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Below is a preview of the CMV (Contrarian Market View) Newsletter for October, 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.)Market Overview
Taking and editing a line from a well-known film, Apollo 13, “America, we have a problem,” seems appropriate for the state of the US (and global) economy. We’re lost in space and our navigation systems have failed.
Stimulus I and II, Federal Reserve Monetary Policy, and Congress in the past three years have:
• Not appreciably improved job opportunities and unemployment remains over 9% with over 14,000,000 Americans unemployed.
• Not improved the quality of life for Americans as 15.1% of the country lives below the poverty line which was set at an income of $22,314 per year for a family of four, the highest poverty level since 1993.
• Seen the nation’s Gross Domestic Product (GDP) grow at less than 1.5% per year over year ending the first half of 2011 – a level normally associated with a recession and with the prospect of less than that number for the remainder of 2011.
• Seen consumer prices rising faster than the real economy while at the same time personal income has declined almost 2%.
• Ratcheted interest rates down to near-historic lows depriving Americans who have assets in money market funds, CDs, US Treasuries, etc., of spendable investment income that has cut consumer spending by an estimated $600 billion in 4 years, and created an estimated 4.1% rise in unemployment.
• Seen the Federal budget balloon from a deficit of $459 in FY ending September 30, 2008 to an incredible $1.4 trillion in 2008 and for the following two years ending this past September 30, 2011, the number will be close to $3 trillion. All this massive deficit spending and a Federal debt approaching $15 trillion, the nation is further from recovery and resolution of our problems than before.
Given the Macro view that the US, the EU and China are experiencing an implosion of the debt bubble and the combined economies are on the brink of collapse, what strategy, what plan do these Masters of the Universe (MOTU) have? The following was derived from the Doug Casey/Sprott Asset Management Summit entitled “When Money Dies” held October 1, 2 & 3 in Phoenix.
First, an absolute certainty. The US economy must de-lever one of two ways. Given the choice between Deflation or Inflation, the global central bankers will choose inflating the monetary base. The Federal Reserve Bank of the United States will soon initiate another round of purchases of US Treasury debt to inject perhaps as much as one trillion dollars into the economy. The goal is to avoid Deflation despite the risk of asset and price inflation.
The following strategy was proposed by Paul Brodsky, Co-Founder and Co-Managing Member of QB Asset Management Co. (QBAMCO). The presentation was entitled “The Necessary Failure & Transformation of the Current Global Monetary System.” The strategy would:
• Inflate the US monetary system, save the banks and keep debtors solvent,
• Stabilize the US dollar and prevent commodity inflation,
• Restore confidence in the US dollar, and retain the USD as the World’s Reserve Currency.
The Federal Reserve should institute the following:
Administered Dollar Devaluation
1. To remediate all past monetary inflation and resent the global monetary regime, the Fed would tender for privately-held gold at or near the Shadow Gold Price (SGP). (The SGP of $10,000/oz is derived by dividing the US monetary based by the official US gold holdings of 261.5 million ounces.)
2. As the Fed purchases gold, the gold would flow to the asset side of its balance sheet. The Fed would fund those purchases through newly-digitized Federal Reserve Notes, which would flow to banks in the form of net new deposits. This would be a discrete monetary inflation event (devaluation) and a simultaneous de-leveraging.
3. Once the Fed acquires enough gold from the markets, a gold price peg for the US dollar would be established.
Obviously, this is a simplified version of a solution to a very complex problem, but its’ very simplicity makes it doable. There are some subtle but meaningful advantages to Brodsky’s plan. First, the bullion banks don’t presently have a sufficient inventory of physical gold and silver bullion to make delivery on demand. This plan could get them off the hook. Secondly, the mining companies would have a ready market at a fixed price. Their profit margins would be enormous and their ability to pay substantial dividends to shareholders would make them akin to utilities.
CMV sees this plan as a “repricing mechanism.” Prices of all goods, services, stocks, commodities, real estate, etc. could increase. Debt is a constant. Real property, for example, could increase in value, the mortgage would remain the same and remarkably, there could be equity in the property. We could see a situation where wholesale refinancing could take place. Income would also have to re-adjust in the re-pricing.
Brodsky’s plan is conceptually creative and simple. Government and the Federal Reserve have destroyed our money. Had Franklin D. Roosevelt and Richard M. Nixon not taken the US off the gold standard the USD wouldn’t have lost 95% of its’ value since 1933. Will the MOTU adopt the Brodsky Plan? Unfortunately, government seldom does the right thing. Time and options are about to expire.
Without a counter-balance to the Fed’s expansion of the monetary base the prospect for uncontrollable inflation or hyper-inflation would be highly probable. Are the MOTU listening?
The Future For Gold
Given the dramatic sell-off in all the global financial markets in late September, including gold which declined from the July high of $1921.00/oz to close on Friday at $1593.00/oz – a decline of about 17%, the obvious question is: Is the 10-year gold bull market over? My answer is No. And, Hell No! Your writer had the privilege of attending the Casey/Sprott Research’s Summit “When Money Dies” for 3 days at a cost of $1500. CMV will share some of the words of the host Doug Casey, one of the world’s foremost authorities in the precious metals market.
The Global Macro Picture:
Everything I know about economics tells me that it’s impossible for the global economy to get out of this intact...Greece, Italy, Spain, Ireland – all of these governments are bankrupt. So is France. The Euro is in terminal decline...almost anything looks good relative to government paper. It’s another bullish indicator for what’s in store for gold...and it’s happening now.
The US Dollar:
The Chinese have more US dollars than anyone else and are unloading those dollars anywhere they can. For instance: in Africa, in exchange for real wealth – natural resources to fuel their future growth. We have finally gone beyond the point of no return. There is no way to avoid a gargantuan catastrophe – much worse than in the 1930s and ‘40s. There are several ways this could play out, but the government always chooses the worst alternative, which in this case is the destruction of the US dollar.
The United States:
Its’ (the government’s) first priority is saving the US government, not the dollar or the interests of the people. The politicians will end up destroying the productive parts of the economy to save the government; the parasite will kill the host...It’s a total disaster.
Gold:
...gold and silver are no longer the cheap values they were 10 years ago – but over the next year or so they are going much higher. Nobody is going to want to hold dollars...gold is going to be driven much higher by fear, greed and prudence, all at once...I expect a historic gold mania is still ahead.
CMV believes that readers can take Doug’s views to the bank. For a more philosophical and intellectual perspective on gold, one of CMV’s true heroes is Jim Grant, Editor of Grant’s Interest Rate Observer. In an interview with Barron’s on September 19, 2011, Leslie Norton asked Jim:
“Is gold in bubble territory?”
Jim’s reply:
You can think of gold as a stock that went from 25/8 to 18 in a dozen years. I’m not sure that’s a bubble. It is the nature of gold that its’ valuation must be forever a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think gold is simply the reciprocal of the world’s faith in the institution of managed currencies. It is one divided by T where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold...
Some other comments were:
The dollar will become the beneficiary of this (Europe’s) mess. The Euro is confederate money...the Euro will break up.
Today the eccentrics are the gold people. The establishmentarians are teaching at Princeton and running the Central Bank.
Gold will go up a lot and that’s as finely calibrated as I can get.
So, you have the same conclusions from a noted gold guy (Casey) and an intellectual and economic analyst (Grant). The sell-off simply represents an opportunity to add to positions at a nice discount. The handwriting is on the wall – the same wall that the Banksters have just collided with. They won’t read the writing and would not understand it if they did. You just got the message.
Real Estate
The real estate market is vital to the nation’s health, and is a principal reason why the economy is as Ben Bernanke says, “faltering”. Observing the US real estate market today is like watching a re-run of the “Good, Bad & The Ugly.”
First, the ugly.
Acting as a conservator for “The Evil Twins” Fannie Mae and Freddie Mac, the Federal Housing Finance agency (FHFA) is now suing 17 large banks on the grounds that the banks misrepresented to Fannie and Freddie the quality of the loans inside the mortgage-backed securities bought by the Twins during the housing boom. Yes, after all these years FHFA is shocked that the Twins were buying questionable mortgages. This despite FHFA’s own examiner who concluded that Fannie was “the worst-run financial institution” he had see in 30 years as a regulator. It gets even more absurd.
• Congress re-wrote the Community Reinvestment Act in 1994 and created quotas that mandated financial institutions to make mortgage loans to low-income applicants.
• Franklin Raines, the former CEO of Fannie and other officers “cooked the books” at the Government Sponsored Enterprise (GSE), paid themselves millions of dollars in bonuses based upon fraudulent numbers and were never criminally prosecuted for their theft of taxpayer’s money.
• Barney Frank, Chairman of the House Finance Committee, continually stonewalled the Office Of Federal Housing Oversight (OFEHO) investigation of Fannie while all members of the Committee were receiving outsized political contributions from the GSEs. Can anyone dare say the word “bribe?”
• FHFA is attempting to extort billions from the banking industry at a time when the industry again needs liquidity. Bank of America (BAC), in particular, has already repurchased $8.5 billion mortgages from other institutions (originated by Countrywide Financial) and is in the process of selling off assets and laying off thousands of employees in anticipation of the action by FHFA. BAC also just sold off an $880 million commercial mortgage portfolio at a 20% to 25% discount.
The Good:
Certain sectors of the real estate market are recovering on their own without government intervention. As previously reported by CMV, in Phoenix, the low-end residential market in the $100,000 range is very vibrant. In one case, well-known to CMV, a buyer was unsuccessful in 5 attempts to acquire a home due to competitive offers. At the other extreme, Barron’s reported on September 19, 2011, that the high end city real estate (apartments and town homes) in the $5 million range, were up as much as 50% in New York, Miami and San Francisco. Buyers from China, India, Russia and Brazil are seeking exceptional value in this market. What remains to be seen is what impact the current sell-off in the global stock markets will have on luxury homes. We will soon find out.
The Federal Reserve’s “Operation Twist” should have an impact on long-term fixed mortgage rates. For those who can qualify 3.5% or lower is in the near-term future, although the 10 Year T-Note yield has jumped over 30 BP’s in 2 weeks. The President recently indicated that refinancing will be available for homeowners that are “underwater” on their mortgage. The Brodsky Plan, if adopted, could jump start the real estate market.
The Bad:
A two-year revival in the commercial real estate market which has been a god-send for developers, investors and mortgage holders, is losing momentum. Industry experts reported in a recent Wall St. Journal article, however, that commercial property sales have dropped significantly this past summer and the Architectural Building Index has fallen below 50 after a rise from below 40 in 2007. The Commercial Property Index (a measure of value) which has risen over 30% since 2009 is now flattening out. The recent burst of the debt bubble in Europe and the stock market sell-off could also negatively impact a market that was experiencing a pause prior to these events. Likewise, a perceived solution in the EU could have a positive impact.
Green Jobs
You should be able to recall the imposing figure of Van Jones, the Green Jobs Czar, microphone in hand parading across numerous venues two years ago promoting the advent of the brave new world ahead in solar and alternative energy that would create thousands upon thousands of new jobs. Unfortunately, Mr. Jones became a lightening rod for the Obama Administration because of his Marxist rants and he lost his job but the seeds were planted for an example how the private sector and government could create jobs and make a positive environmental impact. (Jones has just re-surfaced on Wall St. charging up the protestors.)
Approximately $500 million of private equity and a $535 million Department of Energy (DOE) loan guarantee launched Solyndra, LLC, a California manufacturer of a new cylinder-type solar product which differed from the more conventional solar panels. The product, as forecast by several industry analysts, turned out to be for more difficult and costly to manufacture and within two years of receiving the loan the firm declared bankruptcy in September, 2011 and laid off 1000 employees. The largest government co-venture capital deal gone bad quickly became a criminal and congressional investigation.
Bloomberg reported on September 22nd that several issues “cry out for investigation.” It seems that no information will be forthcoming from the key officers at Solyndra as the CEO and CFO invoked the 5th Amendment and refused to testify. In question is the ties that the solar company may have had with George Kaiser, a campaign supporter of President Obama, and the role he may have played in awarding the loan guarantee. The DOE released its’ First Lien position just prior to the filing. Other skeletons are certain to surface before Halloween.
The Solyndra episode, unfortunately, has cast a pall over the other solar projects in the pipeline. There are eight companies with tentative commitments for $6.5 billion of taxpayer financing to be funded prior to September 30th. First Solar, a Phoenix-based company, has been advised by the government that there wouldn’t be enough time to close a loan guarantee for a $1.9 billion, 500 megawatt solar-powered plant in California. It’s possible that many viable and worthwhile projects will be deprived of funding because of the sunlight that exposed Solyndra, LLC.
In another case of government involvement that has affected Arizona , the Secretary of the Interior, Max Salazar decided that there will be no uranium mining on one million acres of federal land that lies north of the Grand Canyon National Park. The area contains approximately 375 million pounds of high grade Ux which is equivalent to 13 billion barrels of oil. Salazar’s decision came despite two years of study and consultation with federal, tribal, environmental groups, public hearings and The Bureau of Land Management’s (BLM) verdict that mining there “would do little irreparable harm.” Thousands of potential jobs were lost in an area that is economically depressed. Unfortunately actions and decisions like this by the Obama Administration has led to this conclusion by Thomas G. Donlan in Barron’s:
The administration is re-tooling politically in order to create jobs. It should re-tool legally to recreate jobs it has destroyed.
Greece – Where Democracy Failed and Dignity Died
The macro and micro view and meaning of the tragedy that presently unfolds in Greece is misunderstood by most Americans both in personal and political terms.
In a macro sense the Greek government has simply borrowed and spent itself into bankruptcy and the debt bubble has burst. The country’s GDP has plummeted from a plus one percent in the first quarter of 2010 to a minus 8% in the past three quarters. 1000 Greeks were losing their jobs per day in the private sector in August and a businessman interviewed recently on CNBC stated that 80,000 small businesses have closed down in the past year and he expects that number to double. Consumer spending has fallen precipitously and the government’s tax revenues have dropped sharply as a majority of citizens have refused to pay taxes. Greece is on the precipice of default on its’ sovereign debt if it doesn’t receive additional financing in the very short term.
That’s the situation as most Americans understand it. But the micro or personal story hasn’t been told until Marcus Walker’s piece in the Wall St. Journal (September 20, 2011) entitled Greek Crisis Exacts The Cruelest Toll which revealed the gut-wrenching tragedy that is playing out in this beautiful, historic and democratic country.
Walker relates the story of Vaggelis Petrakis who owned a fruit and vegetable business in Athens. As Greece became a “credit-driven” economy as it joined the EU (as opposed to the old fashioned cash and carry economy), small business owners like Petrakis had to accept post-dated checks for his goods and the supermarkets would take several months to pay. To get money more quickly, Petrakis, like most small business owners, would take the post-dated checks to his bank and sell them at a sizeable discount. Merchants using this system were slowly going bust and when the government’s debt-bubble burst, the post-dated checks began to bounce. The banks refused to buy them. Loan sharks entered the vacuum and compounded the problem. Suddenly friends and customers became enemies and this network of happy, gregarious small business owners – the heart and soul of Greece – became unglued. Petrakis, a very proud man, wrote a long suicide note declaring that it was the banks that had destroyed him. His son later said after his father’s death, “It was his shame, fear, pride and dignity. Whoever you ask, they will say he was a man of dignity.” Suicides are rising at an alarming rate.
Now, the rest of the story.
Unemployment in Greece is stated at 16% but with most of the private sector small business owners going bankrupt this probably understates that number. In the government sector however, “Over the past year the government hasn’t laid off a single civil servant,” according to another article in the WSJ. As the Greek government has attempted to exact harsh austerity on the private sector, the government’s union employees are assured that they have a job for life and they can retire at near full pay as early as age 55 with guaranteed healthcare. As the WSJ article states, “Greek politicians are loathe to give up the system of spoils that they have long run through these enterprises, which are staffed by the party faithful in exchange for votes.” De-nile is not a river in Egypt!
What the world and most Americans fail to see is that the banksters have destroyed the small business owners and entrepreneurial spirit that epitomized Greece and the power has been transferred to the bureaucrats. What these bureaucrats can’t see is their money will die also, salaries and entitlements will be cut and jobs for life will end. The strikes, riots and shutdowns will be fruitless.
The Greek tragedy dramatically portents what is now emerging in America. The Socialist-Democratic Welfare system in Europe is collapsing while our President is intent on replicating the same European model. The Greeks at their pinnacle of enlightenment founded a democratic system knowing full well that it was vulnerable to destruction when the populace realized that it could vote itself perpetual jobs and entitlements. America has a chance to change direction. Do we have the will?
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