Don't miss podcasts by The Myth Buster. Bookmark the podcast site http://www.hlquist.libsyn.com/.
Below is a preview of the CMV (Contrarian Market View) Newsletter for December, 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.)Important Notice:
The December edition of CMV was written with a market close of Tuesday, November 29, and the text does not include the major Wednesday price increases in equities, commodities and precious metals. In CMV’s opinion the Central Bank coordination intended to prevent a major financial meltdown in the EU marks a commitment to attempt to inflate the crisis away. CMV sees this development as very positive for most of our recommendations. We will keep you advised by special bulletin.
Market Overview
Jon Kyl, Arizona’s Senator, who served as one of the twelve on the Super Committee, gave an articulate post-mortem on the failure of the effort to reduce the federal deficit. He said (the committee) “was probably doomed from the start because of the absolutely irreconcilable views of the parties about the goal of its’ work.” Kyl went on to say that “The White House was perfectly satisfied with failure because it fit with the President’s campaign to run against a ‘do-nothing’ Congress.” Americans will be faced with another year of out-of-control fiscal deficits but one analyst saw the lack of action as a plus. Chris Edwards at the Cato Institute said, “A Super Committee plan might have paired phoney spending cuts with real tax increases.” He also added that if Congress did nothing the budget could be balanced by 2021. On January 1, 2013 the “Bush Tax Cuts” will automatically end thus raising taxes which is precisely what the President wanted.
As CMV predicated last month, the third quarter GDP was revised downward from the original estimate from the Commerce Dept of 2.5% to 2.0% – a drop of 20%. The recent decline in Consumer Confidence would have an implied negative sales growth of a -7% which are recession levels but actual positive results are confounding the experts. BMO Harris Bank says that the top 20% of income earners are creating 50% of retail sales. CMV, after observing lines of almost maniacal shoppers on Black Friday and documenting the various forms of entitlement benefits that the US Government pays out to low-income recipients, takes the view that the bottom 20% of income earners are holding their own when it comes to retail spending – especially during the Christmas holiday season. Remember, 47% of all Americans receive some form of government entitlement. The upper 20% is actually funding the bottom twenty.
Stephanie Pomboy, who heads Macro Mavens and has been quoted often by CMV because she’s not only smart but she’s also has raised a cogent issue regarding spending. She says, “...what if the gains in spending, like the gains in the stock market, have also been a paper illusion – a function of higher prices, not rising demand?” She adds that in nominal terms growth is up $783 billion from its’ pre-crisis levels but in real terms GDP is up an imperceptible $27 billion. In short, after TARP and an alphabet soup of various government programs, and after the $787 billion stimulus program all the US got was a 0.2% increase in real growth and a 0.96% increase in consumer spending. Stephanie concludes that consumers aren’t spending because they want to, it’s because they have to and prices are increasing at an accelerated pace. QE 2, of course, was the major culprit. QE 3 is coming soon and we’ll experience more of the same. James Dines calls this condition an INFRESSION – an inflationary recession.
Here’s another invisible trend that has dramatic implications. In Barron’s (November 28, 2011) OTHER VOICES section, Bob Adams cites the research of American Wave (AW), a firm that has been tracking the trends of Americans considering relocation overseas since 2005 using the IBOBE-Zogby opinion survey firm. AW reports that 40% of young Americans 18 to 24 are thinking about leaving the US to seek opportunity abroad. There are 42 million Americans between the ages of 25 and 34 who are amongst the most energetic, innovative and creative Americans. Approximately 5% of this age group is actually in the planning stage to relocate. In the 18 to 24 age group nearly 40% indicated a desire to relocate to mostly Asia or Latin America. Ominous overtones for a US economy and culture desperately in need of creative and motivated young people who fear they will have to support an aging population.
Another rude awakening fact that now effects more than 44 million Americans is that the Pension Benefit Guaranty Corp announced that it has a $26 billion deficit. This is the government agency that insures pensions of those whose employers have gone bankrupt and can’t pay pensions to their former employees. In addition some retirees currently receiving a pension are selling their pay-outs for cash at a deep discount. BuyYourPension.com is one of the sources. In one instance one retiree sold what was calculated to be $125,000 in future payments for a cash sum of $57,000. Senator Tom Harkin (D-Iowa) has launched an investigation into this practice to make certain that “our laws are respected and pension participants are not abused.” CMV takes the view that Congress should also examine the role that it played that has created this act of desperation.
CMV has opined as for back as a year ago that Barrack Obama would not be the Democratic nominee for President in 2012. In an Op-Ed piece in the November 21, 2011 edition of the WSJ, Patrick Caddell and Douglas E. Schoen, both long-term Democratic Party consultants and advocates, called for the President to step down because the President “can’t win by running a reconstructive campaign, and he won’t be able to govern if he does win a second term.” In order to win, the two men believe, the President would have to wage the most negative campaign in American history. One year ago, in the WSJ, Caddell and Schoen warned that Obama’s partisanmanship would result in 2 years of political gridlock at a time when the nation could ill afford it. That’s exactly where we’ve been the past year and 2012 will be the same. Who do the consultants propose? Secretary of State Hillary Clinton, who has played the role of “good soldier” and has never criticized the President or his policies though justified to do so.
On November 21, 2011 on FOX with Neil Cavuto, Charlie Gasparino, who is privy to all the scuttlebutt on Wall St., said that the “tipping point” for the withdrawal of financial support for the President from the “Masters of the Universe” came when the Occupiers posted the pictures of the heads of the banksters on spikes and paraded down Wall and Broad Streets. If Warren Buffett and George Soros also come to the conclusion that BO can’t win, the President’s tenure is over. Like Herbert Hoover in 1932, these tent cities will come to be known as “Obamaville.”
Hillary Rodham Clinton has more baggage than her potential opponent Newt Gingrich. Her Senior Thesis at Wellesley College, unretrievable in 2008, will certainly surface which mirrors the President’s far-left ideology and Ms. Clinton’s relationship with Saul Alinsky. Certainly the videos of her “F Bomb” rants while she was the first lady of Arkansas will run rampant on youtube. And, of course, the mysterious death of her former lover, Vince Foster will be resurrected. With so much baggage Hillary will need a valet. Bill is available. Yes, it will get ugly but the nation desperately needs strong leadership not partisanship. The challenges for the next five years will be as formidable as they were in 1932 and 1941. May we have the courage and the will of the past to overcome the obstacles of the future.
Just a week prior to Thanksgiving in the US, the newly anointed Prime Minister of Italy Mario Monti, startled all Europeans when he raised the prospect of “the end of the euro.” Monti may have had a flashback to 1999 when the euro was introduced and Milton Friedman, one of America’s premier economists and forecasters, said that the euro would fail at the first major financial crisis in Europe. That event is at hand.
It is generally agreed by the French and German leaders that the collapse of Italy, the euro-zone’s third largest economy behind the two aforementioned countries, would indeed cause the end of the euro. Investors worldwide fear that this event could spark a global contagion that could be more devastating than the collapse of Lehman Brothers in 2008. This was effectively stated by David and Joy Levy (Levy Forecast) in Alan Abelson’s “Up & Down Wall St” column (November 28, 2011) when they said that they had never seen anything like this when “an enormous external crisis with sufficiently severe consequences to take out the US expansion.” There is a prominent school of thought that maintains that a EU crisis will NOT impact the US and that corporate earnings and stock prices will enjoy a robust 2012. CMV disagrees and sides with the Levys.
Americans, unknown even to those who consider themselves erudite and in “the know,” have a major financial stake in what happens in the Euro-zone. The first ever Government Accountability Office (GAO) audit of the Federal Reserve was just carried out recently due to the persistent efforts of Ron Paul, Alan Grayson, Jim DeMint and the Socialist Independent Senator Bernie Sanders. The Audit was vehemently opposed by Ben Bernanke, Alan Greenspan and the super secretive banksters who have successfully resisted an audit for 100 years.
Information revealed from the audit was mind-boggling! The US Federal Reserve doled out $16,000,000,000,000 (that’s trillion) to US banks and corporations and foreign banks and governments all over Europe between December 2007 and June 2010. The Fed calls these “loans” but virtually none have been repaid and was loaned out at 0%. These funds were ostensibly to prevent a global financial crisis and collapse of the world economy. Now, the Euro-zone has returned to the same precipice as 2008 and it appears to CMV that the urgency and the amount of money needed to forestall a collapse is even greater. There’s more that you may not know.
EU law prohibits the European Central Bank (ECB) from making direct loans to euro-zone governments. The “self-appointed committee” of banksters to save the euro has concocted a scheme whereby the ECB would print a massive supply of new euros, lend them to the International Monetary Fund (IMF) and the IMF in turn would lend to Portugal, Italy, Greece and Spain (PIGS). Ireland has been removed from the list of the destitute thanks to the nationalization of the Irish banks and the resolve of its citizens to fulfill its’ obligations to creditors. The problem for Americans is that the US contributes 17% of all funds assessed by the IMF. For the euro-zone a total of 75% of all funds would be coming from countries outside of Europe!
Oliver Sarkozy, Chairman of the elite global investor Carlyle Group, recently (November 23,2011) stated on CNBC that the amount of money needed to bailout the EU was probably in excess of 10 trillions euros – $13 trillion dollars. CMV believes that the money-well is going dry. What the world is about to experience is the beginning of the end of the western-centric monetary system that was created 100 years ago. It will be the end of a fiat money system that believed it could create, without limit, massive currency and debt without dire consequences. The euro-zone will soon be forced to nationalize most if its’ banks and trillions of euro debt will never be repaid. Who takes the loss? Pension funds, mutual funds, hedge funds, and investors worldwide.
The over-encumbered and over-entitled socialist EU system will fail. Yet, the US has a President whose goal is to replicate this system which is also doomed to fail. The handwriting is on the wall. Read It and Weep!
As previously reported by CMV, city and state governments across the country are facing severe budget shortfalls that expose bond holders and taxpayers to possible default and bankruptcy. Harrisburg, PA, Jefferson County, AL are two high profile cases, with Jefferson County being the largest in US history. Now, compounding an already deteriorating situation, cities are diverting money intended for specific purposes such as fixing roads, sewers and the like to projects that are more aesthetically or socially acceptable and neglecting the essentials.
For example, in Portland, OR, money raised for water and sewers was used for other purposes including remodeling of a building of a non-profit organization that runs the city’s Rose Festival. The diversion of funds may have appealed to the general public who simply do not ‘get it’ but in doing so the city violated state law, city code and most importantly, bond covenants. A municipal borrower that misleads investors, when funds are used for other purposes, could violate anti-fraud provisions also. Cities nationwide have persisted in this type of practice so in an effort to curtail this activity the Securities & Exchange Commission (SEC) fined individual officials in San Diego to settle allegations the city had misled bond investors. City and state bureaucrats, as long as they can hide under their blanket of anonymity, will continue this practice until they are personally accountable or their muny bond funding dries up.
Adding to the shortfall is the cost that major cities are incurring on police over-time, clean-up and repairs during the Occupy Wall St. revolt. A recent analysis indicates that 18 cities have incurred about $13 million in costs directly related to the protestors. Oakland, CA for example, has spent $2.4 million when they are already faced with a $58 million budget deficit. The eventual outcome should be obvious even to the oblivious but it’s not. Cities and states will be forced to layoff employees, police, firemen and cut essential services and entitlements. All city officials and employees should read the story of Vallejo, CA. Ex-employees there have experienced all of the above. Now, Detroit has declared bankruptcy. Meredith Whitney was blasted by Wall St. for her forecast, but she was right. Rolling defaults will roil the Muny Bond market.
A feature WSJ article dated November 15, 2011, entitled, “Mortgage Insurer’s Cash Depleted, Auditor Warns,” written by Nick Timeros, indicates that there is close to a 50% chance that the Federal Housing Administration (FHA) could run out of money and require another taxpayer bailout in the next year.
As private lenders have withdrawn from the housing market over the past four years, FHA’s market share of mortgage loan guarantees has ballooned from about 5% in 2006 to 33% in 2010. Federal law requires that the agency have cash reserves above 2% of the level of loans outstanding to bank future potential loan losses. As of September 30, 2011 reserves stood at 0.24% of all $1.1 trillion mortgages insured. Industry experts say FHA could require an infusion of $13 billion in additional funds that, of course, do not presently exist at the US Treasury.
Gone un-noticed by those in the real estate industry and specifically mortgage companies is that the Obama Administration promised in February 2011 to wind down Fannie Mae and Freddie Mac and rein in the FHA in order to encourage the revival of the private mortgage market. Now, in a typical backroom deal on November 14, 2011, a bipartisan Congressional Committee announced an agreement to increase FHA’s maximum mortgage limits from the present $625,500 to $729,750 through December 31, 2012. The Administration’s promise was to return FHA “to its’ pre-crisis role as a targeted provider of mortgage credit access for low and moderate-income Americans and first-time home buyers.” These limits seem hardly geared to low income buyers. This decision plus the recent increase in funding for Fannie and Freddie bringing taxpayer losses to $169 billion to date, indicates that the Administration’s goal is to be the nation’s lender of first resort.
As of this date, the $25 billion settlement against the “robo-signers” is nearing a potential conclusion with all the states except California and the Administration’s mortgage reduction and refinance plan is also gaining momentum. All of these initiatives are geared to revitalize the morbid real estate market by mid-2012 giving the President a strong leg to stand on provided by you know who.
In many of the nation’s housing markets mortgage loan payments have fallen so far that it cost significantly less to own vs. rent. In Atlanta the average monthly mortgage payment is $539. Rent is $840. In Phoenix the average mortgage is $651 and rent is $723. On the surface it would appear to create perfect conditions for a residential recovery. Qualifying for a loan, however, remains a key issue preventing many renters from becoming buyers. Some renters simply will not buy.
According to a November 22, 2011 feature article in the WSJ “for years Penn State’s (PSU) football program and its’ four-decade tenured coach, Joe Paterno, were considered to be a model for all college football. PSU had won two national championships, its’ players graduated at rates far above the national average and it was one of only four major-conference athletic programs never to be sanctioned for major violations by the sport’s governing body the NCAA.” The recent child sexual abuse scandal involving Jerry Sandusky, a long-time assistant coach at PSU, has dramatically changed that reputation and uncovered a culture that has a much greater societal significance, which is CMV’s primary focus.
The philosophy and purpose of the PSU football program and college sports in general, has taken a dramatic and profound shift in the past 10 years. Today, its all about, “show me the money!” In the case of PSU, all sports brought in total revenue of $106 million in 2010. About $70 million was generated by football. In addition, if PSU would have been invited to one of the five BCS post-season bowl games they would have earned an additional $22 million that would be shared with other Big Ten member schools. In effect, college football is big business. It’s virtually equal to the Pro games in the public view without a huge (direct) payroll expense for the players. In addition, the Big Ten, and other conferences, have their own TV networks. On any given Saturday you can watch at least 20 games on major networks or cable all day long. An enthusiastic fan base at PSU plus other alums, has created a $1.7 billion endowment at the school. All of these numbers bring us to the obvious conclusion: PSU, as well as most other institutions, will do most anything to preserve the goose that lays the golden egg – including a cover-up of one of the (potentially) most onerous cases of child sex-abuse in the country.
Coach Joe Paterno made certain that “extra-curricular activities” of his players would also be sheltered from criminal prosecution and an inability to perform on Saturdays. In 2003, PSU hired Dr. Vicky Triponey to become Vice President of Student Affairs, who was responsible for enforcing a student code of conduct of any incident on or off the campus. Dr. Triponey soon discovered that PSU football players were getting in trouble at a “disproportionate rate” from other students and often for very serious acts of violence. In 2007 about 24 players broke into an off-campus apartment creating a brawl that destroyed property and knocked one student unconscious. Police filed a criminal complaint against 6 of the players. Largely due to the intervention of Coach Paterno police dropped most of the charges and none of the players missed a single game. The Coach was quoted as saying, “it should be his call if someone should practice and play in athletics.” Somewhat prophetically before the Sandusky incident, Dr. Triponey resigned under pressure saying, “Coach Paterno would rather we NOT inform the public when a football player is found responsible for committing a serious violation of the law and/or our student code...despite any moral or legal obligation to do so.” (Thanks to Rachel Bachman, Kevin Helliker and John W. Miller of the WSJ for this information.)
So, college football, not only PSU, but also at Southern Cal, Ohio State and other programs have been above the law. Like our contemporary American society, priorities and values are out of balance. In the future, the PSU incident (though not the sole cause), will be recalled as the time when college football reached its’ pinnacle of financial success and influence. These massive stadiums seating over 100,000 mostly maniacal fans are somewhat reminiscent of the Roman Colosseum, near the end of the world’s greatest empire. These monoliths will begin to crumble and decay as a recessionary US economy inhibits discretionary spending and attendance shrivels. TV revenue will decline as sponsors cut their advertising budgets. State funding to colleges which has been declining substantially in recent years will continue to fall. And, college tuition, growing exponentially at 8% per year ever since taxpayer subsidized student loans were created, will cease to be available as the number of defaults accelerate. Excess always breeds abuse of power, corruption and over-indulgence in any system. College athletics is a window in to the emerging change in America.
The rest of the newsletter is only available to paid subscribers and includes the portfolio of recommendations.
As CMV predicated last month, the third quarter GDP was revised downward from the original estimate from the Commerce Dept of 2.5% to 2.0% – a drop of 20%. The recent decline in Consumer Confidence would have an implied negative sales growth of a -7% which are recession levels but actual positive results are confounding the experts. BMO Harris Bank says that the top 20% of income earners are creating 50% of retail sales. CMV, after observing lines of almost maniacal shoppers on Black Friday and documenting the various forms of entitlement benefits that the US Government pays out to low-income recipients, takes the view that the bottom 20% of income earners are holding their own when it comes to retail spending – especially during the Christmas holiday season. Remember, 47% of all Americans receive some form of government entitlement. The upper 20% is actually funding the bottom twenty.
Stephanie Pomboy, who heads Macro Mavens and has been quoted often by CMV because she’s not only smart but she’s also has raised a cogent issue regarding spending. She says, “...what if the gains in spending, like the gains in the stock market, have also been a paper illusion – a function of higher prices, not rising demand?” She adds that in nominal terms growth is up $783 billion from its’ pre-crisis levels but in real terms GDP is up an imperceptible $27 billion. In short, after TARP and an alphabet soup of various government programs, and after the $787 billion stimulus program all the US got was a 0.2% increase in real growth and a 0.96% increase in consumer spending. Stephanie concludes that consumers aren’t spending because they want to, it’s because they have to and prices are increasing at an accelerated pace. QE 2, of course, was the major culprit. QE 3 is coming soon and we’ll experience more of the same. James Dines calls this condition an INFRESSION – an inflationary recession.
Here’s another invisible trend that has dramatic implications. In Barron’s (November 28, 2011) OTHER VOICES section, Bob Adams cites the research of American Wave (AW), a firm that has been tracking the trends of Americans considering relocation overseas since 2005 using the IBOBE-Zogby opinion survey firm. AW reports that 40% of young Americans 18 to 24 are thinking about leaving the US to seek opportunity abroad. There are 42 million Americans between the ages of 25 and 34 who are amongst the most energetic, innovative and creative Americans. Approximately 5% of this age group is actually in the planning stage to relocate. In the 18 to 24 age group nearly 40% indicated a desire to relocate to mostly Asia or Latin America. Ominous overtones for a US economy and culture desperately in need of creative and motivated young people who fear they will have to support an aging population.
Another rude awakening fact that now effects more than 44 million Americans is that the Pension Benefit Guaranty Corp announced that it has a $26 billion deficit. This is the government agency that insures pensions of those whose employers have gone bankrupt and can’t pay pensions to their former employees. In addition some retirees currently receiving a pension are selling their pay-outs for cash at a deep discount. BuyYourPension.com is one of the sources. In one instance one retiree sold what was calculated to be $125,000 in future payments for a cash sum of $57,000. Senator Tom Harkin (D-Iowa) has launched an investigation into this practice to make certain that “our laws are respected and pension participants are not abused.” CMV takes the view that Congress should also examine the role that it played that has created this act of desperation.
CMV has opined as for back as a year ago that Barrack Obama would not be the Democratic nominee for President in 2012. In an Op-Ed piece in the November 21, 2011 edition of the WSJ, Patrick Caddell and Douglas E. Schoen, both long-term Democratic Party consultants and advocates, called for the President to step down because the President “can’t win by running a reconstructive campaign, and he won’t be able to govern if he does win a second term.” In order to win, the two men believe, the President would have to wage the most negative campaign in American history. One year ago, in the WSJ, Caddell and Schoen warned that Obama’s partisanmanship would result in 2 years of political gridlock at a time when the nation could ill afford it. That’s exactly where we’ve been the past year and 2012 will be the same. Who do the consultants propose? Secretary of State Hillary Clinton, who has played the role of “good soldier” and has never criticized the President or his policies though justified to do so.
On November 21, 2011 on FOX with Neil Cavuto, Charlie Gasparino, who is privy to all the scuttlebutt on Wall St., said that the “tipping point” for the withdrawal of financial support for the President from the “Masters of the Universe” came when the Occupiers posted the pictures of the heads of the banksters on spikes and paraded down Wall and Broad Streets. If Warren Buffett and George Soros also come to the conclusion that BO can’t win, the President’s tenure is over. Like Herbert Hoover in 1932, these tent cities will come to be known as “Obamaville.”
Hillary Rodham Clinton has more baggage than her potential opponent Newt Gingrich. Her Senior Thesis at Wellesley College, unretrievable in 2008, will certainly surface which mirrors the President’s far-left ideology and Ms. Clinton’s relationship with Saul Alinsky. Certainly the videos of her “F Bomb” rants while she was the first lady of Arkansas will run rampant on youtube. And, of course, the mysterious death of her former lover, Vince Foster will be resurrected. With so much baggage Hillary will need a valet. Bill is available. Yes, it will get ugly but the nation desperately needs strong leadership not partisanship. The challenges for the next five years will be as formidable as they were in 1932 and 1941. May we have the courage and the will of the past to overcome the obstacles of the future.
The Coming EU Implosion
Just a week prior to Thanksgiving in the US, the newly anointed Prime Minister of Italy Mario Monti, startled all Europeans when he raised the prospect of “the end of the euro.” Monti may have had a flashback to 1999 when the euro was introduced and Milton Friedman, one of America’s premier economists and forecasters, said that the euro would fail at the first major financial crisis in Europe. That event is at hand.
It is generally agreed by the French and German leaders that the collapse of Italy, the euro-zone’s third largest economy behind the two aforementioned countries, would indeed cause the end of the euro. Investors worldwide fear that this event could spark a global contagion that could be more devastating than the collapse of Lehman Brothers in 2008. This was effectively stated by David and Joy Levy (Levy Forecast) in Alan Abelson’s “Up & Down Wall St” column (November 28, 2011) when they said that they had never seen anything like this when “an enormous external crisis with sufficiently severe consequences to take out the US expansion.” There is a prominent school of thought that maintains that a EU crisis will NOT impact the US and that corporate earnings and stock prices will enjoy a robust 2012. CMV disagrees and sides with the Levys.
Americans, unknown even to those who consider themselves erudite and in “the know,” have a major financial stake in what happens in the Euro-zone. The first ever Government Accountability Office (GAO) audit of the Federal Reserve was just carried out recently due to the persistent efforts of Ron Paul, Alan Grayson, Jim DeMint and the Socialist Independent Senator Bernie Sanders. The Audit was vehemently opposed by Ben Bernanke, Alan Greenspan and the super secretive banksters who have successfully resisted an audit for 100 years.
Information revealed from the audit was mind-boggling! The US Federal Reserve doled out $16,000,000,000,000 (that’s trillion) to US banks and corporations and foreign banks and governments all over Europe between December 2007 and June 2010. The Fed calls these “loans” but virtually none have been repaid and was loaned out at 0%. These funds were ostensibly to prevent a global financial crisis and collapse of the world economy. Now, the Euro-zone has returned to the same precipice as 2008 and it appears to CMV that the urgency and the amount of money needed to forestall a collapse is even greater. There’s more that you may not know.
EU law prohibits the European Central Bank (ECB) from making direct loans to euro-zone governments. The “self-appointed committee” of banksters to save the euro has concocted a scheme whereby the ECB would print a massive supply of new euros, lend them to the International Monetary Fund (IMF) and the IMF in turn would lend to Portugal, Italy, Greece and Spain (PIGS). Ireland has been removed from the list of the destitute thanks to the nationalization of the Irish banks and the resolve of its citizens to fulfill its’ obligations to creditors. The problem for Americans is that the US contributes 17% of all funds assessed by the IMF. For the euro-zone a total of 75% of all funds would be coming from countries outside of Europe!
Oliver Sarkozy, Chairman of the elite global investor Carlyle Group, recently (November 23,2011) stated on CNBC that the amount of money needed to bailout the EU was probably in excess of 10 trillions euros – $13 trillion dollars. CMV believes that the money-well is going dry. What the world is about to experience is the beginning of the end of the western-centric monetary system that was created 100 years ago. It will be the end of a fiat money system that believed it could create, without limit, massive currency and debt without dire consequences. The euro-zone will soon be forced to nationalize most if its’ banks and trillions of euro debt will never be repaid. Who takes the loss? Pension funds, mutual funds, hedge funds, and investors worldwide.
The over-encumbered and over-entitled socialist EU system will fail. Yet, the US has a President whose goal is to replicate this system which is also doomed to fail. The handwriting is on the wall. Read It and Weep!
Cities Robbing John Q To Pay Paul
As previously reported by CMV, city and state governments across the country are facing severe budget shortfalls that expose bond holders and taxpayers to possible default and bankruptcy. Harrisburg, PA, Jefferson County, AL are two high profile cases, with Jefferson County being the largest in US history. Now, compounding an already deteriorating situation, cities are diverting money intended for specific purposes such as fixing roads, sewers and the like to projects that are more aesthetically or socially acceptable and neglecting the essentials.
For example, in Portland, OR, money raised for water and sewers was used for other purposes including remodeling of a building of a non-profit organization that runs the city’s Rose Festival. The diversion of funds may have appealed to the general public who simply do not ‘get it’ but in doing so the city violated state law, city code and most importantly, bond covenants. A municipal borrower that misleads investors, when funds are used for other purposes, could violate anti-fraud provisions also. Cities nationwide have persisted in this type of practice so in an effort to curtail this activity the Securities & Exchange Commission (SEC) fined individual officials in San Diego to settle allegations the city had misled bond investors. City and state bureaucrats, as long as they can hide under their blanket of anonymity, will continue this practice until they are personally accountable or their muny bond funding dries up.
Adding to the shortfall is the cost that major cities are incurring on police over-time, clean-up and repairs during the Occupy Wall St. revolt. A recent analysis indicates that 18 cities have incurred about $13 million in costs directly related to the protestors. Oakland, CA for example, has spent $2.4 million when they are already faced with a $58 million budget deficit. The eventual outcome should be obvious even to the oblivious but it’s not. Cities and states will be forced to layoff employees, police, firemen and cut essential services and entitlements. All city officials and employees should read the story of Vallejo, CA. Ex-employees there have experienced all of the above. Now, Detroit has declared bankruptcy. Meredith Whitney was blasted by Wall St. for her forecast, but she was right. Rolling defaults will roil the Muny Bond market.
Real Estate
A feature WSJ article dated November 15, 2011, entitled, “Mortgage Insurer’s Cash Depleted, Auditor Warns,” written by Nick Timeros, indicates that there is close to a 50% chance that the Federal Housing Administration (FHA) could run out of money and require another taxpayer bailout in the next year.
As private lenders have withdrawn from the housing market over the past four years, FHA’s market share of mortgage loan guarantees has ballooned from about 5% in 2006 to 33% in 2010. Federal law requires that the agency have cash reserves above 2% of the level of loans outstanding to bank future potential loan losses. As of September 30, 2011 reserves stood at 0.24% of all $1.1 trillion mortgages insured. Industry experts say FHA could require an infusion of $13 billion in additional funds that, of course, do not presently exist at the US Treasury.
Gone un-noticed by those in the real estate industry and specifically mortgage companies is that the Obama Administration promised in February 2011 to wind down Fannie Mae and Freddie Mac and rein in the FHA in order to encourage the revival of the private mortgage market. Now, in a typical backroom deal on November 14, 2011, a bipartisan Congressional Committee announced an agreement to increase FHA’s maximum mortgage limits from the present $625,500 to $729,750 through December 31, 2012. The Administration’s promise was to return FHA “to its’ pre-crisis role as a targeted provider of mortgage credit access for low and moderate-income Americans and first-time home buyers.” These limits seem hardly geared to low income buyers. This decision plus the recent increase in funding for Fannie and Freddie bringing taxpayer losses to $169 billion to date, indicates that the Administration’s goal is to be the nation’s lender of first resort.
As of this date, the $25 billion settlement against the “robo-signers” is nearing a potential conclusion with all the states except California and the Administration’s mortgage reduction and refinance plan is also gaining momentum. All of these initiatives are geared to revitalize the morbid real estate market by mid-2012 giving the President a strong leg to stand on provided by you know who.
In many of the nation’s housing markets mortgage loan payments have fallen so far that it cost significantly less to own vs. rent. In Atlanta the average monthly mortgage payment is $539. Rent is $840. In Phoenix the average mortgage is $651 and rent is $723. On the surface it would appear to create perfect conditions for a residential recovery. Qualifying for a loan, however, remains a key issue preventing many renters from becoming buyers. Some renters simply will not buy.
A Monolith Crumbles
According to a November 22, 2011 feature article in the WSJ “for years Penn State’s (PSU) football program and its’ four-decade tenured coach, Joe Paterno, were considered to be a model for all college football. PSU had won two national championships, its’ players graduated at rates far above the national average and it was one of only four major-conference athletic programs never to be sanctioned for major violations by the sport’s governing body the NCAA.” The recent child sexual abuse scandal involving Jerry Sandusky, a long-time assistant coach at PSU, has dramatically changed that reputation and uncovered a culture that has a much greater societal significance, which is CMV’s primary focus.
The philosophy and purpose of the PSU football program and college sports in general, has taken a dramatic and profound shift in the past 10 years. Today, its all about, “show me the money!” In the case of PSU, all sports brought in total revenue of $106 million in 2010. About $70 million was generated by football. In addition, if PSU would have been invited to one of the five BCS post-season bowl games they would have earned an additional $22 million that would be shared with other Big Ten member schools. In effect, college football is big business. It’s virtually equal to the Pro games in the public view without a huge (direct) payroll expense for the players. In addition, the Big Ten, and other conferences, have their own TV networks. On any given Saturday you can watch at least 20 games on major networks or cable all day long. An enthusiastic fan base at PSU plus other alums, has created a $1.7 billion endowment at the school. All of these numbers bring us to the obvious conclusion: PSU, as well as most other institutions, will do most anything to preserve the goose that lays the golden egg – including a cover-up of one of the (potentially) most onerous cases of child sex-abuse in the country.
Coach Joe Paterno made certain that “extra-curricular activities” of his players would also be sheltered from criminal prosecution and an inability to perform on Saturdays. In 2003, PSU hired Dr. Vicky Triponey to become Vice President of Student Affairs, who was responsible for enforcing a student code of conduct of any incident on or off the campus. Dr. Triponey soon discovered that PSU football players were getting in trouble at a “disproportionate rate” from other students and often for very serious acts of violence. In 2007 about 24 players broke into an off-campus apartment creating a brawl that destroyed property and knocked one student unconscious. Police filed a criminal complaint against 6 of the players. Largely due to the intervention of Coach Paterno police dropped most of the charges and none of the players missed a single game. The Coach was quoted as saying, “it should be his call if someone should practice and play in athletics.” Somewhat prophetically before the Sandusky incident, Dr. Triponey resigned under pressure saying, “Coach Paterno would rather we NOT inform the public when a football player is found responsible for committing a serious violation of the law and/or our student code...despite any moral or legal obligation to do so.” (Thanks to Rachel Bachman, Kevin Helliker and John W. Miller of the WSJ for this information.)
So, college football, not only PSU, but also at Southern Cal, Ohio State and other programs have been above the law. Like our contemporary American society, priorities and values are out of balance. In the future, the PSU incident (though not the sole cause), will be recalled as the time when college football reached its’ pinnacle of financial success and influence. These massive stadiums seating over 100,000 mostly maniacal fans are somewhat reminiscent of the Roman Colosseum, near the end of the world’s greatest empire. These monoliths will begin to crumble and decay as a recessionary US economy inhibits discretionary spending and attendance shrivels. TV revenue will decline as sponsors cut their advertising budgets. State funding to colleges which has been declining substantially in recent years will continue to fall. And, college tuition, growing exponentially at 8% per year ever since taxpayer subsidized student loans were created, will cease to be available as the number of defaults accelerate. Excess always breeds abuse of power, corruption and over-indulgence in any system. College athletics is a window in to the emerging change in America.
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-- H. L. Quist
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