Jason Kelly

The Impending US Bankruptcy Is Not Only Obama's Fault

2010-02-09T19:00:00.001+09:00

Now that the latest US budget has been thoroughly digested by the media, I'm encouraged to see a greater percentage than usual catching on to the nation's stroll down the path to bankruptcy. Maybe we can chalk that up to more people paying attention to finances after watching the ripoff of taxpayers orchestrated by banksters and their wholly-owned politicians.

What's discouraging, however, is that too many people think this is a new path for the US. It isn't. The nation has been walking down this path for decades. Too many people like showing pictures of President Obama on one-trillion-dollar bills and laying blame for the predicament at his feet. It doesn't belong only there.

What people need to know is that it doesn't matter who's president. To grasp that, one need only notice that US policies under both Bush and Obama have been roughly the same. Had McCain won in 2008, I'd be writing this exact same article, except I'd be using the name "McCain" instead of the name "Obama." Democrats would be screaming that, see, they told us McCain was just Bush 2.0. Instead, Republicans are saying that we need to stop the big government being created by Obama and the Democrats. "Stop the tax-and-spend mindset," they say, ignoring that much of our current predicament happened on their watch over the White House.

It doesn't matter who's president because government is owned by special interests, most of which are funded by corporations. That's why we get this breakdown:

Bush: Iraq War for no reason
Obama: Afghanistan war for no reason
Winner: Defense contractors

Bush: No national health care
Obama: No national health care
Winner: Health insurance companies, et al.

Bush: No smart energy policies
Obama: No smart energy policies
Winner: Oil companies

Bush: Mind-blowing deficits
Obama: Mind-blowing deficits
Destination: Bankruptcy

Bush: Bad speeches
Obama: Good speeches
Result: Same in each case

When a political system is run in a way that leaves politicians thinking more about funding than leading, those with the funds will lead. This will never change until we have either a second constitutional convention or an amendment that alters the landscape of campaign finance. The recent Supreme Court decision in Citizens United v. Federal Election Commission, which granted corporations the same rights to free speech that were previously reserved only for persons, shows that corporate control is growing rather than shrinking.

It has been growing for a long time. It was the Clinton administration, after all, that allowed Robert Rubin and Larry Summers to get the 1933 Glass-Steagall Act repealed in 1999, which cleared the way for the housing bubble's now-infamous toxic derivative assets. When those blew up, both the Bush and Obama administrations snapped to attention to spend hundreds of billions of taxpayer dollars to bail out bad banks and car companies. The Obama administration even hired Clinton's bad boy Larry Summers as head of the White House economic team, bathing in bright light how the more things change the more they stay the same. The guy who, under Clinton, lit the fuse for the economy to eventually blow up is now helping to put it back together again under Obama. Why vote?

The New York Times wrote in an editorial last Saturday:

When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come.

By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 -- two weeks before Mr. Obama was inaugurated -- the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion.

About half of today's huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit -- all of which Republicans supported, virtually in lockstep.

The other half of recent deficits is due to the recession and the financial crisis.

Those last two, the recession and the financial crisis, were brought on by the slashing of regulations during the Clinton administration, so we can't get too overjoyed about the budget having been in the black for three years prior to Bush. Every bought-off politician is complicit in the impending bankruptcy.

On that, the Times continued:

Under current policies, federal debt in the United States -- the sum total of annual deficits -- would grow from 53 percent of the size of the economy in 2009 to more than 300 percent by 2050, driven mainly by rapidly rising health care costs and, in part, by the aging of the population. Combined, those two factors exert enormous pressure on the government's biggest spending programs, Medicare and Medicaid, and, to a lesser extent, Social Security. . . .

Unless health care costs are controlled, there is no way to solve the country's long-term deficit and debt
problems. . . .

There is no way to get deficits under control until our political leaders are willing to acknowledge difficult truths and make even more difficult political choices. We have heard and seen too little of that from the Democrats lately, and none at all from the Republicans. That is truly a recipe for disaster.

Yes, it is, and we will run head-on into that disaster because our political leaders aren't leaders at all. They're the handmaidens of special interest groups that don't want health care costs to be controlled, or pointless wars to end, or dependency on oil to end, and so on.

To be clear, I am not an Obama supporter. However, nor was I a McCain supporter. Under either man -- indeed, under any person in the current political apparatus -- the results would be roughly the same because those directing the funding will control the outcome. What they want is not usually what citizens want. Therefore, US government under any figurehead will generate results that most citizens don't want. In this case, financial disaster.

A new party won't help, either, I'm afraid. Take the growing Tea Party movement. The name is right in the sense that the original Boston Tea Party used active resistance against existing government to make a point. They threw the tea into Boston Harbor. We need similar active resistance against government to change anything. Instead, the current Tea Party offers as its new version of leadership...Sarah Palin. Huh?

About the nascent Tea Party, Canada's National Post wrote earlier today:

The Tea Partiers face the same challenge faced by all populist protest movements: Crafting policies is far harder than simply venting against the status quo. Once they have driven the subject of their discontent from office, or forced him to retreat (say, from health-care reform), they typically descend into petty in-fighting or are co-opted by an established political party.

As their Tennessee convention showed, once one gets passed the Tea Partiers' common interest in spoiling "Obamacare" and stopping the expansion of the US federal government, the movement is not exactly brimming with sophisticated policy ideas. Its rank-and-file is a colorful but quarrelsome hodgepodge of fundamentalist Christians, antitax activists, anti-immigration cranks, protectionists, mixed in with more mainstream conservative Republicans.

The Obama blame game will continue because he's the current figurehead, but keep your eye on the bigger problem at work. Smart people know that it doesn't matter who wins elections anymore, and that what's needed is a revamping of Washington politics.

That will not happen within the current system because the people in charge don't want the system to change. Therefore, we need a constitutional convention. We won't get one, so prepare for disaster.

Double-Dip Recipe

2010-02-08T19:35:00.002+09:00

As I see it, the recipe for a double-dip recession is a simple one.

The supposed recovery, which we've doubted every step of the way, has happened on government stimulus and bail-outs distributed by bought-off politicians to their private sector cronies. Those politicians refuse to raise taxes for fear of losing their jobs. That leaves the game vulnerable to a bond market upheaval that sends interest rates higher and stops the hands of government money-throwers.

Said money-throwers would have no choice but to cut spending and raise taxes, precisely at the worst possible time to do so. The move could bring the second half of the recession. That's why any ripple in bond markets, but especially in sovereign bond markets, gets stock investors bent out of shape.

What's more, the same forces that contributed to the collapse of 2008 are working hard to cause and benefit from the next collapse. How? By buying credit-default swaps (CDS), which are insurance against a bond going bust, when they don't even own the bond in the first place. That's called "naked" buying. Naked buyers of CDS want to own only the insurance policy against a bond going bust, and collect when it does. Well, what happens when people want to buy the same thing? Its price rises.

Last week, the price of CDS on bonds out of Greece et al. rose like mad. The price of the cost to insure against default is used as a measure of the safety of the underlying bond and, by extension, the bond issuer. If the cost of insuring against Greece defaulting goes through the roof, we assume that Greece is in trouble. Few inspect the cause for the insurance price spike. That's how enough institutions buying the CDS can drive up the prices, cause fear around the bond issuer, lead to downgrades of its debt, and start the cascade that fulfills the prophecy of having bought the insurance against default.

It happened in 2008, and it's happening again. Watch carefully.

Bankers Winning Again

2010-02-07T06:09:00.000+09:00

Two weeks ago, I reported on President Obama's announcing his sudden desire to reform banks after Republican Scott Brown won the Massachusetts Senate seat formerly occupied by Ted Kennedy. I wrote that "after a year of following the traditional Washington way of bending over backwards to hand taxpayer money to financial firms, he was ready to put an end to risky bank activities like proprietary trading."

I went on:

While the market reacted in a way that predicted crashing bank profits ahead, history suggests that banks will win this scuffle. With the help of Robert Rubin and Larry Summers, they succeeded in getting the 1933 Glass-Steagall Act repealed in 1999, a measure that cleared the way for the housing bubble's now-infamous toxic derivative assets. If banks could whittle away a protection that had held for almost seven decades, why not block a too-little-too-late regulatory gesture that involves terms most citizens don't even understand?

Keep an eye on this issue, but do not be surprised when big bank money decides the outcome. . . . Nobody is more vulnerable to big money buy-offs than members of Congress, so all factors suggest banks will not be reined in.

It's already going that way. On Tuesday, Senate Banking Committee Chairman Christopher Dodd criticized the Obama administration for complicating the effort to overhaul financial-market rules, and said the late addition of a new idea for limiting risky behavior had threatened the process.

He said the announcement of the so-called Volcker Rule "seemed to many to be transparently political," as in Obama was trying to appeal to voters upset with Wall Street right after his party lost the Massachusetts Senate seat.

Senator Richard Shelby said Obama had "air-dropped" his new idea into the deliberations on fixing the financial system. Other Senators made similarly resistive comments.

Former Federal Reserve Chairman Paul Volcker, after whom Obama's new proposal is named, told the committee in testimony last week, "I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."

Caution Paying Off

2010-02-05T10:44:00.003+09:00

We've been cautious for a while now, selling into strength and adjusting hedge sizes. It's been far from perfect, believe me, because some of what we sold we should have held longer into the rally, and we bought our hedges too early. We netted out positive, but would have done better if not for those crimps on profit.

Our caution may finally be paying off, though. Brand new subscriber Kent in Connecticut sent the following note earlier today:

I am a new member, joining your web site last weekend, and I am halfway through reading your little book that I ordered from Amazon.

Just wanted to thank you for your recommendation to buy a hedge with BGZ and to change the entry price from $17 to $18. Today, [with the market losing 3.1%] that hedge is covering my butt, and reducing some of the stress a day like this could cause.

That one call paid for my yearly subscription to your web site ten times. I hope to enjoy similar success as I adopt a few other of your ideas in the weeks and months to come.

And I hope to provide Kent with similarly useful calls down the line. By the way, the part of last Sunday's note that led Ken to buy BGZ at $18 was this:

With the market's continued drop last week, our limit order to double down on our BGZ hedge at $17 in Tier 3 did not fill. It closed the week at $18.88, a full 10% away from our target price. It would take a move on the S&P 500 back to 1110 or so to see that fill, and I doubt it'll go that much higher on a relief bounce. It might go to 1095, though, so let's adjust our order from $17 to $18:

Double down on Direxion Russell 1000 -3x (BGZ) at $18

A modest relief bounce would see that fill, and put us in position to make a few more moves before a drive lower takes hold in a new downward-sloping channel.

The S&P 500 peaked at 1105 on Tuesday, and BGZ bottomed that same day at $17.22. It was good to adjust the order upward. BGZ closed today at $19.23.

Please join us!

On Success Express

2010-02-04T09:12:00.001+09:00

I spoke with hosts Nancy and Lisa on "Success Express" from 7:20 to 7:40 p.m. ET. We discussed why most people feel intimidated by the stock market, how to make 3% quarterly growth consistently regardless of the market environment, and why the US market is still in great danger because the government followed Japan's flawed playbook for dealing with bad banks -- even though every US Treasury secretary flew to Tokyo for the past 20 years to tell the Japanese government that it shouldn't have made private banking debt disasters public.

When the US encountered its own private banking debt disasters, what did it do? Made them public. Way to go! Now, maybe America can enjoy a two-decade up-again-down-again recession just like Japan has experienced following its stock market bubble burst. The Japanese bubble burst in 1989, and the recession it caused still hasn't ended.

Nancy and Lisa were gracious hosts, and I hope to join them again in the future.

Why We're Going Bankrupt

2010-02-03T19:25:00.001+09:00

It doesn't get much simpler than this:

Fiscal 2011 Budget: $3,800,000,000,000
Fiscal 2011 Deficit: $1,300,000,000,000
Savings achieved by "tough choices": $20,000,000,000
Share of budget those savings represent: 0.5%

From a January 30 post titled Tough Choices by White House Communications Director Daniel Pfeiffer:

In the 2011 Budget we will release on Monday we terminated or reduced programs that weren't working well or duplicated efforts, some in areas that are important to the President and to the Administration.

Last year, President Obama sought to end or reduce 121 programs for a one-year savings of approximately $17 billion of which $11.5 billion was from discretionary savings. Congress approved cuts that produced a net discretionary savings of $6.8 billion, nearly 60 percent of the discretionary cuts proposed. . . . This year, we are proposing more than 120 terminations, reductions, and savings for approximately $20 billion in savings this year.

For perspective, cutting a $3.8 trillion budget by 0.5% is the equivalent of a household that spends $2,500 per month making "tough choices" that add up to $13 saved.

Being Careful

2010-02-03T18:44:00.000+09:00

We've been selling into strength, and also increased a hedge at the beginning of this week. I think the market is hitting a rough patch here, and that it would be wise to guard profits you've made on the way up.

If You Hate Corporations, Then Don't Buy Bonds

2010-02-01T18:52:00.001+09:00

Many of my readers have written me over the past two years to express their anger toward the causes of the recession. They hate the government that succumbed to banking calls to relax regulations, and the government that pushed "affordable housing" which turned into "housing for even those who can't afford it." They hate the banks who jumped on the chance to lend to great throngs of unqualified borrowers, securitize the loans, and crater the economy when the unqualified borrowers failed to make mortgage payments.

More than anything, though, you know what they hate? The constant collusion between government, banks, and big business that forever jacks up the ramps of commerce so that America's wealth flows steadily into their coffers. The recent Supreme Court decision allowing corporations wildly free rights to fund the political candidates of their choice is just the latest evidence that it's big against small in America.

If you don't watch your own financial back, you'll end up working a job you hate to take home a little bit of money after you're automatically taxed, buying too many depreciating trifles you don't need with credit cards you don't understand and whose balances you never pay down, living in a home too big for you to afford, driving a car that costs five times more than it should, and wondering why you can't get ahead. They don't want you to get ahead. They want you trapped in that very cycle because it keeps you docile and taxed...for life. Financial freedom is good for your interest, but not for the interest of government, banks, and big business. Financial servitude serves them better, so everything is tilted to get most citizens on the hamster wheel.

To fight back, many have decided to remove themselves from the stock market as if doing so will "show them," meaning the powers that be. A second reason they want out is that two bubble bursts in one decade were enough to send them in search of investment returns beyond Wall Street. Some have concluded that moving their money from stocks to bonds is a great way to shrink the influence of big business while still getting decent investment performance.

Here's the problem with that: bonds fund the big businesses people are trying to shun by turning their noses up at stocks. Tom Petruno touched on this in his Saturday column at the Los Angeles Times:

The Great Recession has killed untold numbers of small firms, many of which were unable to line up financing to keep their operations afloat.

But money is no problem at all for corporate America. And the biggest businesses don't need banks, at least not for loans. As the credit crisis has eased, they've been able to turn to the welcoming arms of the bond market.

Who helped make the corporate rich even richer? You did -- if you're one of many Americans who pumped your savings into bond mutual funds. An unprecedented $375 billion poured into bond funds in 2009, providing a significant chunk of the capital that then flowed into newly issued bonds from companies such as General Electric Co., Pfizer Inc. and Dow Chemical Co.

If you really want to shun every part of the government, bank, and big business cabal, you'll need to get your money out of bonds, too. Swearing off both stocks and bonds for your portfolio will leave a very unorthodox list of investments, but one that might not do as badly as some think.

One dawning notion among those snubbed at banks when seeking financing is that direct investment in small businesses is a way to move forward. It provides capital-starved small businesses with funding, provides investors with assets that can't be wiped out by the stroke of a bureaucrat's pen, skirts big businesses and banks entirely.

The simplest way to move capital from a former stock/bond portfolio to the small business sector is by using your own capital to start your own business, be it a shop, a hair salon, a professional firm, or something else. The balance of a typical 401(k) or IRA, for instance, is often large enough to start a small business, even after paying the early withdrawal penalties. Some people at a later stage of their career would probably have enough to start a small business and still keep most of the account in place. They'd end up with a new asset, cash flow from a business, on top of what's left in the old smoke-and-mirrors account.

I realize that starting a business is no small decision. Most are hard enough to operate that a person can't stay at their job that funded the retirement account and start a new business at the same time. Maybe, though, they have a spouse or child or a friend whom they could bankroll for a portion of the business profits. Barring that, they could go to Kickstarter or other sites like it that match people who have money with people who have ideas.

If you really hate the collusion at the top, you'll need to disown bonds as well as stocks. That will leave you seeking returns on investment elsewhere, but you may be surprised at how much more fulfilling -- and profitable -- some of those alternative places can be.

He Cometh

2010-01-28T11:33:00.001+09:00

The Corporate Takeover of America

2010-01-25T20:30:00.000+09:00

I finished a book last month, to be published by Wiley in June, that examines how financial manipulators at the top of every industry buy influence in government to create a legal and cultural backdrop that directs the assets of financially inept people in the general population into government, bank, and big business coffers.

That situation has gripped our nation for more than a century, even though during that time it was illegal for corporations to contribute directly to federal candidates. From my manuscript: "Since the Tillman Act became law in 1907, corporations have been prohibited from contributing directly to federal candidates. They still buy candidates, of course, but for more than 100 years they've had to do so through political action committees and individual members of their companies."

That was how, for example, President Obama accepted $889,000 from oil companies during his campaign, then crowed in ads, "I don't take money from oil companies or Washington lobbyists, and I won't let them block change anymore." Technically, he was right, because he didn't accept money directly from them, but rather from their various front groups. His biggest contributor was the financial services industry, which made those in the know roll their eyes at the "change we can believe in" line of bull as Washington's freshest face kept in charge the same crowd of cronies that blew up the economy to begin with: Bernanke, Geithner, Summers.

As bad as the steady corporate takeover of government has been, it got a whole lot worse last Thursday when the Supreme Court overruled two First Amendment precedents and prohibited government from banning political spending by corporations in elections. Under the auspices of corporations having the same right of free speech as individuals, the court dispelled even the veneer of propriety that existed a week ago.

While corporations are still banned from direct contributions to candidates, they can make any ads, videos, or other support material for the candidate of their choice as a form of free speech. Because such exposure tools are what every candidate spends his or her campaign budget on anyway, the result will be the same as if direct financial contributions were allowed.

Justice John Paul Stevens wrote in his dissent that the "court's ruling threatens to undermine the integrity of elected institutions around the nation" and "will, I fear, do damage to this institution." Even special-interest-backed-Obama called it "a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans." Too bad they've been able to continue doing so as usual under his administration.

The New York Times wrote in an editorial on Thursday:

The majority is deeply wrong on the law. Most wrongheaded of all is its insistence that corporations are just like people and entitled to the same First Amendment rights. It is an odd claim since companies are creations of the state that exist to make money. They are given special privileges, including different tax rates, to do just that. It was a fundamental misreading of the Constitution to say that these artificial legal constructs have the same right to spend money on politics as ordinary Americans have to speak out in support of a candidate.

The majority also makes the nonsensical claim that, unlike campaign contributions, which are still prohibited, independent expenditures by corporations "do not give rise to corruption or the appearance of corruption." If Wall Street bankers told members of Congress that they would spend millions of dollars to defeat anyone who opposed their bailout, and then did so, it would certainly look corrupt.

My book predicted that the situation would only worsen with time, but I had no idea how little time it would take. We can forget any gentle solution to America's national financial woes. What tiny shred of possibility there was of reducing special-interest claims on taxpayer money disappeared on Thursday. The nation will be bled dry by corporations focused on their own financial health, and oblivious to the nation's.

Is The United States Bankrupt?

2010-01-21T19:16:00.001+09:00

I wrote yesterday about the World Economic Forum's Global Risks 2010 report, and how its top risk is unsustainable debt levels among several nations, notably the United States. The WEF report referred to the article, "Is the United States Bankrupt?" written by Laurence J. Kotlikoff for the July/August 2006 issue of the Federal Reserve Bank of St. Louis Review, pages 235-249. Today, I'll review with you that article's key points. You'll find it in its entirety here.

Before we begin, note that the article's publication three-and-a-half years ago proves what I mentioned yesterday about long-term crises taking their time to show up. Prior to Kotlikoff's article, many other people warned of impending national bankruptcy in the early 2000s, the 1990s, and at the end of the Reagan administration. It's not a new subject, but it has also not disappeared. The risk of the answer to the article's title being "yes" is greater than ever, which is why we need to keep an eye on it.

Let's dive in. Here's the article's opening summary:

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of US fiscal institutions is essential to secure the nation's economic future. The paper offers three policies to eliminate the nation's enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.

Kotlikoff believes that the right way to consider a country's solvency is by looking at the life-time fiscal burdens facing current and future generations. If the burdens are bigger than the resources created by the generations, bankruptcy looms. Put simply, if people demand benefits costing more than the tax revenue they supply, the government goes broke. Well, guess what? That's our current situation.

Kotlikoff asked, "Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke." He referenced a 2005 study by Gokhale and Smetters that looked at the gap between future government spending obligations and future government tax receipts, which is where the $66 trillion figure mentioned yesterday first emerged. Pause a moment to consider just how astounding a shortfall that represents. It's $10,200 for every human being on the planet, or $220,000 for every American.

It's a testament to government inefficiency that it has managed to owe every American more than a fifth of a million dollars, an amount more than twice the median net worth for 50-year-old citizens. In Kotlikoff's words, the $66 trillion gap "is more than five times US GDP and almost twice the size of national wealth."

He goes on: "One way to wrap one's head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143%." As I covered yesterday, none of that is politically possible.

Plus, believe it or not, the $66 trillion gap is the most optimistic figure! Its calculations omit the value of contingent government liabilities and employ rosy assumptions about longevity and health care expenditures. The best thing most citizens can do for their country appears to be kicking off early before they cost too much. Lovely.

One example of how the assumptions behind the $66 trillion horror story are actually too optimistic comes from Medicare and Medicaid spending. The study assumed that the growth rate in the programs' benefit levels would be just 1% higher than the growth rate of worker wages. Too bad in recent years wages haven't been growing at all, and for many have disappeared entirely as jobs went up in smoke. Meanwhile, Medicare and Medicaid benefits per beneficiary have been cooking along at 3% rates of growth.

Kotlikoff lamented the inability of either major political party to deal with the growing gap and its parallel growing risk of national bankruptcy. The Clinton administration failed to make any headway and went so far as to censor an Office of Management and Budget accounting study that would have blown the whistle. The Bush administration was even worse, cranking up expenditures while shrinking receipts, and then firing former Treasury Secretary Paul O'Neill for producing an inconveniently honest report. Needless to say, the already bad trajectory went parabolically awful under the Obama administration.

Both parties and all presidents become irrelevant in the face of corporate control over government. Voters forever choose only between kettles and pots, getting excited about issues of the day, when the primary issue of national solvency never comes front and center and continues to worsen year by year.

Kotlikoff: "The fiscal irresponsibility of both political parties has ominous implications for our children and grandchildren. Leaving our $65.9 trillion bill for today's and tomorrow's children to pay will roughly double their average lifetime net tax rates."

The deteriorating situation caught the attention of some economists years ago, and the specter of inflation has been on their lips ever since. We've covered its risk numerous times in The Kelly Letter, and the recent popularity of gold shows that more and more people are aware that the most likely solution will be money printing that kills the value of the dollar and introduces hyperinflation to the streets of America.

On that subject, here's Kotlikoff:

Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve "being forced" to buy Treasury bills and bonds to reduce interest rates.

Specifically, once the financial markets begin to understand the depth and extent of the country's financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of US Treasuries. In so doing, they'll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation -- exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.

Yes, this does sound like an extreme scenario given the Fed's supposed independence, our recent history of low inflation, and the fact that the dollar is the world's principal reserve currency. But the United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century.

It can happen in America, too.

In upcoming issues, we'll explore defending against it by owning assets that appreciate in an inflationary environment, including commodities such as precious metals, businesses that sell non-discretionary goods, and real assets like land and art. The trick will be finding ones most likely to perform well during the potentially long wait to d-day.

Risk of National Bankruptcies

2010-01-20T17:55:00.001+09:00

I wrote last month in The Kelly Letter about the growing risk of sovereign debt default, national bankruptcy in layman's terms. Several countries around the world are facing it, the US among them, and one or several such defaults would make the corporate bankruptcies of 2008 look like fallen grass blades before falling redwoods.

In the case of the US, national debt held by corporations, foreign governments, individual investors, and institutions such as pension funds grew just last year from 41% of GDP to 53%. That led the Committee on the Fiscal Future of the United States to issue a warning last week that the US must reign in its deficit. The committee is headed by Rudolph Penner, former head of the Congressional Budget Office, and David Walker, former head of the Government Accountability Office and author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.

I think everybody agrees that the US needs to cut its deficit, but it takes only a glance at the federal budget to see that doing so is politically out of the question. Consider that the five biggest gobblers of the US budget are Social Security, Medicare, Medicaid, the Department of Defense, and interest on the debt.

Given how angry people already are about pending health-care reform and its attendant reduction in Medicare benefits, do you think there's a prayer of ruling Democrats announcing on top of it that they will next cut back on Social Security, too, and even further on Medicare? No way. Democrats were already so nervous about the unpopular health-care reforms that they watched the close race for Ted Kennedy's old seat in Massachusetts for signs of what might befall them in the 2010 autumn elections. They lost that seat yesterday. They lack the stomach -- and maybe now, even the numbers -- to get much else changed.

The health-care reform effort itself may yet fall flat, painting in vivid color the rigor mortis afflicting American politics. Everybody agreed that the health care system was broken with prices too high and coverage too low, yet nobody likes the proposed solution that came from nearly a year of debating how to fix it. No wonder. Without offering a single answer to the issue of runaway costs, Congress decided to make participation in the broken system compulsory. There's creativity for you!

Our issue here is not health care per se, but government finances. They're shot, and the health care debacle showed that government is nearly powerless to fix them. It was not able to fix health care, and its bungled attempts have made it impossible to even try fixing the unfunded liabilities of Social Security, Medicare, and Medicaid. If anything, outlays for the latter will only increase now that individual states are going bankrupt and seeking help from the federal government. California, for instance, requested earlier this month $7 billion from Washington to prop up its health and welfare programs.

Moving down the list, what odds are there of reducing defense spending? Zero. Even anti-Iraq-war President Obama made sure to ramp up the Afghanistan war before ramping down the Iraq war, so powerful are the forces of the military industrial complex that President Eisenhower warned against. Here again, corporate forces are in clear control of government action, and show no signs of backing off their demands for government money in light of the deteriorating national balance sheet.

As you can see, not one of the top five financial drains on America will be slowed. Social Security, Medicare, Medicaid, and defense spending will continue growing, and interest on the debt can't be reduced short of default. Which brings us to sovereign debt risk.

Marc Faber of the Gloom, Boom & Doom Report told Barron's last weekend, "The deficit will be above a trillion dollars a year as far as the eye can see. One day, Mr. Bernanke or whoever is at the Fed will have to increase short-term interest rates. When that happens, America's interest burden will go up dramatically. Interest payments could go to 35% of tax revenue in 10 years' time, but that is an optimistic assumption. I'm inclined to think 50% of tax revenue will go toward interest payments on government debt in 10 years. Then you are bankrupt. There is only one way out -- the Zimbabwe way. You will have to print and print and print."

To which Felix Zulauf of Zulauf Asset Management in Zug, Switzerland added, "All federal debt, including unfunded liabilities, isn't 100% of GDP, but 600%. In most industrialized countries, federal-government debt is between 350% and 360% of GDP. Eventually the US will arrive at the point where, as Marc says, interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30%, you are done. You go into default or your currency breaks down and your system collapses. The problem you will run into first is a dramatic increase in individual tax rates. You'll see much bigger wealth-redistribution programs than you can believe."

Quietly, my circle of investors and geopolitical thinkers are wondering if a national bankruptcy is just what America needs to finally get corporate bloodsuckers off the taxpayer aorta. Given the political impossibility of reducing costs, will Democrats actually try raising taxes to retain US solvency? Imagine how that would go over as the bankers who caused the latest mess announce their record bonuses courtesy of taxpayer funds. The explosions to come may be the only way through the lobbyist choke-hold on Washington. Pick your poison: bankruptcy or bellicosity.

That's just the US. Other nations face similar financial calamity, which is why the World Economic Forum paid attention to last month's article in The Kelly Letter, and placed national bankruptcies at the top of its list of risks in 2010.

The WEF think tank releases an annual Global Risks report ahead of its meeting in Davos, Switzerland. This year's came out last week, and is available here.

Its top three risks are: unsustainable debt levels, underinvestment in infrastructure, and diseases driving health costs up and economic growth down. The US is grappling with all three issues.

John Drzik, Chief Executive of management consultancy Oliver Wyman, was one of the contributors to the WEF report. He said, "Governments, in trying to stimulate their economies, in fighting the recession, are [amassing] unprecedented levels of debt and, therefore, there is a rising risk of sovereign defaults. Debt levels have risen from 78% [in 2007, before the crisis] to 118% of GDP in the G20 ... this is something that could really create much more of a crisis than in the past, and we are already in a vulnerable situation."

He warned that unemployment could rise even more, bringing societal and political unrest. Recent news over Dubai, Greece, and Ukraine captured the attention of global financial markets, showing the risks to be real and raising the specter of such collapses happening among the kings of consumption, America and the UK.

Following the same line of thinking that we followed above, the WEF report showed that both the US and the UK face "tough choices" on the immediate horizon as they try to time a "gradual and credible withdrawal of fiscal stimulus so that the recovery is sustained, but not so late that fiscal deficits cause fear of sovereign debt deterioration."

Figure 1 in the WEF report plots various risks based on their severity in US dollars, from 2-10 billion to more than 1 trillion, and their likelihood, from below 1% to above 20%. Those clustered in the upper-right corner of the chart pose the highest severity and highest likelihood. They are:

Asset Price Collapse: more than $1 trillion, more than 20% likely
Chronic Diseases: about $1 trillion, about 20% likely
Fiscal Crises: about $1 trillion, about 20% likely

Two of the three are precisely what we and others have watched build during the stock market rally that was supposedly happening because the economy was improving. Here are the WEF report's quick overviews of each of the three:

Asset Price Collapse:

The last edition of this report discussed the longer term implications of the financial crisis, exploring the tight interconnections among economic and resource-related risks. The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation. Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven.

Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high. Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume. Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate. As illustrated by the events in Dubai in December 2009, debt loads remain high; as refinancing needs arise, which are only expected to peak between 2011 and 2013, further shocks could emerge.

Chronic Diseases: "As a consequence of profound socio-demographical transitions among large sections of the world population, changing physical and dietary habits, chronic diseases including cancer, diabetes, cardiovascular and chronic respiratory disease are continuing to spread rapidly throughout the developed and developing world, driving up health costs while reducing productivity and economic growth."

Fiscal Crises: "In response to the financial crisis, many countries are at risk of overextending unsustainable levels of debt, which, in turn, will exert strong upwards pressures on real interest rates. In the final instance, unsustainable debt levels could lead to full-fledged sovereign debt crises."

On the challenges facing America and other economies with unaffordable social systems:

The difficulties posed by the combination of weak fiscal positions and long-term pressures from current social spending trajectories are considerable. A generational approach that also accounts for the fiscal burden facing current and future generations (accounting mainly for social security and government-supported healthcare) reveals huge fiscal gaps. According to one estimate [Laurence J. Kotlikoff, "Is the United States Bankrupt?" Federal Reserve Bank of St. Louis Review, July/August 2006, covered in last Sunday's Kelly Letter], the United States alone has to reckon with a gap of US$ 66 trillion, a figure more than five times current GDP and almost double the US national wealth. Similar outsized generational debt-to-GDP ratios are obtained for many other advanced economies.

On unemployment: "One risk is that this crisis leaves a legacy of underemployment, where people are constrained to accept part-time jobs or jobs that do not require their level of skills. US Department of Labour statistics show that there are 9 million workers in part-time employment who are seeking full-time jobs. Unemployment can become entrenched as workers lose skills or find themselves with the wrong skills to take advantage of new jobs when they arrive."

The rising likelihood of sovereign defaults, and their residing at the top of the financial severity scale, make this an issue we'll monitor all year. As with so many geopolitical subjects, pinpointing if and when this one will rain fire on the parade is hard to do. It's on the short list of items that could show us a dramatic second leg down in the stock market, however, so we'll pay it the respect it deserves.

Deleveraging Not Over Yet

2010-01-19T19:10:00.000+09:00

The debt deleveraging process is still in its infancy, I don't care what the happy talkers say on TV. Last week, the McKinsey Global Institute issued a report looking at where the world's rich economies lie along the spectrum of debt reduction. America's ratio of total debt to GDP (which includes debt owed by households, government, non-financial businesses, and the financial industry) comes in at just under 300%. As awful as that sounds, it's actually lower than in many other countries. Britain and Spain, for instance, are looking at 465% and 365% respectively.

For the US, the report assigned high odds of further deleveraging on the way in the household and commercial real estate sector, two areas we flagged in The Kelly Letter last year as walking down a long road to anything remotely akin to balance.

To ascertain the economic impact of deleveraging to come, the report defines sustained deleveraging as at least three consecutive years in which total debt to GDP declines by at least 10%. It found 32 historical examples of such. Some were resolved by debt defaulting away, others by it inflating away, but around half were resolved by an extended period of austerity during which credit grew less quickly than production. It happens to view the austerity periods as the ones most appropriate to understanding what lies ahead for us today. About those episodes in the report, last week's Economist wrote:

Typically deleveraging began about two years after the beginning of the financial crisis and lasted for six to seven years. In almost every case output shrank for the first two or three years of the process.

Worse, there are several reasons why today's mess could be more protracted than previous episodes. First, the scale of indebtedness is higher. The highest debt ratio in the report's group of belt-tighteners was 286%, in Britain after the second world war. Today more than half the rich countries in the McKinsey sample have debt totalling more than 300% of GDP. Second, the number of countries afflicted simultaneously means that rapid expansions of exports, which have supported output in the past, are harder to achieve. Third, big increases in public debt, while cushioning demand in the short term, increase the overall debt reduction that will eventually be needed. Once private deleveraging is done, the public sector will need to cut back.

In theory that sounds simple. In practice it will be fiendishly hard to get the balance right. Investors may worry about the sustainability of public debt long before private-debt reduction is over, forcing a lot of belts to be tightened at once. The most painful bits of deleveraging could well lie ahead.

ObamaCare's Prescription: Stay Single

2010-01-15T08:53:00.001+09:00

Stephen Moore wrote in The Wall Street Journal Political Diary yesterday:

Marriage is a revered institution in America but not apparently under the Congressional health care legislation, which contains steep "marriage penalty" taxes, i.e. tax burdens that only get heavier when a couple says, "I do."

Under the Senate bill, if family income rises above a certain level, couples lose benefits or have to pay higher taxes. That's an incentive for dual-income couples to skip the marriage ceremony altogether and continue to file as singles. For cohabitators, the savings could amount to thousands of dollars a year.

Take two low-wage workers who are considering marriage. In 2016, if each has an income $11,800, they would each have to pay $248 as singles for government-approved health insurance. Married, their joint income climbs to $23,600 and they would have to pay $1,109 -- a ding of more than $600 annually.

Middle-class workers could get hit even harder. According to the Congressional Budget Office, a single individual earning $35,400 -- three times the poverty rate -- would be obligated to pay $3,611 for mandatory health insurance. But two such individuals, if married, would lose their eligibility for government subsidies and their mandatory health insurance payments would rise to $13,100 -- a whopping $5,878 annual marriage penalty.

An analysis done by Senator Charles Grassley of Iowa, ranking Republican on the Senate Finance Committee, finds that the Senate health bill "will cause the 7% of Americans who are eligible to receive the subsidy to pay more for health insurance just by getting married." Call it marital non-bliss.

"I've always argued," fumes former House Majority Leader Dick Armey, "that our tax code rewards vice and punishes virtue," with the marriage penalty being a typically perverse example. And ObamaCare would only make it worse.

Another Crisis Brewing

2010-01-12T18:21:00.002+09:00

From Chris Hedges' column at Truthdig:

These deeply stunted and maladjusted individuals, from Treasury Secretary Timothy Geithner to Robert Rubin to Lawrence Summers to the heads of Goldman Sachs, Morgan Stanley, J.P. Morgan Chase and Bank of America, hold the fate of the nation in their hands. They have access to trillions of taxpayer dollars and are looting the U.S. Treasury to sustain reckless speculation. The financial and corporate system alone validates them. It defines them. It must be served. This is why e-mails from the New York Fed to AIG, telling the bailed-out insurer not to make public the overpaying of Wall Street firms with taxpayer money, were sent when Geithner was in charge of the government agency. These criminals sold the public investments they knew to be trash. They used campaign contributions and lobbyists to turn elected officials into stooges and gut oversight and regulation. They took over retirement savings and pensions and wiped them out. And then they seized some $13 trillion in taxpayer money so they could lend it to us with interest. It is circular theft. This is why we will endure another catastrophic financial collapse. This is why firms like Goldman Sachs are more dangerous to the nation than al-Qaida.

These corporations don't make anything. They don't produce anything. They gamble and bet and speculate. And when they lose vast sums they raid the U.S. Treasury so they can go back and do it again. Never mind that $50 trillion in global wealth was erased between September 2007 and March 2009, including $7 trillion in the U.S. stock market and $6 trillion in the housing market. Never mind that the total amount of retirement and household wealth trashed was $7.5 trillion or that we saw $2 trillion in 401(k)s and individual retirement accounts evaporate. Never mind the $1.9 trillion in traditional defined-benefit plans and the $2.6 trillion in nonpension assets that went up in smoke. Never mind the job losses, the foreclosures and the 35% jump in personal and small-business bankruptcies. There are bundles of new money, taken again from us, to make deals and hand out outrageous bonuses. And when these trillions run out they will come back for more until our currency becomes junk. Not that any of these people have thought this through. They are too busy focused on the pathetic, little monuments they are building to themselves and the intricacies of court intrigue.

"We will have another crisis," [Nomi Prins, the author of It Takes a Pillage and a former managing director at Goldman Sachs] lamented. "I don't know when, but it is brewing. If you don't fundamentally change the foundation of the banking system you are piling on capital and time into something that is faulty. This does not result in decades of stability. They are banking on trading. Nothing has changed. The rest of the consumer economy is continuing to deteriorate. These losses go into banks. You gain on trading and lose on more solid practices. The foundation has not changed. The regulations are bullshit. The old assets are still crap. The new assets created off the old assets are still crap. The banks are still levering them and still doing the same practices they did before. We will have another liquidity crunch. Banks will again stop trusting their assets and each other. . . . The buying of complex assets will stop, although this time more quickly. People will remember what happened before. You will have a repeat of credit constricting between financial institutions. It is already constricted on the consumer side. The banking system will use up this federal capital and then go back for more."

On America's Morning News

2010-01-11T20:16:00.002+09:00

I joined John McCaslin on America's Morning News at 6:32 a.m. eastern today to discuss the strategies in the 2010 edition of my stock book, and the current market.

John was interested in my value averaging strategy that's worked well over the past year, as a way for lay people with limited time for stock research to take advantage of volatility. I didn't get to explain it quite as thoroughly as I would have liked, but those interested can read more about it in the book's Dec. 29 announcement.

John mentioned that he'd been burned by dot-com stocks ten years ago and was still bitter toward them, and assumed I'd have nothing good to say about the sector. I didn't, but I distinguished between the dead dot-coms of yesteryear and the likes of Apple and Google today. We talked more about Apple, and I reiterated what I've shared here and with subscribers about the company, mainly that the growing popularity of the internet has diminished Apple's compatibility challenges and allowed more people to choose its fantastic line of products. That trend should continue.

It wasn't really a stock tip, per se, but John called it that and I don't mind going on record as a fan of both Apple the company and AAPL the stock.

Back Next Week

2010-01-05T23:06:00.003+09:00

I'm traveling from Colorado back to Japan the rest of this week, first with a drive through America's breathtaking scenery on wide non-toll highways, then on the flight that knows me so well. Two meals, some reading, and a nap. That's the formula from L.A. to Tokyo.

While I'm away, how about catching up on some good offline reading? Let's see if anything interesting comes to mind. Hmm. Oh, I know!

How about the 2010 edition of The Neatest Little Guide to Stock Market Investing? I tend to agree with the author on several key points, so feel good recommending it. Below is a picture of the book on display last weekend at the Borders at 104th and I-25 in the Northglenn Marketplace. It's the Borders closest to downtown Denver. The staff did a great job:

With that, I'm off. Happy trails to me, and happy reading to you! See you back here next week.

2010 Edition Debut

2009-12-29T12:00:00.005+09:00

I'm very pleased to announce the debut of the 2010 edition of my bestselling book, The Neatest Little Guide to Stock Market Investing. This is the book's fourth edition, with more than 200,000 copies sold, making it one of the most popular stock books ever written.

Once a book becomes so well established, updating it gets tricky. On the one hand, the author must be careful not to break what's already working so well. On the other hand, life moves quickly and even a bestseller needs to be kept fresh and pertinent to current news. Let me tell you how I approached the task when revamping this title for its 2010 edition.

The most obvious new information was the near collapse of the financial system in 2008. That wreaked havoc on even the best-planned portfolios, as every investor will recall. Did the market crash invalidate the book's permanent portfolios? The star of them, Maximum Midcap, had performed splendidly from 2002 to 2007 in the Fed-liquidity-driven market run, turning $10,000 into $28,495. The same strategy left untouched, however, plunged 68% in 2008. Those who did not watch the market carefully as the subprime housing bubble stretched thin and burst, suffered heavy losses. Too many sold at the strategy's lows, just before its breathtaking recovery from March. From its low in March to its high this month, the strategy has gained 228%. It already recouped its losses from the great crash for those who stayed put, but became a veritable money machine for those who got out and back in at the right moments.

This new edition helps readers find those right moments.

I realized that the book was missing a set of tools I use every day to keep tabs on market health and the risk level of investments I hold: technical analysis tools. Charting is a primary part of most stock investors' approach to timing, and a certain element of timing is needed in every investment program. In my desire to keep the book light and easy in its earlier edition, I chose to skip technical analysis in favor of fundamental analysis, the checking of a company's debt levels, marketing plans, and valuation in an attempt to know if it's a bargain or not. The latter comes more naturally to people, in my opinion, because it's close to how we manage our own personal financial lives. Technical analysis can seem arcane.

My challenge then was to introduce just enough technical analysis to help readers avoid plunging years like 2008. I researched extensively to find the charting methods that combine the best accuracy rates with the easiest usage. Some techniques have high accuracy but are extremely hard to interpret or monitor for anybody not working the market full time. Others are simple to use, but not very accurate. The sweet spot occurs when a measure is fairly accurate and fairly simple to use.

Once I found a subset of measures in that sweet spot, I ran regression tests on them in combination to validate what my own experience had already shown to work pretty well. The tests did confirm my own experience, and I chose a group of three fairly accurate, fairly simple measures that become even more accurate when used in combination, with two of the three firing the same signal being the call to action.

Those three measures are the simple moving average, MACD, and RSI, and they're introduced and explained in this book's hallmark style in a new section in Chapter 4 called "Limiting the Downside with Charts" on page 131.

One thing I do between editions of the book is collect feedback from readers, and I learned over the past two years that, while many people like the firepower of the permanent portfolios, others wanted me to present a less stressful, methodical strategy for extracting steady profits from the market. This is a tall order, to be sure. The axiom holds that the more return an investor seeks, the more risk he or she will need to take (within reason, of course). Balancing the risk and reward of a portfolio is the art of the successful investor. Is there a low-stress way to map out the money growth we need and then keep that growth on track?

Yes! I'm proud of a new system introduced in this edition that uses a technique called value averaging to achieve a steady rate of growth. I didn't invent the approach. I took research presented in a 1988 article by Michael Edleson, who later expanded the concept in his book Value Averaging: The Safe and Easy Strategy for Higher Investment Returns, and applied it to the new market products available today. The result is a system that we've been using in The Kelly Letter all year to extract 3% quarterly growth out of the S&P SmallCap 600 index of smaller companies.

Why 3% per quarter, you may wonder. That rate becomes a 12.6% annual growth rate, which is 20% higher than the S&P 500's long-term rate of 10.5%. That level of outperformance -- thanks to the magic of compounding -- turns a substantial profit over time. Yet, it's modest enough to keep the amount of new money required to a low level.

I'll give you a nodding acquaintance with the strategy here. You're probably familiar with dollar-cost averaging, which is just adding the same amount of money to an investment on a steady basis. For instance, you might add $100 per month to an index mutual fund. It works well for a couple of reasons. First, you build a capital base over time and, second, the steady payments automatically buy more shares when the price is cheaper and fewer when the price is more expensive. If the shares are $5 in October, $10 in November, then $8 in December, your $100 would have bought 20 shares in October, 10 in November, and 12.5 in December.

Value averaging asks this question: instead of just sending the same amount of money when the price is cheaper, why not send more? Then, the benefits of buying more of the cheaper shares will be magnified, right? You bet, and that's what we accomplish with value averaging. We put in place a framework for knowing whether we need to send more money, less money, or even pull money out of the investment to keep it on track to reach our growth rate target. In our example, that target is 3% per quarter.

The beauty of the new strategy is that it enables investors to ignore much of the natural volatility of the market but -- even more important to investors these days -- the artificial volatility inflamed by shenanigans of government, banks, and big business. The game has changed a lot in the last two years, with the strokes of pens from the Treasury and the Fed having much more to do with the direction of any stock than the stock's product or marketing plans. In such an environment, which is nearly impossible to forecast, tried-and-true growth rules are invaluable. I hope you benefit from the ones explained in this edition, which are presented in "Value Averaging for Steady Growth" on page 110.

Beyond those big strategy enhancements, the 2010 edition brings a thoroughly updated list of websites and resources, extends the book's classic examples with fresh data so you can see how the situations have changed or remained constant through the fire, and shares reflections from master investors Bill Miller and Charles Michaels, each of whom navigated the rough market and emerged wiser for it.

All in all, a compelling bundle of information for just $10.88, one that I believe you'll find useful as you reconfigure your portfolio for a new decade. As always, I welcome your thoughts and suggestions once you've had a chance to buy the book and implement its techniques.

Best wishes,

Merry Christmas!

2009-12-25T16:37:00.007+09:00

It's the best day of the year, and I hope you're having a good time. Here in the Colorado Rockies, a fresh blanket of snow lies outside and the stars twinkle through crystalline winter air each night. A friend recently asked me why I return to Colorado for Christmas each year. "Because I can't imagine being anywhere else," I replied, and this year confirms the notion.

Faber's Long-Term View

2009-12-23T01:34:00.000+09:00

The following excerpts are from Gloom, Boom & Doom Report editor Marc Faber's interview with India's Economic Times:

The cause of the financial crisis was excessive credit growth and essentially the private sector has reacted rationally. After 2008, the private sector has reduced its leverage, in other words, the consumer credit is declining and business credit is also declining but this is being offset by a huge expansion of government credit. So total credit as a percent of the economy in the US is still growing. Now officially, the debt to GDP is 375%, it was 186% when the US went into depression after 1929. In other words, we start with a much higher debt level. In 1929 we did not have Social Security and we did not have Medicare and Medicaid, and if you add these unfunded liabilities of Medicare and Medicaid, and if you add Fannie Mae and Freddie Mac, which have been taken over by the government, we are talking about the debt to GDP of over 600%. In my opinion, in the long run, this is not sustainable. They will have to print money and the fiscal deficits will go up and the problem will be that one day when interest rates go up for whatever reason, maybe next year or in three years time, the interest payments on the government debt will balloon and in, say, seven years time, the interest payments on the US government debt will be between 35% to 50% of tax revenues, and then you are in a huge mess.

And so I believe that to get out of this mess, they will monetize and they will have all kind of stimulus packages and they will lead to high inflation, and the standards of living of the typical household will go down and it will enrich a few people, the elite, essentially, on Wall Street. But then to distract the attention, the US will escalate its war efforts and then the whole thing will collapse.

The interests of the US and China are further apart than ever before because you have essentially a declining superpower the United States and you have a rising superpower China, and the current superpower the US will obviously try to contain the rise of China, and China will want to have more say in global affairs and you can see their expansion everywhere in Latin America, in the Middle East even in the Indian Ocean, in East Africa and so forth. So that will lead to tensions.

I think the world has to learn that the US is no longer as relevant as it was 20 years ago to the global economy. I mean the share of the US in the global economy has diminished very substantially. You have higher car sales in China than in the United States and, by the way, car sales today in emerging economies including Indian, Latin American, China and so forth are larger than in the G-16 countries. In other words, it is larger than in Western Europe to US and Japan combined so also oil consumption in emerging economies today is larger than in the developed countries. So, we are dealing with a totally new world. There has been a huge shift in the balance of economic power between the rich countries, the arrogant countries of the west, and the emerging economies that are coming up, and that also will lead to tensions, in my opinion; political and geopolitical tensions.

Dollar Up, Oil Down

2009-12-13T19:46:00.002+09:00

It's the trade we've been watching for a while. At the beginning of this month, the dollar looked far too hated for its downtrend to continue. The dying dollar was largely responsible for the commodities boom on an elementary level, and elementary analysis was all we needed to think oil stood a good chance of moving lower.

The strong jobs report on Dec. 4 is what cracked the dollar's descent. Even though the dollar extended that up move only modestly last week, it has so far this month bounced up from 15-month lows. That, in turn, sent oil down some $8 per barrel. Last week was particularly good for those short oil. We hold a half-sized position hedge against an oil price decline, and the hedge surged 13.5% last week.

Some point to factors other than the rising dollar for oil's price decline, but other factors were fairly positive for the oil market, or benign. For instance, while Barclays noted that US consumption of petroleum products is off 20% from a year ago, China's rebounding economy countered that news with factory output rising 19.2% in November. That alone caused the International Energy Agency (IEA) to raise its estimate of per-day oil consumption in 2010 by 130,000 barrels to 86.3 million.

Worries about disappearing stimulus support killing demand are valid, and act as nice back-ups in case the stronger dollar case for falling oil prices doesn't hold. If the liquidity-driven phase of the market is petering out by any measure, weaker oil prices should follow.

Watch that dollar, though. Here's its three-month chart, with the jobs report bounce flagged:

Watching Natural Gas

2009-12-07T05:55:00.000+09:00

We looked last month at the natural gas market and our $9 target for buying US Natural Gas (UNG). While the price of gas looked to us very cheap, we also found little to drive it higher. I wrote, "Probably won't go much lower. Not much to make it go higher. What to do?"

We decided to watch a while longer while maintaining our price target at $9 "to keep us alert to the fact that UNG is coming into range." I concluded that the near-term forecast for mild weather coupled with "the overall slack demand picture from the recession, and gas inventory levels running 11% higher than last year and 12% higher than their five-year average, we may be able to buy UNG for well under $9."

The following week, UNG closed at $8.99. One week after that, Nov. 27, it closed at $9.83. Last week, it closed at $8.64 after touching a new 52-week low of $8.50 on Thursday.

What's going on? Gas supply is simply overflowing. It hit an all-time high at the end of Thanksgiving week, 3.84 trillion cubic feet, 14% higher than last year and 15% higher than the five-year average. In just a few weeks, we've gone from being 11% over last year's supply to being now 14% over.

Stephen Schork, editor of the energy advisory newsletter the Schork Report, told the Wall Street Journal on Friday, "The bottom line is that you are at the end of November, and you are still putting gas in the ground." He said it would take an "ice age" to send prices significantly higher.

Seeing no ice on the horizon out my office window, I'm content to watch longer.

Addicted to Nonsense

2009-11-30T19:38:00.001+09:00

From this morning's article by Chris Hedges at Truthdig:

The chatter that passes for news, the gossip that is peddled by the windbags on the airwaves, the noise that drowns out rational discourse, and the timidity and cowardice of what is left of the newspaper industry reflect our flight into collective insanity. We stand on the cusp of one of the most seismic and disturbing dislocations in human history, one that is radically reconfiguring our economy as it is the environment, and our obsessions revolve around the trivial and the absurd.

What really matters in our lives -- the wars in Iraq and Afghanistan, the steady deterioration of the dollar, the mounting foreclosures, the climbing unemployment, the melting of the polar ice caps and the awful reality that once the billions in stimulus money run out next year we will be bereft and broke -- doesn't fit into the cheerful happy talk that we mainline into our brains. We are enraptured by the revels of a dying civilization. Once reality shatters the airy edifice, we will scream and yell like petulant children to be rescued, saved and restored to comfort and complacency. There will be no shortage of demagogues, including buffoons like Sarah Palin, who will oblige. We will either wake up to face our stark new limitations, to retreat from imperial projects and discover a new simplicity, as well as a new humility, or we will stumble blindly toward catastrophe and neofeudalism.

Give Thanks That The Unemployment Rate Is Only 10.2%

2009-11-26T23:02:00.001+09:00

Happy Thanksgiving, fellow Americans! Being a Colorado mountain boy, I've loved the cozy, warm smells of this holiday since I was short enough to win at hide-and-go-seek by just running into the meadow grass. It's cold in them thar Rockies, you know, and nothing sets off the joys of a hot turkey meal better than a cold autumn day.

It was in just such a spirit that I learned to use the day of Thanksgiving to give thanks for what's right in my life. I still do that and pass along the sentiment whenever I can, pointing out our good health, our acceptable wealth, an ample stack of firewood, a car that starts in the morning. All good things, to be sure, but this year there's a glaring gift from above that just can't go without an extra serving of appreciation.

That something is the 10.2% unemployment rate.

Let's pause a moment to give thanks to the exemplary leadership of our president, who put in charge of the economy such luminaries as Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers. One shudders to think how terrible the economic landscape would be without them at the helm, wisely directing the nation's resources away from Wall Street criminals and incompetents, to those trying to make ends meet in the real world.

Oh, sure, one could quibble over the way Geithner didn't lift a finger to stop the banking bonanza when he was supposed to be doing so as president of the New York Fed, or the way Summers worked hard with former Goldmanoid Robert Rubin to reduce and block regulations in the 1990s so that banks could start the bonanza, but such quibbles aren't kind on a festive day like this.

Those who think 10.2% is too high an unemployment rate obviously haven't thought about some of the double digits above that first one. The best way to appreciate 10.2% is to note its being less than, say, 17.5%, which is what some like to call the "real" unemployment rate because it includes those who've just plain given up and those who can't get enough hours at the jobs they have. On a happy day like this one, though, who can spare a moment for such dour inclusiveness? The best approach is the one demonstrated by our leaders: snub and celebrate.

Summers provides probably the best example to emulate. He's the grandfather of grand unkept promises who handles failure by pretending it didn't happen. Back in 1999, he celebrated at the signing ceremony of the Financial Services Modernization Act, which smashed the 1933 Glass-Steagall Act that had worked like a charm for seven decades in preventing financial companies from getting too big to fail by combining in any way the services of investment banking, commercial banking, and insurance. Summers called the new legislation "a major step forward to the 21st century," to which he probably should have added "and the eventual bankruptcy of our nation in a multi-trillion-dollar giveaway of taxpayer money to banks that use this new deregulation to blow up the financial system." He left that last part out then and doesn't mention the legislation anymore, for some reason. He seems less proud these days of having backed it.

More recently, now that he failed upward into a new position of national leadership, he promised in February of this year at the signing of the $787 billion stimulus bill that it would prevent unemployment from exceeding 8.5%. Here we sit on Thanksgiving day with 3.4 million fewer jobs than we had in February and an unemployment rate 1.7% higher than the rate he promised would be the top, and what does he have to say about it all? "I think we got the Recovery Act right."

You see, that's how to give thanks no matter what's going on. That's real leadership we can all put to use in our lives. For Summers's lighting the way down the road to happiness, I, for one, am most grateful.

I'm also grateful that we haven't yet reached the desperation shown during the Great Depression by those who needed work. In his book Fly Fishing Through The Midlife Crisis, Howell Raines relayed the following recollection told to him by Ben Schley, "a spry and gallant man in his mid-seventies who had spent his career with the Fish and Wildlife Service of the Department of the Interior:"

"There was a drought through the Alleghenies probably about 1937 or '38 when many of the streams went dry, and those that didn't became very, very warm. The local people would often burn the mountains so that they would get a job putting out the fire. Really. I was a fire warden in Morgan County, West Virginia, at one time, and we paid them twenty-five cents an hour, and they would literally start fires so they would have a job."

So, things really aren't so bad at today's wimpy levels of unemployment. For that, we should give thanks to our fine leaders and the low 10.2% unemployment rate they've achieved by getting the Recovery Act right.

Enjoy your turkey today, my friend -- if you can afford any.

China Crashes

2009-11-24T20:38:00.000+09:00

Richard Rhodes wrote in The Rhodes Report on Nov. 11:

What we find ironic about this situation where all markets are higher except for China is that the reason the markets are higher is Chinese industrial production and retail-sales figures. To wit, Chinese factories rose to a 19-month high in October, which isn't surprising, given the massive stimulus that remains in place. This coincides with other figures that show a still-large number of investment projects in the pipeline, rising real-estate spending and a very large increase in loan issuance. If there was a weak spot, it was clearly that exports and imports fell from year-earlier levels for the [12th] month in a row. Obviously, the stimulus is doing its job, but it is doing very little to stimulate the world economy as exports remain weak, as do imports.

That's right, and backed up by this September comment from Premier Wen Jiabao: "China's economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren't appropriate."

That sentiment was confirmed this morning when we received news that China's massive stimulus may not have been enough to save its banks yet. That sent the Shanghai index crashing 3.5% to 3224, its biggest swoon in three months. From Bloomberg:

China's five biggest banks, including Industrial & Commercial Bank of China Ltd., the nation's largest, submitted capital-raising plans to regulators, according to four people with knowledge of the matter. International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday that banks have revealed only about half of their losses from the financial crisis.

This is some swell global recovery underway.