Hello World,Below is a preview of the CMV (Contrarian Market View) Newsletter for February, 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.)
February, 2011
H. L. Quist’s
Contrarian Market View
Newsletter
H. L. Quist’s
Contrarian Market View
Newsletter
Market Overview
In CMV’s opinion one of the most important determinates in the investment process is a Macro View – at what juncture are you in the economic cycle? As your author documented in two recent books, there have been 11 Boom and Bust Cycles since 1974 in the US and number 12, a Boom Forecast by H. L. Quist eighteen months ago, is well underway as evidenced by our results in 2010. Number 13, appropriately numbered, will be a catastrophic Bust that will signal the End Of America As We Knew It (EOAAWKI). Here’s a quick summary of CMV’s Macro Picture, past, present and future:
2002 - 2007 The Greenspan Plan BOOM
2002 - 2007 The Greenspan Plan BOOM
Historians in the future may mark September 11, 2001 as the beginning of the EOAAWKI. It certainly drove the final nail into the .com bubble’s and equity’s coffin which, by the end of 2002, gave cause to the Fed to develop a strategy to motivate the fearful and moribund consumer to spend. The Greenspan Plan that triggered cash-out financing set in motion an unparalleled spectrum of greed on Wall St. and Main Street that was destined to end badly. In a SPECIAL REPORT dated July, 2005, H. L. Quist forecast the crash but few listened. The Boom was actually over by late 2006, but mass denial kept the momentum going until 2008.
2008 - 2009 The Merchants of Debt Crisis BUST
2008 - 2009 The Merchants of Debt Crisis BUST
The massive contraction and deflation of assets and jobs was as predictable as a sunset, but the nation was plagued by an incurable malady of vision called “fecalopia.” It took until January 26, 2011, 633 pages and a panel of 10 experts on the Financial Crisis Inquiry Commission to conclude that: “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”
And, as you’ll soon learn IT WILL happen again. The US Treasury Department’s seizure of the “evil twins” Fannie and Freddie in August 2008 and the failure of Lehman Brothers in September, marked the bottom of this BUST cycle.
And, as you’ll soon learn IT WILL happen again. The US Treasury Department’s seizure of the “evil twins” Fannie and Freddie in August 2008 and the failure of Lehman Brothers in September, marked the bottom of this BUST cycle.
2010 - 2012 Helicopter Ben’s Reflation Plan BOOM
The Last Rodeo
Determined not to have the Second Great Depression on his watch Ben Bernanke unleashed an unprecedented monetary stimulus and asset purchase plan to save America and his job. Congress in its infinite wisdom and under the guise of “intellectual cover” of Keynesianism and directed by a new President motivated by ideological change and social justice, created an alphabet soup of stimulus programs that would rack up more than $3 trillion in additional Federal debt in two years with prospects for an equal amount by the end of 2012. The ASSET INFLATION BOOM began on March 9, 2009 for those few who had capital to invest and the courage to follow the “smart money.” Hedge fund managers like John Paulson, who personally made $4 billion shorting The Greenspan Plan made another $5 billion in bonds, gold, and commodities in 2010 and is looking for the next fertile opportunity which is ahead of him and all of you who follow CMV.
As 2011 begins, Bernanke’s Reflation Plan (QE2 included) and Congress’ fiscal largess have planted the seeds for price inflation and ultimately Hyper-Inflation. A testimony that the Inflation Jeannie has made her appearance is validated by Mr. Bernanke’s recent bold pronouncement, “I have 100% certainty that the Fed can control inflation.” With commodity prices soaring at the end of 2010, it was time to prick this speculative bubble to further demonstrate that “there is no inflation.” On cue, the Masters of the Universe on Wall St. took profits in gold and commodities and for a short period of time, it appeared that deflation of commodity prices was concrete evidence that there isn’t and won’t be inflation. As we’ve quickly discovered, denial is not a river in Egypt. The riots there and worldwide, are inflamed by poor economic conditions, shortage of rice, wheat and corn and increase in the prices of everything EXCEPT wages. And, to the penultimate politically correct deniers, a global Islamic Revolution has begun.
This INFLATION BOOM should continue in 2011 and into next year – certainly to the election. But, this is the LAST RODEO. The Fed will be out of silver bullets. In the end Bernanke, the Rodeo’s clown, will be the victim of the raging bull called inflation, he will lose his job and we’ll be left with the manure.
2013 - 2015 The Crack-Up Boom (EOAAWKI) BUST
Determined not to have the Second Great Depression on his watch Ben Bernanke unleashed an unprecedented monetary stimulus and asset purchase plan to save America and his job. Congress in its infinite wisdom and under the guise of “intellectual cover” of Keynesianism and directed by a new President motivated by ideological change and social justice, created an alphabet soup of stimulus programs that would rack up more than $3 trillion in additional Federal debt in two years with prospects for an equal amount by the end of 2012. The ASSET INFLATION BOOM began on March 9, 2009 for those few who had capital to invest and the courage to follow the “smart money.” Hedge fund managers like John Paulson, who personally made $4 billion shorting The Greenspan Plan made another $5 billion in bonds, gold, and commodities in 2010 and is looking for the next fertile opportunity which is ahead of him and all of you who follow CMV.
As 2011 begins, Bernanke’s Reflation Plan (QE2 included) and Congress’ fiscal largess have planted the seeds for price inflation and ultimately Hyper-Inflation. A testimony that the Inflation Jeannie has made her appearance is validated by Mr. Bernanke’s recent bold pronouncement, “I have 100% certainty that the Fed can control inflation.” With commodity prices soaring at the end of 2010, it was time to prick this speculative bubble to further demonstrate that “there is no inflation.” On cue, the Masters of the Universe on Wall St. took profits in gold and commodities and for a short period of time, it appeared that deflation of commodity prices was concrete evidence that there isn’t and won’t be inflation. As we’ve quickly discovered, denial is not a river in Egypt. The riots there and worldwide, are inflamed by poor economic conditions, shortage of rice, wheat and corn and increase in the prices of everything EXCEPT wages. And, to the penultimate politically correct deniers, a global Islamic Revolution has begun.
This INFLATION BOOM should continue in 2011 and into next year – certainly to the election. But, this is the LAST RODEO. The Fed will be out of silver bullets. In the end Bernanke, the Rodeo’s clown, will be the victim of the raging bull called inflation, he will lose his job and we’ll be left with the manure.
2013 - 2015 The Crack-Up Boom (EOAAWKI) BUST
The famous (but continually discredited) economist Ludvig Von Mises wrote about 50 years ago: “The credit expansion is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into a crack-up boom: The flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.”
If a long-deceased Austrian economist doesn’t jangle your chain because he’s so out of touch in the modern world, listen to Richard Russell, who founded the DOW THEORY LETTERS many decades ago, when he said on January 25, 2011: “QE Will Not End. That will surely mean an imploding US dollar and exploding inflation. This is scheduled to happen by the end of June, making this the most predictable financial calamity in history.”
Richard, CMV hopes you are wrong on your timing. We need this BOOM to continue for at least a year, make some serious money, and then, GET THE HECK OUT OF DODGE. Where is Hope?
A catharsis will occur and a cleansing and washout of trillions of dollars of debt will take place. America will have an opportunity to Rediscover itself just as it did after the Great Depression. That is our Hope and that is Challenge.
Barron’s Roundtable
Every six months Barron’s Magazine holds a roundtable discussion with a panel of 10 diverse market analysts to reveal their outlook for the period ahead and list their stock picks. Here are a few excerpts from the January session from three experts who share a similar view with CMV.
Marc Faber, Mgn. Director Marc Faber Ltd., Hong Kong (Also known as Dr. Doom).
Fred Hickey, Editor, The High-Tech Strategist, Nashua, NH (who like CMV likes both technology and gold)
Felix Zulauf, President Zulauf Asset Mgt, Zug, Switzerland (who CMV had dubbed the “Lug from Zug” - meaning - flatteringly, a true heavyweight)
Their overview of the global economy is:
Felix – “These are two worlds – the industrialized world and the emerging world. The industrialized world continues to live in a fiction: that it can afford its current life style by going further and further into debt. At some point the bond markets will riot against that...how emerging economies handle inflation will be the decisive factor for the industrialized world. If they decide to fight inflation with really restrictive monetary policies, we’re in trouble.”
Fred – “But we’re looking at 8% inflation in India and Russia and 5% in China. Will they be able to hold off much longer?”
Marc – “You are all wrong...I would let the market correct itself. The crisis in the US happened largely because of government intervention that began 25 years ago...I admire you all but you’re all dreamers. Rich people and resource producers are doing incredibly well. The ordinary people aren’t doing all that well...but this year the US has stabilized and is going to grow modestly.”
On particular investments and sectors these three gentlemen had the following views:
Fred – “I’ve had 50% of my assets in gold for the past seven years. Institutional ownership of gold is ridiculously low. It is less than 1%.” Felix – “At its peak of $850 an ounce in 1980, gold represented 3% of the market capitalization of global equities, bonds and money market assets. Today it is 0.6%. The price has a long way to go...Those who had gold in Indonesia or Brazil or Russia where well off when the currencies collapsed.”
Marc – “The Dhaka Stock Exchange in Bangladesh dropped 16% in two days. They closed it down and now they have riots. I guarantee you that emerging economics aren’t going to tighten...The US market has almost doubled since March 6, 2009. Some emerging markets have gone up more than that. A correction is overdue...As we approach the 2012 election, the Fed is going to print like hell.”
Felix – “A lot of good news is in stock prices. The market will move sideways this year, but fluctuate widely. There is a lot of optimism around...I want to be long volatility...it brings us to my next idea: agricultural commodities...all these factors support the continuation of the bull cycle in agricultural commodities...”
“My next recommendation is in energy...there are 441 nuclear reactors operating in the world. They require 185 million ounces of uranium per year. (Actually its pounds: Ed). There are 331 proposals to build new reactors...annual production is 47,000 tons. (94 million pounds). It meets only 60% of demands...I prefer to invest in the commodity through Uranium Participation Corp - Symbol U - on the Toronto Stock Exchange” (up from $5.08/sh to $8.28 over 12 months).
Fred – “I won’t dwell on it (gold) except to say that gold has been in a 10 year bull market without the speculative phase. That phase is still ahead of us and I want to be there for it...I want to store gold outside the US because I am concerned about where this country is heading. Owning this helps me sleep at night.”
These views are from three of the sharpest minds in the business who reside in Europe, the US and Asia.. You may have reason to question CMV’s analysis and global view but not these experts.
The Debt (Has Hit The) Ceiling
The January 15/16, 2011 edition of the WSJ ran a feature article by Ben Levisohn on “How The Debt Ceiling Could Ding You” which is timely since the nation is rapidly approaching the $14.3 trillion limit established by Congress just last year. Levisohn points out that the last time the US faced a debt-ceiling crisis of this magnitude was in 1996. He says, “In just a month’s time, the yield on the 10-year Treasury rose nearly a full percentage point from 5.58% to 6.46%, as the political parties wrangled over how to fix the problem.” Given the Tea Party mandate the ‘wrangling’ will be much more vocal and demonstrative. One good reason to be short the longer-term treasuries as recommended by CMV.
What we can expect is a show-down at the OK Corral and the question will be who blinks (can’t say shoot anymore) first. David Greenlaw, Chief US fixed-income economist at Morgan Stanley says, “There’s a lot of maneuvering the Treasury can do to get to July or August” without an approval so we can expect a continued harangue for nearly six months. Remarkably, Congress has yet to settle on a budget for FY 2011 which ends September 31st. Given all the fiscal and monetary turmoil CMV also recommends diversifying bond holdings outside the US. Canadian bonds being one of the best. (See page 8.)
America’s College Debt Bubble
If the Masters of the Universe on Wall St., the lobbyist-influenced members of Congress, the Merchants of Debt (the bankers) and the Federal Reserve had strategically designed a plan to destroy the American economy and the country’s middle class, it couldn’t have designed a better scheme than overburdening its citizenry with mountains of debt. Now we learn that the wisdom and foresight of our leadership has also encumbered our college students with almost a trillion dollars of debt.
On December 15, 2010 CNBC ran a special documentary entitled “Price of Admission: America’s College Debt Crisis” hosted by Scott Cohn. He interviewed a young couple who had borrowed a total of $250,000 in order to obtain MA and BA degrees. The couple, who now have a child, are unemployed and face a payment of $1,700 a month for 25 years which will total one half a million dollars with interest. Most Americans are unaware of the fact that student loans cannot be discharged by bankruptcy which will burden these people for most of their lives.
SLM Corporation, commonly known as Sallie Mae (a government sponsored enterprise - GSE) like its cousins Freddie and Fannie, was formed in 1972 and is a publically traded company whose purpose is to originate, service and collect student loans. It had almost $200 billion in loans to about 10 million students and the loans are guaranteed by US taxpayers. Like its cousins Freddie and Fannie, Sallie had no risk of loan loss, made absurd profits and paid its executives handsomely. In fact, Albert Lord the former CEO, as pointed out by Cohn, built his own private golf course at the expense of students who figuratively carried his golf bag. In March, 2010 Sallie was stripped of her comfy lifestyle and the Federal government cut out the middle man. It should be noted that college costs over the past 20 years have been rising at the highest rate (439%) of any service in America. Twice the cost of medical care! The correlation between the cost of higher education and the advent of Sallie Mae’s presence can’t be refuted. A classic double whammy!
As ill-conceived and fundamentally flawed as Sallie Mae was the GSE can’t hold a candle to the for-profit education companies who gamed the system that has led to this invisible crisis. The highest profile for a for-profit enterprise is Apollo Group Inc.’s University of Phoenix, whose name is emblazoned on the Arizona Cardinals Football Stadium. The gross tuition revenues for this “diploma mill” were $3.8 billion in 2009 and 86% was from government aid. All told, the government subsidies total about $24 billion each year. Various allegations of misrepresentation, high-pressure sales techniques and outright fraud have resulted in fines and censures but the diploma mills continue to harvest the fertile fields of student loans milking the cash cows as they go.
Enter Steve Eisman, the hedge-fund manager of the “THE BIG SHORT” fame, who recently made his fortune shorting sub-prime debt. He also saw this education bubble and shorted Apollo Group, Inc., as well as most of the other for-profits. So appalled was he at the system that had to fail, Eisman demanded and was granted an opportunity to present his findings to testify before the Senate Health, Education, Labor & Pensions Committee last year. He described the for-profit schools as “marketing machines masquerading as universities” and predicted “a new social disaster” as tens of billions in loans would eventually default leaving taxpayers with the bill because of the federal loan guarantees. Actually, as default rates are near 50% the number is closer to $500 billion.
So, what is the point here?
1. Parents and grandparents, who have young family members who are seeking a college education must have these facts before they commit their offspring to a near lifetime indenture particularly with parental loan guarantees. (If the student dies the parents are still liable.)
2. While investigating the financial abuse, we should also examine the quality of education. A recent survey by a think tank which interviewed 2500 senior college students found that 50% failed a rudimentary test on civics or basically how our country is governed. The Huffington Post reported that a university study of over 2,300 undergraduates, disturbingly, found that 45% of these college students showed no significant improvement in critical thinking, complex reasoning or writing at the end of their sophomore year.
3. Easy credit and mortgaging one’s future is the wrong message to send to our children. The students themselves spent a good portion of the government aid on a frivolous lifestyle only to discover later that the party was over when they signed the loan docs.
4. The day will come when trillions of homeowner debt, nearly a trillion of consumer and student debt will never be paid. It will be transferred to the American taxpayer whose diminished resources won’t foot the bills due. The most excruciating education in history is ahead of all of us.
The Inflation Jeannie Appears
How To Profit From The Coming Inflationary Boom was published in July, 2009. Forecasting then, amidst investor’s fears of deflation, that asset values would inflate or increase was quite a stretch. H. L. Quist wrote (p. 76):
“Going forward in 2009 will be difficult. In the early stages of recovery and as pricing power returns to US companies and interest rates remain at current levels, equities could rebound significantly.”
And, so they did. March 9, 2009 is considered to be the market low for most of the major indices and the S&P 500 has dramatically rebounded about 90% since then.
Specifically addressing precious metals and the commodity sector as a whole in “Profit”, Quist wrote (p. 60):
“From an investor’s viewpoint the early stages of an inflationary cycle presents a rare opportunity. At the juncture where FEAR dissipates and HOPE is restored, equities, real estate and commodities can be purchased below asset value. The first half of 2009 should provide that opportunity barring an unforseen catastrophe. The first “pop” off of these lows frequently contain some of the highest gains – and highest risk, of course.”
And, again that opportunity came to pass as the entire precious metals complex skyrocketed with gold advancing from $700/oz to $1422/oz at the end of 2010. Even more dramatic were commodities such as cotton from $.40/lb to $1.50; sugar from $.14/lb to $.27; oil from $38/bbl to $80 and copper from $1.50/lb to $4.00. The result? An opportunity seized and profits realized. The downside? The Inflation Jeannie has exited the confines of her bottle and has begun to party. As forecast by CMV, food price inflation is the first to manifest itself. That, affects everyone. We’ve never faced a situation in the US where we can’t find new acreage to plant!
In an op-ed piece that appeared in the WSJ on January 24, 2011 entitled “The Latest American Export: Inflation”, Ronald McKinnon, a Stanford University Professor, reminds the reader that, “hot money” outflows from the US in the years 1971 and 2003 helped create world-wide inflation. In the above two instances foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating which is exactly what China is doing at present. McKinnon goes on to say, “But by ignoring inflationary early warning signs on the dollar standards periphery, which in turn leads to rising domestic prices and asset bubbles, the Fed has made both the world and the American economies much less stable.” Asia, Latin America and Euroland are speaking in unison. America is exporting the “I” disease. Ultimately however, the US will import its export.
Argentina’s recent shortage of pesos exemplify how precarious the global currency picture is at present. Argentines were recently faced with a cash crunch – literally. Banks and ATMs ran out of pesos. Economists say that President Christina Kirchner’s intent is to sweep the country’s 25% inflation rate “under the rug” by refusing to print 200 and 500 pesos notes because issuing larger notes would alarm its citizens. CMV vividly remembers when most Latin America countries had to stamp several zeros on the old currency as inflation reached 10,000% in the mid-eighties.
Obviously there’s a confusing picture here. We need to distinguish between the various “flations” and determine what’s good and what’s bad.
ASSET INFLATION:
As indicated above the US has experienced the inflation of asset values in equities and commodities since the March 9, 2009 low. This is good, and has been profitable for those who follow CMV.
PRICE INFLATION:
The prices of goods and services are beginning to rise significantly as illustrated above including food prices. Imported labor-intensive goods from China – apparel, shoes, luggage, etc. will rise 10% to 20%. China has reached a key inflection point in its economy. A restive labor force has already seen an 18.5% increase in wages last year and prospects are they will continue to rise as food in China becomes more scarce and expensive. Price inflation is bad for US citizens who are struggling with reduced income and high levels of debt.
WAGE INFLATION:
For US citizens wage increases, if any, have been modest and as long as unemployment is above 9% will remain so. Low wages mask the true impact of price inflation as citizens will be squeezed by higher prices. The worst of both worlds The entire world is now experiencing rapidly accelerating inflation without rising wages.
The comparative results for January, 2011 were as follows:
YTD 52 Wks
The CMV Portfolio -1.57% +38.69%
Dow Jones Industrial Avg. +2.72% +16.25%
S&P 500 +2.26% +18.08%
NASDAQ Composite +1.78% +24.36%
If a long-deceased Austrian economist doesn’t jangle your chain because he’s so out of touch in the modern world, listen to Richard Russell, who founded the DOW THEORY LETTERS many decades ago, when he said on January 25, 2011: “QE Will Not End. That will surely mean an imploding US dollar and exploding inflation. This is scheduled to happen by the end of June, making this the most predictable financial calamity in history.”
Richard, CMV hopes you are wrong on your timing. We need this BOOM to continue for at least a year, make some serious money, and then, GET THE HECK OUT OF DODGE. Where is Hope?
A catharsis will occur and a cleansing and washout of trillions of dollars of debt will take place. America will have an opportunity to Rediscover itself just as it did after the Great Depression. That is our Hope and that is Challenge.
Barron’s Roundtable
Every six months Barron’s Magazine holds a roundtable discussion with a panel of 10 diverse market analysts to reveal their outlook for the period ahead and list their stock picks. Here are a few excerpts from the January session from three experts who share a similar view with CMV.
Marc Faber, Mgn. Director Marc Faber Ltd., Hong Kong (Also known as Dr. Doom).
Fred Hickey, Editor, The High-Tech Strategist, Nashua, NH (who like CMV likes both technology and gold)
Felix Zulauf, President Zulauf Asset Mgt, Zug, Switzerland (who CMV had dubbed the “Lug from Zug” - meaning - flatteringly, a true heavyweight)
Their overview of the global economy is:
Felix – “These are two worlds – the industrialized world and the emerging world. The industrialized world continues to live in a fiction: that it can afford its current life style by going further and further into debt. At some point the bond markets will riot against that...how emerging economies handle inflation will be the decisive factor for the industrialized world. If they decide to fight inflation with really restrictive monetary policies, we’re in trouble.”
Fred – “But we’re looking at 8% inflation in India and Russia and 5% in China. Will they be able to hold off much longer?”
Marc – “You are all wrong...I would let the market correct itself. The crisis in the US happened largely because of government intervention that began 25 years ago...I admire you all but you’re all dreamers. Rich people and resource producers are doing incredibly well. The ordinary people aren’t doing all that well...but this year the US has stabilized and is going to grow modestly.”
On particular investments and sectors these three gentlemen had the following views:
Fred – “I’ve had 50% of my assets in gold for the past seven years. Institutional ownership of gold is ridiculously low. It is less than 1%.” Felix – “At its peak of $850 an ounce in 1980, gold represented 3% of the market capitalization of global equities, bonds and money market assets. Today it is 0.6%. The price has a long way to go...Those who had gold in Indonesia or Brazil or Russia where well off when the currencies collapsed.”
Marc – “The Dhaka Stock Exchange in Bangladesh dropped 16% in two days. They closed it down and now they have riots. I guarantee you that emerging economics aren’t going to tighten...The US market has almost doubled since March 6, 2009. Some emerging markets have gone up more than that. A correction is overdue...As we approach the 2012 election, the Fed is going to print like hell.”
Felix – “A lot of good news is in stock prices. The market will move sideways this year, but fluctuate widely. There is a lot of optimism around...I want to be long volatility...it brings us to my next idea: agricultural commodities...all these factors support the continuation of the bull cycle in agricultural commodities...”
“My next recommendation is in energy...there are 441 nuclear reactors operating in the world. They require 185 million ounces of uranium per year. (Actually its pounds: Ed). There are 331 proposals to build new reactors...annual production is 47,000 tons. (94 million pounds). It meets only 60% of demands...I prefer to invest in the commodity through Uranium Participation Corp - Symbol U - on the Toronto Stock Exchange” (up from $5.08/sh to $8.28 over 12 months).
Fred – “I won’t dwell on it (gold) except to say that gold has been in a 10 year bull market without the speculative phase. That phase is still ahead of us and I want to be there for it...I want to store gold outside the US because I am concerned about where this country is heading. Owning this helps me sleep at night.”
These views are from three of the sharpest minds in the business who reside in Europe, the US and Asia.. You may have reason to question CMV’s analysis and global view but not these experts.
The Debt (Has Hit The) Ceiling
The January 15/16, 2011 edition of the WSJ ran a feature article by Ben Levisohn on “How The Debt Ceiling Could Ding You” which is timely since the nation is rapidly approaching the $14.3 trillion limit established by Congress just last year. Levisohn points out that the last time the US faced a debt-ceiling crisis of this magnitude was in 1996. He says, “In just a month’s time, the yield on the 10-year Treasury rose nearly a full percentage point from 5.58% to 6.46%, as the political parties wrangled over how to fix the problem.” Given the Tea Party mandate the ‘wrangling’ will be much more vocal and demonstrative. One good reason to be short the longer-term treasuries as recommended by CMV.
What we can expect is a show-down at the OK Corral and the question will be who blinks (can’t say shoot anymore) first. David Greenlaw, Chief US fixed-income economist at Morgan Stanley says, “There’s a lot of maneuvering the Treasury can do to get to July or August” without an approval so we can expect a continued harangue for nearly six months. Remarkably, Congress has yet to settle on a budget for FY 2011 which ends September 31st. Given all the fiscal and monetary turmoil CMV also recommends diversifying bond holdings outside the US. Canadian bonds being one of the best. (See page 8.)
America’s College Debt Bubble
If the Masters of the Universe on Wall St., the lobbyist-influenced members of Congress, the Merchants of Debt (the bankers) and the Federal Reserve had strategically designed a plan to destroy the American economy and the country’s middle class, it couldn’t have designed a better scheme than overburdening its citizenry with mountains of debt. Now we learn that the wisdom and foresight of our leadership has also encumbered our college students with almost a trillion dollars of debt.
On December 15, 2010 CNBC ran a special documentary entitled “Price of Admission: America’s College Debt Crisis” hosted by Scott Cohn. He interviewed a young couple who had borrowed a total of $250,000 in order to obtain MA and BA degrees. The couple, who now have a child, are unemployed and face a payment of $1,700 a month for 25 years which will total one half a million dollars with interest. Most Americans are unaware of the fact that student loans cannot be discharged by bankruptcy which will burden these people for most of their lives.
SLM Corporation, commonly known as Sallie Mae (a government sponsored enterprise - GSE) like its cousins Freddie and Fannie, was formed in 1972 and is a publically traded company whose purpose is to originate, service and collect student loans. It had almost $200 billion in loans to about 10 million students and the loans are guaranteed by US taxpayers. Like its cousins Freddie and Fannie, Sallie had no risk of loan loss, made absurd profits and paid its executives handsomely. In fact, Albert Lord the former CEO, as pointed out by Cohn, built his own private golf course at the expense of students who figuratively carried his golf bag. In March, 2010 Sallie was stripped of her comfy lifestyle and the Federal government cut out the middle man. It should be noted that college costs over the past 20 years have been rising at the highest rate (439%) of any service in America. Twice the cost of medical care! The correlation between the cost of higher education and the advent of Sallie Mae’s presence can’t be refuted. A classic double whammy!
As ill-conceived and fundamentally flawed as Sallie Mae was the GSE can’t hold a candle to the for-profit education companies who gamed the system that has led to this invisible crisis. The highest profile for a for-profit enterprise is Apollo Group Inc.’s University of Phoenix, whose name is emblazoned on the Arizona Cardinals Football Stadium. The gross tuition revenues for this “diploma mill” were $3.8 billion in 2009 and 86% was from government aid. All told, the government subsidies total about $24 billion each year. Various allegations of misrepresentation, high-pressure sales techniques and outright fraud have resulted in fines and censures but the diploma mills continue to harvest the fertile fields of student loans milking the cash cows as they go.
Enter Steve Eisman, the hedge-fund manager of the “THE BIG SHORT” fame, who recently made his fortune shorting sub-prime debt. He also saw this education bubble and shorted Apollo Group, Inc., as well as most of the other for-profits. So appalled was he at the system that had to fail, Eisman demanded and was granted an opportunity to present his findings to testify before the Senate Health, Education, Labor & Pensions Committee last year. He described the for-profit schools as “marketing machines masquerading as universities” and predicted “a new social disaster” as tens of billions in loans would eventually default leaving taxpayers with the bill because of the federal loan guarantees. Actually, as default rates are near 50% the number is closer to $500 billion.
So, what is the point here?
1. Parents and grandparents, who have young family members who are seeking a college education must have these facts before they commit their offspring to a near lifetime indenture particularly with parental loan guarantees. (If the student dies the parents are still liable.)
2. While investigating the financial abuse, we should also examine the quality of education. A recent survey by a think tank which interviewed 2500 senior college students found that 50% failed a rudimentary test on civics or basically how our country is governed. The Huffington Post reported that a university study of over 2,300 undergraduates, disturbingly, found that 45% of these college students showed no significant improvement in critical thinking, complex reasoning or writing at the end of their sophomore year.
3. Easy credit and mortgaging one’s future is the wrong message to send to our children. The students themselves spent a good portion of the government aid on a frivolous lifestyle only to discover later that the party was over when they signed the loan docs.
4. The day will come when trillions of homeowner debt, nearly a trillion of consumer and student debt will never be paid. It will be transferred to the American taxpayer whose diminished resources won’t foot the bills due. The most excruciating education in history is ahead of all of us.
The Inflation Jeannie Appears
How To Profit From The Coming Inflationary Boom was published in July, 2009. Forecasting then, amidst investor’s fears of deflation, that asset values would inflate or increase was quite a stretch. H. L. Quist wrote (p. 76):
“Going forward in 2009 will be difficult. In the early stages of recovery and as pricing power returns to US companies and interest rates remain at current levels, equities could rebound significantly.”
And, so they did. March 9, 2009 is considered to be the market low for most of the major indices and the S&P 500 has dramatically rebounded about 90% since then.
Specifically addressing precious metals and the commodity sector as a whole in “Profit”, Quist wrote (p. 60):
“From an investor’s viewpoint the early stages of an inflationary cycle presents a rare opportunity. At the juncture where FEAR dissipates and HOPE is restored, equities, real estate and commodities can be purchased below asset value. The first half of 2009 should provide that opportunity barring an unforseen catastrophe. The first “pop” off of these lows frequently contain some of the highest gains – and highest risk, of course.”
And, again that opportunity came to pass as the entire precious metals complex skyrocketed with gold advancing from $700/oz to $1422/oz at the end of 2010. Even more dramatic were commodities such as cotton from $.40/lb to $1.50; sugar from $.14/lb to $.27; oil from $38/bbl to $80 and copper from $1.50/lb to $4.00. The result? An opportunity seized and profits realized. The downside? The Inflation Jeannie has exited the confines of her bottle and has begun to party. As forecast by CMV, food price inflation is the first to manifest itself. That, affects everyone. We’ve never faced a situation in the US where we can’t find new acreage to plant!
In an op-ed piece that appeared in the WSJ on January 24, 2011 entitled “The Latest American Export: Inflation”, Ronald McKinnon, a Stanford University Professor, reminds the reader that, “hot money” outflows from the US in the years 1971 and 2003 helped create world-wide inflation. In the above two instances foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating which is exactly what China is doing at present. McKinnon goes on to say, “But by ignoring inflationary early warning signs on the dollar standards periphery, which in turn leads to rising domestic prices and asset bubbles, the Fed has made both the world and the American economies much less stable.” Asia, Latin America and Euroland are speaking in unison. America is exporting the “I” disease. Ultimately however, the US will import its export.
Argentina’s recent shortage of pesos exemplify how precarious the global currency picture is at present. Argentines were recently faced with a cash crunch – literally. Banks and ATMs ran out of pesos. Economists say that President Christina Kirchner’s intent is to sweep the country’s 25% inflation rate “under the rug” by refusing to print 200 and 500 pesos notes because issuing larger notes would alarm its citizens. CMV vividly remembers when most Latin America countries had to stamp several zeros on the old currency as inflation reached 10,000% in the mid-eighties.
Obviously there’s a confusing picture here. We need to distinguish between the various “flations” and determine what’s good and what’s bad.
ASSET INFLATION:
As indicated above the US has experienced the inflation of asset values in equities and commodities since the March 9, 2009 low. This is good, and has been profitable for those who follow CMV.
PRICE INFLATION:
The prices of goods and services are beginning to rise significantly as illustrated above including food prices. Imported labor-intensive goods from China – apparel, shoes, luggage, etc. will rise 10% to 20%. China has reached a key inflection point in its economy. A restive labor force has already seen an 18.5% increase in wages last year and prospects are they will continue to rise as food in China becomes more scarce and expensive. Price inflation is bad for US citizens who are struggling with reduced income and high levels of debt.
WAGE INFLATION:
For US citizens wage increases, if any, have been modest and as long as unemployment is above 9% will remain so. Low wages mask the true impact of price inflation as citizens will be squeezed by higher prices. The worst of both worlds The entire world is now experiencing rapidly accelerating inflation without rising wages.
THE CMV RECOMMENDATIONS
February 1, 2011
February 1, 2011
The comparative results for January, 2011 were as follows:
YTD 52 Wks
The CMV Portfolio -1.57% +38.69%
Dow Jones Industrial Avg. +2.72% +16.25%
S&P 500 +2.26% +18.08%
NASDAQ Composite +1.78% +24.36%
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Financial Questions? Contact hlquist at djmwealth dot com
--H. L. Quist
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