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Our September 1, 2007 Newsletter
Edition
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IN
THE NEWS:
.
.
EMERGING
MARKETS RESISTANT TO U.S. TURMOIL, LENDERS SAY
Reuters
News - August 27, 2007
.
Emerging-market
economies have resisted the turmoil in U.S. sub-prime mortgage markets
so far but could still feel a dampening impact on lending from the U.S.
experience, a lenders group said on Monday. The Institute of
International Finance said deterioration in U.S. housing and mortgage
finance markets has affected emerging markets in the sense that there
has been a sharp reversal in the appetite for risk. On a longer
term basis, there is a chance that prospects for growth in emerging
economies will be reduced, and it is not yet known whether investors
from emerging economies have suffered big losses from U.S. sub-prime
market problems. Despite all these linkages, however, it is
impressive that emerging market financial markets have so far been
remarkably resilient to turmoil in mature markets, the institute said.
.
http://today.reuters.com/news/
.
EDITORS NOTES:
We return to the previous comments we made earlier, whereby we said,
even though the US economy may hit the skids, the impact will be much
less so on other nations (there may be some reduced growth, but that is
a very different event then all out recession, or negative
growth). While any cutback in spending by the US consumer will
certainly be felt to some extent world-wide (and Chinas annual GDP
growth of 10 percent could possibly be halved), the real story is the
other fundamentals going on economically in those other emerging or
growth markets (and remember we highlighted the low use of credit, and
preference for cash, meaning no credit crisis or mortgage implosion in
such countries).
.
Jerome
Booth writes, regarding a Financial
Times Article titled: Emerging
Market Debt Is The New Safe Haven:
.
The
countries themselves (emerging markets) are much less vulnerable to
external shocks, often with BETTER
debt ratios than developed countries, STRONGER
RESERVES, LOW INFLATION
and strong current account and fiscal SURPLUSES. If central banks main
risk is too big a concentration in US assets, then non-G7 sovereign
debt is often a better risk reducer than other G7 sovereign debt. So
emerging debt is the new safe haven. We only hope that there are
enough people who do not believe me and sell emerging assets anyway,
allowing us to buy paper more cheaply.
.
http://ftalphaville.ft.com/blog/2007/08/29/6888/
.
From
an article posted in India's Business
Standard on August 28, 2007 titled: Emerging Markets Still A Big Draw,
we are offered the following:
.
In
the last couple of weeks, markets have seen a re-assessment and
re-pricing of risk but that doesn't mean that the story is over. There
are still phenomenal traffic jams in the streets of Beijing and Mumbai
and the economies are still growing. You may end up with a minor
correction in the stock markets but ultimately the focus remains on the
same economic growth potential, companies delivering very strong
earnings and strong return on capital regardless of what has happened
in the capital markets in the last few days.
.
http://www.business-standard.com/smartinvestor/
.
Mr.
Conrad De Aenlle writes on August 27, 2007 in an article from the International Herald Tribune
titled: Emerging Markets Rise
Above Global Turmoil, whereby it is reported:
.
There
is more to developing economies than peddling consumer goods to the
West. In particular there is massive infrastructure and other capital
spending taking place - roads, power plants, airports - to try to meet
the needs of an industrial base that has expanded enormously during
half a decade of accelerating growth. Citizens in the developing
world can see the headlines, but they also see that their paychecks are
much bigger and that the property market is booming. When they
read about sub-prime mortgage blowups, they think, What's that got to
do with me?
.
http://www.iht.com/articles/2007/08/27/yourmoney/
.
.
THE
GOLDEN YEARS: EUROPEAN STYLE - By Stephane Fitch -
July 30, 2007
.
You
can live large in several European nations--as long as you're willing
to surrender your American citizenship. The phrase tax haven
usually conjures up rum-soaked images of palm trees and marlin fishing.
But what if you hate hot weather and sand in your shorts?
Suppose, instead, you long for the smoldering charm of cafe life,
cobblestone streets and high-speed trains: Europe. You may be surprised
at what tax havens you can find in the Old World.
.
To
be sure, Europe can be a hornets nest of outrageous taxes and high
overhead. There's no arguing with the high cost of living in London,
for example. The British pound costs $2, up from $1.75 just a year
ago. And worst of all, if you import income of $200,000 to the
U.K., taxes may eat up $90,000 of it. The high taxes and pricey cost of
living are a killer combination. The good news: In many other
spots around Europe, the environment is far more welcoming. We've
compiled a list of 12 European locations that really are havens of low
taxes and reasonable prices. Even the U.K. has its advantages if you
know how to play it.
.
According
to Global Property Guide, a real estate data firm that supplies
information about rents to property investors through its Web site, a
luxury 1,200-square-foot apartment in Vienna's premier neighborhood can
rent for about $1,800 a month. That's less than the rent in many prime
big-city neighborhoods in the U.S. The fine print: Austria
reserves this low-tax deal for non-citizens only. So if you decide to
retire here, establish citizenship in the Bahamas or another country
that doesn't tax worldwide income. (More on this later.) And to get the
most favorable tax treatment for income you import to Austria, it's
best to live there less than six months a year.
.
Switzerland,
Austria, Italy, Spain ... beautiful places, but maybe learning a new
language isn't your thing. Back to the United Kingdom. The Queen offers
a tax loophole that the U.S. doesn't, and it may make living under the
tyranny of the British pound less painful. Under U.K. tax rules, you
pay income taxes only on cash that you remit to Britain. So
suppose your assets are all in the Cayman Islands, churning out
$500,000 a year in income. And suppose you can live on just $200,000
for most of the year in London (the city's museums will let you peruse
their collections for free mid-week). The $300,000 difference that
stays in that tropical bank account is all yours. You could go on an
all-out vacation to one of those sunny, rum-soaked island retreats you
didn't want to retire to.
.
All
the above assumes you're willing to apply for citizenship in a country
outside the U.S. The reason is that the U.S. taxes worldwide income.
The sure way to avoid filing taxes in the U.S. is to become a
foreigner. That means, of course, giving up your right to vote back
home. So if you're not ready to renounce your U.S. citizenship and get
a foreign passport, this may not be the route for you.
.
http://www.forbes.com/personalfinance/taxesestates/2007/07/30/
.
EDITORS NOTES:
As we discussed many times previously, there is a very long list of
countries that are indeed tax havens, or we can say tax beneficial in
the least (even if they are not known as formal tax havens), in one
form or another, all depending upon what passport you carry and what
your residency status is. In other words, bank accounts in some
of the most highly taxed nations (high taxes that is, for local
citizens living inside those countries) are often TAX-FREE for
foreigners or non-residents. The United States is a tax-haven for
non US citizens as it pertains to capital gains on stock transactions,
which means that the US is certainly hypocritical as well, as it chides
other nations for low taxes or certain tax incentives.
Regardless, the idea is to make sure you set yourself up in such a way
that you can benefit, and that may mean obtaining a second citizenship
(and maybe even discarding the first one as a longer term option,
especially if you are a US citizen).
.
Regarding
the idea of the Bahamas being mentioned by the author of the article,
my only comments are that, in regards to many of the former British
Caribbean Islands (Bermuda, Bahamas, Turks & Caicos, etc.) it can
be very difficult to obtain citizenship and a passport, as this is
reserved for those that were born there or are children of native
citizens (and even being a child of such a person may not automatically
grant you citizenship in some cases for these countries, as there is a
litmus test to be met). This is not to say it is utterly
impossible to become a citizen of the Bahamas or some of these other
islands, but it is not as easy as the author would make it seem.
They will of course grant you residency status, providing you make an
investment into real estate, but the price of homes (plus the cost of
living) is not cheap (in fact, it is outrageously expensive in
comparison to some other Caribbean destinations, and the investment
requirements for residency ridiculously inflated as well).
However, with that said, the author, generally speaking, is on the
right track, or has the right idea (and there are many other countries
that do not make the residency or naturalized citizenship application
so difficult or costly). In fact, many developing or growing
economies actually may proactively want you (the solvent, law abiding,
educated go-getter or entrepreneur) as a new citizen, whereas the
so-called first world nations may see you as nothing more than a ripe
fruit to squeeze, in order to make up for the growing deficits (which
one can argue are the result of failed economic policies, failed
long-term planning and gross mismanagement).
.
As
the traditional first world welfare states still lure the poor,
uneducated and impoverished who continue to be filled with dreams of
making it in the so-called wealthier nations, the educated and solvent
are indeed heading in the other direction with due speed. In any
event, the point is, you can choose where you wish to live and what
citizenship you wish to carry, if it so pleases you. Obviously
the choice is yours, but you can certainly live a less costly and less
taxing life simply by changing what passport you carry. Which is
to say, as just one example, you can afford to send your kids to an
excellent private university to study medicine, law or engineering or
less than US$3,000 per year - an absolute impossibly in
North-America. Many people have already done it, and are doing it
(much to the chagrin of some politicians).
.
With
this last statement in mind, you must understand (as we have mentioned
many times before) that the high tax welfare states are looking at some
serious revenue shortfalls in the near future, as it pertains to the
government welfare and pension systems (partly of course this is due to
changing demographics, but also it is also very much due to failures to
address this problem previously as well). That being the case,
expect to see even more draconian efforts to stop the exodus of money
(they don't care if you leave, you are doing them a favor in fact by
doing so, but rather they simply do not want to see the money or tax
revenue leave, which is the crux of the matter). Indeed, as we
see the US Central Bank running the printing presses lately, this tells
you quite clearly they are out of dough and need to create it. At
the same time, as some citizens have already become cognizant of what
is going on, some politicians will label such group of expatriates as
being nothing more than anti-social ingrates, who are deemed to be
shirking their so-called social responsibility. However, the flip
side of the coin is, what about the social responsibility of the
politicians and central bankers to keep the debt and spending down, to
keep the value of the currency stable, to maintain policies that
encourage growth and prosperity, etc.? It would seem at times
that the benefits only run one way, from you rather than to you.
And so, the argument that expatriates should be chastised, one way or
another, is a bit one sided and does not reveal the underlying causes
(the failures and irresponsibility of government officials), even
though such an argument sells well with the masses that are stuck and
unable to extract themselves. But, be that as it may, individual
citizens will continue to seek out ways to guarantee that their
families have a fighting chance in this new competitive and perhaps
volatile (and maybe even bankrupt) environment of globalization we find
ourselves in
today.
.
.
BLIGHT
MOVES IN AFTER FORECLOSURES
By
David Streitfeld, Los Angeles Times - August 28, 2007
.
Houses
abandoned to foreclosure are beginning to breed trouble, adding
neighbors to the growing ranks of victims. Stagnant swimming
pools spawn mosquitoes, which can carry the potentially deadly West
Nile virus. Empty rooms lure squatters and vandals. And brown lawns and
dead vegetation are creating eyesores in well-tended
neighborhoods. More than 100 houses a day are being foreclosed on
in Southern California, up from 13 a day last year. That's still a
relative handful for such a populous area, but even the optimists
predict that the problem will soon get much worse.
.
If
the foreclosure trend continues on its current pace, experts warn,
communities will need to act decisively to avoid blight. We know
it's coming, said Tina Hess, the assistant Los Angeles city attorney
who handles housing enforcement and problem properties. Hess is
proposing that the number of inspectors in L.A.'s vacant-building
program be nearly doubled, from the current 15 to 27. Inspectors can
order pools to be fenced and houses to be secured against trespassers.
.
In
Northridge, the house next door to Michael McKenna's was put on the
market, sold and then foreclosed on, all in the space of a few months
last spring. With the five-bedroom home now forsaken and
deserted, McKenna has been reluctantly cutting the lawn and dumping
chemicals in the pool to kill the bugs. I resent having to do
this, the former studio production manager said. It's breaking my
back. Homeowners like McKenna, 47, and his friend Israel Del
Pino, 54, who lives on the other side of the foreclosed property, are
eager for stepped-up enforcement. Their efforts to contact an owner,
lender or real estate agent responsible for the house have proved
fruitless. We're getting the raw end of the deal here,
McKenna said. No one will take responsibility.
.
In
another Los Angeles cul-de-sac, this one off Coldwater Canyon Drive
near Beverly Hills, the neighbors have the opposite problem. Here's a
foreclosed house that should be empty and isn't. The mansion in
question was bought by a man in early 2005 for $1.4 million. By last
fall he was gone and the property was in foreclosure. HSBC, a
major lender that was carrying the biggest note on the house, asked Leo
Nordine, a real estate agent who specializes in foreclosures, to
represent it for sale. Nordine went to check out the property and
realized that people were living there. He left them a polite letter on
the kitchen counter. There was no response to that letter, nor to
follow-ups that he mailed.
.
Neighbors,
who asked that their names not be used because they were worried about
their safety, said the occupants were a group of men apparently in
their 20s and 30s. The men take the trash out every week, but that was
the only good thing the neighbors had to say. Nordine said that
HSBC was pursuing a formal eviction but that it would probably take
many months. The HSBC manager in charge of the foreclosure didn't
respond to questions. On a recent evening, the front door was
open. The inhabitants declined to respond to a reporter's
queries. Authorities and real estate agents say similar problems
arose during the wave of foreclosures in the 1990s, when houses stayed
empty for months.
.
http://www.latimes.com/business/printedition/
.
EDITORS NOTES:
I honestly do not wish to appear mean spirited or cruel, but I have to
tell you that I find all this to be both ironic and comical.
Which is to explain, for years I have been hearing Americans ask
concerned questions about issues involving squatters in various Latin
American countries (when contemplating real estate purchases), and here
we NOW have more of a problem
with vandals and squatters in America, involving Million Dollar
homes no less. It is truly an ironic situation, to say the least.
.
And,
based upon the comments of Mr. Michael McKenna, who was profiled in the
article, this current scenario illustrates what we have been suggesting
as one very real possible outcome or fallout from the borrowing -
spending binge. Meaning, it would seem that formerly upscale or
well heeled neighborhoods are seeing a rash of empty, abandoned
foreclosed homes, and the people that are left standing when all is
said and done (the homeowners that possibly did NOT get involved with
borrowing over their heads, or otherwise in general, used some prudence
and common sense in managing their own personal finances) are left to
suffer (both in having to keep an eye on the abandoned property next to
them, and in the case of Mr. McKenna, actually doing some basic upkeep
on the adjoining property to prevent the weeds and other nasty critters
from encroaching on his own home). In addition, certainly the
possibly of being hit with an even higher burden of real estate taxes
going forward exists as such solvent homeowners, such as Mr. McKenna,
are the only taxable milking cows left on the block, so to speak.
Unbelievable, yet true. I eagerly await the possible new book
coming out in the self-help section of your local book store,
titled: How to Live Like a Millionaire Rent Free (just move in to
a bank foreclosed mansion, enjoy the Jacuzzi and the Sub-Zero
refrigerator while you can, it will take the bank at least six months
to get you out with a court order, assuming the local Sheriffs
Department has the man power to handle all these squatter
evictions). Are such properties now the new modern equivalent of
the Hooverville?
.
.
CREDIT
CARD DEFAULTS KEEP RISING, REPORT SAYS - August 28, 2007
.
American
consumers are defaulting on their credit cards at a sharply higher rate
compared to last year, in what could be another consequence of the
recent sub-prime mortgage market crisis, according to a report
published Tuesday. In addition, late payments are also up,
cardholders are showing signs they are less willing to pay and credit
card companies have written off 30 percent more payments during the
first half of this year versus a year ago, the Financial Times
reported. At the same time, Moody's said that the people
defaulting on their credit cards may not be the same individuals
defaulting on their sub-prime home loans. The agency cited stricter
underwriting standards in the credit card industry and the fact that
borrowers with little or no equity in their homes may choose to default
on their residence before giving up their credit card, according to the
paper.
.
http://money.cnn.com/2007/08/28/
.
EDITORS NOTES:
We are now being told that possibly the people defaulting on credit
card debt are NOT the same people defaulting on these sub-prime
mortgages. Which is to say, a whole load of other, completely
different, individuals not involved with shaky mortgages as being the
persons embroiled in these credit card defaults. If it is true
that banks and credit card issuers are indeed now writing off 30
percent of their outstanding accounts as uncollected losses - that is
no joke, considering the estimated US$ 9 TRILLION
Dollars of consumer debt floating around out there, not to be
confused with the roughly $ 9 Trillion Dollars of Government Debt,
which is a whole other matter altogether. Along these lines,
American consumers tacked on almost US$3 Trillion Dollars worth of new
debt in 2004 alone, and while it is estimated that incomes have
increased by 11 percent since 1990 (assuming the more positive
estimates, as some economists have calculated that wages have either
remain stagnant or have even declined after factoring inflation),
consumer debt has gone up by 80 percent during that same period.
Stated another way, in very recent years, for every US$1 Dollar
Americans have managed to save (and the overall national US savings
rate is negative, by the way), they have taken on an additional US$20
worth of debt, resulting in a 20 to 1
leverage of debt to equity. Think about that, in terms of
the long-term sustainability if indeed many consumers have gotten
themselves into such a situation.
.
.
BERNANKE'S
ROLE AS THE REPO MAN - August 15, 2007
.
The
Federal Reserve's effort to inject liquidity into financial markets
last week was not unprecedented; it repurchases Treasuries and
government agency-backed securities from banks regularly. What was
different was the amount - $80 billion in just five days and the public
announcement of its action. This was the Fed essentially telling
the markets that they're watching things very carefully, says Quincy
Krosby, chief investment strategist for The Hartford. It's really had a
calming effect on the market. The repurchase included $52.6
billion in mortgage-backed securities from Aug. 7 through Friday,
representing 28 percent of all mortgage-backed repurchases this year.
These securities have lost value amid concerns about risky sub-prime
mortgages. By taking some of these bonds off banks' hands, the Fed
freed up billions in capital that can be used to make new loans, easing
the credit crunch or placed in reserve in case of more mortgage
defaults.
.
The
Fed's actions may not immediately prevent stocks from falling, as
evidenced by Tuesday's losses. Some say an interest-rate cut may be
needed. While Fed Chairman Ben Bernanke has said inflation poses
the greater risk to the economy, the Fed really does need to move to a
more flexible stance, says Jack Ablin, chief investment officer at
Harris Private Bank. At some point, they may need to at least show
they're willing to consider a rate cut.
.
http://seattletimes.nwsource.com/html/businesstechnology/
.
EDITORS NOTES:
And a rate cut was what exactly Mr. Bernanke gave the rattled markets,
with maybe more to come? He is after all between a rock and a
hard place. Which is to explain, he can either keep interest
rates elevated to both continue attracting the much needed foreign
capital to fund the government's spending - borrowing binge and to
fight the consumer price inflation that he has SAID publicly that he is
concerned about, OR he can annoy all the foreign lenders and cut rates
to try and assuage the domestic credit markets, which we know are in
less than attractive financial shape (but then risk the foreign capital
drying up as a result, plus add fuel to the inflation fire at the same
time). However, I am still trying to decide which moniker I like
better, Helicopter Ben or Repo-Man.
.
In
any event, Mr. Quincy Krosby, chief investment strategist for The
Hartford says that the Federal Reserve Banks buying up 80 Billion
Dollars worth of mortgages has had a calming effect on the
market. I'll bet it has, the Keynesians must be smiling from ear
to ear right about now. However, I am wondering if the average
middle class citizen understands what that is going to do to inflation,
the value of the US Dollar, not to mention who now owns the note on
your home? Simply put, where is all that money coming from (the
80 Billion smackers to buy up all these mortgages, that is)? Do
they have it, or do they need to print it? Or will they continue
to borrow it? Or will they rape tax payers even further and take
it from private citizens going forward in the form of higher
taxation? Or will they start selling off the nations highways,
bridges, and other infrastructure? The money has to come from
some place - can you guess where?
.
Ambrose
Evans-Pritchard says in a news article dated August 20, 2007 from the UK Telegraph newspaper:
.
In
the end, the world's central banks
can always re-inflate the markets - if they are willing to tolerate the
side-effects. The 1930s liquidity trap has been overtaken by new
methods of stimulus, as Mr. Bernanke made all too clear in his
helicopter speech in November 2002. The US government has a technology,
called a printing press, that allows it to produce as many US dollars
as it wishes at essentially no cost, he said.
.
http://www.telegraph.co.uk/money/
.
EDITOR:
If they are willing to tolerate the side-effects, the man says.
Does he mean they, or does he mean YOU? Because the truth of the
matter is, it will be the ignorant and the uniformed citizenry who will
be bush-whacked with a devaluing currency, higher inflation and a lower
standard of living. Those that know or understand basic
economics, already have their money safely tucked away elsewhere as a
hedge (in gold and silver, other currencies, real estate in other
countries, etc.) or have themselves and their families tucked away as
well (check out the real estate market in tax-free places such as Dubai
to get an idea of the booming real estate sales there). Along
these lines, also take note of the previous comments about emerging
markets being the new safe haven for investments (and once again, with
no local mortgage problems).
.
.
THE
ESCAPE OF THE ENABLERS
By
Allan Sloan, Fortune senior editor-at-large - August 17, 2007
.
NEW
YORK (Fortune) -- Wall Street loves to talk about letting financial
markets weed out the weak. But when the Street itself gets in trouble,
it sticks out its little tin cup, asking for help. And gets it.
The sub prime-mortgage-market meltdown is a classic example of the way
small fry get devoured, but the whales of Wall Street get rescued.
Here's the deal: People with crummy credit who took out mortgages are
being allowed to fail in record numbers. The mortgage companies that
made those loans are being allowed to fail.
.
The
Street itself? It's bailout city. Even before the Fed made a symbolic
half-point cut in the discount rate, it and other central banks from
Switzerland to Singapore were trying to rescue the Street by injecting
hundreds of billions of dollars into the financial markets and
announcing they will put up more, if needed. Hello? If you
believe in markets - which I do - this rescue is especially galling,
because Wall Street enabled this mess in the first place. How so? By
happily sucking up hundreds of billions of dollars' worth of suspect
mortgages from marginal U.S. borrowers-and begging mortgage makers to
create more of them. The Street sliced and diced this financial toxic
waste into a variety of esoteric securities, making a nice markup when
it sold them and generating a continuing stream of profits when it made
markets in them.
.
Somehow
analysts at credit-rating agencies, looking at computerized scenarios
rather than at the real world, decided that the bulk of the securities
backed by these trashy loans could be rated triple-A. It's really
amazing: Most of the loans to substandard creditors borrowing 100% of
the purchase price of homes they couldn't afford were rated the same as
GE and the federal government. That makes no sense. But the money
rolled in, and Wall Street-by which I mean the world's biggest and most
important financial institutions-didn't care about the real world or
ask any questions. It was too busy making money, and cashing bonus
checks generated by sub prime-mortgage profits.
.
But
the world's central banks aren't letting the big guys fail. Think of it
as the Escape of the Enablers. The reason this is happening, of course,
is the same reason that the Fed orchestrated a bailout of the infamous
Long-Term Capital Management hedge fund a decade ago-and about 20 years
ago didn't close some of the nation's biggest banks, even though they
were effectively insolvent because unrealized losses had wiped out
their capital.
.
The
Fed's job, you see, isn't to protect you and me and our retirement
portfolios, or even many of the nation's largest companies and biggest
employers. The Fed's job is to protect the financial system. That's why
it's trying to rescue the gigantic sub prime enablers while letting
borrowers and mortgage companies go under.
.
Your
collapse or mine wouldn't bother Fed chairman Ben Bernanke or the
world's other central bankers. But if, say, a big German institution
loaded to the eyeballs with sub prime securities croaked, Bernanke and
his fellow central bankers would care a lot. Sure, we know that
Ben and the boys will always bail out the biggies. And none of us - I
think, anyway - wants the world's financial system to implode. But I'd
feel a lot better if the Street had to pay a serious price to its
rescuers--say, having to fork over a big equity stake and pay a
loan-shark interest rate. That way taxpayers, who are picking up the
tab for the rescue, would get paid big time for taking on big time risk.
.
http://money.cnn.com/2007/08/17/commentary/sloan_enablers.fortune/
.
EDITORS NOTES:
Many people think it wonderful when the government or the central bank
steps in and bails out the banks and or other private
corporations. However, as Mr. Sloan alludes, too bad they are not
worried about you or me - eh? Also, I find it hysterical when
people start cheering for things like this (government bailouts).
The government, and or the central bank spends the people's money or
tax payer funds (without even asking your permission, and often before
they even have it in their own hands to dole out), bails out the
various financial institutions who have made stupid lending decisions
with depositors or investors money, and then after all is said and
done, has the nerve to make you, the tax payer, liable for it - and
even worse, the unsuspecting citizens actually cheer about it (they
will not be cheering when the bill comes in the mail, metaphorically
speaking, when either increased taxation, inflation or further erosion
of the USD on exchange markets is the result).
.
Which
is to further explain, I believe in the free market system and
capitalism. Business enterprises, such as banks and brokerage
firms, are in business to make money. This is well known and
stating the obvious. However, the thing about capitalism is that
it is self-correcting when mistakes are made. Meaning, it imposes
pain and discomfort on those that make foolish business or economic
decisions (so that hopefully such persons or enterprises will learn
from the mistake and never make the same one again). Anytime the
government steps in they are removing this self correcting mechanism,
often referred to as MORAL HAZARD
in economics. This is not to say that the government has no role
to play in order to assuage the situation, but rather in this case,
they are punishing those firms and or individual citizens that did not
make such foolhardy decisions. How? At the end of the day,
it is the man or woman that did NOT get involved with such precarious
no money down adjustable rate mortgages directly that is punished
economically for such virtue (via more taxation or devaluation of the
money supply). In addition, the governments actions are resultant
in nothing more than a confiscation or taking of the solvent and
prudent citizens in order to pay for the sins of the ignorant and
foolish. Sounds harsh, I know. But why in the world should
you be made to suffer, if you live your life responsibly and maybe even
frugally? And suffer you will from such policies. It is
grossly unfair and irresponsible to say the least, and the true lesson
being taught is, as far as the government is concerned - - it is good
to be one of the foolish. Why not, if the government will simply
bail you out and make someone else to pay for your mistakes each and
every time? Such a deal.
.
In
any event, we often get some, shall we say, strongly worded mail from
time to time by some individuals telling us we should not write about
this or that (that we should not talk about the economy or whatever
else if the comments are negative or unsettling). My favorite
question of all is: Whose side are you on? The answer is, I am on
my side, and the side of our clients, because the truth is, no one else
is (not the bankers and certainly not the politicians).
.
.
MARKET
CORRECTIONS ARE COMING - By Jim Rogers
.
We've
had the worst bubble in credit we've ever had in American history. As
the bubble got bigger and bigger, it spread to emerging markets and
leveraged buyouts and all sorts of things. And it hasn't been cleaned
out yet. I don't think you can have a bubble like this and clean it out
in six months or even a year. It has always taken longer.
.
Look
at homebuilders, for instance. Historically, when an industry goes
through a retrenchment like this, you have two or three big companies
going bankrupt and most of the companies in the industry losing money
for a year or two or three. Well, we haven't gotten anywhere near that
in the homebuilding business, so I think that bottom is a long way off.
As far as the credit bubble, we have another several months, if not
more, of mortgages that are going to reset and people who are going to
find themselves with even higher monthly payments. There are many, many
more losses to come, most of which we won't know about for weeks or
months.
.
Normally
you have markets go down 10% or so every couple of years. We haven't
had a 10% correction in the stock market in nearly five years. I don't
know if this is the beginning of it, but we've got a lot of corrections
coming. It wouldn't surprise me to see a little bounce--say if a
central bank cuts rates. But that will just lead to the markets falling
further late this year or next year. It would be better for the market,
it would be better for investors, and it would be better for the world
if we went ahead and cleaned out the system. If they do cut rates in
the U.S., it would be pure madness. Because the market's down 7% or 8%
from an all-time high? My gosh, what's that going to say about the
dollar? What's that going to say to foreign creditors? What's that
going to say about inflation? The Federal Reserve was not founded to
bail out Bear Stearns or a few hedge funds. It was founded to keep a
stable currency and maintain its value.
.
I
have been and continue to be short the investment banks and the
commercial banks. If they bounce up, I'll probably short more. I'm
certainly not buying anything. The market's only down 8%. I don't
consider that a buying opportunity. The things that I'm short, some
people probably think are buying opportunities, but I don't. I've been
short the banks for close to a year, and for a while it was not fun.
But I added to my positions, and now it's a lot of fun.
.
http://money.cnn.com/galleries/2007/fortune/0708/gallery.crisiscounsel.fortune/7.html
.
EDITORS NOTES:
Mr. Jim Rogers, the very successful investor and financial commentator
speculates that the rate cut will produce a bounce. And bounce it
has, albeit slightly, but the real problem with a bounces, it is a
temporary steroid and not a permanent real long-term cure, which
results usually in a downward rebound (once the steroids wear
off). I guess we will have to wait and see if he is correct
(personally, I would keep my attention focused on what happens in
October, the traditional month for market drops).
.
.
FED
INVOKES THE MORAL HAZARD
By
Greg Peel - FN Arena News - August 18 2007
.
It
was only ten days earlier that Fed chairman Bernanke declared the US
economy sound and inflation still the primary concern. In ten days the
credit crunch - in which lenders withdrew support from high-risk asset
classes - became a liquidity crisis - in which lenders became so
panicked they would not support even prime mortgage and commercial
paper. The next potential step from the liquidity crisis is a solvency
crisis, and that was not something the Fed was prepared to allow. The
risk had now become a deflationary environment and an economic
recession.
.
To
date the Fed had attacked the problem (as had central banks around the
globe) by treating it as a temporary loss of liquidity in the
inter-bank system. It injected billions into the overnight money market
in a move which it hoped would encourage banks to extend credit to
non-bank institutions which were facing the inability to rollover
financing on even their quality debt portfolios. If these injections
were intended only to be a band-aid, then there was no rush to take the
risk on lending to non-bank institutions.
.
America's
biggest non-bank home lender - Countrywide - can be seen as
representative of the problem facing the US financial system.
Countrywide is not weighed down with sub-prime mortgages. The majority
of the lender's mortgages are of prime quality. Yet as liquidity dried
up, Countrywide was forced to go cap in hand to banks to provide any
sort of financing to save its mortgage portfolios. There was a very
real risk Countrywide would go under.
.
This
is where the central bank becomes truly the lender of the last resort.
Lending cheaply to a distressed borrower is not sound commercial
practice, but if it prevents thousands or millions of US citizens
losing their life's savings or losing their houses then it is what an
elected government is there to do. It is a moral hazard because
many see the move as Main Street bailing out Wall Street. Not only has
the Fed lowered the discount rate, but the market is now all but
certain the Fed will have to ease the target cash rate - at least by
the next FOMC meeting on September 18, but quite possibly in an
emergency meeting earlier. The implication is that the Fed has
thrown the lifeline to those institutions and investors who got
themselves into trouble through their own sheer greed. Saving the
rich, you could say. To offer up as much money as the banking system
needs to avoid a solvency crisis, the Fed must shift the printing press
into another gear. This reduces the value of the US dollar, and hence
the purchasing power of all Americans. Thus - Main Street bails out
Wall Street. To make matters worse, the Fed may also ease. It was a
too-easy monetary policy that got us into this mess in the first place.
.
http://www.fnarena.com/
.
Here
is a commentary being floated on the financial message boards out of
Europe. Ten reasons the Titanic was actually a sub-prime mortgage
security (CDO): The downside was not immediately
apparent, 2. It went underwater rapidly despite assurances it was
un-sinkable, 3. Only a few wealthy people got out in time,
4. The structure appeared iron-clad, 5. Nobody really understood
the risk, 6. The disaster happened overnight London time,
7. Nobody spent any time monitoring the risk, 8. People spent a
lot trying to lift it out of the water, 9. People who actually made
money were not in the original deal, 10. Despite the disaster, people
still went on other ships.
.
.
BERNANKE
FINDS LESSONS IN THE GREAT DEPRESSION
By
Caroline Baum - August 17, 2007
.
Ben
Bernanke is a self-described Great Depression buff, which is a good
prerequisite for his current line of work as chairman of the Federal
Reserve. Whether the Fed was primarily responsible for the severe
and sustained economic contraction of the 1930s, as asserted by
economists Milton Friedman and Anna Schwartz, or just bears partial
responsibility, is still a subject of lively debate among economic
historians almost 80 years after the fact. Bernanke theorized
that the financial crisis of 1930- 33 affected the macro-economy by
reducing the quality of certain financial services, primarily credit
intermediation. Translation: Many commercial banks, considered
efficient at allocating credit (they have a knack for differentiating
good from bad credits), failed. The ones that remained solvent wanted
to hold liquid assets or, if they were willing to make loans, charged a
higher rate of interest.
.
It
was reported that the extraordinary rate of default on residential
mortgages forced banks and life insurance companies to practically stop
making mortgage loans, except for renewals, Bernanke said, citing the
work of the late economist A.G. Hart. Sound familiar? The rate of
default isn't extraordinary just yet, but the mortgage market is
contracting in leaps and bounds, starting with originations and ending
with securitizations. The tentacles of the home-loan market are
starting to strangle portions of the debt, equity and even the normally
staid money market. Bernanke is fully sensitized to the
collateral damage damaged collateral can cause. Over and over in
speeches during his stint as Fed governor from 2002 to 2005, he
returned to the subject of the Great Depression, detailing where the
Fed went wrong and what the Fed could have done to ameliorate the
problems of the banks (provide liquidity or lower interest rates).
.
http://www.bloomberg.com/
.
EDITORS NOTES:
Ms. Baum tells us that, because Mr. Bernanke is a so-called Depression
buff, this is a good prerequisite for his current line of work as
chairman of the Federal Reserve. Why? Is Ms. Baum saying
that we are currently experiencing a repeat credit crisis similar to
what happened in the 1930s depression era? By George, I think she
is. In any event, Mr. Greg Peel tells us (from the previous news
article) that: It was only ten days earlier that Fed chairman Bernanke
declared the US economy sound and inflation still the primary
concern. We can only conclude that somebody is smoking something
not sold over the counter, or in the least, is lying through their
teeth.
.
.
CALLS
GROW LOUDER FOR INTERNATIONAL OVERVIEW OF U.S. MARKETS
By
Heather Timmons and Katrin Bennhold - August 28, 2007
.
Politicians,
regulators and financial specialists outside the United States are
seeking a role in oversight of American markets, banks and rating
agencies in the wake of recent problems related to sub-prime
mortgages. Their argument is simple: The United States is
exporting financial products, but losses to investors in other
countries suggest that American regulators are not properly monitoring
the products or alerting investors to the risks. We need an
international approach, and the United States needs to be part of
it, said Peter Bofinger, a member of the German government's
economics advisory board and a professor at the University of
Würzburg. Washington might have to yield if it wants to
succeed in imposing bilateral regulations on state-owned investment
funds from emerging economies. America depends on the rest of the
world to finance its debt, Bofinger said. If our institutions
stopped buying their financial products, it would hurt.
.
http://www.iht.com/articles/2007/08/28/business/
.
EDITORS NOTES:
I am reminded of a comment from another news article in our previous
newsletter, whereby it was stated that China was now starting to behave
like an activist investor (in terms of all the US debt it owns, and
proactively dumping US Treasury Bonds out of fear and concern of the
future financial condition - inflation). Indeed, as the United
States has become very overtly dependent upon foreign capital for its
borrowing, the lenders (the Asians and the Europeans) are seemingly
become more critical of the credit quality and transparency (or lack
thereof) in the US debt markets as it pertains to US securities (which
of course are sold abroad out of necessity, as there is seemingly not
enough available money to borrow at home to keep the bubble propped up).
.
Lawsuits
will abound for sure, regarding these CDO mortgage backed securities,
as the European Banks will likely seek legal recourse. But that
aside, in a strictly market analysis sense, it would seem that either
the possibly very low US interest rates (bond and bank interest rates
lower than the true inflation rate, which do not compensate for the USD
devaluation as a result) will force foreigners to shy away from US debt
instruments in the near future, or, foreigners will be made wary to
invest regardless, as the perception is that Wall Street is trying to
sell them junk, while falsely dressing up such investments as carrying
a AAA credit rating. In any event, for whatever reasons, if the
foreign money stops flowing into the US capital and debt markets -
watch out, because if that happens, the fun really begins.
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