words, as mentioned in last week's article, $1 trillion of money created out of thin air by the Federal Reserve will flow directly into Wall Street's coffers.

But let's take a step back and ask ourselves whether these levels of stock market valuation are justified.

The S&P 500 is currently selling at a PE ratio (price/earnings) 50 percent higher than the long-term historical average. Investors must think that corporations are going to grow 50 percent faster than they did during most of the 20th century.

Does that even begin to make sense? Well, let's see.....

There is about $20 trillion worth of bad credit still to be many houses are headed to foreclosure that banks have had to stop taking them back...unemployment is at levels not seen since the Great Depression with the "real" unemployment - U6 - over 17 percent.

And let's not forget that what little economic growth we've had has come from the government and now Uncle Sam is headed for a debt crisis - the US government now borrows a dollar for every dollar it receives in taxes! No wonder the dollar keeps spiraling down!

Yep, it makes sense - not. What is happening here is that the Federal Reserve believes that all economic problems can be solved by creating money out of nothing, and giving it to Wall Street, creating one financial market bubble after another.

Speaking of bubbles, the biggest of them all - the US Treasuries market - continues growing. It is being aided by continuing flows from individual investors into bond funds, thinking that these funds are safe.

The numbers speak for themselves. More money has flowed into bond funds over the past year - $412 billion - than flowed into stock funds in the 12 months leading to the 2000 tech bubble high - $312 billion. I don't have to tell anyone what happened to those investors.

What do I expect? I would expect a solid correction in at least the stock market during the period in early November when the Federal Reserve "officially" announces how much money they're going to print - "buy the rumor, sell the fact".

If that does not happen and Wall Street keeps inflating the bubble, then we won't see a correction until at least mid-January. And then it could be a very nasty one, ala 1987.

Saturday, October 9, 2010

QE2 Ready to Sail

People ask me why the US stock market has been so strong lately. The answer is simple - QE2.

No, not the ship. QE2 stands for the second round of Quantitative Easing (money printing) from the US central bank - the Federal Reserve.

Much like QE1, it is expected to be in the one trillion dollar range. And like the first round, Wall Street is expecting that money will flow directly into its coffers, with very little trickling out to Main Street.

That gives Wall Street a lot of money to "play" with and speculate. Plenty of money to push bubble stocks like Apple even higher.

And importantly to Uncle Sam, it allows Wall Street to buy more of its debt and keep the Treasuries bubble going too.

Bottom line - with a trillion dollars, you can throw a heck of a party (for a while).

And as mentioned in prior articles, Wall Street could care less that this money printing is slowly destroying the US dollar.

They are not concerned about 'real' returns, but only nominal returns which allows them to pay themselves large bonuses every quarter.

But the value of the US dollar is important to the average American. Look at what has happened since all ties were removed to the gold standard by President Nixon in 1971.

With nothing to hold the Federal Reserve back, the US money supply increased 1,314% between 1970 and 2008...and the stock market rose 15 times - right in line with the money printed. That is why Wall Street celebrates every time more money is printed.

But for the average Joe, it's a different story. Consumer prices rose fivefold during the same time frame. So any nominal gains in salary were eaten up by a three-quarter decline in the value of the dollar and inflation.

This led to an ever increasing income gap between the classes.....

During the 1960s, the bottom 90% of the population got 60% of the income gains of the period. But by the end of 2007, that segment of the population got only 11% of the income gains.

Half the nation's income today goes to the 20% of the population,nearly twice as much, compared to the bottom 20%, as in 1967. This is the largest gap ever recorded.

Nothing is being done to stop this insanity. Congress is doing its usual smoke and mirrors act and blaming those 'manipulating' Chinese for all of America's economic woes.

Their 'solution' will only result in higher prices for American consumers and a movement of jobs from China to lower-income countries around the globe.

Meanwhile the real problem is reckless fiscal and monetary policy the United States has followed over the past 40 years. Unfortunately, these policies show no signs of ending any time soon.

Here is something I read this week at the Daily Reckoning website which puts things into perspective:

"What's the difference between a thief and a counterfeiter? A thief takes what is not his without another's consent. A counterfeiter passes off as genuine that which he knows to be a fraud. Or, in simpler terms, one is a politician and the other is a central banker."

Saturday, October 2, 2010

Gold and the US Dollar

I'm often asked about gold and whether it is in a bubble. People hear the talking heads on TV say that gold is a bubble.....

The same talking heads that missed the dot-com bubble, the housing bubble, and are now missing the current bubble in bonds. But somehow these "experts" see a bubble in gold.

First of all, let me say that gold will go back down a $100 or $200 an ounce soon, but that will simply be a correction in gold's ongoing bull market.

Although it may be more correct to say that it is an ongoing bear market in the US dollar. Remember that gold is priced in US dollars, so as the dollar drops gold will rise.

I always find humorous those ads on TV urging people to take advantage of high gold prices to get rid of their unwanted jewelry...exchanging it for cold, hard cash.

Only the cash isn't all that "hard". From just a year ago, the cash is worth about 20% less the gold people sold a year ago.

This serves to underline the biggest mistake I see both novice and sophisticated investors make. Investors do not take into account the value of the dollars that they own.

Take a simple example. Let's say stock A is trading for $100 a share. Then a year later it is trading at $120 a share. Most investors would be overjoyed - "Hooray, I made 20% in one year on my investment!"

But then let's say, due to the Federal Reserve printing money madly and other stupid federal government policies, the US dollar drops by 25% in value over that year.

In real terms, the buying power of the dollars you invested has declined. So in real terms, you have NOT made 20% on your money, you have actually LOST 5% on your money!

That is how the Feds continue to pull the wool over Americans' eyes. They continue to devalue our currency and then blame scapegoats like China. The problem isn't China...the problem is that the US dollar has been on the decline for decades.

I smile when people boast about how Apple went from $200 to $300 a share. Yes, I ask but how much have you really made. They look at me like I'm nuts.

That's the beauty of gold. It has been a store of value for thousands of years. Gold isn't a speculation or really even an investment.

It is an insurance policy. It protects the value of your assets over the very long-term so you can pass on your wealth to the next generation.

There is no paper asset, including the US dollar, that has ever done that in the history of humankind.

But back to the question of a gold bubble. Yes, it will eventually reach a bubble price, but not for a long time.

Ordinary people do not own gold. Most people couldn't tell you the price of gold within $200. They cannot imagine that the US dollar is not a safe place for their wealth.

Eventually, they will see the light. When that happens, the public will panic and gold will skyrocket in price. $2000? $5000?

Who knows how high gold will go. But the height of the stampede into gold will be the time to sell it. Keep just enough as an insurance policy and move the rest into other assets which will be dirt cheap because of the ongoing panic by the public.

Saturday, September 25, 2010

It's Good to Be King

There is an old saying - "Fool me once, shame on you, fool me twice, shame on me."

Well, the American public is being fooled again. Shame on them.

According to the fuzzy-headed economists from the National Bureau of Economic Research (which sounds like a throwback to the old Soviet Union), the longest US recession since the Great Depression officially ended in June 2009.

Tell that to the unemployed. According to the latest figures, there are more people without jobs today than there were when the recession "ended".

My only regret is that the economists from the National Bureau of Economic Research aren't among those without jobs.

Ever since the recession "ended", more Americans have gone to the poorhouse than have come out of it. Not only do they lack jobs, but the value of their assets keeps falling too.

If one looks at the value of Americans' homes and stock market portfolios over the past few years, it is down 25.7 percent from June 2007 to the recent low.

The figure has dropped from $65.8 trillion to $48.8 trillion, a plunge of nearly $17 trillion! No wonder most people don't feel that the recession is over for them.

But don't worry, America. Wall Street is as healthy as ever and the bankers are gleeful. And they have every right to be.

Tough international banking regulations, the so-called Basel III, have been completely watered down. The "new" regulations still would not raise a red flag if Lehman Brothers were going bust today.

And no other meaningful changes in how Wall Street operates are coming. Here are a few examples.

Wall Street can continue freely producing toxic assets like the mortgage securities which nearly crashed the global economy.

In the rest of the world, they have a product called "covered bonds" which are much safer. They are called "covered" because the lenders who pool, package and sell these securities are forced to actually keep 'skin-in-the-game'. The banks are required to retain the underlying loans on their balance sheets, not dump them on some unsuspecting third party.

But Wall Street strongly opposes covered bonds and they will not be issued here. After all, why should the banks be responsible for the loans when they can leave US taxpayers holding the bag?

And look at the difference between how the United States bailed out its banks and Sweden did it in the 1990s.

Sweden did not just bail out its banks by having the government take over the bad debts. It extracted concessions from the banks before writing checks.

Banks had to write down losses and issue warrants to the government. That held banks responsible. Holders in bank stocks and bonds paid the price as well they should have. Meanwhile here in the US, owners of bank bonds paid no penalty and were paid in full.

No wonder the final cost of the Swedish bailout of its financial system came to only 2% of its gross domestic product (GDP). Here in the US, we have already spent 15%-20% of our GDP on the bailout and the costs are still rising.

There is another difference between Europe and the US too. In Europe, the heads of many of its major banks are being forced out by unhappy shareholders.

But here in the US, shareholders have very little say in how a company conducts its business. So nearly all the CEOs who were in place and helped cause the financial crisis are still in place and continue to collect tens of millions of dollars in compensation.

Yes, it's good to be the king, or a Wall Street banker. No worries about unemployment in the executive offices of Wall Street.

Saturday, September 18, 2010

Investing is a Waiting Game

Being a trader requires a mindset where your attention span is fleeting as, like a buttefly, you flitter from trade to trade.

However, being an investor requires a totally different mindset. You have to actually think and try to figure out where things will be in the future.

The most difficult thing for an investor to learn is patience. Sometimes you may have to wait for years for something to occur which you know should and will occur.

Look at the bubble. People who did not put money into these stocks were told they were "out of it" and that they just "did not get it".

The traders told them that new technology had changed the rules of the game forever. Now that the internet was here, the sky was the limit. You could pay anything for an internet stock because it would grow, like Jack's beanstalk, to the sky.

But then that fairy tale hit reality. Companies providing free services on the internet turned out to be worth no more than people paid for their services. And the internet bubble blew up in January 2000.

But investors had been forced to endure three years of being laughed at before proven to be right. The traders finally "got" it and they got it good.

And then there was, of course, the housing bubble. Once again, investors were forced to endure three years of being laughed at again because they did not "get" it. After all, who didn't know that house prices in the United States always go higher. Like Jack's beanstalk.....

But then the housing bubble burst in 2007 and the believers in fairy tales "got" it again.

What are investors waiting for now?

For the next bubble - the US bond market - to burst. Again, it will probably take several years of enduring derision of not "getting" it.

The weavers of fairy tales on Wall Street have created another wonderful delusion. This time it's a scary tale.....

It's a tale of monster called deflation. Deflation as in Japan...nevermind that the demographics in Japan are nothing like those in the United States.

It's a tale of a declining economy and oh my gawd - falling prices! Nerermind that the only falling prices are prices of assets, like houses, that were priced at bubble levels.

Even the US government's own distorted measure, the CPI - consumer price index - shows no scary deflation monster.

Over the past 10 years, the CPI is up 29%. It is only down 0.6% from its record high and yet that is being called deflation.

Yes, and it is such scary deflation that the Federal Reserve must keep rates near zero and everyone must purchase bonds to protect themselves against deflation.

Patience, investors. This bubble will eventually burst and bond holders will "get" what they truly deserve.

Saturday, September 11, 2010

America Is Off-Course

Japan was the world's most admired economy in the 1980s. But over the last twenty years, it has become the most disliked economy on the globe, as its economy has been mired in a two-decade long slump.

Japanese businessmen were feared in the 1980s. However, by 1995 economists pointed their fingers and laughed at the Japanese businessman...the world's most admired businessman had lost a "shoe".

In today's global economy, we have seen that most of the developed countries are "barefoot", caught in a seemingly never-ending cycle of too much debt and currency debasement caused by excessive money printing.

Respected economics professors Ken Rogoff and Carmen Reinhart (perhaps the most accomplished female economist today) studied 15 economic crises over the last 75 years.

What they found is what one would expect...Real recoveries in the post-Keynes economic era are very rare.

As mentioned in a previous article, modern-day politicians follow a perverted form of Keynesian economics. It makes sense to stimulate an economy when it is suffering. But politicians forgot about the other part - stimulus money is supposed to come from money SAVED during good economic times. Instead, politicians have resorted to adding enormous amounts of debt.

Professors Rogoff and Reinhart found that in the 10 years following an economic crisis economic growth rates are lower and unemployment is higher than in the years preceding the crisis.

In two-thirds of the episodes, jobless rates never recovered to pre-crisis levels, EVER.

And in 9 of 10 of the crises, housing prices were still lower 10 years after the crisis ended.

Their findings sadly should sound very familiar to many Americans today. The bad news is that if this financial crisis plays out like the prior ones have, the US economy looks set to struggle for years to come.

What is truly sad to me in America today is that most Americans still refuse to take actions to correct this.....

They need to hold the feet to the fire of the people responsible for this mess - the elites in Washington, on Wall Street, and in the Federal Reserve.

But instead, many Americans go off in search of bogeymen to blame for their problems. Bogeymen that are the most "different" from them.....

By all means, let's let the crooks off the hook and solve our problems by attacking the BP chief executive or Muslims or by burning books.

Saturday, September 4, 2010

Foggy AAA Ratings

Congress, the Obama Administration and government regulators have done next to nothing to rein in Wall Street excesses. So the games continue.....

One can describe Wall Street today as a foggy valley of shadows where clever bankers and brokers pick the pockets of the lost, wandering masses.

Where are the beacons of light in this fog-shrouded valley? They are nowhere to be seen.

One beacon of light is supposed to be the ratings agencies. Their job is to assess investment risk and provide a clear playing field for investors of every kind. They are supposed to be the guys with the lanterns leading the masses out of the fog.

Instead, they did the opposite - they led the lambs to slaughter. Last month, a Senate study determined that over 91% of the AAA-rated mortgage backed securities issued from 2006-2007 have since been downgraded to "junk" status. Wall Street snake oil salespeople sold these toxic securities - what I call "briefcase nukes" - all over the world.

The ratings agencies excuse? "Hey, don't blame us. Our economic 'models' said these bonds would be ok."

Maybe the housing statistics from the Great Depression were "lost". Or maybe the raters deliberately left those statistics out of their models. After all, in modern America housing prices could never drop 20% in a year - we're so much smarter than anyone else has ever been.

Whatever the reason, it is incredible that the ratings agencies not only remain, but prosper. The very obvious conflict of interest is still in place. Let me lay it out for the readers:

1) Investors want the "safety" of AAA-rated securities.

2) Investment banks deliver want their clients want.

3) Investment banks PAY ratings agencies for their services.

4) The service of a ratings agency is to rate securities.

Pick your metaphor. It's like a student paying his teacher to grade his homework. Or a plaintiff paying the judge's salary.

Despite all the obvious common sense issues - incompetence, conflict of interest, past performance - the US government is turning a blind eye to this tawdry corner of the financial services industry. And taxpayers around the world are paying the price for it.

Saturday, August 28, 2010

Wall Street Consensus Is Often Wrong

There is one sucessful way to not only make money but to avoid losing money in the financial markets. That is to avoid the 'certainties' determined by the Wall Street consensus and to consider investing into areas disliked by the Wall Street consensus.

Look back a decade ago...The United States' government was running a budget surplus, no Western country could ever imagine facing default and the only BRICs anyone had heard of were the ones used to build houses.

At the time, Wall Street was telling everyone there were two surefire investments which were the road to riches for the average American. The two surefire investments were technology stocks and housing. Subsequently, both the Nasdaq bubble and the US housing bubble burst in spectacular fashion. It was the bursting of the housing bubble which has brought the American economy to its knees.

And at the same time, Wall Street told everyone to avoid other areas such as those "dangerous" emerging markets like China. And gold? It was a relic and only a nut case would invest in gold. After all, it was at a two-decade low of $279 an ounce.

That advice really worked out well - not! While the Dow Jones average has gone nowhere, the Nasdaq was sliced in half, and housing prices collapsed, gold prices have steadily climbed in the past decade to its current level above $1200 an ounce.

Meanwhile, China experienced near double-digit economic growth nearly every year in the past decade. And other emerging markets like Brazil and India have also done remarkably well.

In fact, the emerging markets have done so well that they are countries that are sitting on huge amounts of surpluses and are not at the risk of default as are many Western nations.

So what are the "geniuses" on Wall Street saying today?

The consensus is that gold is a "bubble" and sure to collapse. The geniuses are also saying that China and other emerging markets are also bubbles sure to collapse at any time.

Keep in mind, these are the same people that somehow did not see the almost-impossible-to-miss bubbles that were the Nasdaq and the US housing markets.

And what does Wall Street like? Why, of course, they love US Treasuries. The consensus is urging everyone to get into Treasuries for "safety" reasons. That is laughable!

US Treasuries are the biggest bubble I have seen in my 30 years in the investment industry. It is merely a "momentum" trade that everyone on Wall Street is piling into.

During the Nasdaq bubble, people would "invest" into companies with no realistic business plan, no revenues and no hopes of ever making money. Or if a company had earnings, investors would pay 100 times earnings.

Today in the Treasuries bubble, investors are once again paying sky-high prices for tiny streams of income. For example, in the case of the 10-year inflation adjusted notes (TIPS), investors are now paying more than 100 times the expected annual return.

In addition, the amount of money pouring into bond funds from individual investors is similar to the money flows that went into technology mutual funds at the height of the tech mania. And the chart comparing the performance of the Nasdaq in the bubble years to the recent performance of the US Treasury market is also scarily similar.

Bottom line - it will end very badly some day for investors who buy Treasuries, with the bonds losing 50 per cent or more of their value.

What should investors do? Get out of bonds and look at areas that are out of favor on Wall Street such as gold, other commodities and emerging markets.

Saturday, August 21, 2010

A Tale of Two Economies

Charles Dickens 'A Tale of Two Cities' begins with "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness."

Apparently Dickens was an economist. His quote describes perfectly the global economy and the current juxtaposition between the German and American economies.

The contrast between the two economies can be seen in the recent important economic news, which the mainstream American press pretty much ignored.

That news was the performance of the German economy and its vigorous rebound from the recession of last year. Germany's economy grew by 2.2% in the second quarter of 2010. That stands in stark contrast to the American economy which looks to be slipping back again.

The German economy's 2nd quarter growth translates to a 9.1% annual growth rate! This is emerging markets type of economic growth, which we normally see in countries like China and India. In addition, Germany's unemployment rate is now at the lowest level it has been in years - a 7.6% rate.

How did Germany accomplish this?

One key factor is that Germany is still an industrial powerhouse. Its industrial sector makes up about one-quarter of its total economy.

And it's not an just export story...German imports are also surging. German imports in June surged to a record 100 billion euros thanks to confident consumers.

Germany's industrial sector sold all sorts of manufactured goods to fast growing emerging economies such as China.

And speaking of China.....

In the United States, there is constant griping about China and how they don't compete fairly or buy American products,etc.

In Germany, policymakers are "worried" that German companies are selling too much to China and becoming dependent on Chinese demand.

Siemens is an example of a large German industrial company. It recently reported that its order backlog is the highest ever in its entire 163 year history! And much of that is thanks to China and other emerging markets.

Another factor in Germany's strong economic performance is that it was wise to ignore American economic "advice".

German leaders ignored American government leaders like Tim Geithner and American economists who all urged Germany to not work so darn hard, go on a spending spree and pile up debt like America in order to stimulate its economy.

However, instead Germany focused on the basics. It encouraged work and productivity and focused on making products that other nations around the world actually need and want. It did not focus it efforts on leisure activities or creating the latest 'cool' tech gadget.

The contrast between the two economic philosophies could not be sharper and neither are the economic results.

'The age of wisdom and the age of foolishness' indeed.

Saturday, August 14, 2010

The Federal Reserve Strikes Again

A recent headline on the cover of Barron's said it all: "Why the Fed will soon print $2 trillion".

This past week the Federal Reserve, headed by Ben Bernanke, said it would continue to keep interest rates near zero and that it would continue to buy billions of dollars worth of Uncle Sam's debt.

Its decision has two obvious effects. First, the Federal Reserve continues to screw savers with those near-zero interest rates.

Second, the Fed's purchases of US Treasuries continues to distort the Treasury market. Their actions keeps rates artifically low, creating a dangerous bubble in the Treasury market. This bubble has sucked many unwary investors into bond funds and will blow up eventually. When the Treasury bubble bursts, it will cause huge losses for investors who thought they were playing it "safe".

Why is the Federal Reserve doing this? Because the so-called recovery in the US is a flop. Trillions of dollars of "stimulus" have produced nothing.....

Unemployment is not getting better. Consumers aren't shopping. Banks aren't lending. And the list goes on.....

Both the Federal Reserve and the US government continue to blindly follow Keynesian economics, named for famed economist John Maynard Keynes.

But it is a perverted form of Keynesian economies...Keynes is probably turning over in his grave.

The government only follows half of Keynes' advice - to stimulate the economy during downturns in the economy.

It conveniently forgot the other part - any stimulus money was to come from money that had been SAVED during good economic times.

Keynes' theory is much like the Bible story concerning a dream the Egyptian pharaoh had about seven lean years which would follow seven good years, that was interpreted by Joseph.

Apparently the US government didn't have a Joseph and forgot to save anything during the good years.

The Swedish Solution

And much like the BP oil crisis where the US government arrogantly refused any sort of help from overseas, the Federal Reserve refuses to implement a solution given to them by the Swedish central bank to jumpstart lending.

The United States has a big problem with its banks reluctance to lend to anyone. Here is why.....

When the financial crisis hit, in an effort to "save" the banks, the Federal Reserve began paying banks interest on any money deposited with the Federal Reserve. The Fed did not do this before the crisis hit.

So the banks' logic is "why take a risk and lend the money out, when we make money just by letting it sit there 100% risk-free at the Fed?"

Sweden had a similar problem with their banks not long ago. Their solution?

Negative interest rates.

In plain English, if Swedish banks left money deposited at the Swedish central bank, they would have to pay the central bank interest on the money!

Needless to say, Swedish banks soon took their money out of the Swedish central bank and began making loans in an effort to make a profit.

But the Federal Reserve, with its only concern seeming to be Wall Street and the banks, has refused to do this. At the least, it could go back to its old policy and quit paying interest to the banks.

But do not expect a change in the Fed's or the government's policies until the train (US economy) completely jumps off the track.

Saturday, August 7, 2010

No Ratings Agencies Reform

The ongoing global financial crisis has prompted great changes in almost every industry. Credit rating agencies, one of the main culprits of the crisis, somehow seems to have escaped unscathed. Until now.....

When it came to rating a bond, there were only three companies which did this and all of them are US-based. The three firms are Standard & Poor's, Moody's and Fitch.

But that has now changed. There is a new player in town. It is China's Dagong International Credit Rating Company.

This makes sense. China, the largest sovereign debt holder in the world, with nearly $2.5 trillion would like to have a bigger say as to the risk and reward Beijing deems appropriate for its investment money.

It has already created quite of stir by lowering the debt rating of the United States down from AAA. It lowered its rating to AA with a negative outlook.

That may just be politics but what Dagong said about its competitors is pertinent and rings true.

It accused its American rivals of becoming politicized. It said the three rating agencies were "too close to the clients" [Wall Street] and highly ideological - "the United States will always be a AAA rating" - and thus have lost their objectivity in rating bonds.

As if to confirm the Chinese criticism, the Wall Street Journal recently reported that the three big US credit rating firms have made an urgent request of their new clients.

That request? "Do not use our names on bond issues!"

Why? Because the new financial reform law made them liable for their ratings effective immediately.

So, instead of defending and standing behind their work, the three companies basically told the world "China is right. Do NOT trust us!"

The big three credit rating firms have been highly criticized in the aftermath of the global financial crisis and rightly so.

The firms rated any piece of junk issued by Wall Street as AAA, as long as they were highly compensated by Wall Street.

This inherent conflict of interest was NOT addressed by the new financial reform law, so even the Europeans are joining the Chinese and soon will be setting up their own credit rating agency.

The rating agencies can be put into the too big to fail and too stupid to survive category. These firms' incompetence, or is it complicity, is truly outstanding.

In any true financial reform legislation, their government-supported monopoly should have ended and the firms should have been shut down or at the least completely revamped to make them truly independent.

It looks like the corrupt monopoly is ending anyways though, thanks to the Chinese and the Europeans.

Saturday, July 31, 2010

America's Middle Class Is Vanishing

Once upon a time, the United States had the largest and most prosperous middle class in the history of the world. But now America's middle class seems to be vanishing at a blinding pace.....

At least that is the outlook from the Business Insider which recently published 22 statistics that "prove" the American middle class is being systematically being wiped out.

Here is a brief rundown of the most alarming statistics pulled together by Business Insider:

1) 83 percent of all US stocks are in the hands of just 1 percent of the population.

2) 61 percent of Americans "always or usually" live paycheck to paycheck. This is up from 43 per cent in 2007.

3) 66 per cent of the income growth between 2001 and 2007 went to the top 1% of all Americans.

4) For the first time in US history, banks own a greater share of residential housing net worth in the United States than all individual Americans combined.

5) In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 and 500 to one.

6) The top 1 percent of US households own nearly twice as much of America's corporate wealth as they did just 15 years ago.

7) The top 10 percent of Americans now earn around 50 percent of our total national income.

8) Approximately 21 percent of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.

9) There are now 6 unemployed Americans for every new job opening.

10) The average federal worker now earns 60% more than the average worker in the private sector.

Why is this happening? A lot of it is related to what I discussed in last week's article and the abnormal growth of the financial sector.

The growth of the financial sector and government together have, like weeds, strangled the growth in the once-vibrant sectors of the US economy. For instance, sectors like manufacturing...I have yet to see anywhere around the world a healthy economy that does not have a vibrant industrial and technology backbone.

Sadly, the elites in the government and financial sectors continue grabbing more and more of the no-longer growing US economic pie, starving the other key economic sectors.

Saturday, July 24, 2010

The Financial Sector Goes Rogue

Jeremy Grantham is chairman of the board of asset management firm GMO. He is also an astute investor with an impressive long-term track record.

And it seems he is also a keen observer of the American economy and what has gone wrong with it over the past few decades. His latest quarterly letter to shareholders is very interesting, especially considering it comes from someone in the financial industry.

In the letter Mr. Grantham argues that a disproportionate share of the US economy is devoted to financial services.

He points out that back in 1965 financial services made up only 3 percent of our nation's economic output (GDP). He says that clearly this was sufficient with the proof being that the decade was a strong candidate for the best decade economically for the US in the 20th century.

Therefore, he says, Americans should be highly suspicious of the extra 4.5 percent of the economic pie that went to the financial services sector by 2007, bringing the total to a remarkable 7.5 percent of GDP.

Mr. Grantham said this extra 4.5 percent would seem to be WITHOUT material benefit except to the recipients on Wall Street and elsewhere in the financial services sector.

He said it is a form of tax on the remaining REAL economy and would reduce its ability to save and invest for the future. He argues this would reduce the growth rate of the non-financial sector of the economy.

And indeed it has. Before 1965, the non-financial sector grew at a 3.5 percent rate per year...between 1980 and 2007, this rate of growth had slowed to an annual rate of only 2.4 percent.

Mr. Grantham didn't stop there in his criticisms. He said "This bloated financial system was also increasingly deregulated and run with increasing regard for profit and bonus payments at ALL costs."

He certainly hit that nail on the head.....

Mr. Grantham also decries the 'Age of the Trader'. The following excerpt is spot on:

"I grew up in a world where stocks and other financial instruments were traded by the client with a high degree of trust in the agent (Wall Street). Somewhere along the way, without any formal announcement of the change, the "client" in a trade mutated into a "counterparty" who could be exploited. Steadily along the way, the agents' behavior became more concerned with the return on their own capital than with the well-being of their clients."

Thus we have Goldman Sachs and other big Wall Street firms having no problem with ripping off clients and setting off "suitcase nukes" all over the globe in the form of bad mortgage bonds as long as they made a healthy profit while doing it.

Mr. Grantham argues for more regulation to rein back some of Wall Street's practices. A pity we didn't get that in the recent "financial reform" legislation passed by Congress.

Saturday, July 17, 2010

The New Global Consumers

It is the basic nature of things. Nothing or no one stays on top forever.

Look at the mighty US consumer - long the dominant force in world trade. But no longer...we've crossed an important threshold.

The US consumer has been surpassed by consumers in the emerging world. Emerging market economies now represent about 33 percent of consumer spending worldwide. US consumer spending now accounts for only 27 percent of total global consumer spending.

One example of this trend is the automobile market. China's vehicle market grew by 45 percent last year to become the biggest in the world. GM, for the first time ever, now sells more cars in China than in the United States.

The Economist Magazine said that multinational companies expect about 70 percent of the world's economic growth over the next few years to come from emerging markets. And 40 percent of the world's growth will come from just two countries - China and India.

But these two countries are not alone. Many countries' economies are growing at a torrid pace. Singapore, for instance, grew at a rate of 18 percent in the first half of 2010.

It's a great time to be an investor as we witness the history-making shift in global markets. Especially for investors who look for opportunities outside slow-growing economies like the United States.

At the least, investors should look at multinational companies such as Coca Cola. Coke now gets about 75 percent of its sales from overseas. In the first quarter of 2010, Coke reported a 20 percent increase in profits despite the fact that US sales declined. Sales in emerging markets, such as India (up 29%)and Turkey (up 18%) made it possible.

And many large emerging consumer markets remain nearly untapped. Indonesia, for instance. It has the world's fourth largest population - behind China, India and the United States - with 240 million people.

Ford just opened its first dealership there. And Heinz reports that Indonesia is a big part of why its Asian sales rose 41 percent last year.

Yet, despite all these exciting changes in the global economy, most US investors continue to snooze. They continue to have nearly all of their portfolio concentrated on the nearly-moribund US economy.

There are simple, easy ways to invest overseas through the use of exchange traded funds (ETFs). Please feel free to send an email and I will be glad to help you find some ETFs.

Saturday, July 10, 2010

Bond Funds Are NOT Safe Investments

US Treasury bonds are considered to be the safest investment in the world. However, that does not mean that they cannot be dangerous to your financial health.

Investors - frustrated by the microscopic yields on money market funds and certificates of deposit - have poured money into longer-term Treasury funds. These funds come in the form of mutual funds or exchange traded funds (ETFs).

Investors' thinking about these Treasury funds is simple...too simple.

They say to themselves: "These funds yield over 5%, which is great in this economic environment. And the bonds the funds hold are guaranteed by the US government. What's there to worry about?"

Actually, plenty.....

Even if one considers Treasuries to be free of credit risk (which is debatable), they are NOT free of interest rate risk.

When interest rates go up, bond prices - even Treasury bond prices - go down.

With interst rates so low right now, they can't go much lower...they can only go up. Despite the current complacency about interest rates not going higher for many years by most investors, higher interest rates are coming.

Higher interest rates are an inevitable result of ballooning federal government debt. Consider the following:

Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.

Two years ago, federal debt was 38% of the nation's GDP or economic output. Today, it is nearly 60% of GDP. And by the Congressional Budget Office's own estimates, it is going much higher.

And that does not even take into consideration the federal government's unfunded liabilities for programs such as Social Security and Medicare. These unfunded liabilities are conservatively estimated to be in the $55-$60 trillion range.

If the economy falters, and with short-term interest rates already at near zero, Uncle Sam will surely opt to increase 'stimulus' spending even more dramatically.

This increased government debt will put even more pressure on interest rates to move higher.

One main reason for that will be that global investors will question US government spending policies and whether they will ever be paid back the amount owed to them by the United States.

Global investors may demand a 'risk premium' (aka higher rates) as they have with Greece and some other European nations. That is why all the talk in European nations currently is about austerity and budget cutbacks.

My advice to investors is that there is still time to get these ticking time bombs out of your portfolio. Please do so or you will learn to your chagrin that these are not safe investments.

Saturday, July 3, 2010

The Wall Street Reform That Wasn't

There was lots of talk in the mainstream media about how the recent financial markets reform passed by Congress was the "most sweeping change" of the financial regulatory system since the Great Depression.

What a was nothing more than window dressing.

The real sweeping change to our financial system took place over the past 20 years as Wall Street money became more and more influential in Congress.

The key piece of Depression-era financial legislation - the Glass-Steagall Act - was repealed in 1999.....

Next was the Commodities and Futures Modernization Act of 2000, pushed by Larry Summers and Robert Rubin, which legalized the most destructive financial instruments of all - derivatives.

Then there was the leverage exemption at the Securities and Exchange Commission (SEC) in 2004, asked for personally by Hank Paulson and his friends. This allowed Wall Street to turn into a casino where the gamblers could make 50-1, 100-1 bets and worse.

The new legislation fixes NONE of the major problems.....

Banks are still too big to fail...and continue to gamble with YOUR money.

Banks are still allowed to value assets and liabilities in what can only be kindly be called "mark to mythical valuations". They can also still use off-balance sheet accounting to make sure they give themselves stratospheric bonuses. All of these shenanigans continue to leave the taxpayers on the hook.

Banks are still getting trillions of dollars from the Federal Reserve and the mortgage agencies - Fannie and Freddie - again paid for by the taxpayers.

We still have the supposedly unbiased ratings agencies working for, and paid almost entirely by, Wall Street firms. In addition, the regulatory agencies which are supposed to be overseeing Wall Street still have a cozy relationship with it.

A wonderful example of this is the former chairman of the board of directors of the New York Federal Reserve Bank, which directly oversees Wall Street, Stephen Freidman. At the time, he was also a member of Goldman Sachs' board of directors.

In late 2008 the Federal Reserve ordered AIG to pay Goldman Sachs $13 billion. This controversial decision pushed AIG to the brink and taxpayers are still paying the tab for AIG's problems. At the same time, Mr. Freidman bought 37,000 shares of Goldman Sachs stock. No conflict of interest there, right?

What is a real pity is that Congress, unlike the Congress in the 1930s, did not have the guts to stand up to Wall Street and enact true financial reform.

Saturday, June 26, 2010

Google's Failure in China

Ever since China allowed the first internet connection to be established 16 years ago, global attention has been focused on how the web is changing the country.

To those in the west who saw the internet as an inherently open and free medium, it would only be a matter of time before censorship and authoritarian control succumbed to the inevitable.

At the forefront was Google, the world's richest media and internet company. The company thought that its local search service would be one of the main forces breaking down barriers to the free flow of information.

Google was wrong...they tried to impose their vision of the web onto China and lost sight of cultural preferences and social structures. Therefore, Google has struggled in China.

Google's Goofs

If Google does decide to actually leave China, it will accelerate the online divergence between China and the rest of the world already taking place.

With 384 million internet users, the country already accounts for more than one-fifth of the 1.73 billion global internet population.

For large American multinational companies like Google, that means adapt or lose a substantiative market.

Other American internet companies have failed miserably in China, notably Yahoo and Ebay, so Google is not alone in its struggles.

If Google leaves China it will be because they fumbled the ball and did not adapt to the Chinese market and its competitors like Baidu and Tencent Holdings.

Google ARROGANTLY took years to find out even some basic facts about Baidu – its Chinese rival, which has nearly two-thirds of the domestic market in online search.

For example, Baidu offers a search box formatted in a way much better suited to Chinese characters than Google's...yes, Google, Chinese people search in their own language.

In addition, Google was slow to tackle one of Baidu's main strengths in attracting user traffic – its free music download...Google only began offering a similar service last year.

China's Cyberspace

US companies have simply taken far too long a time to realize that Chinese people use the internet differently than their counterparts in other markets.

Recent research by the McKinsey consultancy suggests Chinese users spend most of their time online on entertainment, much of it playing online games, while Europeans and Americans are more focused on work-related uses.

Behind this difference is the fact that Chinese internet users are younger, poorer and less educated than their counterparts in the west – a result of the fact that the country is moving online at the same rapid pace as it is expanding its economy.

According to China Internet Network Information Center, 61.5 per cent of users are below the age of 29, and only 12.1 per cent have a university degree. Additionally, 42.5 per cent have a monthly income of $146 or less.

But there are also cultural differences which Google took a long time to figure out.

Chinese internet users do not like to type...perhaps due to the fact that Mandarin has many thousands of characters.

They navigate almost entirely by using the mouse...most Chinese portals have reacted by filling their pages with hundreds of colorful links competing for attention.....

This may look cluttered and disorderly to an American, but it makes life easier for Chinese users.

Chinese web users are also more active participants...for instance, the amounts of comments posted per user in China is double that of other countries.

It is how consumers communicate with each other China, as they discuss places to buy food or clothing, etc.

According to McKinsey, consumers are increasingly using blogs and other user-generated consumer reporting when deciding what to buy.

In China, word of mouth is trusted much more than marketing or advertising campaigns...western companies planning to sell their goods in China should keep this in mind.

Instead of slick ad campaigns, their money may be better spent in inviting “key” Chinese bloggers to test their wares and then blog about the products.

Despite government censorship, the internet is still the "freest" space in Chinese society.

Raised on a diet of propaganda in real life, many Chinese are mesmerized by the feeling of authenticity and empowerment that comes with user-generated content.

And the internet has a greater importance in China than it does in other countries, where it is simply another communication or information tool.

In China, through blogs and social networks, the internet is a crucial source of information suppressed in China's traditional media sources.

Bottom line - Google completely misread the Chinese market and culture. The company thought it would impose its vision of the internet on the country. Now that it has failed, it is waving the American flag to cover its lack of success.

Saturday, June 19, 2010

The BP Oil Spill and Higher Oil Prices

Common sense would dictate that the BP Gulf oil spill would wake up someone in this country concerning American energy policy. But it hasn't.....

All we see is political theatre and sleazy lawyers lining up to make BP stand for Big Payments. But America is about to get another sobering slap in the face. That slap will come in the form of much higher energy prices in the years ahead.

With the current talk in our nation's capital from our politicians, it looks like offshore drilling will be banned for a lot longer than the six month ban put in place by President Obama.

My best guess is that it will be at least a 3-year ban and perhaps a permanent ban.

The owners of the oil rigs are not going to let their multi-million dollar rigs sit idly. These rigs are already on the move - to western Africa, to Brazil, to offshore China.

By the way, the safety regulations regarding offshore deep water oil rigs in places like Brazil are much stricter than here in the United States. So the rigs drilling here in US waters may have to be modified a bit. But that only benefits companies like Keppel of Singapore which does such work.

Stopping deep water drilling will hurt US oil production...a full 20% of our oil is produced in our waters offshore. If the oil is not produced, that means only one thing. America will have to import even more oil - we already import 56% - from overseas.

And the United States will have to compete for that oil (and pay a hefty price) against the likes of China, India and the other emerging markets whose energy demand is just starting to ramp up.

And add to that the anti-foreigner rhetoric that has been hurled at BP. There has been a real fury in the British press about this and about America's wasteful energy habits.

Don't think that the other foreign oil companies like Royal Dutch Shell haven't noticed. Do not be surprised that if, within several years, all the foreign oil firms pull out and will refuse to do business in the United States.

With all these problems brewing, the United States still does NOT have a coherent energy policy coming out of Washington. We need a plan that emphasizes ALL forms of alternative energy including natural gas in addition to energy conservation.

But with the lack of leadership, particularly from Congress, do not be surprised if we see oil at well over $100 a barrel in the next few years.

Saturday, June 12, 2010

Investment Winds Blowing East

Debt troubles continue to plague Europe and it seems to be only a matter of time before global investors begin asking the leadership here in the United States the same questions that they are asking European leaders about their debt levels.

But half a world away, Asian economies have rarely looked in better shape and look like a great place for your investment dollars.

Asian states have rather different problems than Europe's nations...awash with cash and thundering along at a rapid pace.

Asian economies are, if anything, in danger of overheating. Asian leaders are worried about too much foreign investment capital coming into their country. This is in sharp contrast to Europe and the US where the problem is having capital leaving the country too quickly.

Yet most US investors are missing this shift in the global economy. Wall Street still tends to think of Asia as being closely hitched to the United States' shopping cart...but that is no longer true.

Much of the demand from the United States and Europe vanished overnight when credit markets froze at the end of 2008. Yet Asian economies barely drew breath before resuming their ascent.

Asia, ex-Japan, is likely to grow by 7.5 to 8 per cent this year...A year ago that would have seemed impossible.

Singapore will grow at more than 6 per cent this year, Malaysia will find at least 5.5 per cent in growth, even battered Thailand will grow by 5 per cent.

How has Asia done so well? One word – China.

Chinese Imports and Consumption

Despite the BS and the rhetoric from the United States, China – the world's biggest exporter – has emerged as a significant consumer.

Overall, China's import volumes are a fifth higher than its pre-financial crisis peak. Many Asian countries have more than doubled their exports to China since the depths of the recession in late 2008 and early 2009.

Exports from neighboring Taiwan are up more than 160 per cent from the bottom, while Singapore has boosted its exports to China by more than 120 per cent and South Korea by nearly 100 per cent.

In absolute terms, nearly 30 per cent of Taiwan's exports, accounting for 15 per cent of its GDP, go to the mainland. A quarter of South Korea's exports, accounting for 10 per cent of its GDP, go to China.

For both of these countries, and others in Asia as well, China is more than twice as important as the United States in terms of exports.

Most American investors would probably to surprised to learn that last year, Chinese consumers bought more cars and mobile phones than did Americans.

The increase in Chinese and Asian consumption is a long-term shift. It is driven by a surge in sustainable and self-generating domestic demand on the back of economic growth. In fact, consumption has played the major role in Asia's economic recovery.

The effect is most dramatic in China where domestic demand increased by $180 billion in 2009. The consumption picture is similar in the rest of Asia. Excluding Japan, consumption in Asia is more than 7 per cent above September 2008 levels.

Shifting Trade Winds

Rapidly rising incomes in China are making its consumers look more and more like those in the developed world. Today investors need to keep in mind that just as the US consumer is key for Chinese exporters, so too is the Chinese consumer key as an export destination for the rest of Asia and the emerging world.

Just as once at the end of many global supply chains there was the American shopper dropping items into a shopping cart, now there is the Chinese consumer doing the same...or the Chinese government planning a new road or steel plant.

Trade patterns globally have begun to shift as China and Asia become both wealthier and seek alternative patterns of continued economic growth.

Commodity-producing economies – Brazil, Russia, Indonesia, Australia and Canada – and commodity-consuming countries such as China, South Korea and Japan are reinforcing each other. South Korea, for example, sells 70 per cent of its finished goods to emerging markets.

China is sucking in all sorts of commodities. That gives suppliers of those commodities more money to buy manufactured goods, many made in China itself.

Of course, China is not yet nearly big enough to carry the world on its shoulders. But it is big enough to carry parts of it. And it is those parts of the world where investors need to and must put at least some of their investment dollars.

Saturday, June 5, 2010

Invest in Emerging Markets

Wall Street continues to gyrate wildly as it grapples with a litany of problems. These problems include the Euro and European debt, the BP oil spill, continued weakness in US employment and disasters still hiding inside US financial institutions.

However, there is one thing which never ceases to amaze me about the behavior of both individual and institutional investors in the United States during these times of stock market volatility.....

And that is, that at any sign of trouble in the stock market the first stocks that are jettisoned are those located in the emerging markets. Emerging markets have felt the most pain in the recent sell-off.

Investing in "emerging markets" sounds risky, but I wonder how risky it really is and compared with what.

The United States, for instance, is hardly a safe haven anymore. The line that separates the United States from the emerging markets may be less than most investors suppose.

The bottom line is that American investors seem to be holding views about emerging markets which are simply outdated.....

First of all, unlike the United States and Europe, most major emerging markets like China are not burdened by debt. In fact, they have surpluses.

Secondly, these emerging economies continue to grow very rapidly. The IMF (International Monetary Fund) sees the emerging economies growing at an average of 6.3 per cent this year, led by China and India. Europe and the US are growing...barely.

Some investors are aware of the term BRIC, which stands for the countries of Brazil, Russia, India and China. The BRIC economies are already larger than the developed economies of Europe.

But what is really surprising is that the other emerging economies - the smaller non-BRIC countries - are now larger than the United States economy!

Investing in emerging economies, like China, now is like investing into the United States about a century ago.....

About that time, the US was considered to be an "emerging market" (although that term did not exist then) and a very dangerous place for those "smart" European investors to put their money.

So most European investors stayed out of the US. We all know how well that turned out!

Yes, there will be lots of ups and downs in all of the emerging markets. But my advice is stay the course and dollar-cost average into emerging market investments. It is a once-in-a-generation opportunity, much like the United States was a century ago.