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Our May 1, 2008 Newsletter
Edition
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EDITORIAL: An
Economic Commentary
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It may seem at times that we only wish to highlight the negative, but
that is not really the intent or goal. Our main concern rather,
is to ferret out the truth and facts as they are, something that the
mainstream press seems reluctant to do, at least in terms of what some
might deem to be politically incorrect economic news (although truthful
information, or lack thereof, might be the more accurate way to put
it). Of course, many people would probably not wish to
discuss such unpleasant economic information, but discuss such things
we must do regardless. Which is to say, you certainly cannot plan
if you do not know what you are planning for. You cannot make the
right investment or other kinds of decisions about your personal
finances unless you have a fairly good idea where the economy is headed
either (and how such things may effect you).
.
As we have stated time and time again, central bankers are scared to
death of deflation, and as such, their weapon of choice in an economic
system of fiat currencies and fractional reserve banking is
inflation. And inflate like crazy they have, although the money
has not gone where they hoped, and inflation may have even gotten away
from them as it takes on a life of its own. The housing market
continues to deflate, the credit markets are contracting, and the money
seems to have gone into commodities (for the time being). But
aside from the obvious expansion of the money supply already, the full
impact of the recent liquidity pumped into the economy to save the
banks, plus higher petroleum prices have not been fully factored in
just yet. Of course, Uncle Ben Bernanke is betting that he can
save the economy via all this liquid slush, while at the same time he
is also betting that a recession will dampen the inflationary effects
of what he is doing. This is like taking a few drinks to ward off
the effects of a hangover, hoping you do not become drunk again in the
process (we might suggest a nice cup of espresso instead).
.
Indeed some analysts have commented that higher food and fuel costs
have not fed into wages, a critical element of inflation since wage,
salary and benefit costs comprise almost 70% of the cost of production
in the United States. But we do not think wages will increase,
which will result in double jeopardy for the average consumer.
Meaning, a recession and higher unemployment puts a stop-gap on an
employer needing to offer higher wages, and therefore, they will
not. While some states are increasing their own minimum wage
levels, and while the federal minimum wage goes up the end of the year
in 2008, we think the result will be higher unemployment in the
restaurant sector as owners look to slash costs, raise menu prices and
otherwise deal with a trend of decreased patronage. Regardless,
consumers will be faced with higher fuel costs, higher food costs, and
all the rest that make up what one would constitute the cost of living,
without seeing the higher wages to offset these added costs.
.
The good news and the bright spot is that frugality is back in fashion,
big time. Even American teenagers, one group of consumers well
known for their conspicuous consumption habits, are now shopping in
second hand stores and in general cutting back (and possibly taking a
cue from their parents presumably). However, since the American
consumer is directly responsible for roughly seventy something percent
of US GDP, you can better believe that the retailers are now hurting
and the recently quarterly reports clearly show it. One leading
indicator is Federal Express and UPS. When they start reporting
significant drops in income and parcel delivery activity, that tells
you something. Chief Financial Officer of UPS, Kurt Kuehn, says that he
sees no signs of economic strengthening in the second quarter (in terms
of the US) and UPS reported a reported a 12 per cent decrease in
quarterly profit recently. Rival FedEx reported a 7 per cent
decline in quarterly earnings. However, UPS said it expected
growing global economies to create a rise in cross-border shipping,
presenting a major growth opportunity. UPS has plans to build a new air
hub in Shanghai to serve China and the rest of Asia. In short,
despite a grim economic picture for the US, the growth is there, albeit
outside of the US and in various emerging markets. That should
tell you where you want to be, either physically or in the least in
terms of your investments. This credit crisis thingy is not over
by a long shot and will not simply vanish on it's own in terms of the
US economy.
.
Speaking of investments, some analysts are saying: Beware of Declining
US Bond Markets. Current interest rates on bonds (and bank
savings accounts of course) are way, way below the true inflation
rate. In addition, anyone who has purchased TIPS (Treasury
Inflation Protected Securities) is out of their minds if they think it
will help. The US government constantly understates the true
inflation rate figures, understates the true unemployment rate figures
and overstates the GDP as well. This means, in terms of these
so-called TIPS bonds, you are relying upon the government to admit the
true rates of inflation to pay you the correct interest accordingly (so
you can keep up with inflation). Not going to happen, and such
inflation statistics are low balled to also keep a lid on so-called
COLA (Cost Of Living) increases for Social Security as well.
However, the world is watching and at some point, interest rates must
go up to compensate for the currency devaluation (and an actual US
inflation rate of roughly 12 to 17 percent, all depending upon whose
calculations you want to accept). At some point, foreign
investors are going to say that enough is enough, and you had better
believe that the US now desperately needs foreigners to finance their
debt, unfortunately.
.
Aside from this, credit is contracting and the short term commercial
paper market in the US is especially drying up. While Bernanke
continues to flood the market with cheap money and bailout initiatives,
the banks are not lending it, but are rather trying to hoard cash to
bulwark themselves against even more possible write-offs.
Interestingly enough, for bonds that investors are willing to buy, we
already have witnessed the auction markets for Municipal Bonds whereby
investors demanded up to 20 percent interest, which can be considered
to be the correct and true free market interest rate. However, it
is interesting to note that more than 60 percent of the thousands of
auctions conducted each week have failed since Feb. 13, accordingly to
data compiled by Bloomberg. One of the many economic comments we
have read says quite clearly: Don't buy (US Dollar) bonds. The
inflation driven by rising prices of oil, precious metals, raw
materials and agricultural products has not run its course. That is,
commodity prices have not fully worked their way into the prices of
pizzas, ball bearings and trash bags. When they do, the CPI growth rate
will go up, interest rates will go up and bond prices will go down (end
of quote).
.
Also of interest, gold has been pulling back in price, and yet the
dollar continues to make new lows against foreign currencies - but why
this anomaly? Former US Comptroller General David Walker
previously reported that the accumulated un-funded liabilities of the
US government total $53 trillion dollars, while others have put the
figure at US$62 Billion Dollars. Regardless of the exact number,
the current national debt is approaching US$10 Billion and destined to
only go up, but these open un-funded liabilities for the next 15 to 20
years is the really big dipper. Where is the money going to come
from? That is indeed the magic question. Will they print
it? Will they get it from increased taxes? Too many
variables without any sound government plan in sight, and all this
chicanery by the Federal Reserve has yet to run its course, in terms of
what we believe will be a negative.
.
So, with all this said, what is the plan? The name of the game is
going to be preservation of purchasing power, and preserving
wealth. In addition, a tight job market (the banking industry
alone will be cutting 10 percent of its workforce, and reduced consumer
spending will wreck havoc with the food service industry - - meaning
restaurants like Chili's and The Cheesecake Factory, which as an
industry group employs 13.1 million people, making it the nation's
third-largest employer, behind the U.S. government and the health-care
industry), wages that do not keep up with inflation and higher costs
for school tuition and general cost of living means the goal is
figuring out a way to lower your expenses without having to give up too
much in the way of living standards. All these things point to a
few different options (and expatriation as just one of those options
for some already). Regardless, it will mean some radical changes
from the way people managed their personal finances in the past (and
one could argue this is a good thing). Just remember you do not
have to sit idly by and take it. You do have options.
Hopefully the transition will not be too painful. Hopefully.
.
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IN THE NEWS:
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FOOD RATIONING
CONFRONTS BREADBASKET OF THE WORLD
By Josh Gerstein - April 21, 2008
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Many parts of America, long considered the breadbasket of the world,
are now confronting a once unthinkable phenomenon: food rationing.
Major retailers in New York, in areas of New England, and on the West
Coast are limiting purchases of flour, rice, and cooking oil as demand
outstrips supply. There are also anecdotal reports that some consumers
are hoarding grain stocks. At a Costco Warehouse in Mountain
View, Calif., yesterday, shoppers grew frustrated and occasionally
uttered expletives as they searched in vain for the large sacks of rice
they usually buy. Where's the rice? an engineer from Palo Alto,
Calif., Yajun Liu, said. You should be able to buy something like
rice. This is ridiculous. The bustling store in the heart of
Silicon Valley usually sells four or five varieties of rice to a
clientele largely of Asian immigrants, but only about half a pallet of
Indian-grown Basmati rice was left in stock. A 20-pound bag was selling
for $15.99.
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http://www2.nysun.com/article/74994
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SAM'S CLUB LIMITS
SALES OF RICE IN U.S.
Reuters News - April 23, 2008
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The Sam's Club warehouse division of Wal-Mart Stores Inc. said
Wednesday it is limiting sales of Jasmine, Basmati and long grain white
rice due to recent supply and demand trends. The news came just a
day after Costco Wholesale Corp., the largest U.S. warehouse club
operator, said it had seen increased demand for items like rice and
flour as customers, worried about global food shortages, stock up.
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http://www.reportonbusiness.com/
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EDITORS NOTES:
Television Station KPTM from Omaha, Nebraska picked up on this news
story and also adds: Food shortages and rationing has been a
third-world problem as of late, but recently, the phenomenon once
thought unthinkable in the United States could start happening.
The rice that is left is selling at near one dollar a pound, and in
some areas, customers report paying about $30 for a 25-pound bag.
Most Costco members were only allowed to buy only one bag. One
clerk reportedly dropped two sacks back on the stack after taking them
from a customer who tried to buy more than the one bag limit. Due
to the limited availability of rice, we are limiting rice purchases
based on your prior purchasing history, a sign above the dwindling
supply said (end of quote).
.
While it is true that the US still exports more than it imports, in
terms of agricultural products, that gap is not as wide as you might
believe. In 2007, the US exported (in Millions) $89,908 and
imported $71,937 (worth of agricultural products). And if you
look at the historical data over the last decade, once again, you would
be very surprised to learn just how much food is indeed imported into
the US. The USDA (United States Department of Agriculture) says
directly: Exports have exceeded imports by a large margin since
1960, but this surplus has been narrowing. Of the total volume of
fruits and vegetables consumed annually by the American consumer, 23
percent is imported.
.
Also, of interest, is the economic commentary produced by the USDA in
their latest report dated February 21, 2008, which states: U.S.
growth will slow in 2008 due to a sharp decline in housing construction
due to falling home real estate sales and financial market disturbances
due to difficulties in sub-prime mortgages and high energy prices.
Adjustments to the financial and housing situation are expected to
continue into 2009, despite lower interest rates. Rice exports
are unchanged at 3.8 million tons, but higher unit value boosts sales
$100 million to $1.7 billion. Stronger sales to Saudi Arabia and Turkey
more than offset an expected slowdown to Mexico and countries in
Central America, which completed purchases earlier in anticipation of
further price increases (end of quote from USDA report). You can
read this information for yourself via the following link:
.
http://www.ers.usda.gov/Briefing/AgTrade/
.
A few things of interest here folks. A US Government Agency,
namely the USDA, reports that the economic situation is expected to get
WORSE going into 2009 despite lower interest rates (even the economists
at the USDA know Bernanke is smoking something). How is it
possible that this information is not conveyed or reported by other
parts of government, including current politicians in office?
Interestingly enough, the USDA reports that Mexico and countries in
Central America did some advance buying in anticipation of further
price increases. Pretty smart, those Latino's - don't you
think? However, more directly as it pertains to rice, the USDA
expects the US to have a sufficient enough excess to EXPORT almost 4
tons in 2008, which is reportedly the same excess production and export
amounts from 2007. If there is an excess of rice production in
the US, how is it possible that there is a shortage and rationing at
Costco? One would presumably and logically only export what you
have in excess, or what remains after local domestic demand and
consumption is met. I must be missing something, or is there some
other agenda I do not understand? And what about flour and
cooking oil?
.
.
ERA OF CHEAP FOOD
ENDS AS PRICES SURGE
By Steve Hawkes, Greg Hurst and Valerie Elliott - April 23, 2008
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Families have been warned that the prices of basic foods will rise
steeply again because of acute shortages in commodity markets.
Experts told The Times yesterday that prices of rice, wheat and
vegetable oil would rise further. They also forecast that high prices
and shortages which have caused riots in developing countries such as
Bangladesh and Haiti were here to stay, and that the days of cheap
produce would not return. Food-price inflation has already pushed up a
typical family's weekly shopping bill by 15 per cent in a year.
Butter has gone up by 62 per cent in the past year. The price of
rice, which has almost tripled in a year, rose 2 per cent on the
Chicago Board of Trade yesterday as the United Nations food agency gave
warning that millions faced starvation because aid agencies were unable
to meet the additional financial burden. John Bason, finance
director of Associated British Foods, one of Britain's biggest food
producers, said that wheat prices had doubled in a year and
supermarkets would have to raise the price of bread again. Vegetable
oil was also likely to soar in price because the price of corn oil in
the US had almost tripled, he said.
.
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/
.
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AMERICANS HOARD FOOD
AS INDUSTRY SEEKS REGS
By Patrice Hill, Washington Times - April 23, 2008
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Farmers and food executives appealed fruitlessly to federal officials
yesterday for regulatory steps to limit speculative buying that is
helping to drive food prices higher. Meanwhile, some Americans are
stocking up on staples such as rice, flour and oil in anticipation of
high prices and shortages spreading from overseas. Costco and
other grocery stores in California reported a run on rice, which has
forced them to set limits on how many sacks of rice each customer can
buy. Filipinos in Canada are scooping up all the rice they can find and
shipping it to relatives in the Philippines, which is suffering a
severe shortage that is leaving many people hungry.
.
http://www.washingtontimes.com/
.
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JAPAN'S HUNGER
BECOMES A DIRE WARNING FOR OTHER NATIONS
By Justin Norrie, Tokyo - April 21, 2008
.
Mariko Arikariko Watanabe admits she could have chosen a better time to
take up baking. This week, when the Tokyo housewife visited her local
Ito-Yokado supermarket to buy butter to make a cake, she found the
shelves bare. I went to another supermarket, and then another,
and there was no butter at those either. Everywhere I went there were
notices saying Japan has run out of butter. I couldn't believe it, this
is the first time in my life I've wanted to try baking cakes and I
can't get any butter, said the frustrated cook. Japan's acute
butter shortage, which has confounded bakeries, restaurants and now
families across the country, is the latest unforeseen result of the
global agricultural commodities crisis.
.
A sharp increase in the cost of imported cattle feed and a decline in
milk imports, both of which are typically provided in large part by
Australia, have prevented dairy farmers from keeping pace with
demand. While soaring food prices have triggered rioting among
the starving millions of the third world, in wealthy Japan they have
forced a pampered population to contemplate the shocking possibility of
a long-term, perhaps permanent, reduction in the quality and quantity
of its food. A 130% rise in the global cost of wheat in the past
year, caused partly by surging demand from China and India and a huge
injection of speculative funds into wheat futures, has forced the
Government to hit flour millers with three rounds of stiff mark-ups.
The latest 30% increase this month has given rise to speculation that
Japan, which relies on imports for 90% of its annual wheat consumption,
is no longer on the brink of a food crisis, but has fallen off the
cliff.
.
http://business.theage.com.au/
.
EDITORS NOTES:
I found the by-line of the article to be telling indeed, which
says: Being a rich nation is no protection for Japan, which faces
the fallout of relying too heavily on foreign food to supply domestic
needs. I think there is a lesson to be learned here, and domestic
self-sufficiency would seem to be it. Stated more clearly, when
any nation is wholly dependent upon another for energy, food, and
whatever other products or necessities, that is when you are vulnerable
as a nation.
.
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THE TRADING FRENZY
THAT SENT PRICES SOARING
By Iain Macwhirter - April 17, 2008
.
Four people were killed in food riots in Haiti. From Bolivia to
Uzbekistan there have been violent protests against the doubling of
food prices. In Italy, mothers are marching against the price of pasta.
The World Food Program has seized up and the World Bank on 13 April
forecast that 100 million people face starvation. It should not have
come as a surprise. Conventional explanations for the food crisis
range from climate change to dietary change in China, from global
overpopulation to the switch of agricultural production to bio-fuels.
These long-term factors are important but they are not the real reasons
why food prices have doubled or why India is rationing rice or why
British farmers are killing pigs for which they can't afford feed
stocks. It's the credit crisis.
.
This latest food emergency has developed in an incredibly short space
of time - essentially over the past 18 months. The reason for food
shortages is speculation in commodity futures following the collapse of
the financial derivatives markets. Desperate for quick returns, dealers
are taking trillions of dollars out of equities and mortgage bonds and
ploughing them into food and raw materials. It's called the commodities
super-cycle on Wall Street, and it is likely to cause starvation on an
epic scale. The rocketing price of wheat, soybeans, sugar, coffee
- you name it - is a direct result of debt defaults that have caused
financial panic in the west and encouraged investors to seek stores of
value. These range from gold and oil at one end to corn, cocoa and
cattle at the other; speculators are even placing bets on water
prices. Just like the boom in house prices, commodity price
inflation feeds on itself. The more prices rise, and big profits are
made, the more others invest, hoping for big returns.
.
Investment houses, pension funds, private equity groups and banks are
driven by profit not morality, and they invest wherever they can see
the biggest return. It is not a conspiracy, but it is a conscious
strategy, backed by the central bankers of the west as they try to help
Wall Street back on its feet. Put another way, the banks are exporting
our debts to the developing world. The collapse of the dollar means
that most international commodities are more expensive for poor people
to buy. The dollar's decline is a direct result of the low interest
rate policy of the US Federal Reserve and the Bank of England, which
shockingly cut interest rates on 10 April even as inflation spiraled.
.
http://www.newstatesman.com/200804170026
.
Another good recent article (April 25, 2008) to read is, Agriculture: What is Really Causing
Agflation?
.
http://www.ipsnews.net/news.asp?idnews=42134
.
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US ROLE IN HAITI
HUNGER RIOTS - By Bill Quigley - April 21,
2008
.
Riots in Haiti over explosive rises in food costs have claimed the
lives of six people. There have also been food riots world-wide
in Burkina Faso, Cameroon, Ivory Coast, Egypt, Guinea, Mauritania,
Mexico, Morocco, Senegal, Uzbekistan and Yemen. The New York
Times lectured Haiti on April 18 that Haiti, its agriculture industry
in shambles, needs to better feed itself. Unfortunately, the
article did not talk at all about one of the main causes of the
shortages - the fact that the U.S. and other international financial
bodies destroyed Haitian rice farmers to create a major market for the
heavily subsidized rice from U.S. farmers. This is not the only
cause of hunger in Haiti and other poor countries, but it is a major
force. Thirty years ago, Haiti raised nearly all the rice it
needed. What happened?
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In 1986, after the expulsion of Haitian dictator Jean Claude, Baby Doc,
Duvalier the International Monetary Fund (IMF) loaned Haiti $24.6
million in desperately needed funds (Baby Doc had raided the treasury
on the way out). But, in order to get the IMF loan, Haiti was
required to reduce tariff protections for their Haitian rice and other
agricultural products and some industries to open up the country's
markets to competition from outside countries. The U.S. has by
far the largest voice in decisions of the IMF.
.
http://www.opednews.com/articles/genera_bill_qui_080421_us_role_in_haiti_hun.htm
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EDITORS NOTES:
Just as an added commentary for those people that may want to ask: What about the Dominican Republic
(which shares the island with it's much poorer French speaking neighbor)? The agriculture sector
in the DR is alive and well, and in fact the Dominican Republic can and
does grow enough to feed it's own people (the Dominican Republic has
historically been an exporter of agricultural products to Haiti in
recent years). There has been enough of an over production of
rice in recent years, so much so that rice has been a barter product to
buy petroleum from Venezuela. Which is to say that despite all
the turmoil over food in Haiti, this has NOT been the case in the
Dominican Republic. While it is true that prices for food have
gone up in the DR (as everywhere else, worldwide), and while it has
also been true that many people involved in agriculture and farming
have abandoned those professions in recent years in search of higher
paying jobs in the urban areas of the country, it is also true that the
basic cultural and social template for agriculture remains in
place. Many urban families still have relatives in the rural
areas that own their own small plots of farmland (where Yuca, Platano
and other such things are grown all over the backyard). If worse
comes to worse, Dominicans can pile the family into the car and head
off to a relatives house in the country if need be (family comes first
for Dominicans, period). For these reasons, our contention is
that the Dominican Republic should not experience some of these same
problems, and so far, it has not been the case at all (the supermarket
shelves are full, and there is no rationing or speculation).
Agriculture is in the blood of the Dominican people, and even in urban
areas, many people plant bananas, avocado and have other things in
their backyards (such as chickens), perhaps out of habit or custom, but
never the less, they have some food source right at home.
Dominicans will get by, and they have no other choice in a country that
does not have unemployment insurance, food stamps or other bloated
government welfare bureaucracies. The country does of course have
plenty of fertile land, and most Dominicans know a little something,
something about growing their own fruits and vegetables (or raising
free range chickens without the free range price tag).
.
The Economic Commission for Latin America and the Caribbean
(ECLAC) estimates that family farms account for 80 percent of all
farming operations in Latin America. They also go on to
report: Although there is no single definition of Campesino
(peasant) family farming, it is associated with three characteristics:
family labor, the lack of permanent employees, and the passing down of
the farm from one generation of the family to the next.
.
In Chile there are roughly 300,000 small farms, which represent over 80
percent of the country's agricultural operations and supply 45 percent
of the vegetables consumed domestically, 43 percent of the corn, wheat
and rice, and 40 percent of the beef and dairy products, according to
the Ministry of Agriculture. In Ecuador, 91 percent of the
country's 843,000 farms are family owned and operated, according to
figures from 2000. In Argentina, over 66 percent of the country's
farms are family owned.
.
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HOW SAFE IS MY
FDIC-INSURED BANK ACCOUNT? - April 14, 2008
.
Your bank account may not be as safe as you think (or hope). Taking a
deeper look at the legal details and the financial depth of the FDIC
reveals several troubling details that call into question how the FDIC
would fare during a true banking crisis. The US is coming out of
a period of unusually low banking stress and failures. Since it is
typical human behavior to let one's guard down during tranquil periods,
we might legitimately ask if this has happened with respect to the FDIC.
.
The two most common methods employed by FDIC in cases of insolvency or
liquidity are the: Payoff Method , in which insured deposits are paid
by the FDIC, which attempts to recover its payments by liquidating the
receivership estate of the failed bank or The Purchase and Assumption
Method , in which all deposits (liabilities) are assumed by an open
bank, which also purchases some or all of the failed bank's loans
(assets).
.
In short, if your bank gets in trouble, the FDIC will ride in and
either pay off your account (up to $100k), or sell your bank off to
another bank which will then assume the usual duties of your bank.
Under normal circumstances, a bank failure should not impact you in the
least. But these are not normal times. We might reasonably ask how the
FDIC would respond during a major banking crisis. After all, this is
our money we're talking about. Faith and hope are great at weddings and
sporting events, but they should not form the basis of our strategy for
handling our finances. How many bank failures could the FDIC
handle at once?
.
The 1.22% Reserve
Ratio means that for EVERY DOLLAR in your bank account, the FDIC has
1.22 CENTS IN RESERVE ready to cover your potential losses. This
has proved to be an ample amount during the period of stability we've
recently had, but it doesn't seem particularly significant, considering
the recent headlines about banking losses (Spring of 2008).
Consider, for a moment, the collapse of Bear Stearns. In order to
assume that bank, JP Morgan asked for, and received, a special waiver
from the Federal Reserve to keep $400 billion of suspect of Bear
Stearn's assets off the books of JPM (page 4 of the linked document).
While JPM may have been padding the books a little bit here, due to the
uncertainty of how bad the wreckage might turn out to be, $400 billion
dwarfs the $52 billion reserves of the FDIC.
.
If one medium-large bank collapse could wipe out the FDIC by a factor
of nearly 8, what do you suppose would happen if there were multiple,
simultaneous bank failures? At this point, my guess would be that
Congress would be sorely tempted to borrow additional funds to remedy
the situation, but I worry that hardship and losses might result while
the laws were amended and sufficient funding avenues identified. So how
many bank failures could the FDIC endure? The data suggests slightly
fewer than one big one.
.
http://www.marketoracle.co.uk/Article4335.html
.
EDITORS NOTES:
For every US$1 Dollar Americans have on deposit with a local US bank,
the FDIC has less than two pennies in reserve to cover a bailout.
Two measly pennies in cash for every dollar in potential
liabilities. That does not sounds like much insurance to me. In
fact, if FDIC was a regular or normal insurance company, one could
conclude they were broke in terms of being able to cover policy holders
in the event of ONLY ten or twenty percent putting a claim in.
Never mind thirty, forty or fifty percent. But all this is old
news for our clients and readers of our newsletters, which is why so
many have decided to not keep all their eggs in one basket, as they say
(not all their wealth in one country nor in one currency either).
Will the US Government allow FDIC to go belly-up? I doubt it, but
the question then becomes: Where will the money come from? As
usual, it will come from the tax-payers, which is exactly what happened
when the FSLIC went insolvent - or have you forgotten already? In
short, this means higher taxes tomorrow so depositors can get their
FDIC insured money back today. If you think about it, that
translates into a sort of reverse Ponzi Scheme, where individual
citizens are getting a loan of their own money today, which they end up
paying back later via taxes. Is this the US Governments
definition of insurance?
.
.
BIG TAX BREAKS FOR
BUSINESS IN HOUSING BILL
By Stephen Labaton and David Herszenhorn - April 16, 2008
.
The Senate proclaimed a fierce bipartisan resolve two weeks ago to help
American homeowners in danger of foreclosure. But while a bill that
senators approved last week would take modest steps toward that goal,
it would also provide billions of dollars in tax breaks for automakers,
airlines, alternative energy producers and other struggling industries,
as well as home builders. The tax provisions of the Foreclosure
Prevention Act, which consumer groups and labor leaders say amount to
government handouts to big business, show how the credit crisis, while
rattling the housing and financial markets, has created beneficiaries
in the power corridors of Washington. In the Senate bill, the
nations biggest home builders, some now on the verge of bankruptcy, won
a provision that would let them claim millions in tax refunds by
charging their current losses against the huge profits they made three
or four years ago. Other struggling industries would benefit from this
provision.
.
http://www.nytimes.com/2008/04/16/business/
.
EDITORS NOTES:
What the politicians are actually offering here is another bailout or
direct subsidy to the housing industry (you know, the guys that made
tons of money in recent years) . Which is to explain, they want
to permit such companies be able to redo their tax returns from three
or four years ago by taking the current losses of today by applying
them to taxable income from four years ago, and thus reduce the taxable
income they paid back then, and get a new tax refund check in 2008 as a
result. When I was a kid playing dodge-ball, we used to call that
a do-over. Of course, school yard rules of some ten year olds and
the antics of mature, educated adults is something different,
especially when money is involved. In short, this is nothing more
than a subsidy or give-away considering that such previous taxes have
already been paid and spent, and therefore such rebate checks or
payouts are coming out of current tax payments from other middle class
taxpayers, or are done so by increasing the debt (or deficit, if you
prefer).
.
The real problem here is that once again, one segment of the population
(middle class taxpayers) are subsidizing another (corporations).
Plus, to add insult to injury as just one example of the deference
given to the average citizen, the US government is now forcing average
retirees participating in the Medicare Plan D Prescription Drug benefit
program to ante up more money now, out of pocket. Which is to
explain, an overwhelming majority of Medicare health plans are now
using a system that places some of the most expensive drugs in newly
created fourth and fifth tiers. Drugs in the higher tiers can cost
consumers significantly more money than a three tier, fixed co-payment
system - anywhere from 25 to 35 percent of the full retail price, which
can amount to hundreds of dollars in some cases for just one
prescription order. In other words, consumers traditionally paid
fixed amounts in the past, or co-pays, when purchasing prescription
drugs, and these co-pays are typically lumped into three groups:
generics, preferred brands, and non-preferred brands. However, Medicare
Part D drug plans have changed all that by placing more expensive drugs
into additional tiers. It has been reported that 86% of all
Medicare Part D plans NOW use four (and sometimes five) tier plan
structures, versus only 10% of commercial health plans, whose members
on average pay a fixed fee of about $71 (but that is now changing as
commercial health insurers are copying the new and higher US Federal
Government co-payment schemes as well). In summary, while
corporations get a tax payer funded bailout, individual citizens are
shouldering even more of the financial burden for government run social
welfare benefits.
.
This is all happening at a time when an unprecedented number of
baby-boomers will be retiring, of which the vast majority fall into the
category of having to pay monthly health insurance premiums because
they are considered too wealthy for the free Medicaid version (and will
be subject to these new co-payment requirements). In light of it
all, this corporate rebate is nothing short of incredulous.
Asking average citizens to absorb reduced social welfare benefits,
higher taxes and or higher co-payments in terms of the medical benefits
is bad enough (with the excuse that the government can no longer afford
the previous programs or arrangements of the past, which it honestly
cannot). But to then turn around and rebate money (that has
already been spent and does not exist, which in turn translates into a
bailout or give-a-away) to another class of citizenry, namely
incorporated home builders, is absolutely preposterous and unfair to
say the least. How can you say the government is cash strapped in
terms of one class of citizens (the human, breathing kind) yet do the
opposite in terms of the other kind (corporations)? I am no fan
of socialism, not by a long shot, but fair is fair, and all are equal
or none are. If this is the shape of things to come (as it
already has been for some time), then this especially should convince
you to seriously reconsider your other options going
forward.
.
.
HERE COMES THE NEXT
MORTGAGE CRISIS
By Mark Gimein - April 15, 2008
.
Sub-prime was just the beginning. Wait until California's prime
borrowers start handing their keys to the bank. California is to
mortgage lending what Chicago is to pork bellies. For years, that meant
it was a place with soaring house values; today, the foreclosure rate
across the state is twice the national average and going up fast.
Riverside County, outside Los Angeles, may be the foreclosure capital
of the country, with a rate close to six times the national average.
And housing prices are in freefall.
.
California should be the poster child for a mortgage-loan bailout. In
few other places have so many taken on such onerous debts with so
little equity. Unfortunately, the crisis in California is going to get
much worse, and there is no bailout that will solve it. Why? Because if
the first stage of the foreclosure crisis was about people who could
not afford their mortgages, the next stage will be about people who
have every reason not even to try to pay their mortgages. Over
the next several months, we're going to be subjected to a chorus of
hand-wringing about the moral turpitude of people who walk away from
their mortgages and pronouncements like last month's warning from
Treasury Secretary Henry Paulson that people should honor their
mortgage obligations. The problem with finger-wagging on what you
should or ought to do is that, when it comes to money, you're usually
given the lecture only when it's in your interest to do the opposite.
.
http://www.slate.com/
.
EDITORS NOTES:
We reported to you previously that an estimated Nine Million American
homeowners owe more to the bank than the home is worth. These are
the very people the above article is talking about, in terms of those
that have an incentive to simply walk away. To put that into
perspective, remember that a little over one million homes were in
foreclosure in 2007 and the estimate for 2008 is two million. But
these were homes that were or are involved with sub-prime mortgages
supposedly. Now, in terms of the above article, the author is
talking about roughly 9 to 10 Million homes, or 300 percent of the
total homes already involved in foreclosure so far that are not
necessarily involved with sub-prime mortgages, but are cases whereby
the home is worth less than the money borrowed from the bank. The
powers that be are so frightened about the prospect that US Treasury
Secretary Paulson has publicly asked homeowners to honor their mortgage
loan commitments. Can you imagine? A senior government
official asking citizens to be honorable and pay their bills.
However, as we suspected, credit card defaults are the next item on the
agenda (see below).
.
.
TARGET CREDIT-CARD
DEFAULTS JUMP
By Chris Serres, Star Tribune - April 23, 2008
.
A growing number of Target customers are walking away from their
credit-card bills, leaving the retailer's credit-card portfolio in a
riskier financial position just as the company is trying to sell half
of it. Target's delinquent accounts -- seen as a sign of possible
future trouble -- have increased 24 percent from a year ago as a
percentage of its total portfolio. People have lost their options
to fund their debt, so they're relying on their Target cards, said
Dennis Moroney, a senior analyst for bank cards at Tower Group in
Needham, Mass.
.
http://www.startribune.com/business/18027834.html
.
.
DEBT COLLECTION DONE
FROM INDIA APPEALS TO U.S. AGENCIES
By Heather Timmons - April 24, 2008
.
In a glass tower on the outskirts of New Delhi, dozens of young Indians
are on the telephone, calling America's out of work, forgetful and
debt-stricken and asking for cash. Are you sure that's all you
can afford? one operator in a row of cubicles asks politely. Well, how
do you take care of your everyday expenses? presses another.
.
Americans are used to receiving calls from India for insurance claims
and credit card sales. But debt collection represents a growing
business for outsourcing companies, especially as the American economy
slows and its consumers struggle to pay for their purchases.
Armed with a sophisticated automated system that dials tens of
thousands of Americans every hour, and puts confidential information
like Social Security numbers, addresses and credit history at operator
fingertips, this new breed of collectors is chasing down late car
payments, overdue credit card debt and lapsed installment loans. Debt
collectors in India often cost about one-quarter the price of their
American counterparts, and are often better at the job, debt collection
company executives say.
.
http://www.nytimes.com/2008/04/24/business/worldbusiness/
.
EDITORS NOTES:
I guess it is my own warped sense of humor, but I find all this to be
both hysterically amusing and ironic. First, the jobs are
outsourced to India, and as a result we had foreigners cold calling
Americans to get them to buy car insurance, apply for another credit
card, take out a second mortgage, or whatever the sales pitch.
Then, Americans get themselves in trouble with their mortgages and
credit cards (and maybe even some of them because they lost their job
to someone is India due to outsourcing). And now, as a final
chapter in all this, we now have foreigners chasing Americans in order
to collect credit card or other debts on behalf of a US collection
agency. Even the best writer in Hollywood could not make this
up. The truth is indeed stranger than fiction.
.
.
THE TRILLON-DOLLAR
MORTGAGE TIME BOMB
By Chris Isidore, CNNMoney.com - April 21, 2008
.
Among the nightmares lurking around the corner for the already battered
housing and credit markets would be a meltdown at mortgage financing
giants Fannie Mae and Freddie Mac. Although few are predicting an
imminent need for a bailout just yet, credit rating agency Standard
& Poor's recently placed an estimated price tag on this worst case
scenario -- $420 billion to $1.1 trillion of taxpayer's money.
This dwarfs how much it cost to help banks during the savings and loan
crisis of the late 1980's and early 1990's. That cost taxpayers about
$250 billion in today's dollars. S&P added that saving Fannie
and Freddie might cost so much that the federal government's AAA credit
rating, the top possible rating, might even be at risk. If that was
lost, then all federal government borrowing would become more expensive.
.
http://money.cnn.com/2008/04/21/news/economy/fannie_freddie/
.
EDITORS NOTES:
We reported on this in the last newsletter, so not exactly anything
new. However, we find it ironic that not so long ago, it was
Standard & Poor's that rated all those junk sub-prime mortgage
securities with a AAA rating (along with the other credit rating
agencies as well). Now, these same guys are warning that US
Government Bonds could be downgraded to something else (perhaps junk
bond status?). Once again, you just could not make this kind of
stuff up even if you tried.
.
.
EURO MAINTAINS
UPWARD TRAJECTORY
By Peter Garnham - April 16, 2008
.
The euro surged to record levels against the dollar and the pound on
Wednesday after euro-zone inflation was unexpectedly revised up to its
highest level since the introduction of the single currency. The
European Central Bank, in contrast to the Federal Reserve and Bank of
England, has steadfastly refused to cut rates in response to signs that
the fallout from the credit crisis was spilling over into the real
economy. Instead, the ECB has maintained that rising price
pressures were a greater threat to economic stability than slowing
growth. The euro rose 1.1 per cent to a record high of $1.5968
against the dollar by midday in New York.
.
http://www.ft.com/
.
EDITORS NOTES:
When the Euro first was issued, it was trading at 80 something US
cents. Now it is worth US$1.60, which means it has doubled in
value against the US Dollar is only a few years. When a Central
Bank of any country cuts interest rates, prints more money than the GDP
growth can support or otherwise floods the economy with excess
liquidity, all these things create or fuel inflation (devaluation of
the currency). When a Central Bank keeps rates stable or
increases rates, this signals a check on inflation and boosts the value
of the currency (or in the least prevents it from being
devalued). All this is very simple and very well known economic
truism. If you want to know which currencies will hold value or
increase, all you need to do is observe what the Central Bank in a
particular country is currently doing to get your answer (and what
currencies you may want to hold in order to maintain your purchasing
power). An excellent article posted on April 16, 2008 explaining some
of the true economic fundamentals at work right now is below:
.
LIARS, WALL STREET
& YOUR GOLD
.
http://www.kitco.com/ind/willie/apr162008.html
.
.
POLICY TIGHTENING
BOOSTS SINGAPORE DOLLAR
By John Burton in Singapore - April 10, 2008
.
The Singapore dollar rose to a record high against the US currency as
the city-state tightened its monetary policy in response to an
unexpected jump in first-quarter economic growth that raised inflation
fears. The move by the Monetary Authority of Singapore to allow
the Singapore dollar to appreciate to curb the cost of imported food
and energy came as the economy grew by 7.2 per cent in the
January-March period from a year ago, according to a preliminary
estimate. A stronger Singapore dollar could hurt exports,
particularly to the US. But analysts are also speaking of the currency
becoming the Swiss franc of Asia, with an increased value likely to
attract more overseas funds as the city-state aims to be a leading
global center for private banking.
.
http://www.ft.com/
.
EDITORS NOTES:
The new Swiss Franc of Asia? Could be. We like the currency
and economic growth story regarding Singapore, just as we do for Brazil
as well (Brazil just discovered a new and very large oil field,
again). There are a number of ways to hedge against US Dollar
inflation, and one of them is to simply get out of the US Dollar.
Of course, for Americans that could mean getting themselves another
passport because they will find it an almost impossibility to open a
savings account in Euros, Singapore Dollars or whatever else inside the
US, and difficult getting a bank account open as an American these days
in many non US jurisdictions as well. Live locally, but think and
invest internationally.
.
.
CHINESE EXPORTERS
SHUN FLAGGING DOLLAR
By Robin Kwong in Hong Kong - March 27, 2008
.
Rising numbers of Chinese exporters are shunning the US dollar or
devising ways to offset the impact of the falling currency as they
confront rising labor and raw material costs at home. According
to Alibaba.com, the online company that matches Chinese suppliers with
international buyers, the vast majority of their almost 700,000 Chinese
suppliers no longer use dollars to settle non-US transactions to
minimize foreign exchange risk. They are moving to euros, pounds,
Australian dollars or even quoting prices in Renminbi, David Wei, chief
executive, told the Financial Times. Moreover, he added, prices quoted
in dollars were now often valid for just seven days compared with the
30-60 days common previously. The dollar has long been the
currency of choice for Chinese and other exporters around the world.
However, the impact of its recent weakening has led exporters to begin
questioning its place as the de facto world currency. Quanzhou
Leething Garment & Knitting, a Chinese men's underwear factory,
said it had started encouraging clients to pay in euros instead of
dollars in November. While the Chinese currency has appreciated against
its US counterpart in recent months, it has moved little against the
euro.
.
http://www.ft.com/
.
EDITORS NOTES:
So there you have it guys. If you do not want to go around naked
underneath, you will now need Euros to buy your boxer shorts because
the Chinese underwear factory does not want payment in US
Dollars. I wonder if they will take rice or cooking oil
instead? Better call Costco to see if we can buy some.
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