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Below is a preview of the CMV (Contrarian Market View) Newsletter for August, 2011. See the end of this post for a free book offer with the purchase of a subscription to the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)
The comparative YTD results for July 29, 2011, and Total Portfolio return as of July 29, 2011, were as follows:
YTD 52 Weeks
The CMV Portfolio -2.10% +31.60% (since 1/1/10)
Dow Jones Industrial Avg. +4.90% +16.00%
S&P 500 +2.80% +17.30%
NASDAQ Composite +3.90% +22.30%
The global banking system and by proxy the worldwide economy is at a tipping point – a critical juncture. The US, Euroland, Japan, and now China are faced with versions of the same dilemma – too much private and government debt that can not be serviced and by extension, is unsustainable. Japan has never recovered from its’ highly leveraged real estate and stock market collapse in the early 1990s. The US and Euroland avoided a systemic collapse of their banking systems and their economies in 2008 by creating massive amounts of liquidity through new debt that is now causing a predicable outcome. China’s National Audit Office revealed this past month that its’ banking sector is exposed to some $1.3 trillion in local government debt and as the WSJ remarked on July 7, 2011, “Investors fear those debts represent the tip of a default iceberg.”
Since 1974, the US and much of the world, has experienced 13 boom and bust economic cycles. Prior to the crash of 2008 all bust cycles resulted in a substantial write-down of non-performing debt. For example, after the highly leveraged commercial real estate boom and bust in the 1980s, Congress created the Resolution Trust Corp to take control and dispose of foreclosed properties. Once in place a substantial inventory of commercial real estate was liquidated rather quickly at huge discounts with a coincident write-off of mortgage debt. In many respects, developers, builders and investors relieved of their suffocating debt, had a fresh state and the markets rebounded quickly during the 90s. Instead of less debt, there’s more today and even more ominously the highly leveraged inverse pyramid of derivatives remain intact at over $600 trillion and growing!
Your writer attended a seminar at Arizona State University about 17 years ago after the 1990 crash. One of the principal speakers was the Chief Economist at a major bank. Your writer asked her;
“What will happen to all this unpaid debt?”
The economist replied:
“It will simply be absorbed into the system.”
Your writer persisted:
“How much can the banking system absorb?”
Agitated, she replied:
“I don’t think there’s a limit. It doesn’t matter.”
Bingo! That’s the bankers’ mind-set then and that was the strategy promulgated by Alan Greenspan in 2002. It didn’t matter how much debt the banking industry created. The “system” could absorb the losses. The banksters got it WRONG. They’ve exceeded the limit.
Debt is analogous to a mold or a fungus that’s embedded into the drywall of a home. Rather than remediating the problem, the owner wall-papers over it to hide the problem from the buyer. That’s what our politicians and banksters are doing. They’re printing more and more paper to cover up the fungus that will destroy the infrastructure of the economy and make its’ residents deathly ill. The US is the best house in a (global) neighborhood but it’s infested with mold. The “Gang of Six” are simply paper hangers. Another short-term fix that won’t remediate the problem.
Where is the cash going to come from to create $95 billion per month of Treasury debt previously provided by the Fed’s QE 2? Read and weep this interview with Stephanie Pomboy of MacroMavens in Alan Abelson’s “Up & Down Wall St.” column in the July 18, 2011 edition of Barron’s.
For example, one proposal Stephanie envisions is to require 401(k)s to hold a certain percentage of their assets in Treasuries at the risk of losing tax-free status. Another is encouraging public pension funds to fatten up the share of their portfolios given over to Treasuries. Still another is enticing companies to put a chunk of the nearly $1.9 trillion in cash "burning a hole in their pockets" into Uncle Sam's obligations, possibly as part of a deal for a tax holiday to bring home the huge cache of foreign profits sequestered abroad.
The impact of such actions, she feels, is bound to be ponderable. Were public pensions to boost their allocation to Treasuries from the current 6% to 16% (pre-Alan Greenspan, 24% was the norm), Stephanie reckons it would mean something like $300 billion of government bond purchases. And that, she points out, would be "chump change" compared with the potential additions by individuals and corporations.
As things stand today, non-financial corporations have $1.4 trillion in cash and a mere $48 billion in Treasuries. As for individuals and their 401(k)s, only $300 billion of total mutual-fund assets of $8.3 trillion are invested in Treasuries. All of which strongly suggests there's a mega-abundance of room for greater exposure to government debt.
Creating demand for Uncle Sam's obligations—"whether by carrot or stick," Stephanie says—has the not-inconsiderable advantage of "allowing fiscal stimulus to continue without all the inflationary consequences of dollar debasement" that accompanied QE1 and 2. And then she quickly adds, in patented Pomboy fashion, "until, of course, this, too, goes bad."
Merchants Of Death
In my book “The Aftermath of Greed,” your author labeled the hucksters and mortgage brokers that originated sub-prime loans for companies such as Countrywide Financial, New Century Financial and the Wall St. Firms that packaged and sold the AAA rated mortgages to unsuspecting institutional investors, as “Merchants of Debt.” Motivated by greed and self-aggrandizement, these merchants pocketed 100s of billions in commissions, fees and mark-ups without any concern for the borrowers, ethics or the rule of law. Now, another group of ethically challenged opportunists have surfaced, invading the previously sacrosanct world of life insurance in order to profit at the death of an insured. Appropriately, these people are the “Merchants of Death.”
Viatical Settlements (VS) came into existence in the late 1980s. Originally, the concept of VS was based upon the premise that owners of existing life insurance policies who were elderly or insured owners who had a terminal illness who were in need of cash prior to death, could “sell” their policies to a VS company for an amount less than the death benefit and the VS company would continue making the premium payments until the insured passed away.
The longer the insured lived, the lower the profit to the VS company. Most insurance companies fearful that this practice would raise ethical and moral questions and could open the door for abuse and fraud, prohibited their agents from engaging in the sale of their client’s policies to the VS companies. The insurance companies probably couldn’t envision the extent of the fraud that would follow.
According to a July 9, 2011 article written by Leslie Scism in the WSJ, Esther Adler died in 2009 and her insurer, AXA Equitable, was on the hook to pay out a death benefit of $5,000,000. After her death, the insurer discovered that instead of having a $12 million dollar estate as listed in her application, Mrs. Adler had assets of less than $100,000 and lived on Social Security. Premiums were in excess of $300,000/year. Settlement Funding, LLC, had purchased the policy shortly after it had been issued and stood to profit enormously from Mrs. Adler’s death.
AXA Equitable attempted to void the policy from the inception date citing alleged fraud. The court ruled in favor of Settlement Funding, LLC, and AXA Equitable was forced to pay the claim , in part possibly, that the insurer failed to do adequate underwriting and it relied upon a financial statement that was a fake.
Based upon your writer’s 40 year experience in the life insurance business, it’s reasonable to assume that there was collusion in Mrs. Adler’s case between the insured, the agent and Settlement Funding, LLC.
There is a much bigger story here with deep societal ramifications for America. Just as insatiable GREED, a disregard for ETHICS, the ABUSE of privilege and power and the circumvention of the Rule of Law by those who devastated America’s middle class as a result of the sub-prime scam, these “Merchants of Death” demonstrated that this type of behavior not only has not been curtailed, it continues to thrive and has become “mainstream.” The motive is PROFIT. The MEANS is irrelevant. The consequences are INEVITABLE.
(End Of America As We Knew It)
(End Of America As We Knew It)
America has lost its’ moral and ethical compass. Hacking, identity theft, insider trading and all forms of fraud is not only undermining our capitalistic system, it is destroying the fabric of our society. Corruption in government at the city, state and federal level isn’t isolated to Chicago and mob rule is hastening the bankruptcy of our political infrastructure. For those of us who grew up in the thirties, forties and the fifties, what was ethically and morally right or wrong was ironclad. There wasn’t a grey area. Progressivism changed America, its’ direction and its’ destiny. Our hope lies in the chaos that will soon envelop our country and the following catharsis that will mark the Rediscovery of America. (Read “Rediscovering America: Growing Up In The Forties” by H. L. Quist.)
Where Did The Jobs Go?
Other than the budget and the debt Sword of Damocles that hangs over our collective heads, no topic commands more attention than the discussion of JOBS. What American’s don’t hear, however, is how did we lose these jobs in the first place, and why most of them will never return. A little history is necessary.
In 1994, Robert Rubin, then the CEO of Goldman Sachs, became the US Secretary of Treasury. President Bill Clinton was faced with the prospect that he would not be re-elected principally because his party was responsible for the largest income tax increase in US history and rising inflation could make him suffer the same fate as Jimmy Carter in 1980. Enter the global market strategist Rubin who immediately declared, “We believe that a strong US dollar is in the nation’s best interest.”
Little did Americans know at the time that Rubin’s patriotic-sounding policy would begin the mass exodus of manufacturing jobs out of the US. Putting it simply, the strong dollar made US exports more expensive and made Chinese imports cheaper. The cheap (in quality and price) Chinese goods held inflation in check and by 1996, despite the sexual sideshow, the economy was humming and the President’s principal goal was accomplished. A perfect example of a short-term fix which, of course, led to a longer-term problem (unemployment) but by that time Clinton and Rubin were off to more fertile fields. (You’ll recall that the Greenspan liquidity-induced .com bubble burst just months after Clinton made his exit.)
Current reports indicate that there are 14 million unemployed workers today. A large percentage are casualties of the “strong dollar policy” which the current administration pseudo-advocates while the USD continues its’ devaluation. The U-6 unemployment rate (includes those who have been out of work more than six months) is 25 million or 16.2% of the workforce. The Bureau of Labor indicates that there has been a cut of 659,000 government jobs. Very little information is available as to how many of this number are state and municipal employees where these governments have had no alternative due to lack of income but to terminate employees. But that doesn’t account for the largest loss of all.
To CMV’s knowledge, there is no published number indicating how many jobs have been lost to TECHNOLOGY. The hard reality is that the massive technological revolution is creating huge numbers of casualties. An owner of a small business, for example, doesn’t need an assistant or a bookkeeper. He or she can do it all by themselves and probably more efficiently and effectively. Large corporations dramatically cut their staffs in 2008 and 2009 and then discovered that they didn’t need the laid off 10% to 20% in 2010 and 2011, despite the fact that their business rebounded sharply.
Some large corporations have just made a “restructuring” move to increase profitability. CISCO Systems, Inc. announced recently that it will lay off 6,500 employees, or 9% of its’ staff. 15% would be executives holding the title of Vice President or higher. CISCO, above all, would comprehend efficiency and productivity.
Going paperless has practically eliminated file clerks. Realtors, financial advisors, insurance agents and other professionals no longer need assistants and many no longer need offices and work from home. Of the 9.2% unemployed it’s possible that the rate, at best given an improved economy, could be reduced to 7.5% and the U-6 to 12%. In CMV’s opinion, the only factor that would change this outlook is a re-birth of the construction business. A DROID doesn’t hammer nails – as yet!
NOTE: The Myth Buster erred in his July 10, 2011 PODCAST. The Bureau of Labor’s birth/death model refers to newly-started businesses (births) as opposed to business closings (deaths) and not individual workers. Thanks to subscriber Kirk Fergus for bringing this to our attention.
European Banks Are On The Verge Of Collapse
This is the opinion of Sean Egan, President of Egan-Jones Ratings Co. (EJR), who was interviewed by Jack Willoughby in the July 18th edition of Barron’s as well as CNBC on the same day. EJR reinforced its’ reputation, by downgrading well in advance several years ago, the ratings of firms like AMBAC, CIT, Countrywide, General Motors, Indy Mac, Lehman Brothers, MBIA and New Century, which all experienced a severe financial crisis or collapse. The Philadelphia-based firm is a Securities & Exchange Commission-regulated rating agency whose customers pay for the research on other companies. In contrast, Moody’s, S&P, and Fitch are paid by the issuers of the securities they are rating as readers all too well recall in the sub-prime mortgage triple-AAA fiasco.
Much of the recent focus has been on Greece, and the European Central Bank (ECB) and the IMF’s resolve to continue to lend the country about $500 billion euros to prevent a contagion that would spread throughout all of Europe. In reality, Greece can only service 10% of that debt, according to Egan. The European bankers think that 30% of Greece’s debt will be “restructured.” Egan believes they’ll have to write down 90% ! The real problem, of course, is that soon Ireland and Portugal will find themselves in the same debt quagmire. If the trend does not reverse, Spain, Italy and Belgium will follow and there’s not enough euros or dollars to bail all of their EU brothers out.
So, why is this important to you?
1. US taxpayers contribute 17% of all the funds deposited to the International Monetary Fund (IMF). The IMF will continue to assess its’ member nations to cover its’ bad loans until Americans cut the umbilical cord.
2. As CMV reported in its’ July issue, five of the largest US money market funds have about 50% of their assets invested in debt of European banks which have considerable exposure to Portugal, Italy, Ireland, Greece, and Spain (PIIGS). Review the Prospectus of your money market fund ASAP.
3.The Federal Reserve Bank of the US (Fed) has swap lines with the ECB which guarantees bailout funds in the event of a contagion, while the US is faced with an enormous deficit and debit crisis of its’ own. In 2008 and 2009 Ben Bernanke “swapped” $580 billion with other central banks. What will the number be this time? Where will the money come from?
CMV has repeatedly said that we are all witnessing the end of the western-centric fiat money system. This is not about saving Greece. It’s about saving European and US banks. The global banksters have created an enormous mountain of debt that can not be serviced. Two questions remain?
1. When will the debt bubble burst? And,
2. Will the western-centric nations experience an inflationary blow-off (crack-up boom) prior to a contraction (deflation) or will global insolvency result in a 2008-type meltdown and depression?
The banksters have (in their view) only one solution. Print more euros (in violation of the EU charter) and more dollars and lend more money that won’t be repaid. At present, CMV’s call is rapidly accelerating inflation and the prospect of HYPERINFLATION.
NOTE: Read chapter six in “How To Profit From The Coming Inflationary Boom: And Avoid The Next Crash”, on ‘hyperinflation.’ If you’re prepared you can profit and survive. The best of both worlds.
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-- H. L. Quist