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The comparative results for February, 2011 were as follows:
YTD
The CMV Portfolio +5.99%
Dow Jones Industrial Avg. +5.60%
S&P 500 +5.53%
NASDAQ Composite +4.88%
Market Overview
Your Future Isn’t What It Used To Be!
Your Future Isn’t What It Used To Be!
For those of you gentlemen who graduated from college in the fifties and the early sixties, your future was as predictable as it was promising. A good job paid $12,000/year, your first home could have been purchased for under $20,000, your spouse was busy and enjoyed the chores of being a mother and a housewife and life was like you envisioned it to be. The maximum base for Social Security was $4,800 and your portion of the tax for your future benefits were $150/year. Medicare wasn’t enacted until 1966 and your contribution to the cost of health care for seniors was barely noticeable on your tax return. Your pension was paid by your employer and your family health insurance was $10/month. You had a savings and a college fund into which you saved $100/month and at an assumed yield of 6% would pay for both of your kids education in the late 70s.
What happened that changed the American Dream into a nightmare in less than 40 years?
The two key factors were:
1. The Genetic Revolution, and
2. The Exponential Growth of Debt
A child born in 1900 was expected to live 47 years. When Social Security came into existence in the 1930s, life expectancy was under 60 years. Today a female is expected to live to age 83 and a male 80. Researchers from the Human Genome Project and other sources could extend life to 120 years within the foreseeable future. A population with a much longer life span, designer drugs to mitigate disease in advance of its onset, the ability to replace worn out body parts and a more healthy life style has dramatically changed the life expectancy of America, but has also created an insurmountable problem.
The Us Federal, State And Municipal Governments
Can Not Pay The Entitlements Americans Expect to Receive.
Can Not Pay The Entitlements Americans Expect to Receive.
In 2002, a study requested by the then Secretary of Treasury, Paul O’Neill, estimated that the “fiscal gap” – the difference in present value between the government’s receipts and future expenditures, was $45 trillion. In less than 10 years, it is estimated that the number has almost doubled to $76 trillion! Congress and the “beneficiaries” have failed to address the issue and kicked the can down the road. We’re now at the road’s dead end. The “Day of Rage” is scheduled for March 12 to protest the inevitable reduction of employment and entitlements of union workers. Lost in all of this discussion and debate is how we got to this point but that has become irrelevant. Do we become Europe where protest can stop all commerce or will Civil Discourse lead to a solution? The Nation and our economy and our lifestyle hangs in the balance.
The Exponential Growth Of Debt began in the 1960s when Lyndon Baines Johnson (LBJ) conceived that “The Great Society” and the Vietnam War (Guns & Butter) could be waged at the same time, while unknown to Americans, the Europeans were exchanging their fiat US dollars for our gold bullion, that has never been accounted for. Richard Nixon compounded the problem as he declared that he was now a Keynesian and was motivated to fight an unexpected rise in inflation with wage and price controls. Jimmy Carter committing to “get the economy going” after the recession triggered by the oil embargo, imposed his will on a compliant Federal Reserve that resulted in a 13% increase in the CPI for three consecutive years at the end of the 70s. The debt bubble that has grown so ominous and continues to inflate, found its helium during these 15 years (1964 to 1979) (and will now burst in a “crack-up boom” within the next few years).
Fast forward to 2002.
The Greenspan Plan, a deliberate strategy to get the US homeowner to utilize their homes as an ATM to increase consumer spending, morphed into a “Doomsday Machine” (so named by Steve Eiseman) fueled by rapacious GREED. Wall Street’s Masters of the Universe, the Banksters and Predatory Lenders, all supported by the compliance and complicity of Congress, combined to convince the American homeowner that they could be “debt free” and enjoy the bounty of their newly discovered wealth. Had these “Masters” set out to deliberately destroy America’s economy and its middle class they couldn’t have devised a more effective scheme than sub-prime debt. To compound the inescapable problem, our misguided leadership has created trillions of dollars of new debt to service the old which will bankrupt its’ citizens, its’ cities, its’ states and ultimately the federal government itself. Where are these “Masters” who created this nightmare? Comfortably retired with guaranteed pensions above the fray and have no concern for retribution or remorse.
Your future isn’t what it used to be. Debt has devoured our citizens and our government. This bubble will too burst and with it, the once incomparable American Dream. What’s coming is:
EOAAWKI
(End Of America As We Knew It)
(End Of America As We Knew It)
The United States of America is no longer united in purpose. A catharsis must occur in order to cleanse our country and our economy of the avariciousness that has consumed us. We must rediscover the Golden Era of the America we knew fifty years ago. That is our HOPE and that should be our resolve. The following countries collapsed and have now recovered:
Russia 1999 (A failure of the Central Planning)
Argentina 2001 (A “crack-up boom” occurred)
Iceland 2009 (A sub-prime debt collapse - “inside-job”)
The Inflation Jeannie
Begins To Party
Begins To Party
How To Profit From The Coming Inflationary Boom: And Avoid The Next Crash was published in July, 2009, not long after the near-fatal collapse of the stock, commodity and real estate markets. For H. L. Quist to even suggest that there was inflation on the horizon when all assets (except bonds) and consumer prices had collapsed in a deflationary spiral, bordered on the absurd.
CMV has well-documented the asset inflation in both the equity and commodity markets during the past year and our subscribers and clients have profited handsomely in 2010. Those who purchased the book in 2009 and followed the author’s advice got a jump start on precious metals, uranium and other hard assets. Phase II of this Inflation Cycle – PRICE INFLATION, has clearly manifested itself in the first quarter of 2011. “Jeannie” has not only emerged from the confines of her bottle, she’s making her presence known on everything she touches.
Escalating steel prices in the US (and globally) are impacting companies that buy and process steel. Basic flat-rolled steel prices have increased six times since November, 2010, resulting in total increases of 20% to 30%. Caterpillar, Inc., the world’s largest maker of construction and mining equipment expects higher sales volume despite having to increase prices on all of its’ products. Appliance maker Whirlpool Corp. says they’re feeling the pinch also and have announced price increases of 8% to 10%.
Companies that must contend with higher commodity prices such as cotton (which reached $2.00/lb in February) are taking pro-active measures to preserve profit margins. John Anton, founder of Anton Sports in Tempe, Arizona, wary of T-shirt suppliers who raised prices four times in six months, borrowed $300,000 on his home-equity line of credit and bought more than a years supply of T-shirts. Anton was quoted as saying, “...I can borrow at 2.45% and if cotton is going up between 10% and 12% why wouldn’t I do this?” He added that cotton prices rose 92% last year and 22% this year-to-date. If Mr. Anton had read CMV he may have done this a year ago, and bought twice the amount of inventory. It’s amazing how slow some businessmen are to react to obvious trends. Obviously some couldn’t due to lack of financing, but that situation is rapidly changing.
The picture has been clear for almost a year. The cost of raw materials is rising at a faster pace than revenue. While stock market gurus were forecasting S&P 500 earnings of $100/share for 2011, costs already were squeezing the bottom line. Procter & Gamble with as broad a line of consumer products as any company in the world, Ford Motor, and Kraft Foods are amongst dozens of companies that reported lower profit margins for the fourth quarter of 2010. This trend will increase in 2011 in CMV’s opinion and will eventually lead to a correction in the stock market.
The Inflation Jeannie hasn’t confined her flirtations to the US. China, Brazil, and emerging markets are concerned that inflation is getting out of control. In Brazil, the overnight lending rate will be increased from the present 11.25% . In early February, China raised its rate another .25 Bps for the third time this year. They’ve reduced their money supply growth from 30% to 19% but the GDP growth remains in excess of 10%. To compound the problem, drought has endangered 66% of China’s wheat crop putting a severe strain on global supply. At $8.74/bushel, wheat is up over 80% from a year ago. Eight months ago, CMV accurately warned that food prices would be a key trigger point for inflation.
Kelley Evans, writing for the WSJ (2/17/11) stated, “...the danger isn’t necessarily an inflationary outbreak-marked by a wage-price spiral–so much as a standard of living shock... The real risk is that the US faces a poverty cycle rather than an inflationary one.” CMV does not agree. The inflationary cycle without a wage spiral is already amongst us. The poverty cycle will follow after the “crack-up boom.” Kelly has it backwards.
Allan H. Meltzer, a professor of economics at Carnegie Mellon University’s Tepper School of Business and author of A History Of The Federal Reserve, stated in the February 5/6 edition of the WSJ that, “Inflation is on the horizon, and now is the time to head it off.” He says the Fed should make three changes now:
1. Increase the short-term interest rate it controls to 1% to demonstrate that it is aware of the inflation risk,
2. It should announce a specific, detailed plan how it proposes to reduce about $900 billion of the more than one trillion banks continue to hold in excess of their legally required reserves, and
3. It should end Q2, it’s latest round of T-Bond purchases.
Meltzer says that, “Throughout its modern history the Fed has made several of the same policy mistakes repeatedly...It concentrates on near-term events over which it has little influence and neglects the longer-term consequences of its’ operations...It does not have a credible long-term plan to reduce both current unemployment and future inflation so it works on one at a time.”
CMV’s most oft repeated line, “Another short-term fix that leads to a bigger problem.”
Real Estate - A Sign Of Life
A year ago, Elizabeth Warren, who was the head of the Congressional Panel overseeing the Troubled Asset Relief Program (TARP) predicted a “tidal wave of commercial (real estate) loan failures’. At the same time banks were ridiculed for their practice of “extend and pretend” or renewing commercial real estate loans with the pretense that the market would improve. Ms. Warren and the pundits are now exhibiting egg on face.
A sudden rise in apartment demand and rents has raised the prospect that Archstone, one of the high profile companies that became a symbol of the massive downturn in the real estate market, could be sold to investors in the largest ($5 billion) initial public offering ever. The company which owns about 200 apartment communities in the US and 230 in Europe, was the millstone of 3 large banks. The value of Archstone’s apartment buildings, which lost 33% of their value between 2007 and 2009, are now off only 8% from their record high.
J. P. Morgan Chase & Co., just revealed that it had made more construction loans in the first six weeks of 2011 than they did in all of 2010. In Atlantic City, the developer of the half-built Revel Casino Resort, just received $1.15 billion in financing for the project. Closer to home a 375-unit high-rise apartment complex in Tempe, Arizona that had been stalled for two years, received a $30 million loan. Demand for space and the rise in rents are the driver behind this sudden surge. Low bond yields are inviting investors to take on more risk for higher returns just as CMV forecast.
The appetite for risk is raising the “animal spirits” in the residential market also. The WSJ reported on a front page article on February 8th that cash buyers were lifting housing. In the Miami-Ft. Lauderdale area 50% of all transactions were cash. Here in Phoenix cash buyers represented 42% of all sales in 2010. A CMV client here in Phoenix reports that there has been an influx of Chinese buyers acquiring residential property for both investment and use. The demand for rental of single family homes is accelerating at an unexpected rate with a commensurate increase in the rental rate which has attracted more investors. There’s a sense here in Phoenix, at least, that the bottom is in.
As CMV has reported during the past year, a number of trial balloons have been floated by the Obama Administration to remediate the residential mortgage loan dilemma. As outlined in an article entitled “Mortgage Deal Takes Shape” in the February 24th edition of the WSJ, the Administration is pushing a proposal that would force America’s largest banks to pay for reductions in loan principal worth billions of dollars. You may recall that Bank of America recently paid Fannie Mae (FNM) $3 billion to repurchase toxic sub-prime loans sold to FNM by Countrywide Financial. FNM had originally asked Bof A to repurchase $42 billion in loans, plus a host of other banks totaling another $200 to $200 billion. In addition, some state attorneys general and federal agencies are pushing banks to pay civil fines of $20 billion to fund loan modifications for distressed homeowners.
In an additional proposal the Obama Administration outlined on February 2, 2011, its plans to shrink the government’s role in the upside down mortgage market including the phasing out of the “evil twins” Fannie and Freddie. Three proposals or options were introduced:
1. The private sector would provide the vast majority of the mortgage market. FNM and FRE would no longer exist and there would be no government backing of mortgages. The government’s role would be limited to FHA and possibly VA.
2. A private market with limited government backing of the mortgages.
3. New privately-owned companies would buy mortgages from banks and sell them as securities. The government would guarantee the debt and collect a fee for its backing.
Laurence Platt, a banking industry lawyer summed up the proposals thusly. “Goldilocks and the 3 options – one’s too hot, one’s too cold, one’ just right, but everyone disagrees which one is which.”
The “Inflation Boom” has finally trickled down to the real estate market. Seize the opportunity while it lasts.
Have The Banksters Lost Control Of The Bullion Markets?
CMV attended Cambridge House’s Resource Conference in Glendale, Arizona on February 18 and 19. For the past four years, we’ve gathered critical information on the markets from an array of knowledgeable speakers and have always discovered new names that invariably shine in the CMV portfolio. Here’s a quick summary of the key highlights.
As silver (Ag) was breaking out of a new 30-year high on February 18, David Franklin of Sprott Asset Management added a significant piece of anecdotal evidence defining the bullish case for Ag. Sprott has recently raised $700 million to buy silver bullion and placed its order for a portion (not defined) of it. After two and one half months and constant inquiries Sprott finally took delivery of part of their order. Sprott has concluded that there is an extreme global shortage of Ag and Franklin’s near-term target is $43/oz and he forecast that $50 would be a ‘lay up’. Other interesting comments were:
• The global financial system is broken.
• Nothing has been solved in the EU and the stress in the European banks is more severe than 2009. Ireland printed $50 billion in Euros unauthorized by the ECB to prevent a collapse of their economy.
• 25 Countries have acute food inflation and China has removed food from their CPI numbers (Stealing a page out of the US book on central planning.)
• There are 860 more banks that will fail in the US.
• China has recently acquired 759 tonnes of gold bullion and India 918 tonnes, which is 51% of the world supply. It hasn’t been disclosed who was the seller. (CMV speculated that China may have “swapped” a portion of their US bonds for US bullion.)
• Franklin’s top silver stock pick is Aurcana Corp (AUNFF) which closed February 18 at $.78/share. It opened on February 22 at $.92/share. AUNFF has been added to CMV’s Recommended List.
John Maudlin (Bullseye Investing) gave his usual “Maudlin” view of the global economy. He believes that the world is at the end of the “debt super cycle” and can’t continue to grow debt faster than GDP. John made the following salient points:
• Ireland won’t pay the ECB
• $4.5 trillion must be raised in 2012 to pay global debt
• By 2013 the bond markets will “revolt” and re-financing will end. The global economy will enter a period of a slow growth SLOG.
• It’s “never different this time”. The end is always the same.
John Kaiser (KaiserResearch.com) is one of the foremost authorities on Rare Earth Elements (REEs) in the world. In Kaiser’s opinion there will be a severe supply problem in REEs in the next 12 to 18 months. He estimates that by 2015, global demand will be 200,000 tonnes and China will produce half that amount. By limiting its export of REEs, China is forcing companies to have their products manufactured in China where their tow-tier pricing gives them an enormous advantage. For example, Lanthanum and Samarium Oxides are $70/kilo on the world market, but in China for internal use these elements are only $5/kilo! The World Trade Organization is reviewing the problem at the request of those companies that desperately need product. There are military weapons that can’t be manufactured without REEs and its conceivable that the production of hybrid automobiles could stop by summer for lack of REEs. Kaiser estimates that demand could push the price of Quest (QSURD) to $60/share.
Kaiser also raised the possibility that solar flares could create a geomagnetic storm that could disrupt or even destroy satellite communications. He said that the last storm, called the Carrington Event, occurred in 1859,which of course didn’t have the impact then as it would today. Any one who has a mega perspective should only look to the extreme weather changes that has created massive floods and drought in different regions of the world and has created food shortages and wonder, are we witnessing a “Black Swan” event?
One of the highlights of the seminar was to see and exchange updates with Bill Murphy and Chris Powell. These two brave men, literally risking their lives, formed the Gold Anti-Trust Action Committee (GATA) in 1999 to force the Federal Reserve and the bullion banks to release historical information on their activity in the gold and silver markets under the Freedom Of Information Act. For over 10 years they have been denied and stonewalled to get obtain information that the banksters were manipulating and controlling the price of bullion. By a stroke of good luck, or maybe by intent, a single memorandum slipped through the cracks that proved that the Fed was indeed involved in controlling the price of gold.
The memo was from a meeting of the Group of 10 (Central Bankers) in April of 1997, that ultimately led to the Washington Agreement that limited the sale of the Central Banks gold. On February 18, the day of the conference, the judge finally ruled in GATA’s favor for the first time. All GATA ever sought was the truth – full disclosure so that there was a level playing field. CMV is reminded of the scene in the movie “A Few Good Men” where Tom Cruise playing the prosecuting attorney asks Colonel Jessup, played by Jack Nicolson, to tell the truth. Jessup yells, “TRUTH? You can’t handle the truth!” The Fed and the Banksters must have been motivated by the fact that the public didn’t have to know the truth because we couldn’t handle it.
Bill Murphy testified last year before the Commodity Futures Trading Commission (CFTC), in New York City providing evidence of the collusion and price-fixing in the bullion markets. Upon leaving the hearing Bill was brutally attacked by an “unknown” assailant and badly injured. You’ve probably wondered why CMV has used the term “banksters” in referring to these “Masters Of The Universe.” Case in point.
The real question is: Now that the veil of secrecy has been lifted and the CFTC has ample evidence of price fixing, what are they going to do about it? What will J. P. Morgan Chase do about their massive short position in silver? And, most importantly, will gold and silver be allowed to reach their true market value – whatever price that may be?
Stay tuned and say a little prayer for your writer who has added his name to the bankster’s fecal scroll!
Badgers Behaving Badly
The Badger, a carnivorous, burrowing animal with short legs, but long claws on its’ front feet is a native of Wisconsin and is the state’s animal as well as the Madison, Wisconsin University’s mascot. Your writer, born in the frozen tundra of Wisconsin proudly proclaimed himself a badger until this innocuous and friendly creature took on the characteristics of its’ Australian cousin, the Wombat. Most everyone in American who can fog a mirror knows what is at stake in Wisconsin and other Midwest states. As Charles Krauthammer said February 26 in his Washington Post Column, “Republican governors are taking on unsustainable, fiscally ruinous pension and healthcare obligations while Democrats are full-throated in support of the public-employee unions crying, ‘hell no’.” The unions simply want to retain the right to increase their entitlements in the future regardless of the fiscal condition of their state. They could win the battle but lose the war as Wisconsin as well as numerous other states run out of money. Socialism ends when they run out of other people’s money.
In your writer’s view, what is more interesting is how these Badgers, who were (prior to the 60s) historically hard-working, salt-of-the-earth, conservative people, made the transformation to liberal, left-wing progressives? After Senator Joseph McCarthy (R-WI) took on the communists who had infested the US government in a highly charged and visible confrontation, the eastern liberal/progressive establishment targeted Wisconsin and most specifically the University of Wisconsin for “conversion.” By the end of the 50s and early 60s, the campus was endowed with professors from eastern colleges who were fully committed to change the hearts and minds of the student body and, they were successful far beyond expectations.
A cousin of mine who attended UW in the mid-60s told me, “As an eighteen year-old, I had no idea what was going on in the world until the Vietnam war riots happened. I woke up one day and I thought, hell, my teachers aren’t here to educate me, they’re here to indoctrinate me!” Fortunately, my cousin Steve escaped, but unfortunately the bastion of Midwest progressivism and Marxism remains rooted in Badger-land, but not Packer-land.
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--H. L. Quist
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