Archives for January 2013

Doug Casey’s Current View of the World

Doug Casey's Current View of the World

By Doug Casey, Chairman

Doug Casey's latest book, Totally Incorrect, gathers his iconoclastic views in a tidy package to stimulate and possibly dismay readers. In an interview with The Gold Report, Doug elaborates on some of his most radical ideas and offers his view of where the markets are likely to head in 2013.

The Gold Report: Doug, you have a new book out called Totally Incorrect: Conversations with Doug Casey. In one of those incorrect conversations with Louis James you said, "It's not the US economy that's facing a fiscal cliff, it's the US government. People equate government with the economy. They are entirely two different things. The only way to revitalize the US economy is through both vast reductions in taxes and vast reductions in government spending. Instead, these idiots are arguing over how much to raise taxes and how little they can cut spending." Now that we have avoided parts of the fiscal cliff and delayed addressing other parts, what are your observations?

Doug Casey: Nothing has changed. I am amazed to read about what is called a trillion-dollar platinum plan to get around Congress having to raise the debt ceiling. It's actually quite comical that some people are talking about it as a solution; it's Three Stooges economics. My only question is: Why not make it a $10 trillion coin? That would solve the problem for several years and release the government from even the fictional restraints on spending it now has. Actually, let's do $100 trillion; why deal in half measures? It's all a ridiculous charade at this point, the precisely scripted Kabuki theater between the left and right wings of the Demopublican Party. The ending of the ridiculous drama is totally predictable.

The point is that the government is spending more than $1 trillion a year more than it is taking in. And that's using cash accounting, which is improper. If the government used accrual accounting, which takes into account future obligations, mandates, and liabilities, the number is more like $3-4 trillion.

Already the Chinese and the Japanese really don't want to buy any more Treasuries to finance the deficit. So the Federal Reserve is buying most of it and crediting the accounts of the US government with the money it creates. Maybe it should ask the Chinese if it would like the trillion-dollar coin? At least it would have a cute collectible. The Chinese should insist on a 10-ounce-size coin, so it doesn't get lost too easily.

But all kidding aside, the Fed may as well issue a $1-trillion coin. As the economy really goes off a cliff over the next couple of years, government outlays will almost necessarily go up and tax revenue will absolutely decline as the economy slows down.

TGR: You often make a distinction between the government and the country, and the economy. But if the government and the economy are two different things and the government is the one facing the fiscal cliff, why should the economy go downhill as well?

DC: Because the government is such a massive actor in the economy today. Whenever a massive economic actor is bankrupt, there will be repercussions. There are around 2.7 million people directly employed by the federal government, by all the hundreds of agencies, bureaus, commissions, and whatnot; that's been fairly stable for a long time. They say there are around 22 million employed by all levels of government, and that's actually been dropping – non-federal governments can't borrow any more, and they can't print money. A few have declared bankruptcy.

But those numbers don't include things like the Post Office and Amtrak. They don't include 1.5 million active-duty troops. And all branches of government have increasingly gone to using outside contractors, as the military famously does.

Some 25 million people, more or less, employed by government is one thing. That's a lot. But of course, many are doing things that would otherwise be done privately. The real problem is so many major corporations have the state as their major customer – military and aerospace contractors, construction firms, computer outfits – everything you can imagine. Having your major customer bankrupt is a big problem.

But there's much more. The US government has 50 million people dependent on food stamps, 7 million on disability, and scores of millions more on Medicaid, Medicare, and other programs.

In my ideal world, government would exist for two reasons: as a police force to protect the citizens, and as a court system to allow citizens to adjudicate disputes. The economy is far too important to be left to the government and the kind of people who are drawn to work in it.

The fiscal cliff and the bankruptcy of the government are important because so many people depend on the government for their livelihoods. Most major corporations are customers of the US government. It's said fully 37% of Americans derive their income from the government. That is a gigantic distortion that has been put into the economy over many decades, and it has to be unwound.

TGR: Can it be unwound slowly over many decades or do we have to go over a cliff?

DC: It could be unwound slowly over many decades, but that would require a complete change in the way the American people think. Right now, the people who run for president or for Congress, for state legislature seats, and even local offices, actually think that government is a magic cornucopia.

This problem will not be solved unless that attitude changes, and I do not see how that will happen at this point. In fact, there's every reason to believe it's going to get worse.

TGR: Some European countries have implemented severe austerity programs. Will that help Europe turn around or are these programs just a slow, painful edging toward the same cliff?

DC: Europe is in much worse shape than the US. Socialism is totally ingrained in the psyche of the average European. The European idea of austerity is cutting back some government programs around the edges, making a few cosmetic changes. Maybe an occasional headline upbraiding a particularly egregious example of corruption. It's all public relations and generalities. But the idea of pulling the plant out by its roots is totally anathema. That's because they really believe socialism, welfarism, and all kinds of state intervention is morally correct. Most Europeans actually want a stronger state, all paid for with money stolen from a diminishing pool of productive taxpayers.

Most Europeans believe the state owes them a living and that the rich should be eaten to finance that. That attitude will not be changed without real tumult. There is no impetus for gradual change or reversal in Europe.

TGR: In the conversation titled On 2013, you say 2013 will be ugly, but merely a warm-up for 2014. Yet the economic trends appear to be positive: the end of quantitative easing by year-end, increased domestic oil and gas production resulting in inexpensive energy for decades to come, more manufacturing jobs, and less unemployment. Is this slow-growing economic recovery masking the effects of the deficit and unfunded liabilities, thus allowing politicians to kick the can further down the road? Why do you think 2013 and 2014 will be so bad?

DC: Most of the information that people get about what is going on comes from the popular press and, at this point, the popular press is almost the fifth branch of government – after all the agencies, which have become the fourth branch of government.

As for things improving, yes, things seem better because we're not actually in the middle of chaos. Well, actually we are, but only because it's the eye of the hurricane. Those trillions of currency units that have been and still are being created make people feel more prosperous than would otherwise be the case.

I have no trust in the unemployment figure. If it were still calculated as it was before 1980, unemployment would be between 13% and 19% today. I have no more confidence in the inflation figures issued by the US government than I have in the inflation figures published by the Argentinean government.

It is in the government's interest to keep those reported numbers as low as possible, in part because payments on things like Social Security are adjusted to inflation. In addition, people in government think the economy depends more on psychology than reality, and no one wants to set off a panic. I suggest people panic now and beat the last minute rush. [laughs]

As far as oil is concerned, I believe in the peak oil theory, which basically says that the cheap, easy, light sweet crude has all been found. Crude is extremely hard to find. At the same time I believe technology will solve all energy problems – oil is a very simple compound made out of hydrogen and carbon, essentially. Technology allows us to create almost anything, so there's no reason why we'd ever run out of oil. Fracking and horizontal drilling will make lots of hydrocarbons available. The question is, at what price?

TGR: But why 2013?

DC: In 2007, we started into the leading edge of a financial hurricane. In 2010 through 2012, governments around the world printed trillions of new currency. That did not solve the financial problems of the banks, brokers, hedge funds, or large corporations – much the way giving a million dollars to a wino will temporarily solve a lot of his problems – but at some point those dollars, which are currently sequestered, will start coming into circulation. That will result in huge price rises of everything.

You can't solve problems just by printing pieces of paper. You become prosperous by producing more than you consume and by saving the difference. However, the US, Western Europe, and many other parts of the world consume more than they produce. They have been living on borrowed money and mortgaging our future with debt. That holds true for governments and for individuals.

TGR: That leads me to another conversation in the book, called The Morality of Money. In that conversation, you argue that accumulating wealth is an important social as well as personal good. You say, "The good to the individuals of accumulating wealth is obvious, but the social good often goes unrecognized. Put simply, progress requires capital. Major new undertakings, from hydropower dams to spaceships, require huge amounts of capital. You need the wealth to accumulate in private hands to pay for these things. If the world is going to improve, we need huge pools of capital, intelligently invested."

You said earlier that the goal of government should be to provide police and to adjudicate disputes. But if world improvement requires huge amounts of capital, who is better placed to make those intelligent investments: self-serving wealthy individuals or self-serving governments?

DC: Let me say something many people will consider shocking: I do not believe government entities should exist at all, or are even necessary. Government is based on force and coercion. Essentially, the power of government comes out of the barrel of a gun, as Mao Zedong noted. I do not think that is the proper way for a civilized society to function. By its nature, government never has and never will be a producer. It is a consumer. It acquires income by theft.

I am an anarchist. Contrary to popular opinion, anarchy has nothing to do with a guy dressed in black holding a little round bomb with a lit fuse. Anarchy is a system of self-rule; you do not have someone telling you what to do and not do.

TGR: But if civilization needs huge amounts of capital to progress, can we expect the wealthy to employ their capital wisely and for the social good?

DC: You cannot expect anybody to do anything, but the fact that the wealthy have a lot of money shows they are good at making money – which is to say, creating and conserving wealth. Governments aren't noted for production – their history is largely one of wars, persecutions, confiscations, and general repression. And the people who are attracted to government are problematical for that reason.

Most rich people, for example Warren Buffett today and Sam Walton a generation ago, are not interested in consumption. They are more interested in creating more capital. It is better to trust the people who are creating more capital than to trust those in government who do things for political, not economic reasons.

TGR: In the On 2013 conversation, you talk about the bond market, saying, "We are approaching the absolute peak of the bond bubble. Interest rates in the developed economies around the world are two percent, one percent, or even negative. This is fueling a bond bubble of truly catastrophic proportions. When it bursts, it will be an order of magnitude worse than the tech stock-market crash of 2001 or the real-estate crash of 2008."

DC: This is another reason why I think 2013 and 2014 will be so turbulent. At this point, it appears interest rates are at an all-time low. Bonds are in a bubble. And low rates encourage people to borrow – not save. But saving is absolutely critical – and as much as possible – because it's proof that an individual or a society is producing more than it's consuming. When interest rates start going back up, the face value of the bonds will collapse. A lot of individuals and a lot of governments cannot crack their monthly interest nut at low interest rates. How will they cope with high interest rates?

This bond bubble will be much more serious than the stock market bubble, especially because absolutely everyone is buying all kinds of complete junk today that offers a 2% yield. This will be much more serious than the tech-stock or real-estate crashes. The money markets are much bigger.

I pity those who are reaching for yield now. Instead of risk-free return, they're getting return-free risk.

TGR: Do you see ancillary economies crashing along with the bond market, or do you agree with the notion that rising interest rates will prompt governments to print more money, creating hyperinflation?

DC: A catastrophic deflation is always a possibility – and it's better than the alternative, a catastrophic inflation. Either way, a depression is inevitable – we're in it now, actually. I think at this point the authorities will go with creating lots more money.

The government gets revenue three ways. The first is by confiscating the wealth of citizens through taxes. There are hundreds of different taxes, and they all are quite high right now. The second way is by borrowing. Governments are incredibly overindebted and uncreditworthy now, and those debts will never be repaid. The third way is by printing money.

They will continue to print money because number one, it is now the only way out. Number two, the politicians masquerading as economists actually think printing is a good way to stimulate the economy.

TGR: Will that create a bond crash or hyperinflation, or are they one and the same thing?

DC: Perhaps both in sequence. The thing to remember here is that bonds are a triple threat to your capital: interest rate risk, inflation risk, and the risk of default. Anyone who holds old bonds today is holding an asset that is reward-free risk. The risks have never ever been greater in the bond market, and the returns have never been lower. We are at the peak of one of the biggest bubbles in history.

TGR: If we are at the peak, what is the best way to preserve wealth and ride out the next two or three years?

DC: Agriculture and arable land have become quite popular recently. I like them. But I am not crazy about investing in grains and soybeans because they are very political commodities, and the price of agricultural real estate has gone up hugely to reflect higher grain prices. There are no bargains anywhere in the world.

I am a big fan of cattle because cattle herds are at generational lows today. They have been in liquidation because it has been an unprofitable business for years. For most people, however, cattle are not a practical investment.

The most practical thing the average person can do is have a significant position in precious metals. They should own the metal. In years to come, when governments have blown up their currencies, gold and silver will be reinstituted as money.

TGR: How large a portion of one's portfolio should be in precious metals?

DC: Apart from my house, my business, and expensive consumer goods, I would not be afraid to have most of my financial assets in precious metals.

I am not very interested in the stock market today. The bond market, as I said, is a fantastic short-sell at this point. Real estate is certainly a lot cheaper than it was, but it floats on a sea of debt. That's not good. It's also the easiest thing for governments to tax.

Now people ask what about owning cash? The dollar is an unsecured asset of a bankrupt government, and it will be a hot potato in the years to come. For cash you definitely want to own precious metals – even at current prices. The other thing to look for is speculations in the marketplace. As inflation heats up and markets become more chaotic in the years to come, people will be forced to speculate. It's a pity, really…

TGR: And what would those be?

DC: Speculation is capitalizing on politically caused distortions in the marketplace. In effect, it's betting against the government. It is not gambling in the market.

The best speculation – the most beat-up market – right now is mining exploration companies, junior resource stocks. There are several thousand of them trading around the world. Most are not "investments," most are "burning matches," but relative to the price of the metals, they are close to the lowest levels in history. We have not had a truly good bull market for them in years, so they are an excellent place to put a portion of your capital with potentially large returns.

TGR: To what extent do investors need to be selective in that category?

DC: There is an old saying in the mining-stock business: When the wind blows, even the turkeys will fly. That is true. When the public gets the bit in its teeth and gold and silver are running, all kinds of junk will be promoted. A lot of money will be spent on promotion instead of exploration work out in the field.

TGR: If the bond bubble bursts this year or next, should investors wait for that before buying into the gold and silver junior mining stocks? Might they not be at even lower prices once the bubble busts?

DC: That is a real possibility. If you want to speculate and ride the futures market, sell long-term bonds short. That will offer a bit of a hedge.

You have to get the timing right in the market, of course. In the past, decent companies have sold for half of their cash in the bank and you end up with all of their properties for free, along with half the cash in the bank.

There is no telling how cheap the market can get. Anything can happen with these little stocks, but I think now is the time to start accumulating quality issues.

TGR: Both Totally Incorrect and the earlier Conversations with Casey are thought-provoking and entertaining. What motivated you to have these conversations and publish them?

DC: No one in the mass media and no politician today is willing to say that the king does not have any clothes on. That is why I am doing this. I say a lot of things I suspect you do not hear among friends at cocktail parties.

TGR: True. Cocktail party chatter tends to be about weather, sports, maybe entertainment, but nobody talks about government or religion. Why is that?

DC: I blame the educational system in part. In the last century, people learned Latin and Greek and read the classics. The object was to see what people thousands of years ago thought and said and to be able to comment on whether they were correct and how those thoughts might apply today. Education today is sound bites. Nobody reads a classical book in school anymore, only PC stuff that has been passed by a school board. They have a half an hour of geography where they're lectured by some teacher who probably has not traveled outside his or her home country, maybe never out of the state or province. Education has been transformed into political indoctrination in many ways.

TGR: Will greater access to the Internet, where you can Google just about anything and delve into specific topics and areas, change people's appetite for more meaningful conversations?

DC: The Internet is the best thing since the invention of moveable type. Rather than misallocating years of time and huge amounts of money to go off to college where they will just chase the opposite sex and drink, and where the quality of the professors is uncertain and the courses are in subjects that will clutter up their minds – gender studies, political science, English, and the like – people who really want to can get an education from the Internet.

The fact that you cannot believe everything on the Internet is equally true for what you read in books or newspapers.

TGR: That is a perfect example of why the book is called Totally Incorrect. Thank you for this conversation.

Ever wonder how famous investors and self-made millionaires think – what it is that makes them so successful?  Then you should let Doug Casey give you a piece of his mind.  His new book, Totally Incorrect, is a showcase of radical libertarian thinking and unwavering free-market advocacy that will open your eyes to a new world view… not to mention investment opportunities flying under Wall Street’s radar.  Learn more about this provocative work.

The Market Rally Tells Us Nothing about the Economy

Courtesy of www.econmatters.com.

By EconMatters

Just four months ago…

Markets have had a good run from the third quarter earning`s selloff, the inevitable Santa Claus rally, and the first quarter new money being put to work. But all this talk about some Super Cycle turn in the economy is putting the proverbial cart ahead of the horse. 

How quickly things can turn. The economy was reacting so poorly at Jackson Hole that Ben Bernanke needed to implement another round of stimulus in QE3, this stimulus measure failed to boost asset prices substantially, so Ben Bernanke tweaked QE3 to try and juice up markets with additional treasury injections. 

The economy is so bad in Japan that they needed to replace another prime minister, employ additional stimulus measures, and weaken their currency.

Auto sales are so bad in Europe that major downsizing has occurred. Britain is currently in a recession, and China has been on a two year downtrend in growth.

Just to provide a little historical context to put this recent market rally in perspective. It is a good idea to separate results oriented thinking, i.e., higher markets from the actual global economic conditions. 

Same ole pattern so far

Most of the earnings results have been tepid at best, these are numbers that are targeted as easy beats by corporations, and they are barely meeting these targets via share buyback programs. Not exactly the kind of profits necessary for 500,000 jobs being created every month reflective of a healthy cyclical turn in the economy. 

I have seen nothing so far that differs from the same pattern that has taken place for the past three years. The pattern is a run-up of asset prices and markets for the first four months of the new year, then a substantial summer selloff, culminating with the need for additional QE programs, and a year-end rally in markets. 

No summer selling allowed

So we will not know anything about the economy until this pattern is broken. So asset prices continue to climb higher over the summer, the fed doesn`t need another QE program, and the market continues to finish the year strong.

Three things I will be watching

The three things that I will be looking at to verify a healthy turn in the economy would be once the fed stops the QE stimulus, do assets continue to climb? So can the private sector take over where the fed leaves off? And I am not even talking about raising interest rates. Just the removal of QE stimulus programs of buying treasuries and mortgages. 

The second component of a healthier economy would be raising wages due to corporations fighting over talent, the job pool getting larger as the underemployed start to become employed to their potential, and job creation numbers every month averaging 500,000. 

Where corporations feel they better start hiring, even as projects are 6 months to a year down the line, just to ensure that they can get the people they need due to a tight job market. 

The third element of an economy finally starting to recover would be a couple of 5.5% and 6% GDP quarters thrown in the mix, as given the pent up demand of a five year 2% growth trudge fest, a genuine recovery or turn in the economy should have some explosive growth quarters. 

The kind of quarters where retailers can raise prices, and consumers can actually afford these higher prices, and not wait for sales to dictate discretionary spending. Therefore, higher margins in the retail sector would point to a stronger economy. 

Why the rise in the transports can be misleading this time around is that with the revival in US oil production, the railroads are skewing the numbers due to a major increase in rail shipments of oil cargo. 

Wake me up in May

It is easy to throw around slogans like the beginning of a new Super Growth Cycle when assets are ramping during what has traditionally been a strong period for assets during the last 3 years even with a 2% growth trajectory. 

However, wake me up in May when the bulls have started locking in profits for the year, and all the sudden Europe is in trouble again, debt to GDP ratios actually matter, and no more fed purchases are running every month, and see if all the bullish euphoria still remains. 

Because at this rate, if we truly are in a new super cycle growth era, by May the pundits will be talking about a “Once in a Generation Super-Super Growth Cycle!

Please click here to read more articles at EconMatters.


Doug Casey’s Current View of the World

Doug Casey’s Current View of the World 

By Doug Casey, Chairman

Doug Casey’s latest book, Totally Incorrect, gathers his iconoclastic views in a tidy package to stimulate and possibly dismay readers. In an interview with The Gold Report, Doug elaborates on some of his most radical ideas and offers his view of where the markets are likely to head in 2013.

The Gold Report: Doug, you have a new book out called Totally Incorrect: Conversations with Doug Casey. In one of those incorrect conversations with Louis James you said, “It’s not the US economy that’s facing a fiscal cliff, it’s the US government. People equate government with the economy. They are entirely two different things. The only way to revitalize the US economy is through both vast reductions in taxes and vast reductions in government spending. Instead, these idiots are arguing over how much to raise taxes and how little they can cut spending.” Now that we have avoided parts of the fiscal cliff and delayed addressing other parts, what are your observations?

Doug Casey: Nothing has changed. I am amazed to read about what is called a trillion-dollar platinum plan to get around Congress having to raise the debt ceiling. It’s actually quite comical that some people are talking about it as a solution; it’s Three Stooges economics. My only question is: Why not make it a $10 trillion coin? That would solve the problem for several years and release the government from even the fictional restraints on spending it now has. Actually, let’s do $100 trillion; why deal in half measures? It’s all a ridiculous charade at this point, the precisely scripted Kabuki theater between the left and right wings of the Demopublican Party. The ending of the ridiculous drama is totally predictable.

The point is that the government is spending more than $1 trillion a year more than it is taking in. And that’s using cash accounting, which is improper. If the government used accrual accounting, which takes into account future obligations, mandates, and liabilities, the number is more like $3-4 trillion.

Already the Chinese and the Japanese really don’t want to buy any more Treasuries to finance the deficit. So the Federal Reserve is buying most of it and crediting the accounts of the US government with the money it creates. Maybe it should ask the Chinese if it would like the trillion-dollar coin? At least it would have a cute collectible. The Chinese should insist on a 10-ounce-size coin, so it doesn’t get lost too easily.

But all kidding aside, the Fed may as well issue a $1-trillion coin. As the economy really goes off a cliff over the next couple of years, government outlays will almost necessarily go up and tax revenue will absolutely decline as the economy slows down.

TGR: You often make a distinction between the government and the country, and the economy. But if the government and the economy are two different things and the government is the one facing the fiscal cliff, why should the economy go downhill as well?

DC: Because the government is such a massive actor in the economy today. Whenever a massive economic actor is bankrupt, there will be repercussions. There are around 2.7 million people directly employed by the federal government, by all the hundreds of agencies, bureaus, commissions, and whatnot; that’s been fairly stable for a long time. They say there are around 22 million employed by all levels of government, and that’s actually been dropping – non-federal governments can’t borrow any more, and they can’t print money. A few have declared bankruptcy.

But those numbers don’t include things like the Post Office and Amtrak. They don’t include 1.5 million active-duty troops. And all branches of government have increasingly gone to using outside contractors, as the military famously does.

Some 25 million people, more or less, employed by government is one thing. That’s a lot. But of course, many are doing things that would otherwise be done privately. The real problem is so many major corporations have the state as their major customer – military and aerospace contractors, construction firms, computer outfits – everything you can imagine. Having your major customer bankrupt is a big problem.

But there’s much more. The US government has 50 million people dependent on food stamps, 7 million on disability, and scores of millions more on Medicaid, Medicare, and other programs.

In my ideal world, government would exist for two reasons: as a police force to protect the citizens, and as a court system to allow citizens to adjudicate disputes. The economy is far too important to be left to the government and the kind of people who are drawn to work in it.

The fiscal cliff and the bankruptcy of the government are important because so many people depend on the government for their livelihoods. Most major corporations are customers of the US government. It’s said fully 37% of Americans derive their income from the government. That is a gigantic distortion that has been put into the economy over many decades, and it has to be unwound.

TGR: Can it be unwound slowly over many decades or do we have to go over a cliff?

DC: It could be unwound slowly over many decades, but that would require a complete change in the way the American people think. Right now, the people who run for president or for Congress, for state legislature seats, and even local offices, actually think that government is a magic cornucopia.

This problem will not be solved unless that attitude changes, and I do not see how that will happen at this point. In fact, there’s every reason to believe it’s going to get worse.

TGR: Some European countries have implemented severe austerity programs. Will that help Europe turn around or are these programs just a slow, painful edging toward the same cliff?

DC: Europe is in much worse shape than the US. Socialism is totally ingrained in the psyche of the average European. The European idea of austerity is cutting back some government programs around the edges, making a few cosmetic changes. Maybe an occasional headline upbraiding a particularly egregious example of corruption. It’s all public relations and generalities. But the idea of pulling the plant out by its roots is totally anathema. That’s because they really believe socialism, welfarism, and all kinds of state intervention is morally correct. Most Europeans actually want a stronger state, all paid for with money stolen from a diminishing pool of productive taxpayers.

Most Europeans believe the state owes them a living and that the rich should be eaten to finance that. That attitude will not be changed without real tumult. There is no impetus for gradual change or reversal in Europe.

TGR: In the conversation titled On 2013, you say 2013 will be ugly, but merely a warm-up for 2014. Yet the economic trends appear to be positive: the end of quantitative easing by year-end, increased domestic oil and gas production resulting in inexpensive energy for decades to come, more manufacturing jobs, and less unemployment. Is this slow-growing economic recovery masking the effects of the deficit and unfunded liabilities, thus allowing politicians to kick the can further down the road? Why do you think 2013 and 2014 will be so bad?

DC: Most of the information that people get about what is going on comes from the popular press and, at this point, the popular press is almost the fifth branch of government – after all the agencies, which have become the fourth branch of government.

As for things improving, yes, things seem better because we’re not actually in the middle of chaos. Well, actually we are, but only because it’s the eye of the hurricane. Those trillions of currency units that have been and still are being created make people feel more prosperous than would otherwise be the case.

I have no trust in the unemployment figure. If it were still calculated as it was before 1980, unemployment would be between 13% and 19% today. I have no more confidence in the inflation figures issued by the US government than I have in the inflation figures published by the Argentinean government.

It is in the government’s interest to keep those reported numbers as low as possible, in part because payments on things like Social Security are adjusted to inflation. In addition, people in government think the economy depends more on psychology than reality, and no one wants to set off a panic. I suggest people panic now and beat the last minute rush. [laughs]

As far as oil is concerned, I believe in the peak oil theory, which basically says that the cheap, easy, light sweet crude has all been found. Crude is extremely hard to find. At the same time I believe technology will solve all energy problems – oil is a very simple compound made out of hydrogen and carbon, essentially. Technology allows us to create almost anything, so there’s no reason why we’d ever run out of oil. Fracking and horizontal drilling will make lots of hydrocarbons available. The question is, at what price?

TGR: But why 2013?

DC: In 2007, we started into the leading edge of a financial hurricane. In 2010 through 2012, governments around the world printed trillions of new currency. That did not solve the financial problems of the banks, brokers, hedge funds, or large corporations – much the way giving a million dollars to a wino will temporarily solve a lot of his problems – but at some point those dollars, which are currently sequestered, will start coming into circulation. That will result in huge price rises of everything.

You can’t solve problems just by printing pieces of paper. You become prosperous by producing more than you consume and by saving the difference. However, the US, Western Europe, and many other parts of the world consume more than they produce. They have been living on borrowed money and mortgaging our future with debt. That holds true for governments and for individuals.

TGR: That leads me to another conversation in the book, called The Morality of Money. In that conversation, you argue that accumulating wealth is an important social as well as personal good. You say, “The good to the individuals of accumulating wealth is obvious, but the social good often goes unrecognized. Put simply, progress requires capital. Major new undertakings, from hydropower dams to spaceships, require huge amounts of capital. You need the wealth to accumulate in private hands to pay for these things. If the world is going to improve, we need huge pools of capital, intelligently invested.”

You said earlier that the goal of government should be to provide police and to adjudicate disputes. But if world improvement requires huge amounts of capital, who is better placed to make those intelligent investments: self-serving wealthy individuals or self-serving governments?

DC: Let me say something many people will consider shocking: I do not believe government entities should exist at all, or are even necessary. Government is based on force and coercion. Essentially, the power of government comes out of the barrel of a gun, as Mao Zedong noted. I do not think that is the proper way for a civilized society to function. By its nature, government never has and never will be a producer. It is a consumer. It acquires income by theft.

I am an anarchist. Contrary to popular opinion, anarchy has nothing to do with a guy dressed in black holding a little round bomb with a lit fuse. Anarchy is a system of self-rule; you do not have someone telling you what to do and not do.

TGR: But if civilization needs huge amounts of capital to progress, can we expect the wealthy to employ their capital wisely and for the social good?

DC: You cannot expect anybody to do anything, but the fact that the wealthy have a lot of money shows they are good at making money – which is to say, creating and conserving wealth. Governments aren’t noted for production – their history is largely one of wars, persecutions, confiscations, and general repression. And the people who are attracted to government are problematical for that reason.

Most rich people, for example Warren Buffett today and Sam Walton a generation ago, are not interested in consumption. They are more interested in creating more capital. It is better to trust the people who are creating more capital than to trust those in government who do things for political, not economic reasons.

TGR: In the On 2013 conversation, you talk about the bond market, saying, “We are approaching the absolute peak of the bond bubble. Interest rates in the developed economies around the world are two percent, one percent, or even negative. This is fueling a bond bubble of truly catastrophic proportions. When it bursts, it will be an order of magnitude worse than the tech stock-market crash of 2001 or the real-estate crash of 2008.”

DC: This is another reason why I think 2013 and 2014 will be so turbulent. At this point, it appears interest rates are at an all-time low. Bonds are in a bubble. And low rates encourage people to borrow – not save. But saving is absolutely critical – and as much as possible – because it’s proof that an individual or a society is producing more than it’s consuming. When interest rates start going back up, the face value of the bonds will collapse. A lot of individuals and a lot of governments cannot crack their monthly interest nut at low interest rates. How will they cope with high interest rates?

This bond bubble will be much more serious than the stock market bubble, especially because absolutely everyone is buying all kinds of complete junk today that offers a 2% yield. This will be much more serious than the tech-stock or real-estate crashes. The money markets are much bigger.

I pity those who are reaching for yield now. Instead of risk-free return, they’re getting return-free risk.

TGR: Do you see ancillary economies crashing along with the bond market, or do you agree with the notion that rising interest rates will prompt governments to print more money, creating hyperinflation?

DC: A catastrophic deflation is always a possibility – and it’s better than the alternative, a catastrophic inflation. Either way, a depression is inevitable – we’re in it now, actually. I think at this point the authorities will go with creating lots more money.

The government gets revenue three ways. The first is by confiscating the wealth of citizens through taxes. There are hundreds of different taxes, and they all are quite high right now. The second way is by borrowing. Governments are incredibly overindebted and uncreditworthy now, and those debts will never be repaid. The third way is by printing money.

They will continue to print money because number one, it is now the only way out. Number two, the politicians masquerading as economists actually think printing is a good way to stimulate the economy.

TGR: Will that create a bond crash or hyperinflation, or are they one and the same thing?

DC: Perhaps both in sequence. The thing to remember here is that bonds are a triple threat to your capital: interest rate risk, inflation risk, and the risk of default. Anyone who holds old bonds today is holding an asset that is reward-free risk. The risks have never ever been greater in the bond market, and the returns have never been lower. We are at the peak of one of the biggest bubbles in history.

TGR: If we are at the peak, what is the best way to preserve wealth and ride out the next two or three years?

DC: Agriculture and arable land have become quite popular recently. I like them. But I am not crazy about investing in grains and soybeans because they are very political commodities, and the price of agricultural real estate has gone up hugely to reflect higher grain prices. There are no bargains anywhere in the world.

I am a big fan of cattle because cattle herds are at generational lows today. They have been in liquidation because it has been an unprofitable business for years. For most people, however, cattle are not a practical investment.

The most practical thing the average person can do is have a significant position in precious metals. They should own the metal. In years to come, when governments have blown up their currencies, gold and silver will be reinstituted as money.

TGR: How large a portion of one’s portfolio should be in precious metals?

DC: Apart from my house, my business, and expensive consumer goods, I would not be afraid to have most of my financial assets in precious metals.

I am not very interested in the stock market today. The bond market, as I said, is a fantastic short-sell at this point. Real estate is certainly a lot cheaper than it was, but it floats on a sea of debt. That’s not good. It’s also the easiest thing for governments to tax.

Now people ask what about owning cash? The dollar is an unsecured asset of a bankrupt government, and it will be a hot potato in the years to come. For cash you definitely want to own precious metals – even at current prices. The other thing to look for is speculations in the marketplace. As inflation heats up and markets become more chaotic in the years to come, people will be forced to speculate. It’s a pity, really…

TGR: And what would those be?

DC: Speculation is capitalizing on politically caused distortions in the marketplace. In effect, it’s betting against the government. It is not gambling in the market.

The best speculation – the most beat-up market – right now is mining exploration companies, junior resource stocks. There are several thousand of them trading around the world. Most are not “investments,” most are “burning matches,” but relative to the price of the metals, they are close to the lowest levels in history. We have not had a truly good bull market for them in years, so they are an excellent place to put a portion of your capital with potentially large returns.

TGR: To what extent do investors need to be selective in that category?

DC: There is an old saying in the mining-stock business: When the wind blows, even the turkeys will fly. That is true. When the public gets the bit in its teeth and gold and silver are running, all kinds of junk will be promoted. A lot of money will be spent on promotion instead of exploration work out in the field.

TGR: If the bond bubble bursts this year or next, should investors wait for that before buying into the gold and silver junior mining stocks? Might they not be at even lower prices once the bubble busts?

DC: That is a real possibility. If you want to speculate and ride the futures market, sell long-term bonds short. That will offer a bit of a hedge.

You have to get the timing right in the market, of course. In the past, decent companies have sold for half of their cash in the bank and you end up with all of their properties for free, along with half the cash in the bank.

There is no telling how cheap the market can get. Anything can happen with these little stocks, but I think now is the time to start accumulating quality issues.

TGR: Both Totally Incorrect and the earlier Conversations with Casey are thought-provoking and entertaining. What motivated you to have these conversations and publish them?

DC: No one in the mass media and no politician today is willing to say that the king does not have any clothes on. That is why I am doing this. I say a lot of things I suspect you do not hear among friends at cocktail parties.

TGR: True. Cocktail party chatter tends to be about weather, sports, maybe entertainment, but nobody talks about government or religion. Why is that?

DC: I blame the educational system in part. In the last century, people learned Latin and Greek and read the classics. The object was to see what people thousands of years ago thought and said and to be able to comment on whether they were correct and how those thoughts might apply today. Education today is sound bites. Nobody reads a classical book in school anymore, only PC stuff that has been passed by a school board. They have a half an hour of geography where they’re lectured by some teacher who probably has not traveled outside his or her home country, maybe never out of the state or province. Education has been transformed into political indoctrination in many ways.

TGR: Will greater access to the Internet, where you can Google just about anything and delve into specific topics and areas, change people’s appetite for more meaningful conversations?

DC: The Internet is the best thing since the invention of moveable type. Rather than misallocating years of time and huge amounts of money to go off to college where they will just chase the opposite sex and drink, and where the quality of the professors is uncertain and the courses are in subjects that will clutter up their minds – gender studies, political science, English, and the like – people who really want to can get an education from the Internet.

The fact that you cannot believe everything on the Internet is equally true for what you read in books or newspapers.

TGR: That is a perfect example of why the book is called Totally Incorrect. Thank you for this conversation.

Ever wonder how famous investors and self-made millionaires think – what it is that makes them so successful?  Then you should let Doug Casey give you a piece of his mind.  His new book, Totally Incorrect, is a showcase of radical libertarian thinking and unwavering free-market advocacy that will open your eyes to a new world view… not to mention investment opportunities flying under Wall Street’s radar.  Learn more about this provocative work.

Dow about to break above its 70-Year channel?

Courtesy of Chris Kimble.

CLICK ON CHART TO ENLARGE

As we approach the end of another month, I thought it might be interesting to look at the above "Monthly Closing" chart on the Dow, dating back 100 years.  As the Dow is closing the month, last nights closing price was within 24 points of the 2007 monthly closing high.

As the Dow is near the important 2007 highs, it also finds itself at the top of its 70-year rising channel at (1) in the above chart. Rising support, created by higher lows is coming into play as well, putting the Dow in a very tight spot, caught in-between long-term support and resist lines.

Momentum is on the side of the bulls and if enough buyers continue to come forward, one would have to view a breakout, as technical positive.

US Economy Contracts in 4Q/2012, Let’s Review

Courtesy of Larry Doyle.

The positive tone to the equity markets and other risk-based assets may provide a degree of cover to developments within the real economy but it cannot totally negate the fact that our nation’s economy continues to move along with all the speed of a pack mule.

In fact, Uncle Sam just reported that the old warhorse, that is our domestic economy, contracted in the 4th quarter of 2012 by 0.1%. Let’s navigate and take a harder look at what might be weighing us down. 

The Bureau of Economic Analysis release highlights,

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Be mindful that private inventories were a primary driver of the 3.1% GDP increase in the 3rd quarter. Averaging 3Q and 4Q, we get a less than robust reading of 1.5%.

In regard to federal spending, be mindful that the sequester takes center stage on our economic landscape on March 1st when a mere $1.2 trillion in spending cuts will start to kick in. Yes, that is only 30 days from now. This is what happens when deficits are run into the trillions and trillions of dollars. At some point the spending must stop and the bills come due.

What about inflation? Any signs of that?

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the fourth quarter, compared with an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 1.1 percent in the fourth quarter, compared with an increase of 1.2 percent in the third.

If we were to exclude everything, then prices would not have changed at all. You do not eat do you? What about health care? I only saw another increase of approximately 30% in my health care premiums this year. But that must not be an input. Those premiums have increased an unsightly 65% in the last three years. Inflation? Try hyper-inflation!!

In positive territory, we saw growth in the following areas:

Real personal consumption expenditures increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. Durable goods increased 13.9 percent, compared with an increase of 8.9 percent. Services increased 0.9 percent, compared with an increase of 0.6 percent.

Real nonresidential fixed investment increased 8.4 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Equipment and software increased 12.4 percent in the fourth quarter, in contrast to a decrease of 2.6 percent in the third. Real residential fixed investment increased 15.3 percent, compared with an increase of 13.5 percent.

A benefit from a small bump in holiday sales and housing certainly helped our mule limp along. But where is the big drag on the mule? From Uncle Sam himself and his cousins scattered across most cities, states, and towns in our nation.

Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.

Why such a decline in government spending? Well, when demand is dragged forward as it has been over the course of the last four years and the can gets perpetually kicked down the road, the basic laws of economics ultimately kick in.  (A large part of the decline in government spending emanated from within the defense sector.) The end of the road along which we have kicked the can eventually starts to appear on the horizon and the games played to cook the books and impact the economy have a lessened effect. Many municipalities are struggling to keep their heads above water so to speak.

Add it all up and an economy that is plodding along at call it 2% will not do much in terms of generating meaningful improvement on the unemployment front. With the sequester kicking in, do not be surprised if growth actually trends down from here and the economy “grows” closer to 1%. If we can call that growth.

What will the Fed do? Look for Big Ben Bernanke and his minions within the Fed to keep the liquidity flowing and asset prices pumped up so they can tell everybody how great things are. Problem is the people out of work and struggling to make ends meet really do not care about the equity markets. They need a job and a good one at that. The labor participation rate continues to languish at a 30 year low.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

What’s Really Pushing the Stock Market Higher

Courtesy of Pam Martens.

I was browsing the Wall Street Journal’s web site last night and found this interesting take on the Dow Jones Industrial Average’s flirtation with 14,000 – a number it last saw in October of 2007. “Small investors are jumping back into the stock market after abandoning it during the financial crisis, and their return is a big reason why the Dow is pushing toward an all-time high.”

The article was prominently placed at the very top of the left hand column under the headline “Individual Investors Aid Stock Surge.”

On January 25 of this year, the New York Times proclaimed a “flood” of new money from individual investors:

“Millions of people all but abandoned the market after the 2008 financial crisis, but now individual investors are pouring more money than they have in years into stock mutual funds. The flood, prompted by fading economic threats and better news on housing and jobs, has helped propel the broad market to within striking distance of its highest nominal level ever.”

Clearly, it’s time we discuss the word “distribution” as it’s understood by the denizens of Wall Street.

The retail brokerage firm that is joined at the hip to major investment banks on Wall Street is considered the distribution channel. The investment bank underwrites various equity (stock) and debt (bond) offerings, and exotic hybrids of both, and uses its thundering herd of stockbrokers (financial advisors) to distribute the product to the investing public (retail) investor.

Continue Here

Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Price Inflation Higher than Fed Admits

Courtesy of Mish.

In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices "Really" Fallen.

The reader specifically wanted an update on inflation as measured by the HPI-CPI (a measure of the CPI where actual home prices instead of rent is the largest CPI component).

Here is some background on the request: The CPI does not track hope prices per se, rather the CPI uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices.

The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices.

OER Weighting in CPI

OER has the single largest weight of any component in the CPI, at 23.957%.

Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?"

Home Price Data

Home price data in this post is courtesy of Lender Processing Services(LPS), Specifically the LPS Home Price Index (HPI).


Continue Here

Quest to Diagnose Obamacare Beneficiaries

Quest to Diagnose Obamacare Beneficiaries

By Ilene with Paul Price

Dr. Paul Price expects the 2014 implementation of Obamacare to provide a major stimulus for physicians to order more lab tests, as at least 30 million currently uninsured people gain coverage. While the Market Shadows’ Virtual Value Portfolio already holds Lab Corp. (LH), and the Virtual Put Selling Portfolio (below) sold one LH put, Quest Diagnostics (DGX) – the industry leader – is missing in action. That’s about to change. The drop in DGX’s price is giving us an opportunity to either buy some virtual shares, or in our case, SELL one put.  

DGX shares fell last week after Q4 earnings and revenues came in light. The stock had reached an all-time high of $64.87 in October. DGX closed at $58.26 on Tuesday, an area of solid technical support. 

DGXJan.1,2012-Jan.29,2013 

Paul likes this company at current prices because 1) management has initiated cost cutting moves designed to save $500 million by 2014, 2) the company has solid financials, and 3) Quest’s current yield is around 2%. This year’s earnings will be around $4.46 /share, giving DGX a 13.1 P/E. Quest’s longer-term median P/E has been 16x. Paul noted,

Share price stability and earnings predictability are each among the highest ranked in Value Line’s 1700 company main research universe. DGX shares have outperformed 70% of that group over the most recent decade. 

DGXValueLinemetrics (1)

This is a classic case of being able to buy low simply because nobody can cite a near-term catalyst to get the shares moving. The fear of ‘dead money’ has brought Quest back to an extremely low-risk entry point… In a supply and demand market, the best buys are issues where few people can make a case for instant action.

Paul’s going to sell one DGX August $60 Put in the Market Shadows’ Virtual Put Selling Portfolio (below) on Wednesday, Jan 30, 13. The price of the DGX put is $4.30 (Jan 30). For non-option investors, Paul likes DGX at the current price, $58.37. 

Screen Shot 2013-01-30 at 2.22.02 AM  

EU Economic Policy Remains a ‘Political Project’

EU Economic Policy Remains a ‘Political Project’

We have previously written extensively about the idiotic 'Robin Hood' tax on trading that the EU – led by, you guessed it, socialist France –  wants to impose. Sweden imposed such a tax in the 1990s and has warned the rest of the EU in no uncertain terms not to make the same mistake. Several studies exist that show clearly that such a tax does enormous economic harm. The damage it inflicts on capital markets is so great that any tax revenue it might generate pales by comparison. More revenue will actually be lost elsewhere than will be gained by this tax.

However, the economics of the tax are the last thing on the mind of the eurocrats. They see an opportunity to grab more loot, and besides, it is held that voters like the idea (mainly because they are economically ignorant and have been inundated with pro-transactions tax propaganda for a long time). As is often the case, voters don't realize that the directcosts of this tax will come out of their retirement funds. The indirect and not immediately seen costs are of course an order of magnitude greater. They will consist of a marked retardation of economic progress and all that comes with it.

In other words, the eurocracy is once again taking economic policy measures based on political instead of economic considerations – which is precisely what ails the euro as well. The downfall of Europe seems almost preordained. They have learned nothing.

According to Reuters:

“Germany, France and nine other euro zone countries will get the go-ahead on Tuesday to start work on a financial transactions tax, a measure likely to unsettle banks and trading houses but which will please voters and could raise much-needed revenue.

European Union finance ministers are expected to give their approval at a meeting in Brussels, allowing 11 states –  Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia – to start preparations for imposing a tax on all financial market transactions.

The levy, based on an idea proposed by U.S. economist James Tobin more than 40 years ago but largely ignored until now, is symbolically important in showing that politicians, who have fumbled their way through five years of financial crisis, are getting to grips with the banks blamed for causing it. Some believe that the tax could raise up to 20 billion euros a year, although estimates vary widely.

"There is sufficient support from ministers … and it looks likely they will allow the 11 to go ahead with enhanced cooperation on a financial transactions tax," said one diplomat. Under EU rules, a minimum of nine countries can cooperate on legislation without all member states using a process called enhanced cooperation, as long as a weighted majority of the EU's 27 countries give their permission.

Germany and France decided to push ahead with a smaller group after efforts to impose a tax across the whole EU and later among just the 17euro zone states foundered. Sweden, which tried and abandoned its own such tax, cautioned that the levy would push trading elsewhere.

Critics are also concerned that the levy could open another rift in Europe, where the 17 states using the euro are deepening ties in order to underpin the currency, and there is the growing risk that Britain could even leave the European Union.

Britain has criticized the tax, and will not adopt it, as trading in the region's biggest financial center, London, will be affected. If either the buyer or seller in a trade is based in one of the countries imposing the tax, the levy can be imposed regardless of where the transaction takes place.

The tax's proponents, including German Finance Minister Wolfgang Schaeuble, believe it can tackle activity many deem speculative, such as high-frequency trading, by imposing a charge on every split-second deal. But Nicolas Veron, a financial market expert at Brussels think-tank Bruegel, said the tax is misguided.

"There are so many things that we don't understand about the financial system, in much the same way that 17th-century doctors could understand a couple of things about the human body but not the whole picture," he said. "Using a tax on financial transactions to tackle the ills of finance such as high-frequency trading could turn out to the equivalent to a 17th-century course of leeches."

Some countries are already counting on the new income, a welcome windfall for countries where shrinking economies and rising unemployment are sapping other tax income. Officials previously estimated that if the scheme were implemented across all 27 EU countries, it could raise 57 billion euros ($76 billion) a year. Estimates for the amount that could be raised from the 11 euro zone states vary widely.

As soon as ministers give the 11-nation plan the go-ahead, the next step is for the European Commission to redraft its plans for the tax. It is likely to suggest taxing stock and bond trades at the rate of 0.1 percent and derivatives trades at 0.01 percent. (emphasis added)

OK, so they want to adopt the idea of an arch neo-Keynesian – no big surprise there. The tax has actually been named after Tobin (it should normally be every economist's nightmare to have a tax named after him).

Let us count the ways in which the idea is misguided:

1. the banks will not be 'punished' at all (the ostensible 'reason' for introducing the tax). Individual traders will be punished immediately (compared to the flat rates paid for trading currently, the tax will add a huge amount to trading costs in spite of 'looking small'). Ultimately though every citizen will pay the price, as the banks will simply pass the cost on.

2. Liquidity will evaporate, as short term trading tactics will no longer make sense. Bid/ask spreads will commensurately widen. Every investor will bear a large cost over time, and that includes of course everyone, as pension funds and insurance companies invest on behalf of retirees and policyholders. A lot of trading activity will simply shift to markets where there is no transaction tax.

3. Raising capital will become more difficult and costly for companies contemplating a listing as a result of the diminished market liquidity. If they can, they will instead opt to raise capital in markets where no such tax exists.

4. The revenue projections are all wet. The tax won't 'bring the much needed revenue' the highway robbers are dreaming of, as trading activity will collapse (this by the way may also lead to a marked decline in share prices). So we know already (since we know how they operate) that the level of the tax will be increased as the hoped for tax take doesn't materialize. As we have pointed out in our previous write-up, the tax is a Trojan horse. Moreover, due to the economic damage the tax will inflict, revenues will decline overall.

5. Can this be compared to medieval doctors applying leeches to every ailment? Absolutely! In fact, medieval doctors were probably harmless by comparison.

6. Sweden has warned repeatedly that the tax is harmful and will have a plethora of unintended consequences. The fact that this warning is brushed aside by the eurocrats tells us all we need to know: the tax is a political measure. Sound economic policy is once again sacrificed on the altar of political expedience. This is par for the course for the eurocrats.

7. UK citizens are probably the only ones that can look forward to a positive effect: this tax brings a UK exit from the EU that much closer. 

We find it simply astonishing that the EU's political class has nothing better to do than conjure up new taxes in the middle of a depression. Have these people lost their mind completely?

Investors, Are They Good for the Future of Real Estate?

 

Source: google.com via Exotic Slipcovers on Pinterest

Investors, Are They Good for the Future of Real Estate?

By , courtesy of Acting Man 

Greetings from Varanasi, probably the most chaotic place I have ever been to. This is supposedly the oldest city on earth, where a never ending stream of pilgrims comes to bath in the the Ganges. Less than 100 yards upstream, a dozen bonfires are roaring as bodies are cremated on a 7/24 basis. Mobs of tourists come to witness the daily offerings, creating monster traffic jams with every square inch of the narrow roads packed. I think I deserve a break this afternoon.

If you like real estate, India is the place. There are probably more households here with no homes than the entire population of the United States, with a birth rate that would guarantee an endless wave of "household formation".  I suppose the bulls would call this pent up demand.  In reality, I have no idea what to make of it.  How India can address the issues of this homeless country within the country is beyond the comprehension of the human mind.

The US is not India, but India's extreme gap between rich and poor did get me thinking about the current housing market phenomenon in the US. Specifically, I am referring to the invasion of investors in the single family market. In India, the rich are getting richer while the poor are already at rock bottom. Is the US heading in the same direction, albeit very slowly?

Take the Blackstone Group as an example. They have been in the news recently as having purchased 16,000 homes already and they are still buying at breakneck speed. Wall Street cheers. Housing has bottomed and is on its path to full recovery. In reality, this is a transfer of wealth that, in my opinion, will be another price that future generations have to pay.

Steve Schwarzman, founder of Blackstone, is not just part of the 1%, he is in the top 1% of the 1%. As Obama and other politicians are fighting tooth and nail over how to tax the rich, Schwarzman has already levied a housing tax on 16,000 families. Here is how it works.  The free market is driving prices back down to equilibrium, so normal people can afford to buy a starter home they can call their own. Right or wrong, Bernanke is trying to accommodate this by driving down long term rates for these potential home owners.  Now mega rich Schwarzman steps in to extract a fee so he can be richer. The first time buyers are forced to either pay a higher price for the same homes, or have to buy an equally inflated house from a builder. Those who are squeezed out and cannot afford to buy anymore will have to rent from Blackstone. Are we back to the middle ages of landlords and peasants? Is Schwarzman the modern day warlord, Shogun or Maharaja?

Henry Ford made his fortune with the Model T, revolutionizing manufacturing and transportation in the process. Alexander Graham Bell gave us the groundwork for modern communications. Steve Jobs created smart and cool devices that brought joy and functionality. The single family bulk buyers today provide no added value to real estate, just added cost.  Blackstone is not alone. In fact, Blackstone is just a small part of this wave of transfer of wealth from the have-nots to the haves. For new college graduates who are burdened by student loans and are lucky enough to be employed in a mediocre low-paying job, trying to save up for a starter home will  prove a challenge.

Home ownership brings pride, not only for the home owner but also for the neighborhood. Home ownership is the back bone of societies. Intuitively, I believe there is something wrong when investors are gobbling up 30% or more of the available inventory in the recovering markets, driving up prices in the process. I believe there is something wrong when foreigners use single family homes as a place to park money, regardless of their need for the dwelling. In the long run, I believe it is the wrong direction for single family real estate, something that deserves attention.

Now off to the next town – Kolkata (Calcutta).

Trouble Ahead?

Trouble Ahead?

By Ilene 

Last week, the 10 year Treasury yield surged on Friday, coinciding with the beginning of loan repayments by European banks to the European Central Bank’s (ECB). Voluntary repayments of this Long Term Refinancing Operation (LTRO) loan program totaled $137 billion. Some European bank borrowers had used their borrowed money to purchase U.S. Treasuries. Now, 278 of these borrower banks are paying the ECB back. 

The loan repayments are being construed as a positive sign for the European Union. 

“Syndicate bankers greeted the news that European banks will repay €137.2bn to the European Central Bank this week as yet another indicant of euro area funding markets starting to normalise.

“’It’s an encouraging sign,’ said one. ‘More and more issuers are working to pay back the LTRO money, which is positive for the market.’

“The €137.2bn of repayments is broadly in line with expectations from analysts. Though large in absolute terms, the sum is only equal to about 12% of the total €1trn lent out by the ECB, indicating banks held on to most of the cash. There will be an opportunity to repay every week between now and the maturity of the loans. (Bankers cheer LTRO repayments)

The repayment of the LTRO loans by European banks means money is flowing back to Europe from the U.S. Treasury market, as the European banks sell U.S. Treasuries. This action is pressuring U.S. Treasuries, causing yields to increase. Lee Adler of the Wall Street Examiner cautions that the 10 year yield surpassing 2% could lead to a disorderly decline:

“The 10 year surged by more than 10 basis points to close Friday at 1.947.” That was a new closing high for this move. The day before Quantitative Easing 3 (QE3) was announced on September 13, the 10 year yield was 1.765. The first settlements of the Fed’s purchases under this program took place in November when the 10 year yield at 1.589. “The Fed must be in a panic to see that one of its stated aims for this program is not happening [yields dropping]. The yield has now shot upward from the bottom of its uptrend channel as it heads for a test of major resistance at 2%.” (Lee Adler, Troubling Signs Piling Up)

In Troubling Signs Piling Up, Lee noted:

  • $63 billion in new Treasuries which would have been auctioned off last week were withheld due to the debt ceiling deal. Those will be auctioned this week, adding pressure to the Treasury market.
  • Withholding tax collections pulled back sharply due to accelerated income recognition at the end of 2012. Low tax collections may be signaling a weakening economy.  With cash levels low, and tax revenue falling off, the Treasury may need to float cash management bills (CMBS) to raise additional cash. 
  • Primary Dealers sold Treasuries heavily last week, possibly portending a dramatic decline in the dealers’ willingness to hold Treasuries. However, dealers and commercial hedgers remain heavily long, and dealers have a history of “massive blunders at the worst possible time.” 

Screen Shot 2013-01-28 at 1.01.44 AM 

  • Last week, foreign central banks (FCBs) were net sellers of Treasuries. If FCBs become net sellers for longer periods, it could be problematic.
  • Commercial banks also sold. If banks do not add to their holdings next week, it might signal trouble for the bond market. If bank buying does not rebound, concurrent with the Fed’s huge MBS purchase settlement, it would be another nail in the coffin of the Treasury bull market.”
  • Public inflows into bond funds remain strong. That is normally bullish for Treasuries, but the public and the Fed may not be able to sustain the Treasury market if dealers, banks, and FCBs are all selling. 
  • Ironically, as Treasuries are sold, rising yields could be taken as a good sign for the economy – resulting in buying stocks, commodities, and inflation hedges.

Lee believes the tide may be turning against Treasuries. More Treasury supply is coming this week, and the Treasury market could be in trouble.  “Add to these forces the beginning of repayments of the ECB’s massive LTRO lending operation, and the trouble could be bigger than anyone expects. Those LTRO operations contributed to the huge rally in Treasuries, as some of the banks receiving those funds used them to buy Treasuries. Now that some of those banks are repaying those funds, it means that they are also selling those Treasury positions.” 

Foreign central banks may have also backed away from buying Treasuries, possibly leading to more significant problems for the Treasury market.

It is tax refund season and the Treasury needs more cash than usual. However, the Treasury’s cash balances are lower than they were this time last year. The government may decide to issue cash management bills (CMB) over the next few weeks. CMBs could absorb some of the excess liquidity being created by the Fed, putting additional pressure on the Treasury market. 

Lee surmised, “The trend of economic reports beating expectations is likely to end. Economists are too optimistic. If early indications from the tax data showing a sharp drop are sustained, the economy may slowing faster than expected. There should be fewer positive surprises, and more downside misses, ahead. Nevertheless, and weakness in Treasuries notwithstanding, Lee expects the money being printed into existence by the Fed to continue to flow into stocks and commodities.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

After Year of “Stability”, Monetary Base Explodes To New All-Time Highs

After Year of “Stability”, Monetary Base Explodes To New All-Time Highs

Courtesy of Tekoa Da Silva of BULL MARKET THINKING

(click to enlarge, source.)

Strangely occurring during a period of collapsing precious metals & mining equity prices, the St. Louis Adjusted Monetary Base (BASE)has catapulted itself to never before seen, record, all-time highs of“2,796.041 Billions of Dollars”. That’s $2.796 trillion dollars.

In this week’s “The Coxe Call”, Don Coxe commented on this historic event, saying, “After a year [and a half] in which the monetary base has been stable, its now entered into rapid-growth mode again. What that means, is that Ben Bernanke is directly or indirectly, [manipulating the currency].”

“[A] simultaneous weakening of all the paper currencies, and a new currency race to the bottom, you would think would be bullish for gold. But of the major commodities [it] has been the weakest, and today we’re at $1659…most particularly because of the surprising strength of the Euro…Talk about an Orwellian currency situation.”

“For investors this means the best performing stocks might be those of the weakest performing commodities. So that’s why I call it, “Orwellian”—[because] weakness is strength. This of course is that famous phrase of the rules of the system, “War is peace, freedom is slavery, weakness is strength.’”

To listen to the full recording of Don’s call entitled,  “Orwellian Currencies: Weakness is Strength”, visit: CoxeAdvisors.com.

Santelli’s Paradox And Why The Fed’s Exit Will Be “Very, Very Messy”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We are in our sixth year since the US officially went into recession and yet, as CNBC's Rick Santelli notes, we are still in crisis management mode. Some argue that any day now, the Fed will begin to remove its mega liquidity pipe from the market but Rick exclaims in this wonderfully succinct clip that: "there is no expiration date on faulty illogical ideas," as he expects any Fed exit to be "very, very messy."

Rick's dilemma is the seemingly paradoxical need for yet moar and bigger monetary policy crisis management by Ben Bernanke when day-after-day we are told by the very guests on his network that "stocks look great." At the end of the day, when the Fed decides to exit, they will not be able to put the liquidity 'toothpaste' back in the tube.

Lanny Breuer on Whistleblowers and Prosecuting Bankers (the Liar Liar version)

Courtesy of Jaime Falcon.

US Consumer Confidence Plunges

US Consumer Confidence Plunges

Courtesy of Jesse's Cafe Americain

What is wrong with the little people, these takers and fakers? Confidence has never been better on Wall Street.

Look at the VIX and the SP 500, and booming home prices in the Hamptons. Get with the program.

Lloyd Blankfein just had a $21 million pay day. He's filled with confidence. And Jamie Dimon is walking on water.

Fraud and deceit will continue until confidence and trust improve.

MarketWatch
Consumer confidence drops in January
By Ruth Mantell 

WASHINGTON (MarketWatch) — A gauge of consumer confidence dropped in January to the lowest level since November 2011 on lower expectations and gloomier views of the present situation, according to data released Tuesday. 

The Conference Board said its consumer-confidence index dropped to 58.6 in January, missing analysts' estimates of 64.3, from an upwardly revised 66.7 in December

A prior December estimate pegged the level at 65.1. "Consumers are more pessimistic about the economic outlook and, in particular, their financial situation," said Lynn Franco, economic indicators director at the Conference Board…

Birds Of A Feather Fly Together

Birds Of A Feather Fly Together

By David of All About Trends

Just take a look here at two names we issued Trade Trigger email alerts on Monday:
 
DDD
 

SSYS
 
 

 
 
The real action is in hit and runs and a market of individual stocks.  Just 24-hours later, we are looking at the following gains:
 
$256 in DDD from $60.46 to $63.02
 
$320 in SSYS from $77.90 to $81.10
 
That's a quick $576 in the course of one day!!
 
THIS IS HOW HIT AND RUN, GET IN, GET YOUR POINTS AND GET OUT WORKS all from a trade what we see not think, hear or fear perspective using basic chart analysis.
 
IF your game plan is get $500 worth of gains per week and get out?  You are done for the week.
 
ALWAYS ALLOW STOCKS TO COME TO YOU!
 
 
To learn more, sign up for David’s free newsletter and receive the free report from All About Trends – “How To Outperform 90% Of Wall Street With Just $500 A Week.” Tell David PSW sent you. – Ilene

How Much Did Crisis Cost Economy? Begins with a T

Courtesy of Larry Doyle.

Have you ever wondered what a best guesstimate might be as to how much the 2008 crisis cost our economy? Well, not that many outlets around here may care to highlight this information, so let’s navigate to a Russian site, Rianovosti, at which we can read and learn,

The absence of criminal accountability for a crisis that cost the U.S. economy trillions of dollars in GDP and wiped out billions more in personal wealth amplifies the risk of a similar financial meltdown in the future, according to securities experts and former regulators.

Trillions?? That is a large number even by today’s standards where many in Washington throw the “t-word” around like it is no big deal. Can we get more specific? 

Let’s continue navigating.

The U.S. government’s “entire response to 2008 suggests this could happen again someday,” said John Coffee, a professor at Columbia Law School in New York and a prominent expert on securities law and white collar crime.

“It’s clear that the Justice Department has not been able to find criminal charges it could prosecute, either because it is very hard to prove complex criminal cases in the financial world or because they were under pressure not to bring such cases, or simply because no one committed fraud,” Coffee said. “I think that last explanation is a little too simple.”

Too simple, you think? Can you say, firms deemed “too big to fail” are “too big to regulate”, and ultimately “too big to prosecute”. Is that capitalism?  No, that is crony capitalism and that is what we have in our country circa 2013. But how much has it cost?

The crisis, which began in 2007 and was accelerated by Lehman’s filing for bankruptcy protection, has cost the U.S. economy at least $12.8-trillion, according to a report released by the independent financial reform watchdog Better Markets—which called its estimate conservative.

$12.8 trillion. . . at least.

But no fraud, right? How do you feel about our elected representatives? Looking out for your interests?

$12.8 TRILLION later. . . . navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

Bloomberg Businessweek Endorsed a Ponzi Scheme

If this investment strategy is for real (have to wonder), it's one of the most ridiculous ones I've seen yet. It's surprising that Bloomberg would publish the article that Paul's commenting on. ~ Ilene 

By Dr. Paul Price (full article at Guru Focus)

 

The Jan. 21-27 issue of Businessweek ran an article praising what Pakistani Community Savings "circles" called Ballot Committees. The author noted that these organizations force citizens to save while paying no interest to their participants.

The article came complete with three photos of typical "savers." Muhammed Sajid was said to have bought a Dell laptop with his distributions. A mother and child proudly posed with their new microwave oven. A third saver showed off his new Nokia phone.

Ali, a merchant in the Karachi market was said to have bought a car and acquired a new store in his 15 years of saving with Ballot Committees. Bloomberg noted that he’s now just months away from getting 400,000 rupees ($4,100) from a nearly year-long, 1,000 rupee a day deposit with his local group. Ali planned to put a down payment on an apartment.

Note that one year’s worth of 1,000 a day equals 365,000. How can a 400,000 return be possible on a non-interest bearing account?

The implication was that without these wonderful committees the purchases illustrated would never have been possible. In reality the best one could hope for was to simply get back all the money they had deposited after taking about an 8% annual hit to buying power due to inflation (Bloomberg’s estimate).

Ballot Committees collect a set daily or monthly deposit from a group of trusting people. The term is typically set for one year. Each participant is then "voted" a number designating his turn to be paid a whole month’s worth of collections (i.e. the total amount contributed by the entire group). The article stated that the organizer usually would personally collect the money while charging no fee. These committee insiders would usually be first to receive their entire year’s distributions in a lump sum.

Here’s an example of how this might work in a best-case scenario.

Keep reading: Bloomberg Businessweek Endorsed a Ponzi Scheme – GuruFocus.com.

Student Loan Bubble Update: “This Situation Is Simply Unsustainable”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The last time we looked at the most underreported debt crisis sweeping the land, which is nothing short of the second coming of subprime, namely the student loan bubble, we posted "the scariest chart of the quarter" in which the Fed had finally caught up with our prior data showing that student loan delinquency had soared to some 11% from the 9% reported in the previous quarter, even as the Fed disclosed it had issued some $42 billion in Federal student loans in the same quarter, and a cumulative $956 billion, a number which as of December 31 is certainly over $1 trillion. This number was lower than the one we had shown previously, or a default rate of some 13.4%, sourced by the DOE. As it turns out both we and the Fed were optimistic.

According to just released data from Fair Issac:

Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying.

The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent

And since there is always a lag between getting the full cohort remittance and delinquency data, the real bad loan percentage is likely in the 20%+ category. So $1 trillion in federal student debt now, 20% delinquency, means $200 billion in loan defaults with zero collateral. And rising fast.

This is on par with the amount of subprime loans that was expected to end in foreclosure, yet another number that was vastly optimistic and would have been far worse had the Fed not stepped in to bailout the entire financial system.

And it gets worse. According to FICO:

While the delinquency rate is climbing, the average amount of student loan debt is increasing even faster. In 2005, the average U.S. student loan debt was $17,233. By 2012, it had ballooned to more than $27,253 – an increase of 58 percent in seven years. By contrast, the average credit card balance and the average balance on car loans owed by U.S. consumers actually decreased during the same period.

In a related finding, FICO’s quarterly survey of bank risk managers conducted in December 2012 found that nearly 60 percent of respondents expected delinquencies on student loans to increase over the next six months. The same respondents expected delinquencies on all other types of consumer loans to decrease, putting the pessimism around student loans in sharp relief.

So not only are loans accelerating, but the actual amount of any given loan is rising exponentially.

Some of FICO's scary charts which nobody will pay attention to until it is far too late.

The total percentage of US population with 1 or more student loans has increased from 12.1% in 2005 to 19% in 2012.

 

The consumer may be deleveraging… in everything but student loans that is: a 58% increase in the average student loan notional in seven years.

 

 

And nearly 1% of the population has over $100,000 in student loans!

 

* * *

FICO's assessment is round in line with outs. "This situation is simply unsustainable and we’re already suffering the consequences,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.

Yes there is: PRINT!

full FICO report below

China Averts $482 Billion in Local Bank Defaults via Massive Rollover Scheme; Extend-and-Pretend Chinese Style

Courtesy of Mish.

The Chinese banking system is insolvent. Of course, the entire global banking system is insolvent, but today’s spotlight is on China. Please consider China averts local government defaults.

Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012, an indication of the immense challenge facing China in working down its debt load.

Local governments borrowed heavily from banks to fuel China’s stimulus programme during the global financial crisis and are now struggling to generate the revenue to pay them back, a shortfall that could cast a shadow over Chinese economic growth.

Banks extended at least Rmb 3tn ($482bn) – and perhaps more – of the roughly Rmb 4tn in loans plus interest that local governments were to have paid them by the end of last year, according to Financial Times calculations based on official data.

Extend-and-Pretend Chinese Style

Since details on refinancing and interest rates are lacking, the reported $482 billion is undoubtedly on the low side.

The key point is that massive rollovers were needed to stave off defaults.

“That’s a correct observation and explanation,” said Stanley Li, a banking analyst with Mirae Asset Securities. “Based on the payback period for the infrastructure projects [started by local governments], it will take more than 10 years to pay these loans back.”

Ten years? How about never? Many of these projects were never economically viable, especially the housing and land schemes.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Continue Here

Pending Home Sales Didn’t Really Miss

Courtesy of Lee Adler of the Wall Street Examiner

The news media reported yesterday that the NAR’s Pending Home Sales Index for December was a huge miss, falling far short of economists’ consensus expectations. This was based on the seasonally adjusted data, which is frequently misleading because the statistical manipulation often obscures the real trend.

I reviewed the actual, not seasonally adjusted data. It was at the low end of the growth trend of the past 2 years, but still up 4.9% year to year. The month to month drop was slightly greater than normal for December, but is was not a significant deviation from the trend. Therefore, calling it a “huge miss” was misleading.

Some observers attributed the lower than expected number to sharply lower inventories of properties for sale. That may have been a  factor contributing to suppressing sales. Inventories were down 170,000 units or 21.6% between December 2011 and December 2012. They were down 1.7 million units or 48% since December 2007. The December inventory to sales ratio of 6.8 is the lowest for December in the data going back to 2005 at the peak of the bubble.

So the excuse about low inventories being the cause of slower sales growth may have some validity. But in the big picture, sales continue on a trend of slow but steady increases since the 2008 bottom. This year’s gain is consistent with the increase in sales contracts of 22% since December 2007, which was the low for contract volume during the crash.

Existing and Pending Home Sales - Click to Enlarge

Existing and Pending Home Sales – Click to Enlarge

 

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

David vs Goliath: The Case for Community Banks

Courtesy of Larry Doyle.

While the mega-banks on Wall Street flex their oligopolistic muscles (price controls, imperfect information, not sharing data), I want to take this opportunity to throw some support to the Davids of the banking world.

Who are these Davids? The community banks. Do you feel like you get a lot of personal touch and proper attention from Goliath? Really? How about from David?

Let’s navigate and review a compellingly detailed analysis recently released by the Dallas Fed. 

A Lender for Tough Times,

Community banks are not only a major source of credit, but also a stable one for businesses. During the recent financial crisis and its aftermath, these smaller, traditional lenders provided credit to many firms, especially small businesses, when they needed it most.

Financial stability is key to economic performance—a proposition made starkly clear when banks became a source of trouble during the recession. Before the downturn’s start in December 2007, U.S. banks stoked an epic real estate boom with lax lending, setting the stage for a severe financial crisis. Once the worst was over, these institutions inhibited a recovery by tightening credit standards and limiting loans. Like a broken thermostat, banks and the financial system helped overheat the economy and then helped overcool it.

Some types of banks destabilized the credit cycle and economy more than others. The biggest banks, their focus diverted from traditional balance-sheet activities and toward capital markets and short-term gains, incurred spikes in loan defaults and exhibited significant cyclical declines in business loan volume.

Meanwhile, community banks concentrated on traditional banking, taking deposits and extending loans, relying on long-term relationships and time-tested judgment. These smaller banks not only demonstrated relative strength in business loan quality, but also maintained business loan volume to a much greater degree, providing credit to many small businesses when they needed it most. Such lending is vital to the economy.

Community banks are organizations with assets of $10 billion or less. The smallest community banks are those with assets below $1 billion.

Their activities are compared with the actions of two classes of larger financial institutions—those in the over $10 billion to $250 billion range and others with assets over $250 billion.

Business Lending Focus

Community banks tend to focus on business lending. Just before the 2007–09 recession, they held overall business loans equal to 30 percent of assets, compared with only 14 percent for the largest banks. This remained true even after the financial crisis. As of June 2012, the subset of smallest community banks held business loans equal to 28 percent of assets, and the group of community banks with assets from $1 billion to $10 billion held business loans equal to 31 percent of assets (Chart 1). The largest banks were down to about 12 percent.

Just as important, a significant share of this lending goes to small businesses. Community banks as a group have about 13 percent of assets in small business loans, far above the 2 percent for the largest banks. Among the smallest community banks, small business loans command almost 15 percent of assets.

Community banks held 17 percent of industrywide banking assets as of June 2012—but they accounted for more than half of the amount lent to small businesses (Chart 2). This importance to the small-business loan market testifies to community banks’ competitive edge based on superior firsthand knowledge of borrowers and their credit needs.

Business Lending Durability

Serving the credit needs of small business borrowers in today’s challenging times is one thing. But, what happens when the operating environment really turns sour? Who lends to small businesses then?

The housing crisis and recession knocked the financial system off kilter. Small businesses are particularly vulnerable to banking crises because their limited access to broader capital markets increases their dependency on banks. Tightening bank credit will likely curtail small enterprises’ activities, jeopardizing the growth and vitality these businesses provide to local communities.

Compared with the big financial institutions, community banks have been more successful in avoiding asset impairment, allowing them to sustain lending activity. At mid-2008, well into the recession, total business lending remained above year-earlier levels for all four bank asset-size categories (Chart 3). Over the next two years, however, community bank loan volume held up relative to 2007 levels, while the biggest banks significantly reduced business lending. In 2011 and 2012, business lending tended to recover—but the biggest banks still had not returned to 2008 levels.

A notable pattern also occurred for small business lending: Community banks with assets of less than $1 billion maintained a relatively steady loan volume (Chart 4). For other types of banks, small business activity dipped well below precrisis levels. The smallest community banks offer small businesses a relatively stable source of credit—a critical element of the financial landscape worth nurturing.

Stabilizing Force

Community banks are not only a major source of credit for job-creating businesses but also a stable one. By extending new loans to business customers, renewing existing loans and minimizing loan losses, community banks better maintained loan volume during the downturn. Less-crisis-prone banks help promote a less-crisis-prone economy.

Chart 1
Community Banks Focus on Small Business Loans

Chart 2
Community Banks Hold Less Than One-Fifth of Industrywide Banking Assets but More than Half of Industrywide Small Business Loans

Chart 3
Business Loan Volume

Chart 4
Small Business Loan Volume

I would welcome hearing from those in the field, both lenders and borrowers alike.

What has been your experience in dealing with David vs Goliath?

Related Commentary/Banking: Wall Street vs Main Street by R. Wilmers

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Tim Geithner’s Treasury Department Gets Another Failing Grade

Courtesy of Pam Martens.

Somebody is right and somebody is wrong when it comes to whether Tim Geithner, the man who stepped down as U.S. Treasury Secretary on Friday, is a crony capitalist covering the backs of his corporate pals, their failed companies, and their obscene pay or is an American hero. 

President Obama is in the good guy camp, using the January 10 occasion of his nomination of Jack Lew to replace Geithner as Treasury Secretary to say: “When the history books are written, Tim Geithner is going to go down as one of our finest secretaries of the Treasury.” 

The President’s assessment stands in stark contrast to that of a growing list of informed insiders, some of whom are already writing those history books.  Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program (TARP), had a devastating take on Geithner in his 2012 book Bailout: How Washington Abandoned Main Street While Rescuing Wall Street. According to Barofsky, Geithner used the Home Affordable Modification Program (HAMP) to “foam the runways” for the banks, slowing down the foreclosure stream so the banks could stay afloat, with no sincere effort to help struggling families stay in their homes.  

Sheila Bair, the former head of the FDIC, painted an equally nefarious picture of Geithner in her 2012 book, Bull by the Horns. Geithner showered Citigroup, a firm that was clearly insolvent, with $2.5 trillion in Fed loans, taxpayer capital, and asset guarantees. (Geithner headed the New York Fed before moving to Treasury.)

In Ron Suskind’s 2011 Confidence Men, Geithner reportedly ignored a directive from President Obama to wind down Citigroup. Instead, Geithner approved the massive bailout package. 

Now, just 18 days after the President’s famous pronouncement about how the history books will remember Geithner, along comes another scathing report on his Treasury Department from yet another Special Inspector General of TARP, Christy Romero. 

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Out-of-Pocket Medical Costs Drive Even Insured Older Americans Into Debt

 

Source: 3.bp.blogspot.com via Rob on Pinterest

How Out-of-Pocket Medical Costs Drive Even Insured Older Americans Into Debt

One obvious way to reduce the deficit is to squeeze Medicare recipients by forcing them to pick up more of the tab for their healthcare costs. And any number of proposals floating around in Washington would do exactly that. 

The problem, though, is that older Americans covered by Medicare are already spending a lot on healthcare — and there's growing evidence that these costs are driving them into debt or poverty. 

Earlier this month, Demos and AARP released a report on credit card debt among older Americans that found that 31.9 percent of senior households between 65-74 carried credit card debt, and 21.7 percent of seniors over 75 had such debt. 

The sample size the survey analyzed was not large enough to determine the exact scope of such debt for these older Americans, but overall found that "Among middle-income Americans who carried credit card debt, the 50+ population had an average combined balance of $8,278 on all of their cards in 2012."

This is a disturbing finding. After all, if you have debt, there's a good chance you have minimal savings — which is not where you want to be in your 50s, 60s, or 70s. 

Keep reading: How Out-of-Pocket Medical Costs Drive Even Insured Older Americans Into Debt – The Demos Blog – PolicyShop.