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Market Overview
“Everyone Wants To Go To Heaven But No One Wants To Die.”
– Anon
That’s clever and it might even evoke a wry smile but, what the heck does it mean? Here’s an example that supports CMV’s often controversial, but introspective, view of the world.
Greece is a nation that has so burdened itself with debt to sustain the lifestyle and the comfortable retirement of its’ citizens that it faces a collapse of its’ democratic form of government, its’ economy and its’ society. Few Greeks however see the inevitable outcome and won’t sacrifice their expectations necessary to survive.
Similarly, there are municipalities and state governments in the US that have discovered the profound validity of Anon’s philosophy. Stockton and San Bernardino, California are the most recent municipalities that have filed bankruptcy, along with 25 other cities in the US. Their burden of “heavenly” entitlement or legacy costs has exceeded their ability to meet these contractual obligations.
As these cities and states grapple with the inevitable there remains the hope that the President will win re-election and that Uncle Sugar will continue to fund these benefits and no one will have to die. Ultimately, of course, the Federal government faces the same reality that it can’t continue to fund its’ obligations also but to most, heaven can wait.
Friday’s (August 3rd) jobs report from the Bureau of Labor Statistics (BOLS) indicated an increase of 163,000 additions from July’s 64,000. The markets in the US rallied sharply on the news ignoring the fact that factory jobs decreased by 25,000 last month and BOLS added 377,000 jobs as a “seasonal adjustment.” It is generally acknowledged that approximately 200,000 new jobs must be created to reduce unemployment which now stands at 8.3%, David Rosenburg (Barron’s August 6, 2012), who is Gluskin-Sheff’s Chief Economist, says the report was a “head fake” and calls it “disingenuous.” CMV believes we can expect BOLS to issue more disingenuous reports in September and October leading up to the election.
Despite the reliable Economic Cycle Research Institute’s (ECRI) forecast that the US will soon be in another recession, the DOW gained 217 points on Friday (August 3rd) to hit 13,096 up 7.19% YTD. The S&P 500 rose 25.99 points closing at 1,391 up 10.61% YTD. The NASDAQ Composite was up sharply by 58.13 points ending at 2,968 and 9.81 points higher YTD. It is interesting to note that the S&P all-time high of 1,422 is just 2.3% above Friday’s close. Based upon the S&P’s price/earnings (PE) multiple and the expected 12 month earnings, the PE is now a little over 13 times. The market usually stalls when the PE reaches 14. With the S&P within 2% of its’ all-time high, and closing in on 14X, the index is at a critical juncture. Will there be a breakout to new highs or will it fail? Much depends on GODOT. (Taken from the Broadway play “Waiting for Godot” which in CMV’s production the lead role is played by Ben Bernanke. GODOT is a pseudonym for God.)
The Fed at it’s recent Open Market Committee Meeting concluding on August 1st, failed to intervene or provide any stimulus in the form of QE 3 that would (ostensibly) juice the equity and commodity markets. You will recall that GODOT (Mr. Bernanke) created Quantitative Easing #1 and #2 as well as Operation Twist #1 and #2 with mixed results. Yes, we enjoyed higher stock prices but we also endured higher gasoline and food prices. So if, as ECRI forecasts, the US economy is slowing and a recession is at hand, what does GODOT do? Some pundits claim GODOT is out of bullets and any more intervention would be ineffective. In the play, GODOT never arrives and the actors are left waiting. Is it deja vu all over again?
There’s another key actor in this global economic play; Super Mario (Draghi),the President of the European Central Bank (ECB). Last week he said the ECB “will do whatever it takes” to save the euro. The markets in Europe and the US both rallied. A week later Super Mario declared that the ECB “may do whatever it takes” to save the euro and the markets tanked. Appropriately, Super Mario has become the NATO man – No Action Talk Only. So, it appears that the Western world and to a large extent, the Eastern, are anxiously awaiting the NATO man and GODOT. In CMV’s opinion, these two actors will be forced to “show” and resort to the printing press and further dilution of their fiat currencies. Bill Gross, the world’s largest bond manager at PIMCO said on August 1, 2012:
“Unfair though it may be, an investor should continue to expect an attempted inflation solution in almost all developed economies over the next few years and even decades. The cult of equity may be dying, but the cult of inflation may have only just begun.”
It has become abundantly clear to CMV that all the previous attempts at stimulus have not created growth in GDP which is precisely what is fundamentally required to increase job opportunities and increase tax revenue. We’re not economists but it seems that when the level of federal debt exceeds 100% of GDP, growth of 4% or greater becomes near impossible. When the federal government has to borrow $.40 out of every dollar to meet its’ cash flow needs and offers its’ citizens a near-zero return to invest in its’ debt securities we are reaching a stalemate. The prospect for a change in the direction of the economy is based upon an illusion which is not a strategy. Read Real Return Investing, on page 9 carefully.
The Coming Confiscation
America is about to face financial Armageddon and our country and its’ citizens are totally unprepared to meet the crisis that looms ahead.
The first of the 78 million baby boomers are turning age 66 this year and are eligible for full Social Security (SS) benefits and Medicare. Most Seniors buy into the myth that there’s a $2.7 trillion trust fund to guarantee their SS income for life. The inescapable truth is that the federal government has spent all of these funds to pay the nation’s bills for decades and the funds in trust are only IOU’s from the US Treasury. And, the Treasury owes bondholders $16 trillion and has to borrow new money just to pay interest on the debt.
In the January 2012 edition of CMV, we revealed the astounding growth in Social Security disability claims and the abuse or gaming of the system that is taking place. In June, 2012 the Bureau of Labor Statistics (BOLS) reported that private employers added 80,000 jobs for the month which was extremely disappointing and caused a sell-off in the US stock market. Incredibly, also in June, 85,000 workers filed for total and permanent disability. In the 3 year period from June 2009 to last month over 3.1 million employees have gone on Social Security Disability which nearly doubled the number of recipients up to that period. As CMV disclosed, the Social Security Disability Fund is separate from the Old Age Survivors Insurance (OASI) fund cited above. Due to the excessive number of disability claimants the fund will be depleted within two years. Where will the money come from to continue these payments? It’s the same dilemma that will soon appear for retirees also. There are only two sources – taxpayers and money printing. CMV believes that the checks will continue to beneficiaries but there’s a catch that virtually few of these recipients has even considered possible. Each check received will become worth less and less and less until they become worthless. Just like pensioners experienced in the Weimar Republic in Germany from 1921 to 1924.
The rise in the cost of Medicare and Medicaid with the advent of the Boomers, will begin to accelerate exponentially and faster than the growth of the Gross Domestic Product (GDP). Since 1997, the Medicare law required that payments to physicians were to be cut. These cuts have been included in the budget (except for the past 3 years where there was none) but Congress has “modified” the requirement each year and the reductions haven’t taken place. That makes the Congressional Budget Office’s (CBO) numbers misleading and grossly understates the problem. Medicare is now 3.7% of the GDP and should more than double in the next 20 years. Add to that Medicaid and all the other entitlement programs and they will eventually consume most of Federal revenue. Congress prefers to target a future date for this to happen which is of little concern to them. They have kicked the can down the road never considering that the road would end.
The critical question that affects ALL Americans is, where will the money come from to meet the promises that the US Government has made to its’ citizens? The following is not what you would expect to learn.
Three years ago in your writer’s book, How To Profit From The Coming Inflationary Boom And Avoid The Next Crash (Yes, there was an asset inflationary boom in 2009 and 2010), the subject of a source of capital to meet the voracious government appetite was addressed. The except from page 23 was as follows:
Daniel D. Show offers a glimpse into America’s new collectivist mind set and the prospect for the governments takeover of private retirement accounts. The Administration and the House Committee on Education & Labor have heard a proposal by Teresa Ghilarducci, Professor of Economic Policy Analysis at the New School for Social Research in New York, to eliminate tax breaks (thus increasing tax revenues) for 401(k), IRA’s and similar retirement plans and convert them into Guaranteed Retirement Accounts (GRA) managed by the Social Security Administration. – Offshorefinancialsolutions.com - also Review & Outlook online at Wall St. Journal November 14, 2008 — http://online.wsj.com/article/SB122662401729126813.html
Private pension assets held in IRA’s 401(K) and other plans represent the largest untapped sources of capital in America. What Ghilarducci says here is that the American public is too ignorant to manage their own money and therefore the Federal government is a better source and can guarantee retirement income. What this form of “Confiscation” would not provide is protection against the inevitable devaluation of the US dollar and erosion of the retiree’s purchasing power, as cited above. CMV believes, on a minimum basis, these private accounts will be required by mandate to invest a large percentage of these assets in government debt securities. The Japanese government initiated this requirement a number of years ago. If Barrack Obama wins re-election, it may be wise to consider terminating your plan(s), pay the taxes in 2012 and continue managing these assets outside a qualified tax-deferred vehicle. CMV would also suggest that you discuss this matter with your CPA and consider your tax consequences and potential penalties before making this important decision.
The following adds credibility to the above. The California Public Employees Retirement System (CALPERS) is the largest public employee pension plan in the US which hardly means its’ the best managed. CALPERS 0.57% return over the past 5 years is, in part, responsible for the fact that the plan is about 25% underfunded which means that it may not be able to meet the obligations of its retirees. The California State Senate has just passed a bill that would expand the CALPERS system into the private sector. Huh? State lawmakers want to extend their mis-managed plan to all businesses in California with more than 5 employees! As Thomas G. Donelan, the editor of Barron’s, points out in his June 25, 2012 editorial, California workers might be gratified for this opportunity to pool their pension assets with CALPERS if not for their secondary role as taxpayers. He says, “As such they are already on the hook for pensions promised to several million public workers, using money that doesn’t exist.” If you haven’t connected the dots, this is a desperate move by the State to create a new source of cash into the fund so they can push the inevitable shortfall down the road. Our public pension plans are becoming Ponzi schemes. Can you imagine what an impact a 30% to 40% decline in stocks and a prolonged bear market would have on CALPERS and other retirement funds?
The CMV Healthcare Solution
In response to requests from our readers, a few who claim to be amongst the intellegencia, CMV will offer its thoughts on one of the most pressing issues of our time – HEALTHCARE. It is and has been our long-held position for over 20 years that any program managed by the Federal Government, any single payer system or any one shoe fits all type of system is doomed to fail and make what is today a looming nightmare an outright financial and human catastrophe. First, a look at the numbers.
The July 7/8 , 2012 edition of the WSJ had a feature article by Janet Adamy and Tom McGinty entitled “The Crushing Cost of Care.” The numbers below were provided by the Congressional Budget Office (CBO) which is, ostensibly, unbiased – if there is such a thing today.
Seniors, naturally, are the sickest of all Americans and account for the vast majority of all healthcare spending. In 2009, according to the CBO, the top 10% of all Medicare beneficiaries who received hospital care accounted for 64% of the program’s hospital spending. In 2011, Medicare’s net expenditures totaled $480 billion or 13.5% of ALL federal expenditures. The CBO projects that Medicare costs will grow at an average increase of 5.7% per year through 2022 and will equal 16.2% of ALL federal budget expenditures at that time. A further breakdown shows that 6.6% (1.6 million) of Seniors who received care in their final year of life accounted for 22.3% of total hospital expenditures! The obvious conclusion? Limit the benefits for Seniors in their final years. Obamacare plans to cut $575 billion from Medicare over 10 years, and if you are age 70 or over, and you need a heart or kidney transplant, hip replacement or another form of expensive procedure the Independent Payment Advisory Board (IPAB), a 15-member committee, whose purpose is to ration care, will decide whether or not your procedure is acceptable. Those over age 70 can expect to receive ‘comfort care’ and little, if any, extensive procedures.
On July 4, 2012, President Obama named Dr. Donald Berwick from the Harvard Medical School as his Healthcare Czar. Dr. Berwick was knighted by the Queen of England for his support of Britain’s National Health Service that is well-known for its’ rationing of care.
Additional “rationing” is likely for Medicaid patients also. Over-looked by most observers, the Supremes (Supreme Court) voted 7 to 2 ruling that the Federal Government could not penalize states that refuse to enroll millions more of low-income people in their existing programs. The State of Maine, for example, immediately moved legally to drop 20,000 Medicaid recipients from the state’s rolls including 19 and 20 year olds to save $10 million over the next year. Wisconsin, Alabama, Texas and other states are expected to follow. Doctors are refusing to take patients because they can’t afford to treat them. The Federal government currently contributes around 57% of the financing for Medicaid programs for the states, but sets restrictions on how the money is used. A legal confrontation between the financially-strapped states and the Department of Health & Human Services is bound to ensue. Depriving possibly millions of low-income people from healthcare may save the states precious dollars but it certainly doesn’t address the critical issues of offering care to everyone.
So, what is CMV’s solution?
A Two Tier Healthcare System
First, we should all recognize that there is a segment of our society that can’t possibly pay for their healthcare or pay premiums for insurance but they must have access to care. An expansion of the current free Medicaid program would be Tier 1.
Second, we should all recognize that there is a segment of our society that can afford to pay for their healthcare (self-insure) or pay premiums for health insurance. These citizens would be eligible for Tier II.
One system can’t serve both segments of our society. Here’s why. As the Federal government continues to reduce its reimbursement to doctors, hospitals and all healthcare providers, those facilities and professionals, who are presently at the top end of the scale, will be forced out of the business. How many doctors will pursue a profession where their education costs $250,000 or more, and results in earning $70,000 or less per year? What hospital will make $100s of millions of capital investments in new facilities and the latest equipment with a continued reduction of reimbursement? Why spend billions in research when no one can afford the treatment? The best and the brightest of our young people will find another career and in a short period of time our entire healthcare system will be on a par with third world healthcare. Ironically, in retaining TIER II, TIER I patients could receive better care. Unfortunately, the Obama Administration’s goal is to eliminate all profit incentive in the healthcare system which will guarantee a reduction in the quality of care and the number of providers when more are desperately needed.
A recently revealed survey of physicians on FOX News (July 10th) indicated that 83% of the doctors polled would leave their professions if Obamacare is not repealed. A two-tiered system could prevent that. [The study polled 699 participants of the group “Doctor Patient Medical Association.”]
Equalitarians and the PC crowd will reject the Two Tier System out of hand because it’s not equal, fair or is socially unjust. The alternative is a nation gone bust where competent, high quality healthcare will be found in another country.
Obama’s Imperial Presidency
This is the title of Kimberley Strassel’s Potomac Watch column that appeared in the July 5,2012 edition of the WSJ. The Myth Buster covered this revealing and timely piece in his Podcast on July 8th. If America wants an insight into what President Obama’s second term may look like, they only have to know how he governed during the past three and one-half years. Strassel says, “Mr. Obama has granted himself unprecedented power.” She adds:
“Mr. Obama proposes, Congress refuses, he does it anyway.”
There is a short summary of various issues and how this “Imperial President” changed the outcome to fit his ideology and his political objectives:
Law Result Presidential Mandate
● The Dream Act Congress Rejected Executive Order
● Medical Marijuana Congress Wouldn’t Repeal Justice Department Won’t Prosecute
● Defense of Marriage Act No Congressional Repeal Justice Department Won’t Defend
● No Child Left Behind Congress Change Failed Department of Education Waivers
● Cap & Trade Congress Wouldn’t Pass EPA Intervenes
● Union Card Check Congress Wouldn’t Pass Stacked National Labor Relations Board
● New NRLB Members Senate Wouldn’t Confirm Declared Recess & Appointed
● Internet Regulations Congress Wouldn’t Pass FCC Ruled Unilaterally
● Fast & Furious House Held Justice in Contempt Executive Order Stalemate
● General Motors Bailout Bond Investors Subordinated Over-ride Contract Law
● States Clean Up Voter Rolls States Prohibited Evoked Voting Rights Act
● States Fracking Rules No Federal Jurisdiction New Federal Authority
● War in Libya Congressional Consent Required No Consent Obtained.
Based upon the above and given an unimpeded four year additional term, what can Americans expect from this second-term President? Supported by a Justice Department that’s clearly above the law of the land, there will be a teutonic shift in the balance of power where Congress will be irrelevant and impotent. The Rule of Law which has made the United States of America the premier jurisdiction to do business in all of the world will continue to fracture and will become a haven for crony capitalists and our version of the Russian oligarchy. What escapes our media is that Venezuela, Argentina, Bolivia and other Latin American countries have become Marxist totalitarian states that in short order will soon collapse – again. For those with a short memory, the Argentine economy collapsed in 2001 and the country defaulted on all its’ sovereign debt owed to US banks. Geez! Maybe that’s the plan for Obama’s America! The present $16 trillion of Federal debt which will explode to $20 - $25 trillion over the next four years, will never be paid in full. That would fit perfectly with this Administration’s goal to lesson America’s power and image in the world and destroy the Capitalist system.
Capitalism Under Fire
Charles Murray has penned a feature article entitled “Why Capitalism Has An Image Problem” in the July 28/29 edition of the WSJ. It is both timely and instructive because it shapes the essence of the current presidential race.
Murray, unafraid of over-stating the case, says:
“...Capitalism is the best thing that has ever happened to the material condition of the human race. From the dawn of history until the eighteenth century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the industrial revolution. Everywhere that capitalism didn’t take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.”
In America today, in what was the most successful nation in the history of mankind, “capitalist” has become an “accusation” according to Murray. The “creative destruction” that is the essence of the system is now seen as evil and anyone who is successful and rich is so because that successful entrepreneur made someone else poorer. Mitt Romney, whose tenure at Bain Capital clearly established him as a successful capitalist, has been branded by the left as an enemy of the people and a person who hadn’t done anything to deserve his wealth or money. The demonization of Romney has been the tactical strategy of the President and his campaign staff that’s effectively changing the argument that capitalism is not the answer to America’s economic malaise.
To build their case, the Progressive and Marxist left only has to point to those capitalists on Wall St. whose rapacious greed destroyed the residential real estate market early in the last decade and impoverished a large section of America’s middle class. CMV has written extensively on those “Masters of The Universe” (MOTU) which was a cabal of Wall St., banking, government and political participants who carried out this coordinated scheme that, in retrospect, had to be deliberate, or on a minimum basis, careless and reckless. The MOTU became the “enablers” who created a perfect environment for candidate Obama and his leftists to exploit the evils of capitalism and the outcome was inevitable. That same argument is being made today and it resonates loudly with those that can pin the blame on someone else for their failure and look to government to provide for their success.
Murray states that capitalism must repair its image. All of us must reinforce the virtue of success and that capitalism is the economic expression of liberty. The challenge is ominous. This basic concept is no longer acceptable in most of our schools nor in many American homes. It isn’t sufficient just to point to the death of democracy in Greece or the failure of European socialism. Mitt Romney, to be successful in November, must borrow the Reagan message of American (and its’ capitalist system) as the “shining city on the hill.” Rumor has it that Reagan’s hologram will introduce Mitt Romney at the Republican Convention. This “appearance” of President Reagan would be spooky but memorable and perhaps a film clip of the former President’s 1980 question “Are you better off today than you were four years ago” will be adequate.
A friend sent me a quote from one of America’s foremost novelists and philosophers who wrote this piece over fifty years ago.
“Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed.” —Ayn Rand
Real Return Investing
Paul Brodsky, who has graced these pages several times, is a principal in QB Asset Management (qbamco.com) and an author of what CMV believes is the most articulate synopsis of macroeconomic issues as well as the Federal Reserve System and the overriding monetary problems that the Fed has created. Brodsky has also offered up a practical and relatively simple strategy that would solve the current “global balance sheet - centric malaise brought about by the end of an almost 40 year global credit cycle.” Here are some concepts that you need to grasp.
● Both creditors and debtors are starved of base money (currency in circulation and bank reserves held at central banks) with which to service debt.
● Conventional monetary and fiscal policy responses seeking higher growth and more efficient spending cannot work.
● Credit money is created (in the fractional reserve banking system) and is all money in existence that is not base money.
● US bank deposits held domestically and abroad total about $20 trillion while base money is $2.7 trillion. The gap separating credit money deposits from base money defines systemic leverage.
● The significantly over-leveraged banking systems and a highly indebted public is currently pressuring monetary authorities to de-leverage credit money by creating more base money. As money creation is less disruptive (in the short-term) than credit deterioration base money inflation is most likely to continue which is the purpose of this exercise.
You may recall that CMV summarized Brodsky’s solution to the Fed’s present dilemma by monetizing gold. The US base money now is approximately $2.7 trillion. The US gold bullion supply (reportedly) is about 8300 metric tons. If you divide the total base money supply by the gold supply the Shadow Gold Price (SGP) would be $9,961/oz. Since the credit crisis of 2008 and the rapid expansion of the Fed’s balance sheet to $2.7 trillion the SGP has ballooned from about $3,000/oz to nearly $10,000. The only way (other than through massive credit de-leveraging) that the Fed can avoid the accelerated devaluation of the USD and historic inflation is for the Fed to monetize gold to stabilize the USD. The Fed would tender for all privately owned gold near the SGP of $10,000/oz and would purchase the gold through newly issued Federal Reserve Notes which would flow to the banks in the form of new net deposits. This would be a discrete monetary event and a simultaneous de-leveraging. The USD would then be pegged to the new price of gold.
Assuming the Fed continues its’ present policy of expanding base money, what options does an individual have to preserve and protect their purchasing power and secure their future? Brodsky recommends:
Treasure
That’s TREASURE, not Treasuries! He’s citing fine art, rare property and gold. Treasure does not have to have any functional utility. It needs to be scarce, have ongoing demand, easily verifiable and portable. The wealthy investor, Leon Black just exchanged $120 million of devaluing dollars for a painting by the artist Edvard Munch entitled “The Scream.” Not many of us could attend a Sotheby’s auction and bid on such a piece but we could acquire rare stamps, baseball cards, historic items and the like. Real property in key locations is not portable but will always have real value. In the late 1970s when monetary and price inflation were out of control, and home mortgage interest rates ballooned to 17%, investors were purchasing real property to convert their currency to hard assets. Future activity could be more dramatic as interest rates are at historic lows and the small investor would utilize leverage.
We believe that this exercise and Brodsky’s expertise should make the reader focus on the anomaly that lies ahead and that there is a solution.
2016: Obama’s America
Gerald R. (Jerry) Molen is an Oscar-Winning film producer whose credits include “Rain Man”, “Minority Report,” “Twister,” Schindler’s List,” and “Jurassic Park.” His latest film is what Molen terms an “educational documentary” entitled “2016: Obama’s America (Love Him, Hate Him, You Don’t Know Him)” . The film was just released and hit the theaters July 27th.
Much of the factual data in the film is based upon the research compiled by author Dinesh D’Souza for his book “The Roots of Obama’s Rage” which has quickly become a best seller and has touched off a massive controversy. Molen said in a recent interview by Jay Fernandez of “Indiewire” when Fernandez asked if movies can be an effective art form; “I think so. I don’t think there’s anything more powerful than the visual image...like “Schindler’s List” that had a great impact on society.” Molen’s objective is to educate the public whom he believes doesn’t know Obama’s background or what his hidden agenda is for America if he should gain another term. Asked by Fernandez if Steven Spielberg, a strong Obama supporter and a close friend of Molen’s would be invited to a screening, “Absolutely.” Fernandez followed up, “Would he (Spielberg) want to see it?” Molen laughed and said, “I don’t know.”
There’s a “Quist Twist” to this story. Your writer has met with Molen and the Oscar-winning producer has reviewed a screenplay of “The Future Isn’t What It Used To Be” taken from a novel by the same title, written by your writer. Ironically, this time-travel story takes place in the year 2053 after America has suffered from financial collapse and is in chaos. A coincidence? Our concern is that given Hollywood’s proclivity to rabidly support the radical left, that Molen’s stature will considerably slip and he will be ‘black-listed’ in Hollywood. As we write, an all-out effort is being made to prevent this film from showing in theaters across the US.
We’ve not had an opportunity to review Molen’s film. Do everything you can to find a theater that will run the film and invite all the people you can reach to see it. America didn’t know who this President was as a candidate in 2008. The story is now being told accurately and effectively. No excuse this time. Get ready for the “October Surprise.”
Updates
The Heretical Banker – Break Up The Big Banks
Sanford Weill just disavowed the work and ambition of his lifetime. This banking giant, who built Citigroup through a myriad of acquisitions including Travelers Ins. Co., in 1998 and who led the industry’s lobbying effort to repeal the 1930s Glass-Steagall Act which prohibited commercial banks from doing investment banking, stated recently on CNBC that “what we should probably do is...split up investment banking from banking.” The banking industry was in shock when Weill added, “I am suggesting that they be broken up so the taxpayer will never be at risk...mistakes were made.” This coming from a man who enlisted the help of President Bill Clinton and Fed head Alan Greenspan to repeal the Act in 1999 that was the major obstacle to the banks taking aggressive and leveraged speculative positions, which gave the nation the sub-prime debacle. Weill stepped down as Chairman of Citi in 2006 and sold his stock back to the mega bank for $47/sh. Two years later the stock had lost 90% of its value. Maybe, just maybe, Weill’s conscience forced him to admit it all was a mistake. Now, we’ve got Dodd-Frank which, like interest, compounds the problem and the taxpayers remain at risk.
The Banksters Strike Again
The Student Loan Marketing Association (SLM Corp), more commonly known as Sallie Mae, was a Government Sponsored Enterprise (GSE) formed in 1972 to provide loans principally to college students. Sallie has been about as successful as its’ GSE cousins Fannie Mae and Freddie Mac but little fanfare has focused on another taxpayer bailout that’s about to transition from the problematical to the absurd. Here’s why.
There is now approximately one trillion dollars of student loan debt outstanding and about 90% of it is federally (read taxpayer) guaranteed. The remaining $10 billion are private loans. In July, the newly-created Consumer Financial Protection Bureau issued a report concluding that Congress should consider allowing borrowers to discharge their private student loans through bankruptcy. What’s coming, of course, is a change that will also permit Sallie Mae borrowers to utilize bankruptcy to discharge their debt thereby making US taxpayers liable for the balance due. First the President and Congress cut student loan interest rates by about 50% and now he’s telling young voters that he’s making it easier for them to avoid repayment at all.
You may recall that CMV labeled those large institutions of higher learning as “Monoliths” in discussing the Penn State debacle. No one (that we know of) has made the correlation of the creation of these “Monoliths” with Sallie Mae. Since the advent of Sallie in the early 1970s, the cost of a college education became affordable to a huge number of students who otherwise couldn’t have afforded it. That is what was intended. As attendance swelled however, so did the size and influence of the colleges which inflated tuition costs at an annual compound rate of nearly 8%. Now, this college debt bubble is imploding and the “Monoliths” will be forced to downsize and the borrowers will be offered a reprieve. The hard reality is that most of the trillion dollar debt will never be paid and the lessons of Econ 101 won’t be learned. The “Monoliths”? Enrollment will start to plummet as young people will go on-line to get their education. Someone moved the cheese – again.
NOTE:
SLM Corp was a publically-held corporation that originated and serviced student loans as a Government Sponsored Enterprise (GSE). It was, in effect, a middle man which earned substantial fees and paid outsized compensation to its’ officers and principals and had little or no risk as loan losses were absorbed by US taxpayers.
Political Correctness
Congressman Trent Franks (R-Az) serves on committees charged with oversight of the President’s Cabinet members and their agencies. He recently signed onto five letters to the Inspector General of five different federal departments charged with National Security, asking them to look into concerns over the Administration’s noticeable and demonstrable shift in policy towards the militant Islamist groups known as the Muslim Brotherhood. Here are a few cogent paragraphs from Franks’ letters:
“The Muslim Brotherhood network within the United States became publicly known during the 2008 Holy Land Foundation trial (the largest terrorism finance trial in U.S. history) where the evidence showed that the Muslim Brotherhood's goal in North America is, in their words, to ‘destroy Western civilization from within,’[1] which their own writings have said includes establishing an advisory presence inside top U.S. institutions. The Brotherhood has also identified 29 groups in the United States as ‘our organizations and organizations of our friends.’ (Reference the government's evidence in the Holy Land Foundation Trial, N.D. TX (2008), specifically "An Explanatory Memorandum for on the Strategic Goal for the Group in North America ," and see United States v. Holy Land Foundation et al. (No. 09-10875)(2010). For a partial list of exhibits, see http://www.txnd.uscourts.gov/judges/hlf2.html)
“The letters to the Inspectors General provide many examples that merit concern. First, the Department of Homeland Security granted a secret security clearance to Mohamed Elibiary, a man who had expressed support for Holy Land Foundation trial defendants. Mr. Elibiary also was reported to have been a featured speaker at a conference in honor of notorious radical Islamist Ayatollah Khomeini. The Obama Administration placed Mr. Elibiary on the influential Homeland Security Advisory Council, where he advises on information sharing within the intelligence apparatus.
“Also of concern was the State Department's grant of a visa – in violation of federal law – to Hani Nour Eldin, a member of the Egyptian terrorist group, Gamaa Islamiya. The leader of this group is Omar Abdel Rahman, better known as the ‘Blind Sheik,’ who is now serving a life sentence for his involvement in terror plots including the 1993 bombing of the World Trade Center. Eldin was subsequently given access to the White House itself, where he reportedly pled for the release of the Blind Sheik from U.S custody. Egypt's Muslim Brotherhood President Mohammed Morsi, openly supported by the Obama State Department, is also calling for the release of the Blind Sheik.
“Other examples include meetings held by the Attorney General and other senior Justice Department officials with representatives of unindicted co-conspirators named in the federal prosecution of the Holy Land Foundation terrorism-financing conspiracy. Preeminent among these was one of the largest Muslim Brotherhood affiliated organizations in the United States: the Islamic Society of North America (ISNA).
“Heightening these concerns was the refusal by the Attorney General to proceed with the prosecution of three of the Holy Land Foundation’s unindicted co-conspirators – ISNA, the Council on American Islamic Relations (CAIR) and the North American Islamic Trust (NAIT). The Attorney General failed to pursue this prosecution in spite of the fact that the record from the Holy Land Foundation trial obviously supported proceeding with the prosecution of the unindicted co-conspirators.
“To collaborate in this administration's political correctness and pretend that these issues are not real is to potentially put innocent lives at risk in the pursuit of preventing anyone from feeling uncomfortable.
“In spite of these examples (representing only a small part of my reasoning for signing the subject letters), the Obama Administration has announced that it will now engage with the Muslim Brotherhood, stating it is in Washington’s interests to deal with parties “committed to non-violent politics.”
“Somehow, the Obama State Department has failed to notice decades of history whereby Hamas, the Palestinian branch of the Muslim Brotherhood, has violently killed and maimed innocent Israeli, Palestinian, and American civilians. What is even more startling and tragic, is that this carnage continues under the watchful eye of this Administration.
“I am not sure which should alarm America more, this Administration’s seeming blindness to the violent and extremist nature of the Muslim Brotherhood, or the Administration’s willingness to overlook it in the name of political correctness.
Political Correctness (PC) has become one of the most dangerous, destructive and insidious concepts or mandates ever to be conceived. PCers portend to preach tolerance as the centerpiece of their philosophy. What’s occurred, however, is that it has bred complete Intolerance of those who disagree with any notion or cause promulgated by the PCers! If you agree with Mr. Franks you are not a concerned US citizen – you are an Islamaphobe or racist. CMV suspects that there’s something more sinister at work here.
In our (informed) opinion, there is a deliberate policy of this Administration to undermine the American culture and foment unrest. The Muslim Brotherhood makes absolutely no attempt to hide its’ goals and its’ intent “to destroy Western Civilization from within.” PC gives the perfect cover. Its’ been almost 3 years since Major Nidal Malik Hasan went on his pre-mediated rampage at Fort Hood and killed so many Americans. PC allowed it to happen and just maybe it will exonerate him.
Chinese Checkers
You’ll recall that CMV reported on Larry Edelson’s (Uncommon Wisdom) report from Shanghai that an agreement had been made by the US Government and their counterparts in China whereby the Chinese would allow their currency, the yuan, to rise and the US Dollar would decline. It now appears that 1) Edelson’s assessment was wrong, or 2) the Chinese have changed their minds.
In a feature article in the World News section of the WSJ (July 26, 2012), the Chinese have reversed their strategy. After two years of trying to boost the value of the yuan vs. the USD (making their exports to the US more expensive) the Chinese yuan has fallen 1.1% vs. the USD this year after rising 4.7% against the USD last year. Premier Wen Jiabao said in mid-July, “The task of promoting full employment will be very heavy and we must make greater efforts to achieve it.”
CMV cynically suggests that now that the Chinese have secured major concessions from this Administration (allowing Chinese banks to locate in the US, trade US Treasuries directly, etc.) they will renege on any previous arrangement or maybe there wasn’t a currency deal after all. Bottom line – the Chinese are going to do what is in their best interests and there’s very little this Administration can effectively do about it.
Proliferate Ponzis
Despite the fact that Charles Ponzi invented the scheme that bears his name almost 100 years ago and died penniless in 1949, the gallery of his copycats continues to grow. CMV reported on perhaps the greatest Ponzi con man of all time, Bernie Madoff, but followers continue to proliferate. We reported on our personal experience with MF Global and Jon Corzine who has successfully avoided any unpleasantness in his scheme because he has friends in (very) high places where corruption reigns supreme and there’s no recourse to curtail it. On August 1, 2012, the trustee in the MF Global case announced that customers of MFG would recover about 90% of their capital that was supposedly secure from Corzine’s fingers. Your writer sold his claims against MFG 3 months ago for 90% of the value of the accounts so our buyer/investor will absorb more loss than we did.
Most of you have not heard of Robert Allen Sanford whose recently collapsed Ponzi of $7 billion earned him a sentence of 110 years, or one Russell Wasendorf, Sr., who owned Peregrine Financial Group, a commodity brokerage firm, in Cedar Rapids, Iowa. $225 million in customer money is missing in this true Ponzi because all the bank records and customer statements have been ‘manufactured’ by Wasendorf for 20 years! What is remarkable about this man is that he married, attempted suicide and has his scheme uncovered all in the same week! Ponzi schemes end abruptly.
What is further noteworthy here is that these Ponzi’s are a definitive sign of the times. People desperately want to get rich quick. They ignore the obvious potential flaws because they have little patience and as a result are a perfect mark for the con man. Expect more Ponzi schemes to proliferate in the future.
The largest Ponzi in mankind’s history, however, is our Old Age & Survivorship Insurance system – Social Security. Payments to retirees, the disabled and the widows and orphans will be dependent on new money from new participants to sustain itself and its’ unsustainable when there is only 1 payee for every 2 receivers. In all probability all those paying into the system now who are under age 30 will never receive anywhere near their projected benefits. UNLESS, the system is changed.
Sector Overview
1. Cash & Fixed Income
Incredibly, in mid-July, US Treasury auctions produced all-time record low loan yields for all two, five and seven year notes and the 10 year T-Note fell to 1.38%! Within a week the yield re-bounded to 1.54% and the 30 year rose to 2.63% from 2.55%. While low rates have been great for corporate elite borrowers it hasn’t done anything for small businesses and most importantly, nothing to create growth. What we’re experiencing, in CMV’s opinion, is that low rates are no longer the elixir to stimulate the economy and have been absolutely devastating to savers which has also contributed to lower GDP. Bernanke’s one-trick pony is no longer in the race.
Evidence that the above is true is the fact that the US Treasury Dept. plans to offer floating rate securities, its’ first new product in 15 years, to attract investors. The new product won’t be available for another year and will be a two-year note. In another development, the Federal Reserve expressed deep concern over the big “repo market.” The Fed sees a need to rein in a $1.8 trillion market that allows Wall St. Banks to fund their trading business using investors money market funds held by companies like Fidelity Investments and Federated Investors, Inc. HELLO! Think Jon Corzine and MF Global. Chances are investors aren’t even aware that this practice exists.
CMV is of the opinion that Treasury yields are going to rise and the US bond market will be the next bubble du jour. We’re getting close to the time to hedge this risk and short this market.
2. US Equities
We’re experiencing the “dog days of summer” but maybe it’s best to let “sleeping dogs lie.” Despite the fact that many traders are on the beach or in the rarified air of high country, the US market has been remarkably resilient. As reported above, the S&P 500 is with 2% of its’ all-time high and given all the uncertainty in the EU, the Congress, the Fed, the election, and the “fiscal cliff,” it is indeed remarkable that there hasn’t been a correction. Traders needn’t be at their desks however. High Frequency Trading is on automatic which has an enormous influence on the market. Just as long as the algorhythms don’t decide to sell. CMV sees a number of issues that could be positive SHORT-TERM for the US equity market.
1. A favorable resolution of the EU debt crisis.
2. A favorable move by the Federal Reserve that could stimulate the “risk on” trade.
3. A Mitt Romney victory in November with a Republican controlled Senate and House.
CMV is of the opinion that the US equity market is going to be challenging in 2013 and beyond. We believe that all investors should consider a professionally managed hedged portfolio. Our advisory services with Dynamic Wealth Advisors include an investment manager with a 14 year track record using a hedging strategy. We would be pleased to discuss your situation to determine how a strategy such as this could help accomplish your objectives.
3. International Equities
We haven’t discussed Latin America for quite some time and dramatic changes have occurred there which are noteworthy. Brazil is a case in point. In 2010 the Brazilian GDP clocked in at 7.5% growth, consumer demand fueled inflation was double digit and the central bank’s policy rate was over 12%. Billions of foreign capital poured into the country fueled by Brazil’s vast natural resources including the largest discovery of oil offshore in the Americas. Now Brazil is the victim of its’ own success.
The middle class, which went on a spending spree, binging on new luxury cars, electronics and vacations now find themselves deeply in debt and the economy has fallen like a rock. GDP has plunged to 1.5% (similar to the US), the bank rate has declined to 8.00% and policymakers are searching for an answer as things could get worse. The spotlight on Brazil is indicative of a global slowdown that has spared virtually no one. There are few opportunities in this Sector at present.
4. Hard Assets
Strange things are happening in the oil patch. In March, West Texas Intermediate Crude Oil (WTIC) was about $110/BBL. When the global economy turned south, demand decreased and WTIC fell to $77/BBL in June. Suddenly crude is at $92/BBL as we write despite little improvement in the demand side. Inexplicably gasoline has risen $.24/gal in the US and as much as $.40/gal in some areas like Florida which is up 9% and Michigan up 12% for the month. There’s a little irony here. These two states are swing voter states that presently have the President leading in the polls. It’s no secret that this Administration is dead set against hydrocarbons and is doing everything it can to restrict domestic production. It appears that the recent price increases are coming back to bite the President where it hurts the most.
CMV remains bullish on the oils and is particularly wary of an October surprise in the gulf.
Natural Gas (NG) has been the big winner in this Sector. In April, 2012, NG was under $2/BTU after a mild winter left supply at a historic level, 6% higher than normal. Suddenly the market changed as one of the hottest summers on record created a massive increase in electric power for air conditioning and utilities switched power from coal to NG. NG rose 50% to over $3/BTU in a couple of months, and one expert sees $4 by next year. This proves one of CMV’s core Contrarian beliefs. When any commodity reaches a historic low in price something always occurs which changes the dynamics of that market.
5. Precious Metals
CMV believes that we’ve arrived at the point of maximum pessimism and bearish
sentiment in this Sector. The Contrarian sees an enormous buying opportunity not unlike September, 2001 when gold was at about $275/oz., just prior to 9/11. The major difference then vs. now is that the downside risk then was negligible. The principal risk then was that the price of gold would remain range-bound and would see little or no appreciation and there were plenty of pundits who forecast just that result. For 11 years it has gained every year and outperformed every Sector. At $1,620/oz today there is an unmistakable downside risk but the following experts believe the upside potential justifies the risk.
● The Daily Wealth Trader says that the global race to devalue currencies will push investors into gold.
● Steve Sjuggerud first recommended gold in his June 2002 issue of True Wealth and since he wrote that piece gold has gone up 11 straight years. He agrees that gold now is at “maximum pessimism.”
● Jeff Clark in his S&A Short Report says gold is approaching a short-term buy signal.
● Eric Sprott of Sprott Asset Management forecasts $150/oz silver within two years.
● John Doody who writes Gold Stock Analyst believes that silver will have greater gains than gold and has launched a new newsletter focusing on silver.
Most of these analysts have a PM bias. What’s important is that there’s a large number of non-gold bugs who also see the upside.
6. Commodities
On July 24, 2012 the droughtmonitor.uni.edu/ produced a color-coded map of the US depicting drought areas of the country from D0 Abnormally Dry to D4 Exceptionally Dry. It looks like someone had burned a hole in the middle of America’s bread basket. Corn, wheat, soybeans and almost all crops have been severely impacted. Corn can be found in just about everything we consume which historically was priced at $2.50 to $3.00/bushel and is now over $8.00 and no one knows what the final production number will be but it could be catastrophic. Ranchers and farmers are liquidating their herds of cattle and hogs because they can’t afford to feed them. Prices for beef and bacon are relatively cheap because of the current liquidation but will rise next year. Chicken has already increased in price and has depressed earnings at Buffalo Wild Wings and other “chicken stores.” Shortages and price increases of basic food products could be, coupled with devaluation of the USD, a trigger point for inflation at a level that could be devastating to the consumer. There are a number of commodity investments that may exploit this situation. We offer portfolios with investments in this area and would be pleased to discuss if they may be appropriate for your portfolio.
7. Real Estate
CMV recalls that approximately three years ago Larry Silverstein, who is rebuilding the World Trade Center site in New York City, was interviewed on CNBC and proclaimed that the demand for office space at WTC far exceeded supply and several million square feet had been committed. He started construction on WTC #3 in mid-2010, which was intended to be 80 stories containing 2.5 million square feet. Construction has stopped at 8 stories recently because there are no tenants. WTC #4 was halted at ground level because zero percent was leased and WTC #4 is just 51% leased. WTC #1 being developed by the Port Authority of NY and NJ and is 55% leased. The principal reason given that demand for office space has evaporated is that Wall St. financial firms, traditionally the reason to build, are downsizing, 1) because of the economy, and 2) margins are shrinking as the industry faces tougher regulations. There is a trend in our business to become independent of the major firms and operate on-line rather than in luxurious quarters. The cheese has been moved again. Silverstein’s over optimism failed to assess the public psyche. Who in the hell wants to be in a high rise at WTC?
In a different context there’s a niche market in commercial properties for users and their agents. Tenants are becoming owners of their properties. The Small Business Administration is funding the acquisition of office and retail space for occupant owners. The buyer puts up only 10% down payment and the SBA guarantees 50% of the loan and the originating bank provides the remaining 40%. JP Morgan/Chase and Bank of America are very active in this market and the number of these loans has soared. This program is termed the SBA 504 plan. It is designed for businesses that have less than $5 million in revenues and less than 500 employees. Tenant/owners are discovering that their payments in many cases are much less than rent. Commercial brokers take notice.
Catherine Reagor’s Real Estate column recently in the Arizona Republic, has cited RL Brown and Greg Burger’s “Phoenix Housing Market Letter” forecasting new homes sales in 2012 of 10,000 vs. 7,100 last year. They predict that 14,000 new home permits will be issued this year and 16,000 next year. This compares to 64,000 permits issued in 2006. These increases are in line with CMV’s assessment of the market going forward. We’re heading into a future that has no precedent in American history. It is not only difficult to forecast but even harder to develop a 3 to 5 year plan.
8. Special Situations
This Sector, which features mostly microcap stocks, is the most ignored, unloved and beaten up of any market. Almost without exception the stock price on most of these names followed by CMV are lower than they were after the Lehman Bros. failure and market crash of 2008. All are in the Natural Resources Sector. The sub-Sectors include:
1. Gold and silver
2. Platinum and Palladium
3. Rare earths
4. Uranium
5. Oil
6. Potash
7. Graphite, Vanadium and Beryllium
1. James Dines (The Dines Letter) who was the “first gold bug” in the 70s, says that precious metals are searching for a bottom which he predicts might occur “around August.” It’s August. A breakout above $1,640/oz in Au and $30/oz in Ag will attract capital to the Sector. As bullion prices increase the Senior Miners will respond first, then the Juniors and last the Explorers. The highest risk and reward should be realized in the Explorers.
2. Platinum and palladium will principally track auto sales worldwide which are now in decline. Strong sales have been supported by sub-prim auto debt. Remember 2007?
3. Jim Dines reports in his July 20, 2012 newsletter:
“...China continues its’ stranglehold on Rare Earths...because they will be required for critical growth industries of the future: cell phones, military missiles, hybrid and electric vehicles, clean-diesel, auto catalysts, super magnets for wind turbines, computer hard drives, phosphor-LCD, plasma and digital music players.” In fact, Dines says, China is stockpiling REEs for the next uptick in demand and higher prices. The Dines Rare Earth Index is down about 60% from its’ 2011 high.
4. Uranium (Ux) U3o8 price is currently at $49/LB down about $8/LB since May. Despite the Fukushima nuclear accident in March, 2011, the demand for uranium exceeds supply and the deficit is expected to grow. Established producers represent one of the best long-term holds in the resource Sector.
5. We’ve stated the case for oil on page 17 above. All investors should have an allocation in this Sector. The majors are paying around a 5% dividend which beats the heck out of Treasuries.
6. Potash is a sleeper and given the short and long-term fundamentals with the coming food shortage fertilizer will be in high demand, and higher prices are baked into the drought.
7. CMV reported extensively in the July issue on these “new age” metals. If you need an update please call.
Just a reminder that there will not be a September issue of CMV because our staff will be on vacation. We’ve deliberately made this issue extensive in both depth and length in hopes that it will fill the void.
Coming In The OCTOBER ISSUE: The October Surprise!
If you want to learn more, please give me a call at (602) 840-4117. At a time of crisis there’s always opportunity.
-- H. L. Quist
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