Phoenix Real Estate Market Showing Signs Of Life

The Phoenix real estate market was one of the hardest hit when the housing bubble popped, and it looks like it might be one of the first to rebound. Buyers are beginning to show heightened interested in the market, with one of the most attractive features being that buying is basically as cheap as renting. Typically when buying is cheaper than renting, people will buy — if they are able. However, with a tightened lending market, millions out of work and many with tarnished credit, the buyer pool is seemingly shrinking. Despite that, the Phoenix market appears to be on the right track, though, Tim Iacono cautions that this could be a small boom created by artificially low interest rates. Foreclosures are continuing to flood the market, and once interest rates go back up the new quasi-bubble could pop.

Evidence is mounting that when home prices tumble by more than 50 percent and the Fed keeps mortgage rates at freakishly low levels, people will buy houses. This report from the LA Times talks of a resurgence in home buying where prices have fallen the furthest.

After four years of renting because they were priced out of the real estate market, Jamia Jenkins and Scott Renshaw concluded the time had arrived for them to buy.

They saw that home prices had dropped so fast here -- faster than in any other big city in the nation -- that mortgage payments would be less than the $900 they paid in rent. The city is littered with foreclosed houses, so the couple figured they could easily snatch up something in the low $100,000s.

Three months later, they're still looking. They have submitted 13 offers and been overbid each time. "It's just pathetic," said Jenkins, 53. "Investors are going out there and outbidding everyone."

While many now cheer the arrival of a housing market bottom this year - more likely in real estate sales than in prices paid - you have to wonder what's going to happen in another year or two when long-term interest rates are much higher.

For example, at today's artificially low mortgage rates, you can get a 30-year loan of $170,000 for about $900, similar to what the couple above is planning. But at the far more typical rates of seven or eight percent, that payment moves up by one-third to about $1,200.

Stated another way, that same $900 payment only buys $130,000 worth of housing - not the $170,000 as indicated above - absent the freakishly low interest rates, something that is a near certainty in the years ahead.

Naturally, that doesn't stop people from buying, as the 2006 fever seems to have returned...

Phoenix's housing bust has turned into a quasi-boom, a sign that its market may have hit bottom and a sneak preview of what a national housing recovery could look like.

More homes are selling than at any time since 2006. Prices are slowly stabilizing. Buyers are once again finding themselves in frantic bidding wars -- only this time over foreclosed houses selling at deep discounts rather than ranch homes listing for vast sums.

"The free market is at work," said Shannon Hubbard, a real estate agent and blogger here. "Prices got driven down so much that people said, 'I'm going to come out and play.' "
Home prices continue to plummet or tread water in much of the nation, but there have been tentative signs of life. Pending home sales rose 3.2% nationally in April, the second month of increases after a record low in January.

John Burns Real Estate Consulting in February identified Phoenix as "the most unique market in the nation," where affordability was better than at any time since 1981 and buying a house was once again cheaper than renting.

It should be an interesting summer as waves of new foreclosures battle waves of new buying interest from a bargain hunting public that is still fearful of more job losses.

This post can also be found on themessthatgreenspanmade.blogspot.com.

Could The Yuan Become The World's Next Reserve Currency?

The U.S. dollar has faced some serious attacks lately, and our economy here in the U.S. is struggling, but have things really gotten so bad that the USD could lose its place as the world's reserve currency? And even if it did, wouldn't the Euro be next in line to take its place? According to Nouriel Roubini, the next world reserve currency could in fact be the Chinese Yuan, and the transition could happen sooner than we think. For more on this, read the following blog post from Mark Thoma which looks at Roubini's recent article on the subject.

Nouriel Roubini is worried that the dollar will lose its status as a reserve currency if we don't change our ways:

The Almighty Renminbi?, by Nouriel Roubini, Commentary, NY Times: ...While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear. ...

The... downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. ...

At the moment,... the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. ...

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. ...

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. ... For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

This post can also be viewed on economistsview.typepad.com.

What Is The Likelihood Of The U.S. Losing Its AAA Credit Rating?

A few months back — after Moody's issued a warning — there was a lot of talk about the possibility of America losing it's AAA credit rating. Of course that never materialized. Now after a recent report on the health of Social Security and Medicare, the talk is resuming. The question still remains though of whether all this talk, is just talk, or if there is any merit to it. Kathy Lien looks closer at the question in her blog post below.

In today’s Financial Times, there is an op-ed article by David Walker, the CEO of the Peter G. Peterson Foundation pondering the possibility of the U.S. losing its prized AAA credit rating. The paper focuses on a warning that was issued by rating agency Moody’s months ago. Moody’s has not issued a new warning, yet Walker and in turn, the FT has decided to re-inject uncertainty into the financial markets by resurrecting this fear. What has prompted this article is most likely the recent comments about the insolvency of the Social Security and Medicare systems. According to the trustees for the systems, the Social Security trust fund could be depleted by 2037 while Medicare could be insolvent by 2017. These dates of insolvency have been pushed up as the weak labor market reduces contributions. The Obama Administration has pressed the importance of gaining control of the growth in Medicare costs and their desire to tackle Social Security insolvency once health care reform is passed.

According to Walker, if the health care reforms strains finances further or if the federal government fails to monitor spending, tax or budget control, rating agencies could strip the U.S. of its credit rating.

Is Losing AAA Rating that Big of a Deal?

But is losing the AAA rating that big of a deal? Yes. A credit rating reflects the risk of default. Therefore a lower credit rating means that a country is at greater risk of defaulting on their debt. Some global funds are mandated to invest only in AAA debt and therefore if the U.S. loses its AAA rating, we could see a massive outflow of foreign investment. Also, a credit rating downgrade is the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds like China that have been buying dollars to prop up the U.S. economy. Yes, investors will still buy U.S. Treasuries, but their purchases will be less. It could also have a spillover effect on corporate debt and will raise the cost of borrowing for the U.S. government.

How Real is the Risk?

Now with the risk in mind, I think that ratings agencies talk a good game but they will face problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations.

This post can also be viewed on kathylien.com.

Japanese Yen Could Be In For A Significant Slide

The Japanese Yen has performed well the past few days, but the USD/JPY could be approaching a wall. Currency expert Kathy Lien warns that the USD/JPY is trading at a critical level and could be in for a significant slide. For more on this, read her blog post below.

The U.S. dollar has sold off significantly against the Japanese Yen over the past 2 trading days. It is nearing a very important support level. If it breaks that level, we could see a test and potential break of 95. Given that equities are pressuring USD/JPY lower, a “break” of the 95 level would be contingent upon a top in equities. In my special report on FX360, I talk about the fundamental reasons behind the sell-off in USD/JPY.

On a technical basis, the chart below illustrates how USD/JPY is approaching very critical levels. We have a major head and shoulders pattern in place, the currency pair is attempting to enter the sell zone according to our Bollinger Bands and is approaching trend line support. For those of you that like Ichimoku clouds, it has also entered the cloud. Therefore a close below 96.80 would open the door for a significant slide.

Click on Chart to see Larger Version

This post can also be viewed on kathylien.com.

How The European Central Bank Is Different

The European Central Bank (ECB) made several important announcements today, and the reaction from currency traders was much different than how they have reacted to similar moves from other central banks. Currency expert Kathy Lien looks closer at the recent announcements, and talks a bit about what sets the ECB apart from the Bank of England and Federal Reserve, in her blog post below.

Both the European Central Bank and the Bank of England announced asset purchases today, but the Euro skyrocketed while the British pound fell, leading many currency traders to wonder What Sets the ECB Apart from Fed and BoE?

Read Boris’ take on the Bank of England Rate Decision

Before talking about why the euro recovered, here are the 4 key announcements made by the ECB today:

1. Cut Repo Rate from 1.25 to 1.00%
2. Narrow Rate Corridor by 50bp (Marginal Lending Rate Cut by 50bp to 1.75%)
3. Extend maturity of refinancings to 12 months
4. Announced purchases of up to EU60 billion in euro-denominated covered bonds

There is no question that these are unprecedented measures for the European Central Bank. Everyone expected the quarter point rate cut to a record low of 1.00 percent, the decision to increase the maturity of refinancings to 12 months and also the narrowing of the rate corridor by 50bp, but the chance of purchasing euro-denominated covered bonds was low.

Nonetheless, Trichet has resorted to what many consider Quantitative Easing (even though he explicitly denied that this is QE) and rather than punishing the euro, currency traders are applauding the ECB for being flexible and realizing that there is no longer a stigma attached to asset purchases. Also, the amount of bonds that the ECB is purchasing is nominal compared to the rest of the central banks. The ECB plans on buying up to EU60 billion, which is less than half of the BoE’s Quantitative Easing program. More importantly however, Trichet suggested that they may sterilize the liquidity impact of bond purchases, which would limit the impact on the money supply and the pressure on the euro. The Fed and the BoE’s purchases are unsterilized. Finally, this is only an initial announcement. Further details on the bond plan will be released in June. Although rates are appropriate for the current time, the central bank could still take interest rates below 1 percent based upon Trichet’s comment that they have decided if rates have hit their lowest point.

This post can also be viewed on kathylien.com.

How Is The Economic Medicine Working?

The government has been injecting trillions of dollars into the economy, but how has it been working so far? James Picerno looks at recent events and attempts to answer that question in his blog post below. In addition Picerno takes a look at what lies ahead for the U.S. economy, and offers some words of wisdom for investors.

In late-March, we asked: Is the medicine working? By medicine we meant the massive injection of liquidity into the economy as a cure for fending off deflation and laying the groundwork for recovery. At the time, we were mildly encouraged, in part due to the rising inflation forecast as derived from the spread between the nominal and inflation-indexed 10-year Treasuries.

More than a month later, there's still reason for optimism, perhaps more so, thanks to the so-called green shoots that suggest better days ahead. Yet the rate spread, which is to say the market's inflation outlook, hasn't changed much since late-March. The current forecast is for inflation of 1.4% for the next 10 years, just barely up from around 1.3% from the end of the first quarter. In both cases, that's a healthy change from expecting flat pricing, as was the case at the end of 2008. Low inflation as far as the eye can see would be nice, but is that a reasonable expectation?

In the months ahead there will be a thin line between a healthy rise in inflation expectations and the potential for burdensome pricing pressures later on. Deflation is a hazard to be avoided for a number of reasons. Although we can't quite shut the book on the danger, the odds look increasingly in favor of mild inflation for the foreseeable future, as the chart above suggests. Behind this reasoning is the growing sentiment that the recession is at or near a bottom. Is it time for the Fed to begin tightening? Or are the green shoots still too tentative?

"We're seeing more indications of perhaps a bottoming in the economy," Bill O'Neill of LOGIC Advisors tells Dow Jones. "So there is an increasing—and it will continue to increase—concern surrounding inflation potential."

Gold, the perennial inflation hedge, seems to be considering the possibility, although this market hasn't quite made up its mind. The price of the metal has been hovering around $900 for much of this year, just below its all-time high of $1,033, set back in March 2008. The 10-year Treasury yield, meanwhile, has been climbing, recently bumping up against 3.2% on renewed worries that inflation may now be the bigger risk. Even so, a 10-year yield of 3.2% is still quite low.

None of the inflation anxiety is worrying the stock market, which has now reversed the selloff in the first quarter. Indeed, the S&P 500 is now marginally up on the year, as of last night's close, on expectations that by the end of this year the economy will be sitting up and prepared to get out of bed.

The big question is whether all the renewed hope that the worst is over is really just the byproduct of a bear market bounce in markets and inflation expectations? Given the extreme waves of selling last year and into March, a rebound was all but assured if the world economy didn't collapse. As we now know, it didn't. There are still lots of problems, but we'll all be here next year and so it was time to reprice assets upwards to reflect a humbled but otherwise enduring economic climate.

Investors have cheered the signs that the U.S. economy no longer seems to be contracting at an accelerating pace. Given the fears of what could have happened, that's certainly a reasonable response. Deciding that you're not going to fall into the abyss is always encouraging. But that's still a long way from arguing that growth is imminent, or that the economy won't tread water for a year or two.

The first phase of the post-apocalyptic visions that prevailed six months ago may be over. If so, now we're faced with the more difficult chore of deciding how to repair and rebuild the economy to foster growth while containing inflation. The hardest days are yet to come. Unless you're expecting a seamless transition, keeping some cash at the ready still makes sense, albeit less so than in past months. Volatility isn't banished, it's only hibernating, which suggests another round of value-oriented pricing opportunities in the major asset classes.

This post can also be viewed on capitalspectator.com.

More Gold News...

The World Gold Council just released the newest Gold Investment Digest, and it contains a lot of great information about Gold, and the Gold market. Tim Iacono walks us through some of the main points, and adds his own insight, in his blog post below.

Always a sucker for a good chart, particularly when it involves precious metals, the one below in the most recent Gold Investment Digest from the World Gold Council is a doozy.
The trade group's first quarter report on gold has some rather interesting statistics related to the quickly changing supply and demand situation.

As shown above, inflows to the many gold ETFs around the world have been brisk:

Investors bought 469 tonnes of gold via this channel, dwarfing the previous record, of 145 tonnes, set in the third quarter of last year. SPDR®Gold Shares (“GLD”) enjoyed the bulk of the inflows. The total amount of London Good Delivery bars held by the Trust increased to 1127 tonnes at the end of Q1 09, from 780 tonnes at the end of last year. The two Swiss listed gold ETFs (the ZKB Gold ETF and the Julius Baer Physical Gold Fund) enjoyed the next strongest inflows, rising by 37 tonnes and 32 tonnes respectively. Inflows into the gold ETFs continued to grow throughout the quarter, despite the downward correction in the gold price, indicating that, as in past price corrections, ETF holdings tend to be “sticky”.

It's kind of ridiculous just how big the SPDR Gold Shares ETF (NYSEArca:GLD) has become when compared to the nine other funds and they have certainly characterized the inventory correctly in light of recently faltering prices - "sticky" is the right word.

As noted here yesterday, just 23.2 tonnes of the almost 350 tonnes added earlier in the year have exited the trust as the gold price declined from almost $1,000 an ounce in early February to current prices of just over $900.

They had this to say about the many and varied rumors about trading on the COMEX:

The quarter was beset with stories either urging investors to take delivery of, or claiming investors had taken delivery of, large amounts of gold from COMEX, driven by widespread shortages of gold in the spot market. Some claimed that the COMEX warehouses might therefore run out of gold.

The reality was quite different. While there were (at times severe) shortages of coins and small bars during the quarter, there was no shortage of London Good Delivery Bars, the main trading vehicle in the global over-the-counter market. And with respect to COMEX stocks, both registered stocks on COMEX (gold which meets the standards for delivery and for which a receipt from an exchange-approved depository or warehouse has been issued) and eligible stocks (gold which meets the delivery standard but for which no receipt from an exchange-approved warehouse has been issued) increased over the quarter, to 2.94 million ounces and 5.94 million ounces, from 2.83 million ounces and 5.71 million ounces respectively. This took total COMEX stocks as a percentage of long positions to 38%, which is high by historical standards, rather than indicative of stocks that have been depleted by a run on physical gold at COMEX.

Geez... The folks at the World Gold Council should really get a hold of some of the officials over at the National Association of Realtors (NAR) to see how an industry trade group is really supposed to operate.

Here's a perfect example where they could add to the fervor over rising gold prices by citing some shoddy statistics about how the supply of gold is limited and "it's a good time to buy" but, instead, they pour cold water on one of the biggest stories this year in the gold community about the goings-on at the CRIMEX.

Maybe former NAR chief economist David Lereah could be hired as a consultant to help out.

The Gold Investment Digest goes on to discuss such important topics as gold's correlation with other asset classes, jewelry demand, mine supply, and central bank sales.

If you've never thumbed through this quarterly report, it really is worth a look.

Registration is required at the World Gold Council website to get a copy, but it's free.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Hong Kong Set To Take Off Thanks To Bernanke

Thanks to the chairman of the U.S. Federal Reserve — Ben Bernanke — Hong Kong is about to take off. It might seem a little weird that Bernanke could impact Hong Kong so drastically, but because Hong Kong's currency is so closely linked to the U.S. dollar they are forced to follow the Fed's every move. That — coupled with the fact Hong Kong's stocks are undervalued — is creating a perfect storm for Hong Kong's market. For more on this, read the following article from Dr. Steve Sjuggerud at Daily Wealth.

Ben Bernanke has cut short-term interest rates in the U.S. to essentially zero... the lowest rate we've ever seen.

He's doing this, of course, to "juice" the economy – to give it a jumpstart. He doesn't know (or care, actually) that this action will inadvertently (but undoubtedly) cause one particular stock market to go absolutely nuts.

This stock market I'm talking about is Hong Kong. Today, we have the ultimate recipe for stocks in Hong Kong to skyrocket. The Fed has cut interest rates to essentially zero (causing Hong Kong rates to be next to zero in its unique money system). And yet Hong Kong stocks are incredibly cheap. They bottomed a month ago at a single-digit price-to-earnings (P/E) ratio.

We've seen this before:

• In 1992-1993, the Hang Seng Index shot from 5,500 to 12,000. At that time, the Fed had cut interest rates below the rate of inflation. So "real" interest rates were below zero.
• The Fed did it again from 2003-2005. And in that time, the Hang Seng Index jumped nearly 7,000 points, from a low of 8,600 to 15,500. (It continued to rise... peaking over 30,000 in 2007. That's four times your money from 2003 to 2007.)

And it's happening again, right now... The Fed has cut interest rates to zero, and the uptrend in Hong Kong has arrived. It's time to get in.

While Ben Bernanke is trying to help the U.S., he's unwittingly creating havoc on the other side of the globe...

Hong Kong is quite an incredible place... With no natural resources, the standard of living has gone from subsistence wages to one of the highest in the world in just a few decades.

I believe two things contributed to Hong Kong's boom... 1) Hong Kong has been for decades one of the "freest" markets in the world, allowing entrepreneurs to succeed or fail. And 2) Hong Kong has had a stable currency, thanks to its unique currency system. For the last 25 years, the Hong Kong dollar has been worth about US$7.80, give or take a few pennies.

Hong Kong's unique currency system is called a currency board. A country that has a true currency board has one U.S. dollar in the bank for every dollar of its own currency that it prints. How does it keep the exchange rate equal? Through interest rates...

Interest rates in Hong Kong dollars are always higher than in the U.S. Depositors are willing to "take the risk" on the Hong Kong dollar for the slightly higher yield.

As a result, Bernanke essentially controls interest rates in Hong Kong. Whether Hong Kong is in a boom or a bust, he doesn't care. So Bernanke could be raising or cutting interest rates at precisely the wrong time in Hong Kong's business cycle.

Therefore, Hong Kong's stock market is subject to wild booms and busts, based on what the U.S. Fed is doing with interest rates.

As I said, today we have the ultimate recipe for stocks to skyrocket in Hong Kong. Interest rates are next to zero. And Hong Kong stocks are cheap, hitting single-digit P/E ratios a month ago.

I have two nearly guaranteed "rules" for making money in Hong Kong...

First is the "Hong Kong Can't Help It Rule." That's when the U.S. Fed cuts interest rates below the "market" rate. This means "real" interest rates are below zero. When this happens, buy Hong Kong... It can't help it. It soars.

The second rule is the "20/10 Rule." In short, you want to be a buyer of stocks in Hong Kong when the P/E ratio falls below 10. And you want to be a seller when the ratio rises above 20.

Hong Kong stocks often soar by hundreds of percent after they fall below a P/E of 10. And often they lose half their value soon after they rise above a P/E of 20.

Right now is an extraordinary moment... both rules are in play... AND we have an uptrend in Hong Kong stocks that started last month.

You should consider buying Hong Kong shares now... Triple-digit gains are possible... and you can limit your downside risk by using a trailing stop. Those are my kind of odds!

Dailywealth.com offers a free daily investment newsletter which focuses on contrarian investment opportunities.

Is $250,000 A Year Really "Wealthy?"

President Obama keeps saying he plans to pay for much of his new spending with taxes on the wealthy, but what should be considered "wealthy?" According to Obama's campaign speeches "wealthy" means families earning more than $250,000 a year, but $250,000 isn't worth as much in New York City as it is in Des Moines, Iowa. Many of these families are challenging Obama's assessment of what should be considered "wealthy," saying how they make more than that but are struggling to get by. Tim Iacono doesn't offer these families much sympathy, but looks closer at the situation in his blog post below.

There have been more than a few comments left here by readers over the years about families with big salaries and/or bonuses carping about how tough it is to get by on just a couple hundred thousand dollars a year in income.

Always of modest means, never having had to foot the bill for little ones around the house, and having avoided living and working in the Bay Area, my view of things is probably a bit slanted in the other direction but, to me, a quarter million dollars a year looks to be a huge opportunity to sock money away for retirement.

Via the Wall Street Journal comes this tale of the difficulty some have in making ends meet.

Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.

Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.

While not familiar with the local real estate market at all, clearly, you can get a lot of house for not too much money in Sevierville.

The story continues:

"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
...
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.

The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
...
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.

James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.

Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
...
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.

"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."

The Parnells should probably take a basic personal finance class or two and many of their problems might quickly be solved - that $4,000 a month in mortgage payments for a house that's too small, and some other property, should have set off alarm bells long ago.

Also, that top line of $260K that erodes to $144K after 401k contributions, medical care premiums, and taxes sounds a bit excessive - you can quickly get to about $40K for the first two items leaving their tax hit at $75K.

Does that sound right?

It's a good thing Ms. Parnell is not asking for sympathy because she's not likely to get any.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Roubini Says Financial Gloom Not Going Anywhere

There has been a lot of positive momentum lately in the markets, and people are starting to think that the end is near for the financial crisis. However, Nouriel Roubini warns that this optimism is not based on facts. The facts say that we still have much longer to go with this recession, and getting one's hopes up that the end has arrived will just lead to disappointment, and likely a loss of capital. For more on this, read the following blog post from Mark Thoma that looks at Roubini's latest article.

Nouriel Roubini cautions not to get your hopes up too high:

End of economic gloom?, by Nouriel Roubini, Project Syndicate: Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. ...

Investors are talking of 'green shoots' of recovery... As a result, stock markets have started to rally... This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow ... in the last two quarters, US growth will still be negative .... in the second half of the year... Moreover, growth next year will be so weak ... and unemployment so high ... that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse... Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ...

By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. ... So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. ...

Let's hope the end is near, but if you are a monetary or fiscal policymaker, it's far to soon to let down your guard and declare victory. You have to assume it won't be over for some time yet, and plan accordingly. If things turn out better than expected the plans can stay on the self, and existing programs can be scaled back accordingly, but that can't happen until we are certain that recovery is around the corner and we are nowhere near that point yet.

[Also see the commentary surrounding the IMF's World Economic Outlook from Yves Smith, Dani Rodrik, and Real time Economics.]

This post can also be viewed on economistsview.typepad.com.

Treasury Yield: What Does The Future Have In Store?

A lot of people have been turning to Treasuries as the investment of choice in these unpredictable and rough economic times, but will it ultimately prove to be a good move? While widely considered "risk free" investments, that is far from the truth. There are many things that perspective Treasury investors need to keep in mind when weighing their investment options. The following blog post from James Picerno offers some insight into what is going on right now in the Treasury market, and hopefully will help investors make an a better informed decision.

It's hard to dismiss the ongoing news about China's anxiety over its massive holdings of American debt. What's worrisome for China is ultimately a concern for the U.S., with fallout that may come sooner than we think.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," Chinese prime minister, Wen Jiabao, said last month. It was a rare public admission of apprehension by a high-ranking Chinese official on the delicate and increasingly precarious lender-borrower relationship that describes the U.S. and China.

Yesterday came word that China's purchases of U.S. bonds slowed in the first two months of this year, according to new data from China's central bank, The New York Times reports. "Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend," the Times notes. The trend may now be reversing, although the notion that a pivotal point in the U.S.-China financial relationship may be near remains intact.

The fear is that China will slow (cease?) buying new Treasuries, a decision that's likely to force up interest rates in the U.S. For the moment, there's no reason to dismiss that scenario, at least when it comes to the recent trend in the yield on the benchmark 10-year Treasury Note. As the chart below shows, the march upward to the 3% mark is alive and well.

What makes the rising yield in the 10-year so striking is that it comes in the wake of the Federal Reserve's announcement last month that it would directly target lowering rates on long Treasuries. The market's initial reaction was to buy Treasuries, which resulted in one of the biggest one-day drops in interest rates on record. For a time it looked like Bernanke and company had struck gold. But confidence that the central bank has complete control over the long end of the curve has been evaporating in recent weeks.

As the above chart shows, the 10-year yield collapsed by around 50 basis points on March 18, down to around 2.5%. As of April 9, the 10-year's yield had climbed by to roughly 2.9%, just under the level where when the Fed made its bombshell announcement last month.

High interest rates in the U.S. necessarily make the dollar more attractive, at least for a time. No wonder, then, that the buck's value is rising in forex markets in recent weeks, in sympathy with higher interest rates on the 10-year. The U.S. Dollar Index is just about at the highest level since the Fed's March 18 disclosure, a news event that had initially sent the buck tumbling. Meanwhile, commodity prices generally have been inching higher as well, as per the CRB Index. Commodities are generally priced in dollars, so it's no surprise that a strong dollar equates with higher commodity prices.

Higher interest rates are almost surely the path of least resistance in the years ahead, in part because the U.S. deficits are sure to be large in the wake of all the monetary and fiscal stimulus of late. The problem is that the arrival higher interest rates now, this week, next month, next quarter come at an especially inopportune time: before the economy has sufficiently recovered. The Fed surely seeks to keep long rates below 3% for the rest of the year, or so one might speculate. But it's not clear that the markets are willing to go along for the ride.

In the old days, the Fed's powers were such that it had more control over keeping interest rates low and thereby providing the economy with ample monetary stimulus until the forces of growth rose anew. Engineering that scenario this time may be tougher, much tougher. One reason is that much of the control over future rates has been transferred to foreigners, courtesy of holding large quantities of U.S. debt. That may not be fate that rates will rise. Indeed, China surely wants to keep U.S. rates low in order to boost growth here, which will promote imports of Chinese goods. But no one really knows how these forces will play out.

Perhaps the cycle will be salvaged if the economy rebounds quicker than the crowd expects. Alternatively, the Chinese and other foreigners decide to buy large quantities of Treasuries in the months and quarters ahead. There are solutions to the current dilemma, but no one should expect that they're a forgone conclusion.

This post can also be viewed on capitalspectator.com.

Why Dropping "Mark to Market" Rules Won't Solve Anything

In an effort to shore up the balance sheets of banks the government decided to drop the "mark to market" rules that have been causing so much trouble in the financial industry. As Peter Schiff points out in his article, though, this won't solve anything. The rule was created in order to give investors a better idea of the true value of bank assets — basing the valuations on market activity rather than arbitrary assessments by the bank's accountants. Letting the banks decide how much their assets are worth, rather than the market, is a recipe for deception and ultimate failure. Read about what Schiff has to say in the article below from Money Morning.

When elementary school kids want to escape the confines of their circumstances, they pretend to be pirates, princesses and Jedi knights. Now, with the relaxation of "mark to market" valuation rules announced by the accounting trade’s self-regulatory body, our bankrupt financial institutions can escape their own reality by pretending to be solvent.

The unraveling of our fairytale economy over the last few months has not yet convinced us that the time has come to put away childish things. The applause that greeted the Financial Accounting Standards Board’s (FASB) ruling on Wall Street is a clear sign that we still have some growing up to do.

The imaginative conceit that lies behind the accounting change is that the toxic assets polluting bank balance sheets are not really toxic at all. They are in fact highly valuable assets that for some irrational reason no one wants to buy.

Using the "mark to market" accounting method, mortgage-backed securities were valued relative to the latest prices fetched by the sale of similar assets on the open market. Currently, those bonds are being sold at deep discounts to their original value. By "marking" their unsold bonds down to those prices, the insolvency of our financial institutions had been laid bare. But the new accounting changes will allow the nervous owners to assign more "appropriate" (i.e. higher) values. Problem solved.

It is important to note that the FASB made its rule modifications only after both Washington and Wall Street applied intense pressure. In their heart of hearts, I can’t imagine that there are too many bean counters happy with the outcome.

The banks and the government have argued that the assets should be valued based solely on current cash flow. Most mortgages, after all, are not delinquent. Therefore, a few bad apples should not spoil the whole bunch, and those that are not yet delinquent should be valued at par. This method assumes we have no ability to look into the future and make assumptions about what is likely to happen, which is presumably what the market is already doing by valuing the assets lower than the banks wish.

All kinds of bonds (corporate, government and municipal, etc.) that are not in default frequently trade at discounts. In fact, the reason agencies such as Moody’s Corp. (MCO) and Standard & Poor’s rate bonds is to assess the probability of default. The higher that probability, the lower the value placed on the bonds, regardless of their current cash flow.

For example, General Motors Corp.’s (GM) 10-year bonds currently trade for only 8 to 10 cents on the dollar, despite the fact that GM is current on all interest payments. The 90% discount reflects investor awareness that GM will likely default long before the bonds mature. By the new logic, financial institutions with GM bonds on their balance sheets should be able to ignore the market and value these bonds at par.

Some argue that the comparison is invalid because GM’s bonds are liquid while mortgage-backed securities are not. However, if sellers of GM bonds were holding out for 70 or 80 cents on the dollar, those bonds would be illiquid too. The reason GM bonds are trading is that sellers are realistic.

The same should apply to bonds backed by mortgages. To assume that a 30-year, $500,000 mortgage on a house that has declined in value to $300,000 has a high probability of remaining current to maturity is ridiculous. The borrower could lose his job, his adjustable-rate mortgage (ARM) might reset higher, or he may simply tire of paying an expensive mortgage for a house that is unlikely to be sold at a profit.

Any bond investor with half a brain will factor in these probabilities and look for deep discounts. The only way to accurately assess a real present value is to let the market discover the price.

Despite the pleas from bankers and politicians, mortgages are not plagued by a lack of liquidity but a lack of value. If sellers would be more negotiable, there would be plenty of liquidity. Who knows, at the right price I might even buy a few. The problem is that putting a market price on these assets would render most financial institutions insolvent, which is precisely why they do not want to let that happen.

Simply pretending that all these mortgages will be repaid does not solve the underlying problems. It may keep some banks alive longer, but when they ultimately do fail, the losses will be that much greater. In the meantime, solvent institutions are deprived of capital as more funds are funneled into insolvent "too big to fail" institutions - hiding their toxic assets behind rosy assumptions and phony marks.

Going from the sublime to the completely ridiculous, in a speech at the just-concluded Group 20 summit in London, President Barack Obama urged Americans not to let their fears crimp their spending. It would be unwise, he argued, for Americans to let the fear of job loss, lack of savings, unpaid bills, credit card debt or student loans deter them from making major purchases.

According to the president, "we must spend now as an investment for the future." So in this land of imagination (where subprime mortgages are valued at par), instead of saving for the future, we must spend for the future.

I guess Ben Franklin had it wrong too – apparently a penny spent is a penny earned.

This post can also be viewed on moneymorning.com.

Bahrain's Economy Is Holding Up Well

Not many Americans have even heard of Bahrain, let alone thought about investing in the country, but while Dubai has been faltering badly, Bahrain is holding up well. Investors interested in the Middle East might want to give Bahrain a closer look, especially if they are considering investing in Dubai. For more on this, read the following article from Overseas Property Mall.

Bahrain has long been the forgotten little brother of glittery Dubai in the housing investment industry. For years we have been told countless stories on why we had to buy property in Dubai and all the while Bahrain has quietly sneaked up in the housing stakes.

Since reports of a falling Dubai have become stronger every month, Bahrain has only suffered “small damage”. After having spent many years in its bigger brothers shadow, Bahrain is ready to raise the stakes and claim back some of its past status as a strong and reliable financial business center in the Arabian world.

The Bahrain Economic Development Board’s chief operating officer Kamal Ahmed said:

“In tough times, people want to be in the most stable place. Of course, nobody is immune to the crisis, but we have certainly shown we are less exposed.”

The CBB (Central Bank of Bahrain) has established itself as one of the better regulators if we are to believe the latest news reports from the Middle East due to the lack of available finance overall. Some even say that Dubai’s loss has resulted into being Bahrain’s gain but clearly it is early days at the moment. Signs are positive though and industry watchers are positive that Bahrain might attract more investors in the next year due to its stable economy despite the global crisis elsewhere.

Ahmed further stated that it wasn’t the banks fault that Bahrain has lacked the attention it supposedly deserves but more so the lack of media attention overall.

The World Bank also helped to establish Bahrain as a strong business center by ranking it 18th in the world for doing business with last year. Another encouraging sign of a stable economy is the number of new lending institutions licensed in 2008. There were a total of 44 new start ups compared to 38 start ups in 2007.

Bahrain’s financial specialty if one could say that is Islamic finance. The launch of the Bahrain Financial Exchange in 2010 will also see the position of this small emirate strengthened overall.

But even so Bahrain’s economy is relative stable, the emirate has experienced plenty of heartache in the banking sector too. Profit margins of banks declined by 17.6 percent in 2008. During the same time, retail banks saw a surge of 112 percent in loan to deposit ratios.

Some financial organizations are also being scrutinized by the Bahrain government. With over 400 institutions in the country, there are too many right now to satisfy the lack of demand while showing healthy growth over time so eventually some of them will take the fall for sure.

This post can also be viewed on overseaspropertymall.com.

Why March's Rally Does Not Mean We Already Hit Bottom

March was certainly an interesting month. The stock market rally was of historic porportion, and investors seem to have a new since of optimism. Once reality sets in, though, that optimism may soon be lost. Tim Iacono points out why March's rally probably doesn't signify a market bottom in his bog post below.

It has been quite a month.

The newspapers were full of stories last week about how March was the best month for stock markets in six years and that the last four weeks were the best stretch for equities since either 1933 or 1938, depending upon the source.

The distinction is unimportant as investors have gotten the message - stocks are on a tear.
Broad indexes have risen between 20 and 30 percent over the last month and recent reports have shown a deceleration in the rate of decline for some economic indicators and tentative signs of a bottom for others, leading many to believe that the worst is now behind us.

The move up in equity markets since the early-March low has officially entered "bull market" territory after a flurry of government actions, pronouncements of profitability from Wall Street firms, and optimism that global leaders at the G20 meeting are taking steps to tackle the financial crisis. All of this has convinced more than a few investors and traders that this is the time to buy riskier assets with the potential for a greater return and stock prices have been bid higher.

The important question becomes, "Is this a sucker rally with lower lows ahead or is this an enduring new bull market?"

That is the question that some people have been asking over the last few weeks, however, with each passing day of stock market gains, fewer and fewer people seem to wonder about it, opting instead to go with the flow, to add to the momentum.

In my view, recent lows for U.S. stocks are likely to be retested again this year, probably making new lows in the process, and equity markets around the world will likely move down with them.

It really boils down to two factors - the U.S. economy and corporate earnings.

The question of decoupling - the idea that emerging markets can ignore recessions in developed economies such as the U.S., Europe, and Japan - will be addressed in a subsequent update as it is deserving of its own lengthy consideration. There is more and more promise that growth in China, Brazil, India, and elsewhere can continue despite continuing troubles in developed nations and this is a critical factor in anyone's investment approach.

For now, the discussion will be limited to the United States.

The U.S. Economy

As has been the case for most of this decade, the future of the U.S. economy is dependent on housing. While financial markets and commerce may be dependent on the banking system and credit flows, the U.S. economy is soundly based on consumer spending and consumer spending, today, is driven in large part by the value of peoples' homes. Until home prices stabilize, consumers will not reemerge in big numbers to borrow and spend and, despite all the recent government initiatives, home prices are going to continue to fall this year. There is simply too much inventory in the pipeline.

As noted last week when discussing the latest report on existing home sales, it is a straightforward predicament, "the red curve and the blue bars in the nearby chart must draw much closer to each other before the downward pressure on prices abates".
Despite what the NAR (National Association of Realtors) might say or what the talking heads on CNBC might offer, that is not likely to happen anytime soon as foreclosure rates continue to break records, more and more homeowners throwing in the towel, walking away from homes where they owe more than the homes are now worth. Banks continue to struggle with their growing inventory of properties and, importantly, the bulk of these bank owned properties have not yet been listed for sale.

In the most recent data from both the NAR and the S&P Case-Shiller Home Price Index, home price declines continue to accelerate, largely driven by distressed property sales which, in many areas, account for more than half of all sales.

The foreclosure market is the market in many areas and defaults are now increasing fastest among prime loans made to borrowers with strong credit. The next wave of mortgage defaults will be the Alt-A and Option ARM loans where borrowers bought property with little or no documentation of income or assets, often times making only minimum payments that did not even cover all the monthly interest due. In contrast to the subprime debacle in 2007 and 2008, many of the Alt-A and Option ARM loans were used to purchase higher priced homes, a good example of this being the area where my wife and are I moving to next month - Bend, Oregon.

This is an area that, for years, has been regarded as overpriced since buyers from Portland and Seattle bid up home values earlier in the decade when the second-home buying frenzy was in full swing. In Bend, during the first quarter, notices of default almost tripled from the level of a year ago. This is in contrast to other parts of the country where foreclosure rates have leveled out at historically high levels over the last year as many of the low-priced homes with subprime mortgages have already been repossessed. Real estate prices in New York City are now starting to tumble and defaults are moving up the socio-economic ladder.

Interestingly, the expected increase in distressed sales at higher prices may have a big impact on some of the median home price statistics to be reported this year. Remember that the median price is highly dependent on the "mix" of home sales and that the sale of more higher priced homes will push up the median price even if these sales occur at steep discounts to what was paid for the same house a year or two ago. This will likely be misinterpreted as a sign of recovery.

With loan modifications souring quickly as job losses mount, housing is in no position to begin a recovery this year. While new and existing home sales may make a bottom by year-end, prices will continue to tumble and, absent any wholesale move by the government to buy up tracts of houses and bulldoze them into the ground, the supply/demand picture will not normalize until prices are much lower, probably sometime in 2010, perhaps not until 2011. Clear signs of this stabilization in prices are a prerequisite for the economy to reach a bottom and we have yet to see that.

Corporate Earnings

Reports last week indicated delinquencies increased to record highs in almost all consumer loan categories as falling home prices have now combined with job losses to create a vicious cycle downward. This only adds to the distress in the consumer sector and while both retail sales and automobile sales have shown signs of stabilizing, they remain at very low levels. Simply stabilizing at these depressed levels is not enough to support an economic rebound.

Commercial real estate defaults are now beginning to appear in large numbers, delinquent loans increasing some 41 percent from $46 billion in the fourth quarter of last year to $65 billion in the first quarter of 2009. In Los Angeles alone there are now almost $8 billion in distressed properties, nearly triple the level of late last year, and Las Vegas recently saw a 54 percent increase to $6 billion.

All of this will weigh on equity markets in the weeks and months ahead as first quarter earnings are announced.

Based on the number of warnings that have been issued thus far, bottom lines for the first quarter are likely to be almost as bad as the abysmal results seen in the fourth quarter when operating earnings for the S&P 500 overall were in the red. Importantly, there may be some big improvements in the banking sector due to "mark-to-market" changes approved last week which allow "significant" judgment in valuing assets, including mortgage-backed securities.

Total operating earnings for the S&P500 are expected to be down almost 40 percent from a year ago but it is the outlook for the future that is more important for stock prices than last quarter's results.

It will be comments by company officials about business conditions and projections of future earnings that investors will look to in order to value their shares.

Since stock prices are "forward looking" - taking into account both estimated future earnings and the health of the economy from which those earnings derive - it will be the prospects for the economy later in the year that will most influence stock prices in the near-term.

Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak and, in some cases during the second half of the 20th century, stocks put in their lows in advance of the worst of the labor market downturn.
If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom.

However, if either of those are untrue - that this downturn will be different than previous recessions or that job losses have not yet reached their peak - then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario - one of those two conditions will not be met.

It wouldn't be the first time that stock market investors came too early to the party.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Profiting From Reflation: A Bet On Economic Recovery

I read an interesting article in the Wall Street Journal this morning that I thought I should share. There are a lot of people who have been making a great deal of money during this economic crisis by shorting the economy, or specifically betting that it would get worse. Many of these same traders are now making a different bet. They are betting that not only are these exorbitant stimulus measures going to stimulate the economy, but they are also going to lead to high inflation.

Right now the Federal Reserve is so concerned with preventing the dreaded D words (Deflation and Depression), that they are basically ignoring the threat of inflation. Once the economy gets going again, though, they are going to have to react incredibly fast in order to prevent a massive run up in inflation. Chances are the government will be slow to react, and if anything they prefer to error on the side of inflation — opposed to prolonging the recession.

What this means is that as the economy starts to recover those investments which typically do well in inflationary environments, stand to do very well. Commodities specifically have proven to be the investment of choice for many successful investors.

To read the full Wall Street Journal article click here.

Geithner's Comments Are Moving The Currency Markets

Timothy Geithner should quickly learn that currency traders take everything he says literally. Recent comments he made caused the dollar to take a nose dive. Geithner quickly followed those comments up with a retraction of sort, which left the markets unsure of his true intent. Currency expert Kathy Lien address this matter further in her blog post below.

How long will it take for Treasury Secretary Tim Geithner to realize that his comments move markets? When he first took office, he mistakenly threatened to brand China as a currency manipulator. This caused a wave of volatility in the currency market and sharp criticism about the experience of the new Administration. And now, Geithner has done it once again (Geithner Comments send Dollar for a Ride).

Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”

These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.

Why has the dollar had such a big reaction to these comments? Because if the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean less demand for U.S. dollars.

source: eSignal

This post can also be viewed on kathylien.com.

Fed Ups Balance Sheet $1.2 Trillion: Irresponsible, Or Just What The Economy Needs?

With the recent announcement that the Federal Reserve plans to buy up $1.2 trillion in mortgage backed securities and other financial instruments, there has been a economic divide created. On one side Americans will benefit from reduced mortgage rates, however, opponents to the decision argue that this will lead to major inflation and devalue the savings of responsible Americans. It seems that anyone "responsible" is getting victimized in all these stimulus measures. Furthermore there is always the worry that the foreign buyers of our debt will be turned off by our actions and decide to stop buying these assets, or even worse sell off what they already own. For more on this, read the following blog post from Tony Straka.

Word has probably spread around by now that the Federal Reserve is going to buy everything in America that's not nailed down, throwing another $1,150,000,000,000 lifeline at markets. (Click here to see what a trillion looks like.)

The Federal Open Market Committee (FOMC) yesterday informed the public that it will expand its dominating position in the MBS market, throwing an additional $750 billion there. The buying spree does not end there. Having arrived at zero interest rate policy 3 months earlier the Fed now hopes to control interest rates by monetizing US Treasuries equalling $300 billion. Stirring still more Bourbon in the punch bowl the Fed will also up its portfolio of agency debt by another $100 billion.

Markets rallied on the news with Treasuries shedding up to 51 basis points. Gold outshone everything and spurted more than $50 on the FOMC's news that will ultimately lead to higher inflation rates despite the FOMC statement that said,

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.

Surprisingly chairman Ben Bernanke and his troops are more worried about possible deflation despite the Fed's balloning balance sheet that will pass the $3 trillion mark this year.

Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

Latest CPI figures show a different picture. Inflation rose to 0.5% (January: 0,4%) or 6% annualized in February.

GRAPH: Gold reacted with the biggest jump seen in decades, rising more than $50 after the Fed released more measures that are designed to fuel monetary inflation. Chart courtesy of kitco.com

Economists were up in arms about the Fed's measures. Stephen Stanley of RBS Greenwich Capital said via the WSJ blogs:

The agency MBS market is close to $4 trillion, so the Fed will end up owning almost one-third of the agency mortgage market. If this was a “rigged market” (to quote one of my learned colleagues on the mortgage desk) before, what should we call it now?! … $50 billion per month in Treasuries pales in comparison to new supply. Just to flesh that point out, we project that auctions of 2’s, 3’s, 5’s, 7’s, and 10’s will total $150 billion in March. In essence, even if all the purchases are limited to 2’s to 10’s, the Fed’s program will merely be a third of the new supply (and far short of one-third of the total market, as is the case for agency MBS).

Morgan Stanleys David Greenlaw said,

Even with energy prices having flattened The Fed’s Treasury purchases will absorb a very significant portion of the amount of gross issuance that we anticipate to occur over the next six months… The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.

Bloomberg summed it up in the lead of their coverage:

By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.

I conclude nothing has changed in the Fed's perception that new fiat money will also solve this crisis. Taking gold's reaction as the canary in the coal mine markets will recognize that the Fed is on the way towards hyper inflation. As in the Weimar republic the US central bank spins up the presses to monetize the debt. At the end of the Weimar republic one percent of government income came from taxes and 99% came fresh from the printing presses.

President Barack Obama may have no other choice than to take this route as foreign investors grow wary about the capability of the USA to serve its debts and we may see less participation in Treasury auctions also for the reason that sovereign wealth funds will spend a bigger portion domestically as nearly every nation is confronted with the economic downturn. For the time being gold investments may turn out again to be the safest asset to hold.

UPDATE: Mint.com says one trillion greenbacks could fund an inflation-adjusted New Deal twice over. Check out their way of visualizing what one trillion can buy and be in for a dose of reality.

I especially liked this one. Do you still say this crisis is manageable? Illustration courtesy of Mint.com.

This post can also be viewed on prudentinvestor.blogspot.com.

Jon Stewart Goes After Jim Cramer

In the much anticipated interview with Jim Cramer from CNBC's Mad Money show, Jon Stewart — host of The Daily Show — went after Cramer. Stewart was critical of Cramer's role in concealing the truth on certain financial matters from viewers of his show, and the American public. Tim Iacono breaks down the interview further in his blog post below.

The online media is loaded with coverage this morning of last night's appearance by Jim Cramer on The Daily Show and for good reason. While some may have been disappointed in the showdown, as is usually the case, Jon Stewart asked at least a few questions that never even occur to most people and helped to shed some light on what is wrong with CNBC.

The videos are in three parts below with the juiciest excerpt in between.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Apparently (and understandably) Comedy Central is getting all the ad revenue they can out of this event, that first clip above barely longer than the commercial... Hmm... or maybe not... it looks like the 30 second commercials don't get cued up when they're embedded...

Here's part two and a transcript of the last minute or so is provided further below.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

This is the exchange that made the biggest impression on me:

Jon Stewart: Honest or not, in what world is 35-to-1 leveraged position sane?

Jim Cramer: The world that made you 30 percent a year for year after year beginning from 1999 to 2007 and it became very easy to play.

Stewart: But, isn't that part of the problem? Selling this idea that you don't have to do anything. Anytime you sell people the idea that, "Sit back and you'll get 10 to 20 percent on your money" - don't you always know that that's going to be a lie? When are we going to realize in this country that our wealth is work - that we're workers - and by selling this idea of "Hey man, I'll teach you how to be rich" - how is that different from an infomercial?

Cramer: Well, I think that your goal should always be to try to expose that there is no easy money - I mean, I wish I had found Madoff.

Stewart: But the show is called "Fast Money".

Cramer: I think that people ... there's a market for it and we give it to them.

Stewart: There's a market for cocaine and hookers!

And here's the last minute or so.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

All-in-all, it was well worth the wait.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Switzerland Cuts Interest Rates: Swiss Franc To Fall Hard

Switzerland has decided to match the U.S. Central Bank's near zero interest rate policy and as a result the Swiss Franc is set to take a beating. Currency expert Kathy Lien explains the impact of Switzerland's decision on their currency, and even throws out some potentially profitable trades for currency investors in her blog post below:

Switzerland has officially adopted a beggar thy neighbor policy approach by intervening in the currency market. This morning, they cut interest rates by 25bp to 0.25 percent matching U.S. levels. They have officially embarked on Quantitative easing and will be buying domestic and foreign bonds (fully synopsis of SNB rate decision) .

Source: FX360.com

For currency traders, this means that a BIG seller of Swiss Francs have just entered the market. They have deep pockets and will probably be in the market for a while. Therefore, expect more losses in EUR/CHF and USD/CHF, both of which have hit 2 month highs. Such a strong move begs a correction but ultimately, I believe that EUR/CHF will hit 1.55 and USD/CHF will break 1.20.

The US retail sales report was much stronger than the market expected and this should add to the gains in USD/CHF, which has already outperformed EUR/CHF this morning.

There are still unanswered questions such as how much Swiss Franc the SNB will sell, the scale of bond purchases and additional liquidity. Their announcement today is aimed at accomplishing 2 goals at their expense of their neighbors which is protect their export sector and prevent the economy from falling into a deflation trap.

This post can also be viewed on kathylien.com.

Yesterday Was Just A Bear Market Rally

Don't fall for yesterday's market recovery, it was just a bear market rally. These bear market rallies should be expected, Kathy Lien points out in her blog post below. In addition Lien explains how the dollar might be impacted by these rallies.

Stocks rallied significantly yesterday, leading many people to wonder if this is “the bottom” in equities. Given that none of the problems in the U.S. economy have been resolved, I think that this is a bear market rally.

With that in mind, it is interesting to look at how much equities could rebound in a bear market rally. The best analog for the economy today is the Great Depression. Therefore I’ve pulled up the chart of the S&P during the Great Depression. The index fell as much as 86.5 percent before it finally bottomed. The sell-off was not without relief rallies. Between 1929 and 1932, there was 6 “bear market rallies” that ranged from 12 to 110 percent. The S&P was trading at much lower levels then but on a percentage basis, bear market rallies usually extend 25 percent. With that in mind, since the S&P 500 bottomed out on Friday, the index is up close to 8 percent. A 25 percent move would put the index at 833.

How does this relate to currencies? Further gains in U.S. equities would mean further strength for the EUR/USD. So if the S&P 500 hit 833, the EUR/USD could break 1.30.

Click on the chart to enlarge

Source: Bloomberg

This post can also be viewed on kathylien.com.

The Pound And Euro Are Taking A Beating

The recent interest rate cuts by the Bank of England and the European Central Bank have lead to major selling of the Pound and Euro. Currency expert Kathy Lien talks about the recent development and offers her insight into the situation in her blog post below.

The Euro and British pound have come under severe selling pressure after the ECB and BoE cut interest rates by 50bp. Interest rates are now at historic lows for both central banks and even though the rate announcements were negative for both currencies, the Euro has sold off more aggressively than the British pound because ECB President Trichet warned that growth will be signicantly reduced in 2009 and 2010 while inflation will remain well below 2 percent.

More importantly, he admitted that the ECB is studying non-standard measures which include quantitative easing. However, Trichet prefers to use the Fed’s label of credit easing over quantitative easing (What is the Difference Between Credit and Quantitative Easing?). The mere possibility that the ECB could consider Quantitative Easing was enough to drive the EUR/USD below 1.25. With the third highest interest rate of the G10 nations, further interest rate cuts are still possible. By saying that they have not made a decision about whether 1.5 percent is the lowest level makes 1 percent interest rates a real possibility for the Eurozone. In fact, Trichet may opt for another rate cut before credit easing. For the US dollar, British pound and Japanese Yen, no surprises are expected from future rate decisions. However for the Euro, the prospect of lower interest rates and the uncertainty of if and when the ECB will adopt credit easing should keep the EUR/USD under pressure.

Bank of England: Rates May Have Hit Rock Bottom

As for the Bank of England, I believe today’s 50bp rate cut to 0.5 percent is their last. The central bank has been worried that excessively low interest rates would erode profitability of banks, reducing their incentive to lend. Now that they have been given the authorization to begin Quantitative Easing, it will be their new focus. UK Gilts have soared on the announcement that the government will purchase up to £100bn in Gilts and £50bn in private sector assets (syndicated loans and ABS). As we indicated in our ECB and BoE preview, Quantitative Easing is negative for a currency, but if the BoE is done cutting interest rates, further weakness in the British pound may be limited.

This post can also be viewed on kathylien.com.

Just How Crazy Is The Stock Market Today?

So just how upside down is the stock market today? Kathy Lien pulled some interesting figures that will make you think a little bit about that question. Everyone knows that the market is down, but this really puts it into perspective. Check out Kathy Lien's blog post below:

Here is some interesting food for thought

It’s a sign of the times when …

The Sunday paper costs more than NYT stock
The Citi ATM fee costs more than C stock
The paper that a mortgage is written on costs more than FRE stock
A subscription to Sirius Satellite radio would cost more than SIRI stock
A gallon of gas costs more than F stock
One ride costs more than SIX (Six Flags) stock
A bottle of soda costs more than JSDA (Jones Soda) stock
A 5 minute long distance phone call costs more than VG (Vonage) stock
A 5 stick pack of gum costs more than RAD (Rite-Aid) stock
The strawberries in a smoothie cost more than JMBA (Jamba Juice) stock

This post can also be viewed on kathylien.com.

Buying Stocks For The "Long run" Isn't Always Smart

A lot of investors have the same potentially misguided advice ingrained into their heads — stocks over the long run always go up. While that indeed might be the case, how long will you have to wait to see those returns? It may be a good strategy for young people just getting started in life, but it certainly is not the right strategy for everyone. For more on this read Tim Iacono's blog post below:

I don't know. I suppose that if most of what I did over the last few decades revolved around compelling individual investors to buy stocks for the long run, come what may, it might be difficult to look at things objectively.

Denial is a powerful force in the world and perhaps one of the most under-appreciated.

These days, a lot of people are having a very hard time with the whole idea that individual ownership of stocks (and now real estate) is not the panacea that they once thought.

That doesn't, however, stop them from encouraging individuals to just "tough it out", likely knowing that, eventually, their advice will pay off - whether or not that advice will pay off in time to fund the retirement of a generation of baby boomers is another question entirely.

Word comes this morning from the Wall Street Journal's always-interesting Jason Zweig that it might be some time before things are hunky-dory again.

In this story coming in advance of tomorrow's update of long-term investment returns by finance professor Elroy Dimson of London Business School, the news is decidedly unfriendly for your typical aspiring retiree with money in the stock market.

The good professor estimated that we'll have to wait nine more years before stocks have even half a chance of hitting their highs of 2007. That is, back when millions of baby boomers started eyeing their retirement account balances again as the housing bubble was meeting its pin.

Those aren't very good odds at all - a 50 percent chance in nine years? 2018?

Who knows what the condition of the U.S. or global economy will be by then?

If you're still sticking with the program of "stocks for the long run", maybe this report at Money Magazine will cheer you up. In one of the daffiest assessments of equity markets that have crossed my computer screen in quite some time, Paul J. Lim, a senior editor at Money Magazine explains how the lost decade that just occurred, really wasn't such a loss.

Yes, it's true that the Dow Jones industrial average sits more than 1,000 points below where it was 10 years ago. But that's irrelevant to your investing strategy for three reasons. First, it's an arbitrary amount of time. We're hung up on it because 10, as University of California-Berkeley finance professor Terrance Odean notes, "is a nice round number we can all relate to."

Second, the market's performance over the past decade is a red herring because the period you're judging starts near the absolute pinnacle of irrational exuberance, when stock valuations - as measured by price/earnings ratios - were absurdly high. If you measure from the end of the last bear market, in October 2002 - when stock prices were still higher than average, by the way - you'll see that the Dow has returned 4.5% a year (including dividends) while the Standard & Poor's 500 index has gained 3.4% annually.

Third, as T. Rowe Price financial planner Stuart Ritter notes, "The only people the lost decade accurately applies to are those who invested absolutely nothing before the late 1990s, put all of their money in at the market peak and invested absolutely nothing ever since." If such an unlucky soul does exist, history suggests that he'll be rewarded.

And, the moral of the story is, of course, stick with the plan - stocks for the long run.

Eventually they'll all be right again... time uncertain...

I'll never forget that info-session back in 2001 when I was first coming of age with this whole stock market/retirement planning trip when the Fidelity rep hemmed and hawed when he was asked why we should continue to invest in stocks after an eighteen year run had just come convincingly to an end the year prior.

I asked, "Don't these markets move in long 'secular' cycles of 15 or 20 years? If so, doesn't that mean that we're due for a 'secular' bear market?"

He didn't really know what to say - he was just a twenty-something trying to stick to the script before a crowd of thirty- and forty-somethings who were starting to think seriously about their retirement planning.

Some, more than others, obviously.

Jason Zweig is a fabulous writer and Money Magazine is great for evaluating whether or not you should upgrade your kitchen, but I stopped listening to their investment advice years ago.

That was a good decision.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Currency Market Update: Look To The Australian Dollar

Yesterday's market rally got a lot of investors excited, but the rally was short lived. Currency expert Kathy Lien points out 3 reasons why investors should have been suspicious of the rally in her blog post below. In addition Lien offers some insight into the future of currencies, and suggests that the Australian Dollar might be a great investment opportunity right now.

The currency and equity markets are turning lower after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious. None of the reasons for Tuesday’s jump delivered real solutions. The market only rallied because Bernanke delivered no surprises. President Obama’s attempt at reassuring Americans also failed to comfort investors.

Instead we are faced with a weakening economy that is only confirmed by this morning’s plunge in existing home sales. Sales of existing homes plunged 5.3 percent to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. The median price of a home sold dropped 14.8 percent compared to the year prior. Such disappointing numbers are not much of a surprise given the big decline in housing starts and building permits. With banks and mortgage lenders reluctant to lend, even potential homeowners with sufficient capital have found difficulty attaining loans.

The British pound has been hit the most because Bank of England member Barker said that the weak sterling is helpful. UK officials have taken every opportunity to talk down the currency.

USD/JPY on the other hand remains an animal. Despite weak economic data and a turn in equities, the currency pair continues to rise.

My favorite is still the Australian dollar because of strong M&A flow, higher gold prices and the prospect of the country remaining recession free. The AUD/USD is also prime for a breakout.

This post can also be viewed on kathylien.com.

Secret TARP Bailout Details To Be Released By Court Order

It appears that we finally (hopefully) will be able to see where our tax dollars are going, thanks to a recent court ruling. This court order will force the Treasury to release some of the information that they have been concealing from the American public in regards to the massive bailout of the country's financial system. Anthony Freed provides us with more information on this development in his blog post below:

Advocates of an open Government and transparent allocation of taxpayer funds celebrated the news late Friday afternoon (2-20-09) that the U.S. District court has moved to enforce a Freedom of Information Act (FOIA) request to release more details about exactly how TARP bailout funds have been and are being used.

The TARP was passed in early October, 2008, in an effort to stem the damage to the nation’s financial industry incurred during a decade of lax risk-abatement that pervaded the banking culture after the legislative emasculation of the Glass-Steagall Act.

FOX Business sued Treasury on Dec. 18 over failure to provide information on the bailout funds or respond to FBN’s expedited requests filed under the FOIA. The initial request, filed on Nov. 25, sought actual data on the use of the bailout funds for American International Group (AIG) and the Bank of New York Mellon (BK), and an additional request, filed on Dec. 1, sought similar data on the bailout funds for Citigroup (C).

FBN asked the Treasury Department to identify, among other issues, the troubled assets purchased, any collateral extended, and any restrictions placed on these financial institutions for their participation in this program.

The Treasury Department - along with the other banking regulators like the FDIC, OTS, and the Federal Reserve - are notoriously secretive concerning the data they collect and their subsequent analysis of the viability of any particular institution, preferring to operate instead behind closed doors.

This tendency often leaves investors in the dark, which generally tends to work in the banks’ favor. Regulators would argue that they are not in the business of moving markets, and that some data may be misinterpreted and inadvertently cause a run on funds at named institutions, evidenced by Schumer’s now infamous disclosure of details that may have led to the collapse of Indy Mac Bank in 2008.

That argument may have held some water until the TARP bailout effectively made the U.S. taxpayer a shareholder in any number of as yet identified institutions, and the owner of any assortment of exotic financial instruments which have proved toxic to Global capital markets.

Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York said in a decision Friday that the government is directed to comply with FOX Business’s request under the FOIA “within 30 days and to produce a Vaughn index with 45 days.” That means Treasury must comply with FOX Business’s request by Monday, March 23, and must produce a Vaughn index by Monday, April 6.

The Treasury will have the chance to withhold some documents and information they deem too sensitive, but now have to provide an itemized “Vaughn index” of which documents and information have been redacted, and for exactly what reason.

“A Vaughn Index must: (1) identify each document withheld; (2) state the statutory exemption claimed; and (3) explain how disclosure would damage the interests protected by the claimed exemption.”

This may open the door to further FOIA challenges to release the remaining information if the Treasury fails to convince the courts that their vetting of information was reasonable.

I don’t think Treasury has realized that they are not the only ones who have new powers and responsibilities in the implementation of this historic bailout - the courts have yet to weigh-in on much of this, including who is ultimately going to be held responsible for the mess that is the economy, even if it is still taxpayers who have to foot the bill to clean it all up.

My guess is that the courts feel very differently about full disclosure than does the insider Wall Street elite who regulate themselves from Washington D.C. in seeming perpetuity.

Frank Rich of the New York Times wrote a good op-ed piece called What We Don’t Know Will Hurt Us, which helps further the argument that it is time to get to bottom of exactly what is going on with our economy, and why their seems to be so little consequence for the perpetrators of so much devastation.

Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.

Remember, the fundamental point of the TARP bailout is to funnel incredible amounts of taxpayer money - debt, actually - to the very institutions and people who are responsible for driving the markets off the cliff in the first place.

And they got paid handsomely for doing it.

It is time for our nation’s financial machine to drop the self-righteous arrogance they have cloaked themselves in for too long, for all of those paper-pushing money lords to release their false sense of entitlement, relinquish their ill-gotten wealth from the last 10 years, and to return to their proper place in the economic landscape as facilitators of capital creation, not the creators of capital.

Accountability in the largest disbursement of public funds in history is not only a good idea, it is essential to our democracy, as is ending the revolving door between corporate boardrooms and the regulatory offices of our government.

The Fox Business FOIA request and the court’s decision to release more information should serve as a warning to the Wall Street good ol’ boys that their orgy of omnipotence is truly over, and that the era of accountability is in.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.

Nationalizing Banks Will Harm The US Dollar

The buzz in the financial industry right now is whether or not the government is preparing to nationalize Citigroup and Bank of America, the two largest US banks. The government denied that they are even considering this measure, however, we wouldn't expect them to say anything else. The amount of liabilities that these banks have is staggering, and as Kathy Lien explains in her blog post below, a nationalization of these banks will have a dramatic impact on the US dollar.

I want to share my piece on How Nationalization of Citigroup and Bank of America could impact the US dollar if you haven’t caught it already (so I’m am posting his before I head to the NY Traders Expo).

The rally in gold prices tells us one thing and one thing only, which is that the fear has returned to the market. There is currently a lot of speculation that Citigroup and Bank of America could be nationalized by the US government. Although this would drive equities lower, it could also trigger capital flight out of the US dollar.

When Northern Rock was nationalized by the UK government in February of 2008, the British pound fell from 1.9638 to a low of 1.9363 over the course of 3 trading days. Although the dollar initially rallied on the news that the US government was taking over Fannie Mae and Freddie Mac in September 2008, it quickly gave back those gains to end the week lower against the Japanese Yen.

Nationalization will ultimately be negative for the US dollar because it increases the debt and liabilities of the US Federal Reserve and hence taxpayers. Nationalization is by no means a foregone conclusion especially since it is not a part of the US Treasury’s Financial Stability Plan. Senate Banking Committee Chairman Christopher Dodd floated the idea of short term nationalization around but it will probably be the last option for the US government if the Financial Stability Plan fails to work quickly. In fact, the rebound in US equities was triggered by speculation that the Treasury could release more details regarding their plan to rescue the financial system next week. Also keep an eye on Bernanke’s Humphrey Hawkins Testimony on the US economy and Monetary Policy.

This post can also be viewed on kathylien.com.

What The Central Bankers Are Saying...

Central bankers wield a lot of power in today's economies. Their mistakes can make a profound impact on the economy of their country, and even other countries. When these powerful figureheads talk the economic world listens. The slightest slip of the tongue can crash markets or send them shooting through the roof. James Picerno from The Capital Spectator takes a look at some recent quotes from Central bankers from across the world in his blog post below.

Central bankers aren't gods, even if a few of them sometimes think otherwise. For proof of their mortal status one need only survey the various errors linked to this group in the 21st century. Yes, many central bankers made good, even superb decisions. But there were also some rather large lapses in judgment in matters of monetary policy and related matters in recent years. Arguably the ill-advised decisions overwhelmed the brilliant ones. A number of central bankers tell us so.

Of course, the private sector made more than a few errors too. In sum, the blame for the current troubles stretches far and wide. But when it comes to concentrated power, and the capacity for generating pain or pleasure, central bankers are second to none. They're an influential lot—influential on a grand scale. For that reason alone, listening to what they say is productive, or shocking—especially when they're deconstructing what went wrong in the run-up to the crisis now pummeling the global economy.

With that in mind, here are a few choice quotes (courtesy of The Bank for International Settlements) from recent speeches by members of world's most elite and potent financial club. We don't necessarily agree with all that follows, but we're listening closely.

Mario Draghi, governor, Bank of Italy, 16 December 2008
One striking aspect of the crisis is precisely how its unfolding has continued to catch both policy makers and private sector players by surprise. It started with defaults in a marginal segment of the financial services industry, then quickly spread to virtually all assets. From being a US-only event, it has become global, and in fact it is forcing and accelerating the redressing of world macro imbalances that have been with us for 15 years. The current recession is the result.

Amando M Tetangco, Jr., governor, Central Bank of the Philippines, 2 February 2009
The roots of the US financial crisis can be traced back to the early years of this decade when the United States aggressively eased its monetary policy to facilitate recovery from the dotcom bubble and the September 11 terrorist attacks. If you will recall, the US Federal Reserve began a cycle of cuts in the Fed funds target rate from 6.5 percent in May 2000 to as low as one percent by June 2003. On the fiscal front, large public deficit spending beginning in 2001 was pursued to prop up the economy which was then on the brink of recession. The low interest rate regime fueled a boom in mortgages, including among borrowers with doubtful credit histories or those fancifully called NINJA loans – that is, loans to No Income, No Job or Assets loans. Thus, house prices in the US began rising in 2000, surpassing the growth of disposable income. The excessive lending itself would not have brought in such great financial distress because if the borrowers turned out to be poor borrowers, then foreclosures would just have followed. However, what made this risky behavior turn into a crisis event was the bundling of mortgages by various financial institutions into complex securities such as collateralized debt obligations (CDOs) which were largely unregulated.

Hervé Hannoun, acting general, manager, Bank for International Settlements, 7 February 2009
The global financial crisis and its macroeconomic fallout have dramatically changed the agenda of the central banks, fiscal authorities and supervisors and regulators. The change is illustrated by a remark surfacing repeatedly in the current economic debate: “We are all Keynesians now.” In some sense, indeed we are. But history teaches us that, in designing economic policies, policymakers always need to look beyond the short time horizon that crises seem to impose on us. In my view, current expansionary policy responses risk a failure to capture two crucial and interrelated facets of the present crisis. The first is that it is part of an underlying adjustment towards more sustainable macroeconomic conditions. The second is that it is a crisis of confidence which requires a recognition of the rational expectations of economic agents and of the behavioral effects associated with expansionary fiscal policies. To restore confidence in a sustainable way, policy actions should be credible from a medium-term perspective, address existing economic imbalances and pay attention to economic agents’ expectations.

José Manuel González-Páramo, member, executive board,
European Central Bank, 6 February 2009
The start of the financial crisis was triggered in the summer of 2007 by the realisation that the risks associated with the US market for sub-prime mortgages were not properly reflected in the price of related instruments, particularly mortgage-backed securities. A market-wide reassessment of financial risk led to sharp increases in premia and spreads across all segments of the credit market. The rapidly falling market values of credit instruments hit both the net worth and the profitability of the banking system.

Philipp Hildebrand, vice-chairman, governing board, Swiss National Bank, 5 February 2009
Financial markets react to incentives, and these incentives were misplaced in the past. It is in our power to start lobbying for clearly defined and risk-limiting conditions. If the responsible authorities wish to enact more stringent regulation, we ought to give them our unconditional support.

Christian Noyer, governor, Bank of France, 11 December 2008
In many respects, the current crisis is about valuation. To be sure, the factors underlying and accounting for the crisis are numerous. However, one of its significant features is that the uncertainty surrounding the “true” value of complex financial instruments has undermined the confidence of global markets, increased uncertainty about counterparty risk and led to contagion across asset classes, financial markets and economic regions. The crisis has highlighted the fact that the valuation of financial instruments is not only a question of accounting. It raises issues about risk measurement and management by financial institutions, prudential issues via the definition of capital requirements and, more widely, financial stability issues. However, valuation is also without any doubt an accounting issue. It is therefore hardly surprising that the debate about the application of accounting standards to financial instruments is a highly topical one.

Jürgen Stark, member, executive board, European Central Bank, 10 December 2008

For too many years financial market participants were used to a macroeconomic environment with high global output growth, low inflation and very low interest rates. Macroeconomic policies led to global and domestic imbalances which became increasingly unsustainable with debt financed over-consumption in one region and high savings in other regions. An overall benign macroeconomic environment led to (i) a general carelessness or a tendency to under-price risks and (ii) to a search for yield which in turn accelerated financial innovation.

Lorenzo Bini Smaghi, member, executive board, European Central Bank, 9 December 2008
When analysing the current financial crisis the temptation might arise to attribute all the responsibilities to the excesses of the US financial system. I think this would be a mistake. While excessive debt creation and risk mispricing are clearly the root cause of the crisis, we should not forget that in order to make a market you need buyers and sellers. And this crisis is as much a crisis of sellers as of buyers.

This post can also be viewed on capitalspectator.com.

EU Leaves Interest Rates Unchanged In Risky Move

All over the world central banks are dropping key interest rates in an attempt to stimulate lagging economies. Why then would the head of the European Central Bank leave interest rates unchanged despite wide spread economic turmoil among EU countries? Kathy Lien shares her thoughts on Trichet's controversial decision, along with the potential impact to currency markets, in her blog post below.

Here is a snippet of my comments about this morning’s price action on FX360.com:

There has been a lot of action in the currency market this morning, mostly centered on the British pound and Euro.

ECB President Trichet is not buckling under pressure. After leaving interest rates unchanged at 2.00 percent, he refused to make any decisive comments on where interest rates are headed in March. Trichet is still buying time to see how the economy and price pressures respond to their recent rate cuts. The Euro has held steady because Trichet said he is not pre-committing or excluding anything. The zero interest rates that Prof Roubini is calling for is out of the question especially for a central bank that remains obsessed with inflationary pressures. Trichet acknowledged that inflation will continue to fall but he expects it pick up in the second half of the year and if oil prices rebound, the acceleration of price pressures could exacerbate. Rather than being completely downbeat about growth, Trichet said that even though the risks are clearly to the downside, there are signs of stabilization. By postponing rate cuts, Trichet is putting his credibility and reputation on the line.

The ECB cannot stop cutting interest rates at this time especially as we continue to see very weak economic data. German factory orders fell 6.9 percent in the month of December, more than double the market’s forecast. Trichet who is known for his candor has already admitted that 2 percent will not be the lowest level for Eurozone interest rates and the market may be right to bet on a 50bp rate cut in March. If he doesn’t plan to cut interest rates to 1.5 percent next month, he would not comment on the market’s expectations. Although zero interest rates is off the table, we do not think that the ECB will stop at 1.50 percent. Interest rates could fall as low as 1 percent, which is why we could see more weakness in the Euro.

EUR/GBP Crushed After BoE Rate Decision

EUR/GBP collapsed following the Bank of England’s decision to cut interest rates to 1 percent. Even though the yield advantage in EUR/GBP has increased from 50bp to 100bp in the Euro’s favor, the market is less focused on interest rate differentials and more focused on recovery. The pound is trading higher because the Bank of England and the UK are being rewarded for their aggressive monetary and fiscal stimulus. The Euro on the other hand is being punished for implementing sluggish monetary policy.

This post can also be viewed on kathylien.com.

What Does February Have In Store For Currencies?

January was a great month for the USD, and even better for the Japanese Yen, but what does February have in store for the currency market? Investors should pay close attention as currency expert Kathy Lien attempts to answer that question in her blog post below. Investors should know that past performance doesn't necessarily represent future performance, but it certainly can help investors make educated decisions.

In the beginning of January, I highlighted the effect of seasonality on the EUR/USD. At that time, I talked about how the EUR/USD has a natural bias to sell-off in the first month of the year as investors reverse their year end flows. Since 1997, the EUR/USD has sold off in the month of January 72.7 percent of the time. If we include the currency pair’s price action in 2009, the EUR/USD has now sold off 75 percent of the time in January. The combination of falling interest rates in the Eurozone, recession and a flight to safety into US dollars has led to the strongest January sell-off in the EUR/USD in more than a decade.

February Performance

Now that January is behind us, many forex traders may be wondering if there are any unique characteristics in the currency market for the month of February. Taking a look at more than 30 years worth of data, we have found that on average the trading range in USD/JPY tends to compress in the second month of the year. In fact, of all 12 months, the average trading range in USD/JPY is lowest in February. Lower volatility could mean stability for USD/JPY because high volatility hurts Yen crosses (A Turn in USD/JPY?).

Currency Performance Since January

The final chart (after jump) illustrates how all of the major currencies have performed against the US dollar in January. So far, the Japanese Yen has been the only currency to outperform the greenback.

This post can also be viewed on kathylien.com.

What Will The Fed Do To Stimulate The Economy Now?

Bernanke and the Fed already played their last interest rate card, so if they can't lower rates what else can they do to get the economy back on track? There is a lot of speculation going around right now about what they might do, but we shall find out for ourselves later today. James Picerno from The Capital Spectator talks about the Fed meeting and the economy in general, adding some valuable input in his blog post below.

The press release that follows the Fed's FOMC meeting today may offer clues about how the central bank will proceed now that it's out of conventional monetary policy ammunition. Then again, maybe not. We're all trapped in gray zone of trial and error about what to do next and the Federal Reserve is also now faced with grasping at straws.

Typically, an afternoon FOMC press release attracts interest for an update on where short-term interest rates are headed. Today, and probably for some time to come, everyone already knows the answer. The Fed controls short rates, starting with the all-powerful Fed funds, but with the effective Fed funds at roughly 0.16%, the mystery about what comes next is, like the price of money, virtually nil.

Yet Bernanke and company may yet surprise us by dropping fresh clues about how the Fed plans to practice unconventional monetary policy from here on out—quantitative easing, to use the phrase of the dismal science. The details are a work in progress, although the immediate goal is still clear: stabilize general price levels.

We won't belabor the issue of deflation today, in part because we've discussed it often in recent months, including here and here. Let's just say that the D risk is still very much with us, and so the Fed has a fair amount of work to do in the months ahead.

The market appears to understand this, at least by way of monitoring Fed funds futures. For the year ahead, all the contracts are expecting Fed funds to remain under 60 basis points, and quite a bit lower for the immediate future.

Long rates remain in a holding pattern as well. The yield on the benchmark 10-year Treasury Note is in the 2.5% range and it may go lower yet, depending on what the next round of inflation reports reveal, although those won't arrive for several weeks.

Meantime, there's plenty of guesswork about what the Fed's next move. "With rates going nowhere for some time, the market's focus will be on whether the Fed will be looking to buy government (or corporate) securities in the near future," Sacha Tihanyi, an analyst at Scotia Capital, opines via AFP.

John Authers in today's FT argues that the critical variable is housing prices. What can the central bank do on that front? "The Fed can give details on quantitative easing— the ugly phrase for the art of buying bonds so as to push down the yields they pay, and stimulate the economy with lower rates, especially for mortgages," he writes. "If there is a single key variable to determine when the crisis in the US banking system can be brought under control, it is house prices. The further they fall, the higher the likely default rate on the mortgage-backed securities that banks now hold on their balance sheets."

Unfortunately, the news on housing prices is still discouraging, even after several years of a falling market. One of the latest bits of housing data shows that prices fell again last month even as sales perked up. Existing home sales rose 6.5% in December, albeit driven by distressed sales at bargain prices, the National Association of Realtors reports. Nonetheless, the median national price of existing homes in the U.S. still dropped by a hefty 15.3% last month.

Even if the Fed is successful in fending off deflation, which we expect it will be, that by itself isn't a cure for what ails the economy. "Ben Bernanke is rightly concerned about deflation right now," Desmond Lachman of the American Enterprise Institute explains in The Christian Science Monitor. But that's merely step one in a multi-step recovery program. "Getting inflation back into the system … is not going to be sufficient," Lachman notes.

Convincing banks to lend and consumers and businesses to borrow is arguably the next big step beyond containing the deflation risk. Solving the latter will be easy by comparison. The real challenge will come later this year in trying to promote growth. But first things first, and so we await today's Fed commentary.

This post can also be viewed on capitalspectator.com.

Low Consumer Confidence Pushes Dollar Higher

Consumer confidence fell again, this time to the lowest level on record. Consumers fear the worst, and as a result they are losing all appetite for risk. That means they will be heading for the relative safety of US dollars according to currency expert Kathy Lien. For more insight into how currencies should perform based on the latest report, read Kathy Lien's blog post below.

In more than 40 years, we have never seen US consumers this pessimistic. The Conference Board’s report on consumer confidence fell to 37.7, the lowest level on record. The disappointing consumer confidence report will drag down risk appetite and drive investors into the safety of US dollars. The rally in the US dollar is a reflection of more panic selling and not optimism about US economy. On the heels of the report, we have already seen the EUR/USD and equities turn negative. We may not see a recovery in confidence Until job security is no longer a major concern. Unfortunately with headlines in national papers touting the 74k jobs axed in one day this morning, consumers will not turn optimistic anytime soon. The one silver lining in the report is that we have seen an increase in plans to buy automobiles within the next 6 months. Major discounts are enticing consumers to buy new cars. Looking ahead, discounts and incentives will be the only for businesses to push inventory. Fourth quarter GDP is due for release on Friday and weak consumer confidence supports the market’s belief that growth was the weakest in 26 years.

Earlier this morning, S&P/CaseShiller reported that house prices fell 18.18 percent in the month of November, the largest decline on record. Unfortunately house prices still have room to fall as the labor market remains weak and more inventory floods the market over the next few months.

This post can also be viewed on kathylien.com.

Silver ETFs Continue To Grow

Silver prices have been going up and down, and up and down, but what has continued to steadily increase is the amount of silver being help inside the Silver ETFs. This means that despite the volatility, investors still see silver as a great investment opportunity and are funneling more money into the metal. Commodity investment expert and well known blogger Tim Iacono, takes a closer look at the recent Silver ETF data in his blog post below.

Like its big golden brother, the iShares Silver Shares ETF (NyseArca:SLV) is now regularly making new all-time highs, the latest move coming yesterday with the addition of 199 tonnes. This brings the net gain to 550 tonnes so far in 2009.

The price of physical versus paper forms of precious metals was a hot topic over the weekend at the Cambridge House Investment Conference. The shortage of coins and small bars last year combined with the fact that both of the major ETFs continued to add inventory as prices fell just adds to the discussion, however, not always in an entirely productive way.

Louis James of Casey Research was one of the more level-headed panel participants acknowledging that, while the physical market is a relatively small part of the overall bullion market, recent developments will have an outsized, long-term impact on investor psychology and the market in general.

Full Disclosure: Tim Iacono is Long SLV

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Reviewing The Latest Quarterly Gold Report

Despite the extreme volatility of gold prices, investors continued to dump more money into gold throughout 2008. The latest quarterly gold report shows us some interesting figures and clearly displays that despite the volatility, many investors feel more comfortable holding gold then various other investments. Tim Iacono from The Mess That Greenspan Made takes a closer look at the report and tries to shed some light on the precious metal's up and down performance.

The World Gold Council released their quarterly Gold Investment Digest yesterday and it contained a number of very good charts including the one below that recounts the many financial market crises that drove investors away from other financial assets and into gold.
They noted that the rising price of gold was quite impressive given all the carnage that occurred elsewhere, most equity markets and many other commodities tumbling 40-50 percent or more for the year as the price of gold posted its eighth annual gain, up four percent.

Holdings by the ten gold ETFs around the world climbed to new record highs with another 96 tonnes purchased during the fourth quarter following a whopping 145 tonne addition in the third quarter.

As shown below, the total amount of gold in the ETFs rose to 1190 tonnes by year-end, worth more than $33 billion. Note that the SPDR Gold Shares ETF (NYSEArca:GLD) just added another 13 tonnes yesterday after a three tonne increase on Monday bringing its holdings to 819 tonnes, by far the largest of the bunch.
Elsewhere in the report, mine production was said to be stable, up just two percent overall from a year ago with a number of countries, notably South Africa, experiencing sharp declines. China passed South Africa last year as the world's biggest gold producer.

De-hedging continued but will have a much smaller impact in the future as the total outstanding hedge book now stands at just 526 tonnes. As shown to the right, during the four quarters ending in Q3-2008, miners de-hedged a total of 368 tonnes.

Note that official central bank gold sales dropped sharply, ending up considerably below the 500 tonnes allowed during the fourth year of the Washington Agreement on Gold.

Jewellery demand rose during the third quarter (the most recent quarter for which data is available) and was up modestly on a year-over-year basis, however, the fourth quarter will likely show a big decline due to the worsening worsening economic conditions around the world.

As should be clear in the table, it is the increase in investment demand, not jewellery demand or industrial uses, that supported the gold price in 2008 and this is likely to continue this year.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

What Is Going On In The Forex Market Right Now?

The currency markets have been going crazy lately, with several currency pairs forming new, or close to new, records. With all this volatility what are currency investors to think? Currency expert Kathy Lien attempts to answer this question in her blog post below.

There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:

GBP/USD - 23 Year Low
USD/JPY - 13 Year Low
NZD/USD - 6 Year Low
EUR/JPY - 6 Year Low
CAD/JPY - 13 Year Low
GBP/JPY - Record Low
NZD/JPY - 8 Year Low

The most significant moves have been in the British pound, which fell to a 23 year low against the US dollar and in USD/JPY, which fell to the lowest level in 13 years. Comments from former Fed Chairman Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said “we are in serious recession, with no end clearly in sight.” Although there is no question that the US economy is in trouble, by saying that there is no end in sight means that there is no hope which coming from the chairman of Obama’s newly formed Economic Recovery Advisory Board is significant. By saying that he does not an end to the recession is certainly not good advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker’s comments overshadowed the prospect of a stimulus plan. Yesterday’s sharp sell-off made investors nervous but Volcker’s comments pushed them over the edge.
We are continuing to see flight to safety into the US dollar and Japanese Yen. Investors are looking to hide in the lowest yielding currencies.

We also had comments from ECB President Trichet and SNB President Hildebrand. Trichet defended the ECB’s monetary policy and said they haven’t decided if 2 percent is the lowest level for rates.

Intervention by Swiss National Bank?

The Swiss franc collapsed after SNB Hildebrand said that the central banks is considering selling francs to halt the currency’s gains. With interest rates already at 0.5 percent, they have no room to ease monetary policy. Therefore they may have to resort to fixed rate currency intervention.

This post can also be viewed on kathylien.com.

Welcome President Obama: Now About The Economy...

Yesterday was basically one big party, everyone it seemed was excited to welcome in our new President. Now the party is over and it is time for Obama to get to work, and he had better act fast. The economy is struggling mightily and Americans expect, albeit a tad unfairly, that Obama's administration is going to be able to fix the problem. James Picerno from The Capital Spectator paints a dreary picture for the economy over the coming months, while holding out some hope for a recovery, in his blog post below.

Today is the first full day of President Barack Obama's administration and, as everyone knows, the new commander in chief has his work cut out for him. With a fresh start before us in Washington the question on the home front remains: What's up (or down) with the economy?

In broad terms, the answer is obvious, and the numbers only lend statistical support. Clearly, tough times lie ahead, with the next 6 months or so looking set to be the toughest. But how does that square with our proprietary measure of U.S. economic activity (CS Economic Index), which bounced sharply higher in November, the last month with the full compliment of data pieces for calculating this benchmark? What's more, based on preliminary data for December, the November bounce looks set to hold.

Alas, the rise is something of an illusion for the time being since only two factors out of the 17 in our economic index are driving the bounce skyward. Granted, the pair is on steroids trying to bring aid and comfort to the ailing economy. Statistically, the changes in those two factors are enough to push the entire index upward. Even so, those two lone bullish factors alone, unfortunately, aren't likely to spark a recovery of any substance for the foreseeable future. Looking out later in the year offers some hope, but first let's talk about the immediate future.

The two factors doing all the heavy lifting in our economic index are money supply and the interest rate spread. Both were in overdrive in November in terms of generating pro-recovery fuel to an otherwise shrinking economy. The rate spread was particularly bullish, although the growth-oriented bounce from money supply was robust too. Collectively, the pair overwhelmed the negative energy elsewhere in the economy, at least when measured on an average basis.

By rate spread we're talking of the difference between the yield on the 10-year Treasury Note less the effective Fed funds. Thanks primarily to the dramatic fall in Fed funds in November, which continued in December, the rate spread widened sharply and thereby moving definitively into positive territory, which generally is a bullish signal for the economy. Why? Because a positive sloping yield curve—rates are higher as bond maturities lengthen—historically accompanies economic growth. By contrast, a negatively sloping yield curve—rates fall as maturities lengthen—is a sign of distress/economic contraction.

Based on the rate spread, this measure went negative in July 2006 and stayed negative until February 2008, when the spread moved back into positive territory. Looking back, it turns out that the recession warning posed by the arrival of a negative yield curve in mid-2006 was an accurate forecast of an approaching recession, which officially began in December 2007.

Fast forward to November 2008 and the rate spread is telling us that it's now in high gear as an economic stimulus. That is, short rates are extremely low relative to long rates—despite the fact that long rates are also bouncing around at historically low absolute levels. Based on this measure alone, one might be bullish on the immediate future, assuming this was a normal cycle. But as we know, the times are anything but normal and so even the unusually bullish stimulants coming from the money supply and interest rate factors aren't yet dispensing their usually pro-growth influence. The reason is that the negative drag from everything else is, for the moment, still too much to overcome. Indeed, the lagging and coincident factors in our broad economic index are either flat lining or still declining.

The good news is that at some point all the monetary stimulus will take root and promote expansion. All the money has to go somewhere and eventually it'll go into corners of the economy other than banks accounts and T-bills. Banks will one day lend and businesses will borrow. In addition, now that the Obama administration is at the helm, we expect a fresh round of fiscal stimulus to compliment the monetary efforts now running at full speed.

Guessing when all this will produce some measurably positive change in the economy proper is the great question. Given the depth and magnitude of the economic headwind, we're not expecting much for the first half of this year, perhaps longer. Even when signs of growth, or at least stabilization emerge, they're likely to be tenuous, slipping temporarily back into negative territory and keeping everyone on pins and needles.

Recovery worth the name is going to take time, and perhaps a fair degree more time than we've come to expect over the past generation, when growth returned fairly quickly after a downturn.

As such, strategic-minded investors should pace themselves and use the next several quarters productively to restructure their portfolios for the day when the storm passes. As we'll discuss in more detail in the February issue of The Beta Investment Report, the ongoing economic and financial turmoil is wrenching but it also offers substantial opportunities for dynamic asset allocation strategies.

That said, the next several months are undoubtedly going to be rough, replete with surprises, false starts and lots of noise in the markets. Economically speaking, there are still a number of big unknowns lurking in the near-term future too. Investors should brace themselves for more volatility, and at the same time prepare to take advantage of it.

Risk management, in other words, has never been more important, or potentially more rewarding.

This post can also be viewed on capitalspectator.com.

Why The "Bad Bank" Is A Bad Idea

There is a lot of momentum gaining right now behind the idea to create a so called, "Bad Bank." This bank would be set up by the government and would be used to take toxic debt off of the balance sheet of the banks like Citigroup and Bank of America. Paul Krugman thinks this "Bad bank" is simply a bad idea. Economics Professor Mark Thoma revisits Krugman's article in his blog post below.

Are policymakers about to take another wrong turn?:

Wall Street Voodoo, by Paul Krugman, Commentary, NY Times: Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

To explain..., let me describe ... a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope ...[of] a government bailout.

Why would the government bail Gotham out? Because it plays a central role in the financial system. ... Gotham has to be kept functioning. But how can that be done?

Well, the government could simply give Gotham a couple of hundred billion dollars... A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to ... the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests ... policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward ... moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” ... “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?

In my example, Gothamgroup is insolvent... The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.

Now, maybe private buyers aren’t willing to pay what toxic waste is really worth... But should the government be in the business of declaring that it knows better than the market what assets are worth? And is ... paying “fair value,” whatever that means,... enough to make Gotham solvent again?

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense...

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. ...Gothamgroup and its sister institutions are already ... utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

This post can also be viewed at economistsview.typepad.com.

Forecasting The Current Recession

We all know that the current economic conditions are unlike anything we have ever seen before. This was a large reason why it took the folks responsible for identifying recessions so long to make the official announcement. It is very interesting to hear their reasoning behind the delay, and even to understand how these things are tracked to begin with. James Picerno from The Capital Spectator interviewed one of the officials that helps make these determinations which helps shed some light on the topic. You can read more about it in his blog post below.

Forecasting cyclical turning points in the economy (and inflation) is job one at the Economic Cycle Research Institute (ECRI), a New York consultancy. In fact, it seems to do so rather well, or at least it has in the past. Notably, ECRI has earned some well-deserved praise in recent years for correctly predicting the 2001 recession.

But the current downturn has been a little trickier. True, ECRI was warning of trouble in late-2007. Even so, the firm held out hope that a recession might be sidestepped. As discussed in a November 2007 report, ECRI explained that "the leading indexes are not yet in a recessionary configuration, thus a recession can still be avoided." Alas, it was not to be. With the clarity of hindsight, we know that the recession began in December 2007, as per NBER's official (albeit 12-month lagged) dating of the downturn's start.

To be fair, ECRI was advising that a downturn was possible well ahead of December 2007. Today, the firm counsels that the recession is well entrenched and that economic contraction looks set to roll on. "The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes," says Lakshman Achuthan, managing director of ECRI and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.

In an interview earlier today with The Capital Spectator, Lakshman talked of recessions, how we got into this mess and the outlook for, one day, better times. If you have a taste for the ugly details of the business cycle, read on…

Lakshman, ECRI did a nice job of predicting the 2001 recession. Were you ahead of the curve this time?

No, we were much more coincident, for a whole host of reasons. We said a recession was unavoidable in early March 2008. The reason we held out some hope that the recession could be forestalled was because of a weird confluence of events going on at the end of 2007 and early 2008 with respect to inventories—manufacturing stuff in the U.S. economy.

Typically recessions are kick started in many examples by a big inventory overhang that, all of a sudden, in sort of a Wile E. Coyote moment, give way and the floor falls out from under manufacturers. They realize that they have way too much inventory and they stop [producing]. That's how a lot of recessions tend to start.

But not this time.

No, it didn't happen that way. There was very little inventory and so we didn't have that kind of downturn in the economy. That gave policymakers the briefest window of opportunity to maybe push [the recession] off. But they weren't that worried and thought they had things pretty much under control. And we had growth abroad that was still drawing on U.S. manufacturers and so there was a widely held belief that we didn't have to worry about [recession] and that we were managing the home price decline and the emerging credit crunch quite well.

The economic cycle has in fact been some sending false signals, or certainly misleading signals in recent years, or so it seems. Inflation, for example, was running hot in the first half of 2008. But by the end of the year, deflation seemed to be the big threat.

Yes, it's been very schizophrenic. For example, the assumption in many models was that home prices couldn't go down; now the assumption is that they can't go up. All along the way there were plenty of prognosticators saying extreme things. Today there are some expecting a depression while others are expecting things to rebound in the second half of this year.

Looking back, you can see how this recession was set up. Certainly oil was part of the reason. We started to have oil spikes in 2005, and every year since then, through early 2008, we had oil spikes. Every time you had an oil price spike, someone warned of recession. When you had the housing market downturn begin in 2005, and you combine that with an oil spike, a lot of people saw recession.

But those were false signals, at least for a few years after 2005.

Right, and instead what we saw was that the economy accelerated to a four-year high with the growth rate in 2007. That's kind of an inconvenient fact. We actually grew faster than Europe in 2007. This wreaked havoc with all kinds of assumptions that decision makers had taken. In fact, the acceleration in 2007 may have lit the match for a lot of this credit stuff.

How so?

Because decision makers in the fixed-income markets and other markets were looking for a recession in 2007, but it never happened. You had the expectation on Wall Street, at Merrill Lynch and Goldman Sachs, for instance, of a 75-to-100 basis point rate cut by the Fed. And then one day in early June those two houses, which have a lot of followers, abruptly turned on a dime and said they didn't think there would be any rate cuts in 2007. What this did was immediately wreak havoc with all of the models pricing subprime credit groups, where the assumption was that rates would go down and so those instruments would maintain their credit ratings. The minute you took out the rate cuts, the guise fell away and everyone started running away from subprime debt very quickly. And that continues today.

So you had a housing price downturn that began in 2006 and then morphed into a credit crunch in 2007. These are massive things that take time to resolve. But they don't in and of themselves mean that you must have a recession. Our indicators were saying, yeah, things were bad, but it wasn't a guaranteed recession.

When did things take a turn for the worse in terms of triggering a real economic contraction?

We started to get a real recession risk in the second half of 2007. Our weekly leading index peaked in June 2007, about six months before the recession actually began in December 2007. In fact, by December 2007, our weekly leading index had plunged to its worst reading since the 2001 recession. However, because of these inventory issues I mentioned [there was an expectation that] maybe we would be able to buy a little bit of breathing room. That didn't happen. You saw the recession begin at the end of 2007. All the dead bodies started showing up in 2008 as the recession turbocharged the housing downturn and credit crisis.

What's the outlook now?

The outlook remains recession. Retail sales, the Fed Beige Books, industrial production, jobs growth—these are all coincident indicators and they confirm that we're in the most severe recession in the post-World War II era. This was forecast by our weekly leading indicators. Our leading index had earlier fallen to a 60-year low. So it's not a surprise that the coincident indicators are now weak.

What has changed in very recent weeks is that the leading indicators have begun to stabilize. I'm not suggesting that there's an imminent recovery ahead, but it is notable that we've gone from minus 30% growth rates to minus 25%, minus 28% or so. I suspect this is largely related to hope. We have a new year. We also have a new administration and some new stewards of the economy. There's talk of a new stimulus plan. The leading index may be showing there's some pause to this sharp decline. However, an objective reading of the index doesn't yet show a sustained recovery. That would require a very persistent and pronounced rise in the leading index for us to make that kind of forecast. What we know objectively is that the first two quarters of 2009 are going to be recession quarters.

The longest previous recessions were 16 months each, in the early 1970s and early 1980s.

If we date the current recession's start to December 2007, that suggests that we'll soon match the previous recessions' 16-month time frames. Does that mean we'll be getting close to the end of the current downturn later this year?

Saying at this point that the recession will end in the second half is really a coin toss—no one really knows. We don't know because the leading indicators haven't turned up yet. The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes. The good news is that the leading indexes can't see that far. A lot of it is going to depend on, for example, the stimulus debate. If the stimulus is three times the proposed size and it happens quickly, then that's one extreme and so there's probably a chance of some kind of bump in the second half of 2009. On the other hand, if the stimulus is delayed, or adjusted down, maybe there's less chance.

Keep in mind that the recessions of the early 1970s and early 1980s were also international recessions. The number of countries in recession around the world today is the broadest we've seen since World War II. It's broader now than it was in the 1970s and 1980s in terms of the diffusion and pervasiveness of the recessions globally. That informs our view of what may happen in the U.S. There's a linkage: The broader the recession, very often the longer it is.

This post can also be viewed on capitalspectator.com.

Risk Strategy In Uncertain Times

You always hear people quoting the great Warren Buffet, "Buy when there is blood in the streets." But today's investment climate seems to be different than anything we have ever seen before. Should we still be buying, or is now the time to go ultra-conservative? What about something in between? At this point who honestly knows? There are a lot of smart people out there that have entirely different views about which direction the economy is heading, and ultimately about how things will turn out. This is beyond a doubt a difficult time to be a successful investors, but one thing we do know for certain is that when all is said and done there will be winners and losers in the investment world. James Picerno from The Capital Spectator dialogs about a recent roundtable discussion between some investment bellwethers, and helps us evaluate some of the current investment risks in his blog post below.

The future is always unclear, and therein lies the chief source of risk in the investment challenge. The degree of risk isn't continuously steady. It ebbs and flows, like market prices and the careers of Hollywood actors.

The fact that risk levels are dynamic suggests a connection. But our ability to model the connection and draw lessons is limited. In fact, at some points the relationship between risk and expected return is especially foggy.

This is one of those times, a state of affairs that creates unusually large opportunities and equally above-average risk. As such, all the usual caveats, and then some apply. Yet recognizing this condition is the first step toward exploiting the opportunity and/or defending oneself against the higher risk.

Macroeconomically speaking, a major risk overhanging the capital and commodity markets relates to the question of deflation and inflation. That is, which one will prevail? Moreover, will one dominate only to give way to the other? And if so, what will the timing be? Being on the wrong side of this uncertainty will be painful, perhaps financially fatal, and so it's the rare investor who can afford to make an all-or-nothing bet. Regardless of your view, a bit of hedging never looked better—just in case.

Certainly there are strong arguments for each possibility, including deflation first, then inflation, which happens to be your editor's bias. But others argue that deflation will linger for a lengthy stretch and so the practical risks of inflation are virtually nil for the foreseeable future. Still others forecast that inflation remains the imminent risk, even if it's not obvious in current data. The chief evidence for this outlook comes from the massive surge in the Federal Reserve's balance sheet, i.e., the printing of money on a scale rarely seen in order to combat the current economic slowdown/contraction.

The fact that intelligent analysts and economists can debate the future on such starkly different terms only highlights the higher levels of risk of late. That's in sharp contrast to debates of the recent past, when dismal scientists were arguing if the economy was set to grow by 2.0% vs. 2.3%.

A telling example comes in the current issue of Barron's and its roundtable discussion. Consider this exchange between Fred Hickey (High-Tech Strategist); Mario Gabelli (Gamco Investors); Marc Faber (Marc Faber Ltd.); Oscar Schafer (O.S.S. Capital Management); and Bill Gross (Pimco):

Hickey: It's hard to predict the market when you don't know what the Fed will do. The Fed has tripled the size of its balance sheet and is plowing ground we have never seen before. Here are my facsimiles of deutsche marks from Weimar Germany [holds up sheaf of papers]. They collapsed in value when Germany started printing money after World War I. It happened very quickly and it can happen again.
The Germans were successful at reflating. But they weren't successful in saving their economy. [Federal Reserve Chairman Ben] Bernanke is on record saying, "I will not make the mistakes of the 1930s. I will not make the mistakes of Japan in the 1990s." He is pushing the limit right now.

Gabelli: So you're saying he's going to make the mistake of the Weimar Republic?
Hickey: There is a possibility of that. Every month that there is a horrible employment, report the government prints more money.

Gabelli: It took Weimar Germany a brief time.
Faber: The worse the economy, the more they will print. It is like in Zimbabwe now, and Latin America in the 1980s. They had large deficits and printed money, and in local currency everything went up. But the currency collapsed.

Schafer: Isn't the federal government increasing its balance sheet to offset the private sector?

Gross: Exactly. The situation isn't similar. The Weimar Republic basically reflated to get out from under its wartime debts. Zimbabwe is a situation unto itself. In the U.S. there has been asset destruction in the trillions of dollars that has to be repaired. To say the Fed's balance sheet has expanded by a few trillion dollars and that this will create hyperinflation is a miscalculation.

Faber: I'm prepared to bet Bill that in 10 years the U.S. has very high inflation. With growing fiscal deficits that may reach as high as $2 trillion next year, it will be hard for the Fed to lift interest rates in real terms. Once they push up rates again, there will be another disaster.

Gross: Marc, you're smarter than that. You know that credit creation is at the heart of economic growth, and to the extent that credit creation has been thwarted, stultified, basically cut by 10% or 20%, economies can't grow.

Faber: The U.S. economy is credit-addicted. In a sound economy, debt growth doesn't exceed nominal GDP growth. Would you agree with that, or do you think debt should always grow at a faster pace than nominal GDP?
Gross: I'm with you there.

Faber: We come at this from different perspectives. You run a company that manages money, and I'm an outside observer of the U.S. financial scene, though I have to admit I bought some U.S. stocks for the first time in 30 years.

The fact that smart people can see such wildly divergent possibilities on inflation and deflation reminds that the potential for instability is alive and kicking. As Abby Joseph Cohen, senior investment strategist at Goldman Sachs, explained in the roundtable talk, "It is important to recognize that we are not starting from a point of equilibrium, where the economy and the credit markets are working properly. Instead, the Federal Reserve is acting aggressively to provide liquidity not just to the U.S. economy but the global economy." She added: "In many ways, the Fed is acting as the central bank to the global economy."

It doesn't take a genius to recognize that the Fed's not designed for such a broad increase in its mandate. Yes, to a certain extent the U.S. central bank has, for some time, been dispensing monetary medicine for the globe. That's one thing, when the global economy was humming along nicely; it's something else in a time of severe asset deflation and recession, the likes of which we haven't seen in decades.

So, yes, there are huge opportunities in the current climate, but those are tempered with huge risks. As such, a prudent risk management strategy is essential. For strategic-minded investors, that begins with taking advantage of sharp discounts on price at those times when available. In fact, the discounts were unusually large about a month ago. Prices have since popped. Did you take advantage of the pessimism? Or are you inclined to jump on the bandwagon now?

The macroeconomic risks are unusually large these days, but the biggest threat to investment success remains a familiar monster that dwells inside each of us: emotion that favors running with the crowd for, say, asset allocation decisions. Taming that beast is still the greatest challenge.

This post can also be viewed on capitalspectator.com.

U.S. Household Debt Declines For The First Time

Yes, that headline is correct. U.S. household debt actually decreased in the third quarter of 2008—the first time it has happened since the measurement started being tracked in 1952, according to The Wall Street Journal. While I knew that Americans have a grand propensity to spend freely, I certainly did not know that we have increased our debt load ever quarter of every year for over 50 years. Depending on one’s perspective, this news could be considered wonderful or a complete disaster. On the one side it is great to see Americans finally taking control over their ridiculous debt burdens, but on the other hand the economy desperately needs people to start spending again. Our economy is built on the willingness of consumers to borrow in order to finance the purchase of goods and services. If Americans keep this new found conservative nature, the economy is going to be in for a rough ride, and a serious adjustment period.

Along with decreasing debt loads, Americans are also saving more. Economists are projecting a savings rate between 3 and 5 percent in 2009 according to The Wall Street Journal, a far cry from the negative savings rates to which we have become accustomed to in the U.S. With people less willing to take on new debt to purchase goods and services—and those with money less willing to spend it—the economy will have difficulty rebounding. A majority of the nation’s GDP is generated from consumer spending, so you can bet that the GDP numbers will suffer whenever that consumer spending drops. Until the consumer regains the desire to spend, we are going to be hard-pressed to exit this recession, barring huge government spending of course.

While this news could be viewed negatively, I prefer to look at it in a positive light. It is simply unsustainable for us to continue increasing our debt loads as a way of growing the economy. This strategy is doomed to failure, because it can only succeed if credit is infinite. At some point, though, consumers have to hit their credit limit and the party will end. That time has come for many people thanks to the credit crisis, but even those who can still borrow are increasingly aware that it may not be the best option. The best way to have a sustainable, consumer-driven economy is to base spending on income and savings, not the use of debt. If we can’t afford something, then we shouldn’t buy it. It’s really that simple. For those visual learners here is a classic clip from Saturday night live that pretty much sums the point up:

"Millionaire" Redefined Yet Again

The financial crisis has seemingly spared no one, including the once ballooning number of millionaires. Millionaires are becoming a rare commodity, and it could be said that the title once again means something. While millionaires still worry about the same things normal people do, sometimes we can elevate them to a higher level than they should be. Tim Iacono looks at this phenomenon a little closer in his blog post below.

One of the many deleterious effects of the many recent financial market bubbles was that the meaning of the word "millionaire" was severely diminished.

The efforts of Regis Philbin and crew notwithstanding, the word had maintained the same weighty connotation early into the new century as gains in stock market wealth, while significant, were not nearly as broad based as what was to follow - housing market wealth.

A few years back, virtually any long-time homeowner in one of the housing bubble states who had also squirreled away a decent sum in their retirement savings could legitimately call themselves a millionaire, though, the value of one's primary residence is typically excluded in the official definition by those who study millionaires.

No matter.

All of that has changed so much over the last two years that, today, few argue that the definition of the word should be expanded to include home equity since there is so much less of the stuff today than there was back in 2006.

Combined with the more recent plunge in equity markets, it seems that one of the few bright spots in the current downturn is that some of the cachet of the word "millionaire" is being restored.

This report in CNN/Money explains:

Millionaires? More like $700,000-aires
While it may be hard to feel sympathy for America's millionaires, they're feeling the economic crunch, too - nearly a third of their assets have disappeared in the downturn, according to a consulting firm's report released Tuesday.

Spectrem Group said U.S. households worth $1 million or more - excluding their primary residence - have seen their assets decline by 30% during the financial crisis.

Almost one-fifth of the asset declines were greater than 40%, the report said.

"There's a huge amount of anger," said George Walper, president of Spectrem Group.

Nearly all the millionaires surveyed - 90% - said they "fear a prolonged economic downturn," the report said. On average, they believe it will last for another 22 months.

Maintaining their current lifestyles is also of concern, as 55% of respondents said they are worried they will not have sufficient assets to do so.

Don't let that last part about the lifestyles of millionaires throw you.

Despite what you may have been led to believe by Robin Leach and his ilk, it's not all "champagne wishes and caviar dreams".

One of the most important books out there, a book that every high school student should be required to read, is "The Millionaire Next Door". You can get the gist of the entire work simply by reading the first two pages that are conveniently reproduced below:
Ironically, this book was first published in the year 1998, the same year that the popular game show "Who Wants to be a Millionaire" debuted.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Currency Predictions For 2009

All things relating to the economy were crazy in 2008, to say the least, but now that it is over, what does 2009 have in store for us? Currency expert Kathy Lien attempts to look into her crystal ball and determine how the new year will be for the key currencies. Forex investors should make sure to check out her latest blog post below.

2008 has been a crazy year in the foreign exchange markets and hopefully 2009 will bring more steady times for the global economy as a whole. The tremendous amount of fiscal and monetary stimulus that central banks around the world have doled out should begin to have their effect in the second half of the year. Countries that will be the first to rise from the ashes are the ones whose currencies have lost the most value in 2008. In contrast, the countries whose currencies soared will have a much more difficult time recovering.

In 2009, we will be celebrating the 10 year anniversary of the Euro and in January, people around the world will cheer the inauguration of brand new US President. Obama embodies change and hopefully that change will help to pull the US economy out of recession.

Make sure you read my 2009 currency forecasts. I talk about what I expect fundamentally and technically for the following currencies in the year ahead.

US dollar forecast
Euro forecast
British pound forecast
Japanese Yen forecast
Australian dollar forecast
New Zealand dollar forecast
Canadian dollar forecast
Swiss Franc forecast

This post can also be found on kathylien.com.

The Media Shouldn't Be Blamed For The Financial Crisis

With retirement accounts shrinking across the country, everyone is trying to determine who is to blame for the financial crisis. After all, if we can place blame on somebody we can then burn them at the stake, and it will make us feel so much better, right? Recently the New York Times published a controversial piece that basically blamed the entire financial crisis on President Bush. Several publications have disputed this piece, including Newsbusters, and of course the White House. Surely President Bush had a hand in the economic carnage of 2008, but to say that he was solely responsible for it is pretty ridiculous. There are so many people that have a hand in economic matters of this country, and while the President is the figurehead, he most certainly is not the only one to whom blame is due. So what other names are being thrown out? Greenspan, Bernanke and Paulson are all likely candidates, but according to a recent survey by Opinion Research most Americans think a large portion of the blame falls on the media.

According to the poll 77 percent of Americans believe the media is to blame for stoking the financial crisis by spreading fear among consumers. My first reaction to this was a big, WOW. Yes, the media has spread a bit of fear and panic, and the stories of doom and gloom are certainly helping to sell more papers, but there is another reason why all you see are negative stories: Positive news is next to impossible to come by if you don’t just make it up. If the media had more positive news to cover, you can bet that they would do it.

Americans who wish to bury their heads in the sand can feel free to do so, but personally I want to know what is going on in the financial world and I want the truth, not some lame story meant to make me feel all warm and fuzzy inside. People hoarding their money out of fear fostered by what they have heard from the media may be making matters worse, but it is hard to blame reporters for doing their jobs and reporting the truth. It is falsifying information or misleading readers in some other way that we should scorn. Yet things are getting so bad that in the press release issued by Opinion Research, national expert on corporate liability and white collar crime issues Richard L. Scheff warns that members of the media could potentially be exposed to liability despite apparent constitutional protections.

This is of course absolutely ridiculous. What we are saying is that instead of the hard truth we want our media to report sugar-coated stories to make us feel good about the economy. If you want a bubble, that is one great formula right there: Get the public to buy into a bunch of hype so they can feel confident buying up overpriced assets, ignoring that the bubble will inevitably pop, bankrupting those who believed that everything was coming up roses when the market was really pushing up daisies. The media should be sued were they to feed false hope in this economic environment, but certainly not for reporting the truth. That defeats their entire purpose for existing. For the Americans who can’t handle this hard truth: Good luck to you, as you most certainly are going to need it.

Looking Back At 2008

2008 was a year to be remembered by investors, but certainly not in a good way. While most investors probably lost a substantial amount of money, hopefully they at least learned some powerful lessons. James Picerno from The Capital Spectator looks back at 2008 and some of the things investors should take away from it in his blog post below.

Two-thousand-and-eight is gone—and good riddance. But the blowback will be with us for some time, on a number of fronts. And that starts with reviewing the previous 12 months.

As our first table below shows, red ink was spread far and wide in 2008 in almost everything other than cash and bonds. Otherwise, double-digit losses were the rule last year. But if we look at the monthly tally for December, the view looks decidedly better. REITs, in particular, rebounded sharply last month, surging nearly 18% in December.

Most of the other asset classes followed suit, albeit with lesser although still robust gains for the month. The exceptions are cash and commodities. It's too soon to tell if the worst is over or if the rally is merely a fleeting affair in an ongoing bear market. But given the extent and breadth of the carnage, it's tempting to think that maybe, just maybe, positive returns await in asset classes other than cash.

Speaking of cash, a few words about last month's performance of 3-month Treasury bills (our proxy for cash) is in order. Although our table above lists December's performance for cash as zero, the number's in red because the return is slightly negative for 3-month T-bills if you carry the return out to two digits: -0.02%. In the grand scheme of the universe, no one will lose any sleep over this microscopic loss. But the fact that T-bills—the classic "risk-free" asset—posted a loss of any degree is extraordinary, and so it speaks to the times we live in.

Indeed, monthly losses in T-bills are so rare that it doesn't register in our databases, which admittedly only go back to the 1980s for "cash." That's not to say that it never happens, but you'll have to go back quite a ways to find monthly red ink in this corner of finance.

The source of last month's slight loss is no mystery, at least. The explanation starts by noting that the yield on a 3-month T-bill slipped to just about zero at the end of November—an astonishing state of affairs in and of itself. Then, in December, the T-bill yield rose a bit, albeit to a mere 0.11% by December 31 from roughly zero a month earlier. Slight as that is, it was enough to tip the monthly return to negative in the 3-month T-bill for two reasons. One, for much of December, the 3-month T-bill barely gave investors any yield to speak of, and since yield is the only source of return for these securities the pickings were fated to be slim at the end of November even under the best of circumstances. Add the fact that T-bill yields rose slightly set the stage for an ever-so-slight loss (rising yields translate into lower prices in bondland).

The fact that even cash could post a loss is a sign of the times, of course, although investors had bigger problems than worrying about miniature losses in T-bills. Indeed, as our second table below reminds, 2008 was a horrendous year for most asset classes. Horrendous, but not entirely surprising, at least in terms of how 2008 compared with previous years. Yes, the depth of the losses are shocking. But the reversal of fortune was overdue—long overdue in some cases.

click to enlarge

Consider emerging market stocks, which lost more than 50% last year. Shocking as the loss is, the volatility is not out of character for the asset class. Indeed, as the chart shows, emerging market stocks had been posting gains of 20% to 50% for each and every calendar year during 2003-2007. That extraordinary five-year stretch of price increases had to end eventually, of course, and for anyone who expected otherwise, well, they were living in a dream. Surely if an asset class can post a 50% gain in one year—as emerging markets did in 2003—something similar is possible if not likely on the downside.

A similar lesson applies to the formerly high-flying world of REITs, which also enjoyed an extraordinary bull market run that finally started coming apart in 2007 and continued in 2008.

Yet not everything was about losses in 2008, a year that witnessed potent gains for some corners of the bond world, which once again makes the case for owning a globally diversified portfolio. Foreign government bonds denominated in foreign currencies, for example, was an exceptionally bright light last year and so if you didn't own the asset class (via BWX, for instance), your portfolio probably paid a price.

The point is that cycles endure, even if the details aren't always 100% clear. What goes up in price eventually comes down. Meanwhile, lower prices precede higher prices. Although one must be extremely cautious about applying that view to individual securities, it generally works well over time when it comes to asset classes, which have a habit of surviving, which is more than one can say for some individual companies or certain bonds.

Timing, of course, is always debatable, even with broad asset classes, which is an argument for maintaining some mix of the world's capital and commodity markets through thick and thin. The question, as always, is how to structure the mix and manage the betas through time?

As it happens, that's the focus of a new monthly newsletter (The Beta Investment Report) that your editor will launch later this month (details to follow on CapitalSpectator.com). For the moment, though, we're simply gazing backward, in search of some basic perspective. Knowing where you've been and what history looks like is the foundation for looking into the future and assessing risk as well as opportunity. As always, a surplus of both awaits. The critical challenge is fleshing out the details, which is the mandate of our soon-to-be-launched newsletter.

This post can also be viewed on capitalspectator.com.

A Christmas Wish For Your 401(k) Account

Most people lost a good portion of their 401(k) this year, but will next year be any better? Most people would have to say yes, if for no other reason than it would be hard to comprehend anything being worse than 2008 was. Already analysts are predicting much stronger earning next year, but then we are hearing reports about how horrible this holiday has been, and how that is going to kill some companies. So can we expect a Christmas gift this year for our 401(k) and other retirement accounts? James Picerno from The Capital Spectator offers up his insight below.

U.S. corporate earnings have been under pressure for some time, based on reported operating earnings for the S&P 500. Indeed, the bloom fell off the rose a year ago, when S&P earnings took a dive in 2007's fourth quarter from the formerly plush levels.

A lower level of earnings has prevailed ever since, as our chart above shows. But bottom-up estimates (as per Standard & Poor's as of December 16) are decidedly upbeat for 2009. If the forecast proves accurate, by this time next year S&P 500 operating earnings will return to the record levels posted in 2007. If such an earnings rebound is coming, the S&P 500 looks inexpensive based on the forward earnings multiple of 10.6, as per the full-year 2009 earnings estimate of $83.44.

Reuters reports that a key source of the expected earnings turnaround next year will come from none other than the ailing financial sector. That would be no trivial rebound, considering the current depth of earnings red ink weighing on the financial sector. But that will give way to positive earnings next year, or so we're told.

Consumer discretionary sector earnings are also thought to be poised to soar next year, rising 46% for full-year 2009 earnings, based on bottoms-up predictions. That's nearly twice the S&P 500's predicted earnings rise. In fact, only the energy, industrials and materials sectors of the S&P 500 are expected to suffer lower earnings in '09 vs. this year. The other 7 sectors for the S&P are on track for higher elevations.

It sounds like just the holiday treat we've been waiting for. Yet we must be wary of analysts bearing gifts. Indeed, bottom-up analysts as a group tend to be more optimistic relative to top-down analysts. Even so, the top-down crowd sees earnings growth for next too. The high end of forecasts among top-down calls for a rich $100 for 2009 S&P earnings, vs. $60 on the low end for this group's prediction, The Wall Street Journal recently noted.

For what it's worth, your editor is also confident that next year's earnings for the S&P will rise above this year's dismal results. But that's like saying Wall Street's bloodbath won't be so bad in 2009 vs. the last few months.

One of the few bright spots about life after the apocalypse is that a rebound of sorts is virtually guaranteed. Timing is always a question, of course, but rebounds eventually arrive. But no one should confuse a bounce off the bottom as a sign that a return to trend is imminent for corporate earnings. The economic headwind promises to be quite stiff next year, and it remains to be seen who'll have the stamina and the savvy to weather the storm.

Yes, government stimulus will be an increasingly positive force as next year unfolds. But unless you're expecting miracles, it's best to keep the celebratory champagne on ice for the foreseeable future. It took us years to get into this mess, it'll take more than a 2 or 3 quarters to get us out. That doesn't preclude a bounce, but repairing the damage this time will take more than running the printing presses at full speed.

This post can also be viewed on capitalspectator.com.

How Will Deflation Worries Affect Gold?

Gold has historically been an asset that people turned to when they are worried about inflation. Today, though, we are in a very unique situation. Governments around the world still don't have inflation under control, but there is a lot of worry right now of deflation. Because inflation is tracking down and deflation is on the horizon nuemours measures are being taken that could have dramatic impact on inflation, and the price of gold, in the future. Deflation may or may not ultimately come, but if it does what impact will it have on Gold prices? What about if deflation doesn't come, and inflation spikes, what then? Tim Iacono from The Mess That Greenspan Made looks closer at that question in his blog post below.

This morning's Ahead of the Tape column($) in the Wall Street Journal neatly summarizes conventional wisdom regarding gold, beginning with the 'ol "inflation hedge" saw.

As the quintessential hard asset, one that traditionally hedges against rising consumer prices, gold's trajectory these days should be downward. After all, prices for just about every other commodity, from oil to nickel to cotton, have plunged as inflation risks have seemingly abated and as investors increasingly fear deflation.

Yet, gold has largely traded between $750 and $850 an ounce for the last few months, and is up about 8% since the Fed cut interest rates to between 0% and 0.25% last week.

It hasn't been an entirely smooth ride. Gold sank amid panic this fall as investors crowded into the U.S. dollar. And it remains well under its $1,002 close back in March. But the metal hasn't stumbled nearly to the degree many other commodities have. Clearly, deflation worries aren't tugging at gold.

It's probably fair to say that, with what the central banks around the world have been doing over the last year or so, gold owners who are now worried about the recent downward trend in the consumer price index are few and far between.

It continues...

And while inflation isn't apparent today, stimulus packages and bailouts mean much more money in the system. That is classically inflationary. Moreover, despite efforts to sop up this liquidity later, the effects of unintended consequences might mean some portion of the trillions added to the Fed's balance sheet are likely to "stick around" to fuel inflation, says Axel Merk, who recently increased gold exposure in his Merk Hard Asset Fund and personal portfolio.

Says Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Australia, "I'm telling clients that the environment over the next five years is extremely constructive because of the inflationary risks further out."

Near-term gold could still demonstrate some weakness as the last of the panic trade peters out. And if the European Union cuts interest rates, as some expect, that could boost the dollar's value, which could undermine gold. And U.S. and European Central banks could sell gold to raise cash to pay for bailouts, which would be bearish for gold prices. But Mr. Southwood suspects Asian central bankers looking to diversify reserves would grab that supply, seeing the sales as "an alarm signal about the dollar."

And what if deflation does hit? Even that doesn't necessarily spell doom for gold, as some think. During the deflationary Great Depression, "gold preserved its value," says Matt McLennan, a lead manager at First Eagle funds, which runs a gold fund. "It preserved its purchasing power."

Yes, some of this new money is likely to "stick around" as Axel Merk says - maybe a lot of it.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

America's Ponzi Scheme Era

There has been a lot of talk lately about ponzi schemes, and of course this can be directly attributed to the recent Madoff scandal. As Paul Krugman points out in his article, though, there isn't all that much difference between Madoff's actions and the actions of the entire investment industry. After all the end result was the same, the investors lost a bunch of money while the facilitators ran off with the spoils. Mark Thoma from The Economist's View shares the Krugman article in his blog post below.

The costs of "America's Ponzi Era":

The Madoff Economy, by Paul Krugman, Commentary, NY Times: The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s ... had a corrupting effect on our society as a whole.

Let’s start with those paychecks. ... The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money..., then invests the bulked-up total in high-yielding but risky assets... For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. ... Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics... Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches ... undermined our sense of reality and degraded our judgment. Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? ... The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.

This post can also be found on economistsview.typepad.com.

Seriously…Madoff Investors Want A Bailout?

Bailout seems to be the word in 2008: Everyone is getting one, or is giving their case for why they need one. In the latest bailout request, the Alternative Investment Management Association (AIMA) is asking for aid for the investors burned in the $50 Madoff investment scam according to Reuters. On the news we have heard heartfelt stories of retirees who lost everything, but then again these were supposed to be sophisticated investors. What should we do?

For those who are unfamiliar with the Madoff investment scandal, Madoff Securities is a hedge fund which set up a big ponzi scheme and scammed investors out of approximately $50 billion. To invest in hedge funds, investors are required to be accredited, which means they have at least a net worth of $1 million or make at least $200,000 a year ($300,000 if married). These types of investments require accreditation because they are considered riskier and more complicated and they are not bound by the same SEC regulations as common investments are.

The fact that these accredited investors would even ask to be bailed out by American taxpayers is preposterous. Considering that millions of people are out of work and millions of retirees already have nothing to live on aside from their social security checks, how can these wealthy people possibly want hardworking Americans to cover their losses? The government didn’t bailout investors in traditional stocks that went bankrupt. They didn’t bailout the workers in Enron who had their entire retirement account invested in Enron stock and lost everything. Sure, it sucks that these people were scammed, but it is hard to feel sorry for them when they have a lot to begin with and they knew that their investment was inherently risky.

Compounding that, I was blown away to learn that some of these people invested every penny of their wealth in these funds. If someone has $2 million and plans to retire on that money, how can one possibly think that it is okay to invest it all in the same fund? That is just ridiculous. I wouldn’t even invest all my money in U.S. treasuries, let alone some hedge fund. This should be especially true for people nearing retirement: The closer you get to retirement, the less risk you should be taking with your money. This means that diversification is absolutely vital, and very, very little of your portfolio should be invested in things like hedge funds. I do feel for these scammed investors, but, firstly, they should have known better, and secondly, they are now in a situation similar to that of millions of other retirees, except that these investors probably have other assets of value and are still better off than most.

If we aren’t willing to spend $15 Billion to bailout the auto industry, then we can’t spend billions to bailout wealthy hedge fund investors who got burned. The AIMA had to know that there was no way they would get it. This action will only cause a PR problem for hedge funds and might lead to increased regulation in the industry. This is could be a good thing or a bad thing depending on your perspective, but it is safe to say that most hedge funds would rather not deal with more regulation or scrutiny. At the end of the day, though, if so-called “sophisticated investors” are making stupid mistakes like this, then I would have to question the criteria being used.

The Next Big Bubble To Burst: U.S. Treasuries

Everyone in the world knows that the U.S. has a huge debt, and that the U.S. economy is performing poorly. Yet, people are flocking to U.S. treasuries like never before driving yields down to record lows. The U.S. has no plans of stopping the debt train, though, so who knows how high it will go. We are on uncharted ground right now, and all it would take to push this train off the tracks is one major debt holder to start selling. Lots of other bubbles have burst recently, so why not possibly the biggest one of all? Needless to say if this happens there will be serious ramifications for the U.S. and the rest of the world, which is probably why it hasn't happened already. Toni Straka from The Prudent Investor looks closer at this looming problem in his blog post below.

Having seen most of the bubbles bursting I had listed in this post from 2005 the world may soon be in for the mother of all bubbles. With a size of $10 trillion the US government debt market has remained the world's #1, now that MBS have shed the better part of their initial values.

US treasuries have long been hailed as a safe haven for money fleeing from other overheated markets. Massive losses in more or less all other asset classes in the past 15 months have shown that investors followed Pavlov's reflexes, driving the 10-year yield to a record low of 2.55% last week.

CHART: The yield for 10-year US Treasury debt fell to a record low of 2.55% last week. This chart may see a sudden reversal based on the fundamentals.

It may be questioned whether this trust into the Federal Reserve's ability to contain long term inflation is justified, given the fact that chairman Ben Bernanke will enter history as the fastest money printer of all times.

While the Fed has reduced its federal debt holdings by $290 billion to $484 billion (buying doubtful MBS instead) in the last 12 months it was foreign investors TIC data and Treasury statistics show.

This has driven yields across the curve to record lows, leaving investors with a negative real yield when discounting inflation. US Inflation was 3.7% YOY as of October.

Institutional investors have been allocating more money into US treasuries recently, citing the safe haven status of American government bonds. But this era may be coming to an end as so many things do nowadays.

There appears to be a split of opinion. While European and American investors follow the old rule of buying US debt with a questionnable AAA rating their Asian counterparts see themselves trapped with US debt holdings they cannot sell in order to avoid a panicky stampede out of the biggest market of all.

The deficit outlook justifies a skeptical approach. Barack Obama will have to finance a budget deficit of an estimated $1 trillion in 2009, the biggest in American history. If Mr. Obama will not manage a U-turn in foreign policy which was mainly based on ignorance and arrogance under Bush, he could run into financing problems. China has urged other countries to replace Federal Reserve Notes with their own currencies in bilateral trade and voiced its concern about US fiscal policy repeatedly.

The global downturn may bring a different borrowing climate too. Losses in all asset classes across the board and record low yields will result in lower reinvestment amounts overall, it can be safely projected.
The borrowing needs will skyrocket as both the federal government and bankrupt local communities will scramble for funds to replace sudden drops in tax revenues.

Bets On A US Default Become More Expensive
While still being a mainstay for investors from all around the world, not everybody is confident about the future of a USA in the grip from the biggest financial crisis ever. Some wary souls are increasingly buying insurance against a default of the US government. According to a Reuters report from November 26, credit default swaps involving Treasuries reached a record high.

Ten-year U.S. Treasury CDS widened to 54.7 basis points from Tuesday's close of 50.0 basis points, credit data company CMA DataVision said.
Five-year Treasury CDS jumped to a record 52.0 basis points from Tuesday's close of 47.50 basis points, it said.

In plain language this means investors were willing to pay $54,700 to insure a portfolio of $10 million 10-year debt paper.

Summarizing the fundamentals such as no end to new debts, tax shortfalls, higher social and military expenditures, a central bank willing to monetize the debt and flooding the world with fresh Federal Reserve Notes, it can be safely bet that this bubble will end like all bubbles: In a gigantic burst that will unsettle everything we have learned about investing in the past.

A hat tip to Econbrowser who undug this paper by Stanford economics professor John Taylor on the failures of the Fed in the current crisis and why it all became worse this autumn.

I stand by my opinion that monetary inflation is in the early stages worldwide and will have seeped through into the real economy in 2009/10.

This article has been reposted from The Prudent Investor. The full post can also be viewed on The Prudent Investor.

Crazy Or Genius?

It is starting to become big news now, but a prestigious resort company, Elite Island Resorts, is running a promotion right now that allows customers to pay for their accommodations with stocks. Not only that, but they are allowing customers to use the stock based on the value back on July 1^st of this year. In case you’ve been in a cave somewhere the stock market has fallen off a cliff since then, so this potentially offers a tremendous value for customers. Is this move craziness, or pure marketing genius?

Before you come to judgment you should know that there are certain restrictions. For one only about 100 stocks are accepted as part of the promotion, so they retain control over the stock that is accepted. They aren’t going to take Lehman stock, or stock from Freddie Mac and Fannie Mae. They have selected around a hundred solid companies, although some, like American Express have seen their stock halved since July. In addition they have capped the program at $10 million in total, and $5,000 per individual stay. In order to qualify, reservations must be made by the end of this year and travel dates must be before the end of 2009. The CEO for Elite Island Resorts, Steve Heydt, was also quoted MSNBC as saying, "The vacation business has gotten hammered probably as much as the stock market."

The last quote is quite revealing: Business is down considerably and vacant rooms are worthless to a resort. They could have simply discounted the room rates like most firms do in this situation, but instead choose a much wiser path. They still discounted the rooms, but did it in a way that created a ton of free publicity. The publicity alone that they have received is probably worth the $10 million set aside for the program. In my mind Heydt is a marketing genius. When the recession ends, his company will be positioned to benefit from newfound clients that could return year after year, and there is always the chance the stocks could rebound and make this slump incredibly profitable for Elite Islands in the long-term.

Brazil’s Economy Remarkably Strong, But For How Much Longer?

In the midst of worldwide reports of falling economies, Brazil’s economy has been remarkably strong. According to Bloomberg, Brazil’s GDP grew 6.8 percent in the third quarter of this year compared to last, up from 6.2 percent growth in the previous quarter year over year. Considering the state of the worldwide economy those numbers are staggering—so staggering that they beat the estimates of all 31 economists polled by Bloomberg. Compared to the constant underperforming of estimates in the U.S., this must be truly exciting for Brazil. On the downside, though, economists are predicting a slowdown for Brazil’s economy, and Morgan Stanley is even predicting a recession for Brazil, according to Bloomberg.

While the talk of recession is probably a bit premature, Brazil will likely see a substantial slowdown in their growth. Economists quoted in the Bloomberg article gave 2009 GDP growth ranges anywhere from 2 to 4 percent. The article also mentioned that certain industries in Brazil were starting to lay off employees, which is never a good sign. However, the layoffs that they mention are nowhere near the level that we are experiencing here in the U.S. We also should remember that 31 of 31 economists underestimated Brazil last time around, so who is to say they won’t do it again?

Brazil is an amazing country with investment potential that has interested me for quite some time. The country has almost every imaginable natural resource and is making great strides towards becoming a world power. I certainly think that we will begin to see a slowdown in their economy as external pressures take their toll on Brazil along with the rest of the world, but I don’t foresee a recession. I think Brazil will continue to grow, albeit at a slower pace than before. Once the global economy begins to turn around I see Brazil taking off once again.

We hear a lot about the BRIC economies (Brazil, Russia, India and China), but of those four Brazil seems to be the least discussed. India and China have their huge populations and incredible growth numbers, and Russia has its huge oil reserves. Brazil always trailed them in growth and in investment hype. To me, though, I think Brazil has as much potential as the others, if not more. India and China have huge populations, but they also are facing some huge problems, such as water shortages. They also are almost entirely dependent on other countries for their energy needs. Russia has abundant water and energy, but their government is repressive. Brazil has tons of fresh water, is energy independent, and though their government is not perfect by any stretch of the imagination, it continues to improve and seems to be headed in the right direction. In addition, the fact that Brazil has not had the same type of investment hype as the other countries is a good thing for investors. Over the long term I think we might see Brazil moving to the head of the BRIC class, and it might happen sooner than we think.

Are U.S. Treasuries Really The Best Investment?

There was an article published on Yahoo Finance this morning written by Ryan Barnes for Investopedia.com that detailed the top 10 investments for baby boomers. The number one investment on the list was U.S. Treasuries, followed by certificates of deposit (for the full list you can read the article here). While baby boomers are nearing retirement and age certainly plays a factor when selecting investments, are U.S. treasuries really the best investment out there?

Here was the explanation for the choice as explained in the article:

“Any good list of investments for retirement-aged individuals could start and end here. Treasuries are the ultimate in safe, reliable investing - in fact, their yields are often considered the literal benchmark of safety (the risk-free rate of return) - when modeling more risky investments. The U.S. government has never defaulted on a Treasury bond, making them a beacon for investors all over the world. However, you access exposure to Treasuries - via mutual funds, exchange-traded funds (ETFs) or individual bonds - they should have a high weighting in your overall portfolio.

For the vast majority of investors over the age of 60, capital preservation is more important than capital appreciation (such as gains from stocks). Treasuries provide this, along with a steady stream of income and a good shot at preserving your assets in the face of inflation. Corporate and municipal bonds are also solid investments in the same vein, but default rates are higher and more research may need to be done on the part of the investor to evaluate their merits.”

With today’s volatile market conditions, it is hard to argue that investors shouldn’t be concerned with the safety of their investment principal, however I think this article overstates the safety of U.S. treasuries. It is not just this article, either; pretty much every investment advisor and investment handbook out there preaches that U.S. treasuries are “risk free.” Of course I would argue that no investment is risk free, especially considering all the economic and financial challenges that the U.S. faces. Sure, the U.S. has never before defaulted on their debts, but that is what everyone says until the first time someone defaults. Chances are the U.S. will probably not default if push comes to shove, but there is a good chance that they will be forced to print an excessive amount of money in order to pay on all this debt that they have piled up. Printing a bunch of new money will lead to dramatic inflation, and considering the low level of interest paid out on U.S. treasuries, high inflation will kill investors.

That being said, U.S. treasuries certainly have their place in investment portfolios, but should they comprise the entire portfolio, as Barnes suggests would be acceptable? I certainly would not recommend it. I think it is very important also that people understand that U.S. treasuries are not risk free. Their risk might be less than other investments out there, but they are most definitely not risk free. And to have one's entire investment portfolio comprised of U.S. treasuries is a huge risk. Not only are you taking a chance that inflation eats away your retirement, but what if the U.S. does default? That is always something hanging out there as a possibility, and if your entire retirement is banking on one investment, your risks are amplified. Even if you are the biggest fan of U.S. treasuries out there, you still want to diversify.

WWWBD: What Would Warren Buffett Do?

When all else fails, ask WWWBD, or "What would Warren Buffett Do?" What are the Oracle of Omaha’s thoughts on the current state of the financial markets and the economy? Well, according to Buffett, we are looking at an economic Pearl Harbor. While that probably doesn’t sound too reassuring, he is also optimistic. In fact, he is so optimistic that he is one of the few people actually buying right now. He recently invested $5 billion in Goldman Sachs and $3 billion in GE. Buffett said the current bailout plan isn’t perfect, but he pushed for it to get passed nonetheless. In a Fortune article, he also proposed a bailout plan of his own.

In Buffett's bailout plan, he recommends that the government involve private investors in the mix by loaning up to 80 percent of the purchase price to hedge funds and the like to buy up the distressed mortgage assets. Buffett said that this would create less risk for taxpayers, and also provide better management of the assets. The biggest advantage, though, is that this would overcome the potential problem of the government paying too much for the assets, as many are worried will happen under the current bailout proposal. Since these sophisticated investors are going to have 20 percent equity in the game, you can bet they will make sure to not overpay for the troubled securities.

I definitely prefer Buffett’s plan to the one that the house just passed, but it is still hard to predict what the ultimate impact would be to taxpayers.

Another point that Buffett made in the article--and that is being echoed elsewhere, too--is that $700 billion probably isn’t going to be enough to fix this problem. The Buffett proposal would bring in private money to help shoulder the burden, but the big problem with it is that we don't know that private investors will even be interested. If they are interested, are banks going to be willing to sell the toxic assets at the prices investors demand? Will prices ultimately get pushed down even further, making things that much worse? It is hard to say, but at the same time, that echoes the main fear of the current bailout plan. How do we know that we are getting a good deal? I don’t know about you, but somehow I have a feeling that if the government is left to their own devices, we are going to end up paying a hefty premium for these assets and taxpayers will get stuck with the bill.

Typical investors, who, unlike Buffett, don’t have billions lying around, need to be smart with their investments right now. Make sure to protect yourself in the event things don’t turn out as planned. Also be aware that there is no guarantee that things are going to get better even now that the bailout has passed. We are likely still heading to recession, and things are still going to get ugly.

The Financial Crisis Expands: Where Should You Invest Now?

Lehman Brothers is bankrupt, Merrill Lynch has been sold off and now AIG, the largest insurer in the country, is on the ropes. Lehman’s bankruptcy was the largest in history and its ramifications will be hard felt in the financial world, but an AIG failure will be even worse. If you read the headlines this morning, it is amusing to see every Wall Street person say AIG is “too big to fail.” Of course they don’t want it to fail because it is going to have a huge impact on the market. AIG insures financial products, and “'I don't know of a major bank that doesn't have some significant exposure to AIG,’'' said Kenneth Lewis, chief executive officer of Bank of America, in a CNBC interview,” as Bloomberg reported.

Yesterday in the blog, I applauded the government for letting Lehman fail, and I hope they are willing to do the same with AIG. Sure, it will be tough, and in the short term things will get worse, but over the long haul, we will be glad we did it. Lessons have to be learned these organizations have to make fundamental changes to the way they are doing business.

Bloomberg reported this morning that, “Republican presidential nominee John McCain told CNBC today that there is a ‘moral hazard’ in forcing taxpayers to be responsible for the poor performance of companies. Asked whether regulators should allow AIG to fail, McCain said, ‘I think you have to.’'' I want to applaud McCain on this statement, and I sincerely hope that the rest of the government feels the same way.

For investors, times like this are extremely confusing and dangerous. The stock market has already taken a huge hit, and it is likely to drop even further. Even bank deposits are in question with many financial institutions on the rocks and the FDIC seemingly underfunded at the moment. You could look to other countries for safety, but it doesn’t appear that you will find any solace there, either, in this truly global financial crisis. Gold has been extremely volatile of late and many investors are wary of investing in it as prices have plunged. Real estate continues to fall, not really offering any comfort either. So again, where should people be investing?

I’m curious to hear what all of you have to say on the subject, so I would encourage you to let us know what you think the best investment is right now and why.

Alternative Investments: Where To Find And Finance Them

The popularity of alternative investments has grown tremendously over the past few years. This helped spawn the creation of NuWire Investor, along with many other alternative investment focused companies. No matter how Wall Street tries to slice and dice it, the stock market just doesn’t cut it for every investor. There are lots of investors who want more control over their investments, or the opportunity to invest in things that are outside of the mainstream. Alternative investments are certainly not for everyone, but they are great for the right kind of investor. Since many alternative investments fall outside the mainstream, locating them can sometimes be difficult…enter NuWire Investor’s Opportunity platform.

Our Opportunity platform is still new, and we admit there are some kinks still to be worked out, but it offers a place for Investors and alternative investment providers to come together (for FREE I might add). If you are interested in alternative investments, or if you sell alternative investments, I encourage you to take some time to visit our Opportunity platform.

Once you find an alternative investment you like, then the next question for many people is how you are going to finance it. Some of the more mainstream investments, such as domestic real estate, are fairly easy to finance, but it can become a little trickier with today’s lending climate. Some opportunities that you can find on our site, though, have made arrangements with hedge funds and the like in order to offer investors incredible financing packages. A couple developments are offering 90 percent LTV investor financing (even for stated borrowers) at decent rates. Try getting that from a local bank:

https://www.nuwireinvestor.com/opportunities/go-zone-investment-opportunity--500-nuwire-special-51879.aspx (This developer even offers a $500 discount for NuWire readers--We like those!)

http://www.nuwireinvestor.com/opportunities/walt-disney-world-good-neighbor-hotelvilla-orlandofl-investment-opportunity-in-51873.aspx

In addition, there is also the possibility of using one's retirement funds to buy alternative investments; this structure is called a self-directed IRA. There are several providers that can set up these account structures, with the main difference among them being whether or not you want checkbook control. The largest custodial self-directed IRA provider is Entrust and the largest checkbook self-directed IRA provider is Guidant Financial Group, who recently made the Inc 500 list of fastest-growing businesses, at #384. (Full disclosure: Guidant Financial Group and NuWire, Inc. are owned by the same parent corporation.) Typically, the drawback to the checkbook account is the cost, but some creative developers are offering to pay for clients' self-directed IRA accounts:

http://www.nuwireinvestor.com/opportunities/free-self-directed-ira-account-to-invest-in-orlando-51907.aspx

http://www.mexicorealestatetours.com/mexico-real-estate-ira

Alternative investments are here to stay, and if you happen to be one of those investors who prefer to take more control over their investments, or who just prefer to stray from the ordinary, I urge you to monitor (and add to, if you sell these investments) our Opportunity platform. The more involvement we get from the alternative investment world, the better this website will become. If you choose to take up one of the offers, I also encourage you to come back after completing the transaction and let the NuWire community know how your experience went. You can do this by leaving a comment on the opportunity itself, or by simply sending us an email at info@nuwireinvestor.com and we can pass on the message. We are excited about this new Opportunity platform and hopefully as an alternative investor, you are, too.

Global Real Estate Becoming More Transparent And Accessible

In the age of globalization, the world's markets are becoming ever more available to foreign investors, and while real estate has traditionally been one of the tougher markets to enter and navigate in foreign countries, it is getting ever easier. Nearly 50 percent of all countries improved their real estate transparency, according to the Jones Lang LaSalle Index from 2006 to 2008, with eight of those countries moving up a full tier. The only country to fall in the index was Venezuela. The Jones Lang LaSalle index ranks the transparency of countries based on five items: performance measurement, market fundamentals, listed vehicles, legal and regulatory environment and the transaction process.

While many countries still have a ways to go before investors can truly feel confident about investing there, this is a great sign that the world is recognizing the need for foreign investment. For investors, it is also great to see the number of investment opportunities continue to rise. Many people are fearful about investing in foreign markets, so out of fear they neglect them. Investors who take this stance are missing out on literally a world of opportunity. Know that while there are additional risks involved with foreign investment, there is also a significant reward variable to consider in addition to the main factor which should compel investors: diversification. Those investors who have 100 percent of their investments in U.S. funds, companies and other U.S. vehicles should seriously re-evaluate their portfolio.

Buying physical property in a foreign country can be rewarding, but it is not for everyone. That being said, if foreign real estate isn’t your cup of tea, then consider at minimum investing into some foreign funds, which could even include a foreign REIT (real estate investment trust). For the more adventurous, though, buying property in an emerging market, or even a developed foreign market, can be exciting and profitable.

If you are considering buying property abroad, the best piece of advice I can give you is to do your homework. Fully evaluate all the potential risk factors and then weigh them against the potential rewards; if an investment makes sense, then do it. Depending on the market you are entering you may also need to take additional precautions. If you are investing in an emerging market, I would recommend that you don’t invest more money than you can lose. Emerging markets and their governments and markets are not always stable, so things can go south quickly--but they also can get better quickly as well. To be safe, though, take extra precaution, especially if you are a new investor. Also, I always recommend seeking trusted local legal counsel (make sure to get referrals from other investors who have been successful), regardless of whether or not your agent tells you that you need one. Things don’t work in other countries like they do in the U.S., so be open-minded and patient (especially in Latin American countries), but that doesn’t mean let people walk all over you. Just realize that things are going to work differently and take a little longer in most places compared to the U.S.

Lastly, I want to point out that, especially in emerging markets, it is easy to get excited by promises of incredible returns and other such things, but there is a reason the developers are offering these returns: There is a lot of risk. Many developments that start never see completion for various reasons. Until you fully understand the market and how things work there, it is wise to only buy what you can see and touch.

Are Private Loans Suitable For Your IRA?

One of the advantages--also, in fact, a potential disadvantage--of a self-directed IRA is that there are a plethora of investment opportunities to choose from. Today we are specifically going to look at private loans. Private loans are loans made from an individual to another, so no banks are involved. In terms of private loans as an investment vehicle, there are, of course, pros and cons.

Private loans can potentially provide investors with substantial returns. Typically, borrowers turn to private loans--knowing they are going to be more expensive than traditional bank loans--because they can’t qualify or don’t have time to wait for bank loans. Again, this can present both a risk and an opportunity for investors. In addition, private loans can also be secured against assets--including most notably including real estate--helping to minimize risk factors.

Investors considering private loans need to take several factors into account. First off, they need to make sure to judge the adherent risk involved with the particular loan accurately. There is a reason these borrowers are turning to private lenders for money, and investors need to find the balance between risk and return. Secondly, banks make their money by lending money; they have the process and paperwork down to a science. They know exactly what they need to do and what they need to have the borrower sign in order to ensure that they have maximum protection under the law. As a private investor you would be wise to do the same. Make sure your contract is good and that you are taking all necessary steps to validate the contract. If it needs to be recorded at the court house, make sure that gets done, and so on. Lastly, private investors need to understand what to do if the borrower defaults. What process do they need to follow in order to collect? With private loans made to friends or family this part becomes especially hard to swallow, but if investors are truly looking out for their investment, they need to take appropriate action.

Now let’s look at some of the things self-directed IRA investors need to keep in mind when investing in private loans. One of the biggest factors that self-directed IRA investors need to understand is the prohibited party rule. When investing your self-directed IRA funds, there are certain people with whom you are not allowed to deal. According to the IRS the following people are all disqualified:

1. The IRA owner; his or her ancestors (i.e. parents, grandparents); his or her lineal descendents (i.e. children or grandchildren)
2. The spouse of the IRA owner
3. Financial advisors and other fiduciaries
4. Any entity owned 50% or more by a disqualified party (such as a business half-owned or more by the IRA holder’s daughter)

If you deal with any of these people, you are going to be in direct violation of the rules and will be heavily penalized. Outside those mentioned above, you are able to deal with who you wish, however remember this next point: As the person in charge of your IRA’s investments, you have a fiduciary responsibility to the IRA. That means that if you decide you want to lend money to your brother, girlfriend or anyone else with whom you have a relationship, you are required to put the best interest of the IRA ahead of your relationship. If your sister defaults and you don’t send her to collections, the IRS could find that you’ve violated your responsibilities and still hit you with all the penalties. This is not a situation you should take lightly, so as a self-directed IRA lender, you need to make sure that if you lend money to someone you have a relationship with, you are willing to do what is necessary to act in the best interest of your IRA. Make sure they understand this upfront, too, so that if push comes to shove, the will be prepared.

Another thing to keep in mind when investing in private loans with your self-directed IRA is that loans are not always liquid. Make sure you are aware of the mandatory distribution rules (required distributions start at age 70.5) as well as when you might need to access those funds for retirement expenses.

With that in mind, if you take the appropriate precautions, private loans can be a great investment for their IRA. Personally, if I were making private loans in my IRA, I would limit them to secured loans (preferably real estate) at fairly low LTVs. I want to know that the money in my IRA is safe and secure, but I also want to see it grow. Done correctly, private lending can achieve both those goals. Compared to what is going on in the stock market and real estate markets right now, making private loans seems like a pretty good option. If you are making real estate loans right now, though, make sure the LTV is low enough to account for possible value loss.

One telling sign as to the validity of private loans within self-directed IRAs can be found in a client survey done by Guidant Financial Group recently, in this survey they found that private lending within self-directed IRAs had increased 131 percent since 2005. That’s a huge increase in self-directed IRA private loan activity, and in today’s market I certainly can’t say I blame them.

Argentina Defaults On Debt

Argentina became infamous earlier this decade for defaulting on their debt during a major financial crisis, and now it appears they have defaulted once again. This time around, things aren’t quite as bad in the country, and the default is a little different, but their actions still qualify as default, according to an article written by a couple economics professors for the Wall Street Journal. Carmen Reinhart from the University of Maryland and Kenneth Rogoff from Harvard claim in their article that Argentina has manipulated their inflation data in order to pay out less on their inflation indexed debt, thus putting them in default.

The professors say that the government’s scheme began with the firing of their top statisticians. Now the inflation measurements that are being “officially” reported are drastically understated. According to the article, Argentina is reporting an inflation rate of less than 10 percent when by most external measurements, the real rate should be closer to 30 percent. The Argentine government owes around $30 billion in inflation indexed debt, according to the article.

Investors should know that circumstances such as this are always a risk when investing, especially in developing countries. Argentina isn’t alone in these types of actions, either. Across the world, countries manipulate their statistics to be in their favor. Sometimes they are minor “adjustments” and sometimes that are major and pretty blatant, like in this case.

I want to also point out that, while these types of things are more pronounced in developing countries, they happen here at home, too. The U.S. has adjusted things in their favor before (such as the gold price in the '30s) and still do it today (such as the CPI and GDP). So don’t be naïve and think this will never impact you because you don’t invest abroad; government manipulations of economic data happen here, too. Inflation indexed bonds just happen to be one of the easiest debts to influence, so invest in them with your eyes wide open.

Institutional Investors Are Re-Entering Troubled Real Estate Markets

Predicting the bottom of the real estate market, or any market for that matter, is anything but an exact science. With the state of our real estate market today, especially in the most troubled areas, many people are scared to even think about investing. In the midst of this uncertainty lies opportunity--at least that is the thought of some institutional real estate investors.

One such institutional investor is Strategic Real Estate Advisors. They believe that now is the time to get back in the market. They have created a fund called the Florida Prime Residential Opportunity Fund, which plans to raise $1 billion to invest in oceanfront condominiums and undeveloped land approved for housing, according to an article from Bloomberg. It appears most of their investments will be located in the Miami area, but they are also willing to look at Orlando and Tampa, according to the article.

The Florida Prime Residential Opportunity Fund isn’t planning to just jump head first into the market, though. They have targeted a price point of around $400 per square foot which they are willing to pay for these properties, and they will wait it out until the right deals to come their way. Properties are now selling for around $500 per square foot; at the height of the housing boom, prices were around $1000, according to Bloomberg. The fund says they expect to see annual returns of 20 percent and have set a holding time frame for the properties of 7 to 10 years.

Are these institutional investors smart, or are they setting themselves up for a miserable failure? That is the question many people are asking themselves. Personally, I think they should do quite well, but I think their 20 percent per annum projected returns might be a little unrealistic. Here is why I think they will do well:

• They set a clear goal for what they are willing to pay for property, and it represents a great value

• They have a large sum of money to work with, which mean they can get preferred pricing

• They have set a long term time frame which will allow time for the markets to recover

• They selected a market that has eternal appeal

Again, while I do think that in the end they will turn a decent profit, 20 percent seems a little high, especially considering that they plan to buy the properties with all cash. When the market finally does recover I just don’t see it jumping as dramatically as it did during the bubble. Instead, I see a 4 to 6 percent yearly appreciation as a more likely scenario once the market turns the corner. I’m assuming they plan to use the condos as rental units while they hold them, but again, the income they can expect to generate might not be as high as they are hoping. One of the problems with renting high end property is that first off, you typically aren’t able to get a high rent in proportion to the properties’ value, and secondly, you have a much higher maintenance cost. The maintenance will be an ongoing experience during the entire holding period, and then when they look to resell the property in 7 to 10 years, they will also likely incur a large remodeling expense to bring the property back up to top condition after several years of being rented. Of the two strategies, I think the land one offers higher return potential, but I still just don’t see 20 percent per year.

For investors, after you take out the funds fees and so on, you can probably expect to be left with a return that isn’t all that exciting. So while I do think that their plan is solid, and that they should be able to make some money, it won’t be as much as they are expecting. Individual investors, though, should be able to do even better utilizing a little leverage and some market savvy. If you plan to go it on your own in a volatile market like this, though, just make sure to keep your cash flow positive. Don’t bank on appreciation--let it be the icing on the cake, not the cake itself.

Unemployment Rate Hits 5.5 Percent: Largest Increase In 22 Years

The national unemployment rate surged a half a point to 5.5 percent in May, signaling the largest increase since 1986 and far surpassing analysts' expectations, according to Bloomberg. To show how surprising these numbers were, not a single analyst forecasted the unemployment rate to go this high, and the consensus among the analysts was an unemployment rate of 5.1 percent, according to a Bloomberg news survey.

The funny part about this is that just yesterday, people were starting to feel better about the prospects for the economy. In fact, this was the headline on YahooFinance yesterday afternoon: “Wall Street shrugs off spike in oil and finds solace in upbeat jobs data, retailer sales.” Yesterday the Dow was up almost 214 points, the biggest one-day gain since April 18, according to the Associated Press. The great jobs news everyone was excited about was the drop in number of laid-off workers seeking unemployment benefits. Oh, how the economic winds can change.

After today’s job data, and with the price of oil continuing to surge, the markets shed (in less than an hour, I believe) all of yesterday’s gains and then some. Once again this is evidence of how traders cling to every little glimpse of good news and look past the big picture. If people would have just sat back and thought things through, they would have seen that the jobs outlook in the U.S. is not a rosy one. The data that was reported yesterday is a bit misleading. Just look at report after report after report about how business owners are hesitant to add jobs right now and how many of them are actually planning to cut staff. Read about how consumer confidence continues to slide and how housing prices continue to tumble. A report from CNNMoney stated that Americans lost $1.7 trillion from their collective net worth in the first quarter of 2008 alone. Does any of this news seem to make a case for businesses to bring on additional workers? All I’m seeing are reports of pending layoffs. Am I missing something?

GM is cutting 19,000 workers by July 1; Ford and the other auto companies are also trimming staff, according to Bloomberg. While the government actually added 17,000 employees, cuts are on their way in the local governments (see the previous post: Pension Plans Could Lead More Cities To Bankruptcy), and of course home builders are continuing to cut workers as they fend for their livelihood. These are just a few of the headlines. So the fact that people were getting excited because one piece of data was published tells me they so desire good news that once they have it, they lose sight of everything else.

While it might be okay to believe the economy is coming around and is on the right track (not my belief, but hypothetically speaking), even if that is true, it is going to still require some time. Problems like we have now don’t just disappear overnight, and the investor reaction to yesterday’s news was way overblown. As an investor, make sure you understand and can see the big picture. I’m not saying, you shouldn't invest, but that you should do so with your eyes open. Don’t be like everyone else out there throwing your money into the market at the first glimpse of hope, only to pull it out the next day when things don’t look so hot anymore. Investing with a long term focus can help solve this problem for the most part, and overall is a great strategy, but don’t lose sight of the big picture.

The Emergence Of Brazil As An Economic Powerhouse

Thanks to the commodities boom, Brazil has emerged on the world scene as a new economic powerhouse. This has not gone unnoticed by foreign investors who have been pouring billions of dollars into Brazil in an effort to capture some of the vast potential for profit. While it has only been a few years since Brazil was on the verge on economic disaster, it appears they have been able to turn things around in the country--and this time change may be for good.

I read a great article from The Wall street Journal this morning about Brazil that is definitely worth your time to read. The article talks about Brazil’s past problems, how they are overcoming them, some current investments happening in the country and even a little about the future prospects for Brazil.

In my opinion Brazil is here to stay. They are one of the few energy-independent countries in the world, they have the largest supply of fresh water in the world (Some think that water resources will soon be in higher demand than oil), they are packed full of just about every other natural resource you can think of, their currency has strengthened and stabilized and their government--while not perfect--has shown remarkable growth. As the government continues to grow and strengthen, and as they continue to combat the corruption and bureaucracy that is still holding them down, the sky is truly the limit for this country.

If you are interested in finding out more about physically investing in Brazil make sure to read NuWire’s article on Brazil Property Investment.

Hispanic Culture: Embrace It And Prosper

America is embracing Hispanic culture, and investors should too. The Hispanic population is the fastest growing segment of the U.S. population, and according to the most recent Census Bureau release Hispanics now comprise 15 percent of the total population or some 45 million people. Furthermore, it is projected that by 2050 Hispanics will make up 25 percent of the total U.S. population. There are numerous ways in which investors can embrace and profit from the emergence of Hispanic culture in America. I will mention a couple.

Real estate investors in particular can capitalize on this trend is by making their rental properties more Hispanic-friendly. Advertise and use signage with both English and Spanish. If you are having a property manager service your property, why not find one that is bi-lingual? A bi-lingual property manager would be able to capitalize on both English and Spanish speaking tenants, offering you more coverage. Depending on your location—California and Texas in particular—you might think about pulling out all the stops to make your rental Hispanic-friendly.

There are many businesses one could start that take advantage of this growth. One of the more interesting ones to my mind was included in our Business Ideas article, namely the creation of bi-lingual call centers in Latin America that service the U.S. population. There is a plethora of bi-lingual natives in Central America in particular that offer cheap labor. How long do you think it will be before U.S. companies stop outsourcing call center business to places like India, where labor is rapidly becoming more expensive? In addition to rising costs in places like India, there is also the difference in time zones, which isn’t a problem in Latin America. Labor might be a tad more expensive, but it is well worth it when you can have employees who speak the top two languages in the U.S. and who reside in the same time zone as you.

No matter what business or type of investment you’re in, there is probably a way which you can better cater to the Hispanic population. Investors who embrace this culture stand to do well in coming years, while those who ignore it could have serious regrets.

Tax Rebate Checks Are In The Mail: Well Maybe…

It appears that the first set of tax rebate checks are in the mail and should be received by people shortly. So if you are wondering when to expect your tax rebate check--and how much it will be for--check out the resources below.

To find out how much you will be receiving, the IRS has put together a handy tax rebate check calculator that can help make this determination: http://www.irs.gov/app/espc/

To figure out when you will be receiving your tax rebate check, see the payment schedule on the IRS website: http://www.irs.gov/irs/article/0,,id=180250,00.html

Now that you’ve figured out how much you’ll be getting and when it will be arriving, the next step is to figure out what to do with it. There are many ideas floating around out there for how to spend your new-found wealth, some of them better than others. It is for this reason that NuWire has decided to put together their own list of the top ways to spend--or better yet, invest--your tax rebate checks. Look for the article later this week.

Analyzing Investment Hype

There is a lot of hype in the investment world. Here is a good example:

http://www.isecureonline.com/Reports/PSF/EPSFJ320/?o=1473323&u=16012317&l=844775

It appears that this newsletter author has some interesting ideas about how to filter through the mass of penny stocks available and choose ones with a decent likelihood of gaining value. I don’t object to this kind of analysis. It’s the kind of filter I would expect to be employed by someone publishing an investment selection newsletter. I do, however, object to some of the language used to market this opportunity.

Here are a few words used in this advertisement that I think are telling:

• “Scientifically selected:” What does science have to do with selecting stocks? Scientific experiments require control groups that allow scientists to observe behavior when specific variables are changed. In that way scientists can make theories about the effect each of these variables has on the outcome (results). Looking at historical numbers of stock prices incorporates so many variables (buyer psychology, societal values, access to capital, other investment alternatives, inflation, etc.) that it would be nearly impossible to control for even a few.



• “Winnings:” This word implies that you aren’t earning a return, but hitting a jackpot at the casino. Part of me wonders whether this was careful calculation on the part of the author and his attorneys in case an investor ever takes them to court for misleading claims of returns.



• “Theoretical:” Using historical performance to build models for predicting the future is not a new concept, but it has hardly proven successful over the long run. This author is clearly communicating that there wasn’t an actual person turning $200 into $1.2 million. Rather, this is an example of what an investor could have done with perfect foresight.



• “Ordinary investor:” This implies that you don’t need to have any experience with or knowledge of penny stocks. Rather, by just following this author’s monthly recommendations, you can make these huge returns. I understand that risk disclaimers do not make effective marketing material, but I doubt this author will take liability if the investments don’t pan out. Oh, and it’s helpful that “ordinary investors” typically do much less due diligence about claims of returns than “extraordinary investors.”

For the record, I’m always wary of promoters that advertise such high potential returns. If this author were assured of his ability to double money in six months, he would be working adverse to his own economic interests by sharing this information. While I’m all for believing there is some altruism left in the world, I haven’t seen many instances of people not wanting their fair share of value they help create. This author, if his claims are correct, would do much better to start his own hedge fund and rake in billions in profits and bonuses risking other people’s money. The fact that he is writing a newsletter instead makes me a little skeptical.

Property Taxes On The Rise Across The Country

Property taxes are on the rise across the country as local governments are feeling the effects of the economic downturn. According to an article in the Wall Street Journal, property taxes account for around 40 percent of municipal governments' funding. Falling property values coupled with higher material costs have caused local governments to feel the pinch; they are now preparing to pass that on to homeowners.

The article it pointed out a few cities which are working to raise property taxes. One of the largest cities was Memphis, Tennessee. The mayor of Memphis is proposing a 17 percent increase in property taxes, according to the article. This was one of the larger proposed increases, but if this measure actually gets passed, it will surely have a huge impact on homeowners and investors in Memphis.

Property taxes are one of the harder expenses for real estate investors to swallow because they typically own several properties and can feel as if they are paying more than their fair share. The taxes go towards things such as roads and schools, which can help bring in quality tenants, but the immediate benefit to investors is less than it is for the typical homeowner. Investors usually can pass on property taxes to their tenants through the rent, but when property taxes are raised, investors are many times forced to eat the difference, especially if they are locked into a fixed-term lease. One of the benefits of typical commercial property leases are that landlords are able to pass on any increases in expenses directly to the tenants.

Residential landlords might want to think about taking a page out of the commercial investor’s book and put a clause in their contracts which allow for a bump in the rent if property taxes are raised. After all it is only fair for the tenants to pay for the added expense since they are the ones directly benefiting from the services provided by property tax revenues.

Money Markets Paying More Than CDs

Bank of America recently rolled out a money market savings account paying a higher interest rate than their four month CDs. What that tells me is that Bank of America is counting on further interest rate reductions from the Federal Reserve.

Perhaps now that B of A owns Countrywide, they have an ever better crystal ball for seeing the extent the subprime shakedown. They are casting their bet that the Fed will continue to drop rates. Where are you casting yours?

Costco And Sam’s Club Memberships: Are They An Investment?

Typically I would shy away from calling things such as Costco and Sam’s Club memberships “investments,” but in light of recent events they might just be entering into that category. I read an article from the Wall Street Journal yesterday that opened my eyes to the concept. In the article, it is explained that food prices are increasing by so much that it makes sense for people to stock pile non-perishable food rather than put that money into savings or money market accounts.

According to the article, food inflation for the average American household is running around 4.5 percent right now. Many foods are seeing price increases much higher than that. Cereal prices are rising by more than 8 percent a year, and flour and rice are up more than 13 percent. Milk, cheese, bananas and peanut butter are all up by more than 10 percent. Eggs have increased 30 percent in the past year and ground beef and chicken prices are up 4.8 percent and 5.4 percent respectively.

It is obviously not possible to stock up on perishable items such as milk and eggs, but you can buy extra cereal, rice and flour. You certainly aren’t going to make 13 percent on any bank account, so in actuality using some of your savings to purchase extra food might not be such a bad idea, or investment, for that matter.

That is where the Costco and Sam’s Club memberships come in. These warehouse stores offer much better prices than typical grocery stores; the catch is that you have to buy large quantities of the items. If you are planning to stock up on certain staple goods, you can save money by buying at these stores. So let's say you can save 5 percent off of the items you purchase at Costco or Sam’s Club over your neighborhood grocery store (though, in my experience, buying in bulk at these stores should save you much more than that)--now your “investment” looks that much better. Instead of making a 13 percent return on your money, purchasing your rice now actually could earn you 18 percent. Obviously those numbers don’t take into account the cost of your membership, or any subsequent storage or other costs which may be associated with holding the extra food, but I think you get the picture.

Also, as an added bonus, you will be in good shape in the event of a complete economic collapse, as many Ron Paul supporters are predicting.

Buying A Short Sale? Think Again…

If you are planning on buying a short sale, you might want to re-think that plan. According to an article in Reuters, real estate agents across the country are calling the short sale system broken. Lenders have unreal expectations of property values, and even if their values are in line with the market, they are often so overloaded with properties that dealing with them becomes impossible. From personal experience I’m going to have to agree with their assessment.

On the surface short sales appear to be a win-win-win strategy for the seller, buyer and the bank, yet trying to complete one tends to be a losing proposition. Until lenders change how they manage their short sale process investors are probably better off spending their time and efforts elsewhere. Don’t get me wrong, money can be made in short sales, but the time and energy taken to complete these deals can be better used on other investment opportunities which are just as good, if not better.

I have personally gone through the short sale process in order to buy one of my investment homes, and I can say it was the most stressful deal I’ve ever been a part of. Dealing with the lender was a complete nightmare, and the deal nearly fell through at the last minute. I would say that the time and effort I put into this one investment deal was at least double the time and effort required for a typical deal, and the profit was basically the same. I tried it once, and I’m not going back--I recommend you do the same. Unless you have some relationship with a lender that gives you an advantage over the average Joe, buying a short sale just isn’t worth the effort.

Remodeling: Cost Vs. Value

Investors who are looking to remodel homes for resale should always keep in mind the cost vs. value of the alterations. For example, remodeling a kitchen is worth considerably more than remodeling a spare bedroom. But what about deciding between a deck and a bathroom upgrade? Is better to replace the windows or do a new roof? Investors who are pondering these questions can refer to the remodeling Cost vs. Value guide issued by Remodeling magazine each year. There are also some additional considerations investors should keep in mind.

The remodeling Cost vs. Value guide is a helpful resource for investors, as it helps put a figure on what the actual value of a particular remodel is compared to its cost. For example, the 2007 Cost vs. Value guide says that adding a deck costs an average of $10,347 nationwide, but only increases the home’s value an average of $8,835. That means that every dollar spent on a new deck equals a loss of 0.146 cents, which on the surface would appear to be a poor investment. As most real estate investors know, though, real estate numbers should not be looked at nationally because real estate differs widely from one city to another and even from one neighborhood to another.

To help with this, Remodeling provides regional and even city-specific numbers, although their regions are large, so investors would do best to focus on the city-specific figures. For example, a deck remodel on average nationally returns 85.4 percent compared to an average in the Pacific region of 108 percent and an average of 120.4 percent in Seattle. So you can see how much the cost vs. value of repairs can change depending on coverage area of the data. But investors shouldn’t stop their analysis there.

Investors must always take into account the specific neighborhood and the types of homes surrounding the home they are remodeling. A major upscale kitchen remodel might return an average of 99.2 percent of its costs in the city of Seattle, yet if this remodel was done to a home in a bad neighborhood, the returns would be significantly less than that. When remodeling for investment, you should always make sure to keep the upgrades within the norm of the neighborhood. As an investor, you never want to be stuck with the nicest house in the neighborhood.

Used correctly, the cost vs. value data provided by Remodeling can be valuable, but investors need to add their own common sense and analysis to the equation as well.

Commercial Properties: Best Places To Find Them On The Web

Commercial properties are something that many investors consider investing in, however, finding listings online can prove to more difficult than your traditional single-family homes. Commercial properties such as mobile home parks, offices, retail spaces and hotels, and residential properties in excess of four units usually aren’t listed on the MLS alongside single-family homes, but instead are advertised on a handful of websites.

By far the biggest and best site to find commercial properties is LoopNet. Any investors looking to enter the commercial real estate market should familiarize themselves with this site, as they will probably become frequent visitors. Viewing basic listings is free, but to see the complete inventory you need to sign up for one of LoopNet’s membership packages, which start at $39.95 a month. Most of the listings can be viewed for free, so if you are just casually window shopping, it probably isn’t worth the expense. Once you come to the point where you are ready to seriously consider buying a commercial property, you can become a member at least temporarily. Many commercial real estate agents have memberships to LoopNet, so you might also try asking your agent to send the desired listings to you and save yourself the trouble and expense.

Many commercial real estate brokerages also provide listings, although some of the brokerages simply pull them from LoopNet. Some of the larger commercial real estate companies are: Grubb & Ellis, RE/MAX, Coldwell Banker Commercial, CB Richard Ellis, Cushman & Wakefield, Colliers and Marcus & Millichap.

I recommend starting with LoopNet, but for those who want to try other commercial property listing sites, here are a few:

• CIMLS

• Commrex

• CoStar

• Property Line

As a last note, some areas of the country have local commercial MLS systems. The Pacific Northwest for example, has CBA (Commercial Brokers Association) otherwise known as the Commercial MLS. They offer a wide variety of listings in Washington, Oregon and Idaho. To see if your market has a local commercial MLS, search online using “your state” and “commercial real estate” as the search term, or simply ask a local commercial real estate agent.

Good luck finding your next commercial property investment, and if you notice any other good sites that I missed, let me know and I’ll add them.

Sure Hope You Weren’t Banking On That Home Equity Line Of Credit (HELOC)

Many people have set up a home equity line of credit (HELOC) to use in case of emergency or as a cash flow buffer for their businesses. Many investors even use their HELOC to buy foreclosures or international properties. All of these individuals may need to rethink their strategies. Several lenders have recently begun freezing borrowers' HELOC accounts without warning and without disclosing the reason for the freeze to the homeowners, according to an article in the New York Times. Washington Mutual, Indy Mac and the GreenPoint Mortgage unit of Capital One are specifically mentioned in the article.

According to the banks, the measures are being taken to protect themselves from declining property values, but even homeowners in markets which have not seen declines in value have been affected. These markets include: Yakima, Wash.; Appleton, Wisc.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. So if you think you are protected because you are in a market thus far unaffected by the housing bubble, think again.

This news will be hard on those who were banking on using their HELOC for their business, investments or tax payment, who are now simply out of luck. The banks are within their rights to do this, and considering the housing market it is surprising they didn’t do it sooner, but the negative impact on the economy will surely be felt.

Let this also be a warning to those who were counting on the equity in their home to save them in the event something bad was to happen: Home equity is not a substitute for savings.

Investment And Health Savings Accounts (HSAs)

Health savings accounts (HSAs) are becoming more common as businesses across the U.S. place more of the onus of health care costs on their employees. As a result employees are now faced with a problem of not only learning the health insurance side of these new accounts, but also the investment side of Health Savings Accounts. Read our article, Health Savings Account (HSA) Basics, if you aren’t already familiar with HSAs.

My company recently switched to an HSA plan, so I thought I would share some of what I have learned.

Some investors may welcome the switch to an HSA plan because it offers the potential to generate returns inside the account. Money going into the HSA account is pre-tax, and as long as the money is spent on medical expenses, the money (and any gains generated inside the account) is also tax-free when you spend it. Sounds pretty amazing, right?

HSA providers typically offer several investment options to account holders, ranging from a basic money market fund to several different types of index funds. The HSA account my company offers gives us the option to keep the funds in a money market to which we can charge medical expenses directly via a debit card, or to invest in one of 13 Vanguard index funds. Most investors would probably think this is a no-brainer, and the Vanguard funds are the way to go. That was certainly my first reaction, but then I started to think of some potential drawbacks.

The first potential pitfall of investing in the funds is the time and convenience factor. With the Vanguard option, you are not able to get a debit card, and to get reimbursed for any expenses you must prove the legitimacy of the claims with receipts and other paperwork. In addition, it will take time to sell out your positions and issue a reimbursement check.

The second issue is the volatility of index funds, which are not guaranteed and may lose value. In the long term, most investors accept this risk, because historically the market has trended up over time. However, what if you get in a major accident next month and the market just lost 15 percent of its value? Some health expenses are just unpredictable. If you have a healthy savings account on the side you may be able to overcome this potential hurdle, but if you are relying on your HSA funds, you must make sure they are there when you need them.

If you are like most Americans and don’t have much in the way of extra savings, then you are probably better off keeping your HSA investments in a money market fund or low-risk bond fund--at least until you get the balance of your account high enough to cover your deductible. If you have a cushion to fall back on, then it is probably safe to invest in those higher-risk funds.

Pawn Shops: Profiting In Times Of Financial Hardship

Pawn shops are ringing up big profits in the midst of a faltering U.S. economy. As people struggle to make ends meet, they have increasingly turned to pawn shops for fast cash. Pawn shops historically do not offer the best terms on loans, or the best prices for sold items, so it is ominous that people are turning to pawn shops en masse. This is a trend that is very typical in times of financial hardship though.

Investors who wish to profit from this trend could invest in stock of a large pawn shop company, such as Cash America (CSH) which is traded on the New York Stock Exchange, buy an existing pawn shop, or open a new pawn shop.

Online pawn shops are an emerging trend, as even brick and mortar pawn shops are now selling inventory for a higher amount on EBay. Low overhead can mean higher profits for online pawn shops, and also allows them to offer customers more money for their valuables or better terms on loans. In addition online pawn shops are able to offer their services to a wider geographic area. It appears clear to me that the future of pawn shops is on the Web.

If you ever were thinking of getting into the pawn shop business, then now is the time. If you prefer a brick and mortar business, and don’t want the added hassles of a startup company, there are also pawn shop franchises available. Two of these franchise opportunities are Cash America and PeoplePawn.

Think Barack Obama Is Going To Be The Next President? Wanna Make A Bet?

If you are so confident that your candidate—be it Barack Obama, Hillary Clinton, Ron Paul or John McCain—will become the next President of the United States, then why don’t you put your money where your mouth is? To show just how far the free market has come, there is now a website that allows you to make money by betting on the outcome of world events from the U.S. presidential race to whether or not Venezuela or Ecuador will declare war on Colombia. The company, which operates out of Ireland, is called Intrade. The website offers a trading platform similar to the U.S. stock exchange, but traders on Intrade buy and sell options on things most people might consider a bit out of the ordinary.

Investors who consider placing bets on Intrade should keep in mind that Intrade is still a small marketplace. This means that positions can be volatile and may be difficult to close out of. Therefore, Intrade should not make up a large portion of an investment portfolio, and should probably be viewed more in terms of entertainment than an actual investment.

Smart investors may be able to profit from some of the holes in the Intrade system and capitalize on the small marketplace. According to an article by The New York Times, a professional poker player named Serge Ravitch made a 35 percent return on his money in just 6 weeks by identifying these weaknesses. One trade he took advantage of was based on the Republican Presidential nomination, which more than 10 percent of traders on Intrade thought would go to Ron Paul. No one in the Republican Party—or any party for that matter—was giving Ron Paul a prayer to win the nomination. Because of the market’s small size, the diehard supporters of Ron Paul raised the percentages in his favor higher than they really should have been.

For other events, Intrade’s predictions have proven surprisingly accurate. The following is a quote from The New York Times article:

“In 2004, President Bush won every state in which Intrade’s contracts—as of the night before Election Day—gave him a better than 50 percent chance of winning. He lost every state where the traders thought Mr. Kerry was the favorite. Late on election night in 2006, while the talking heads on CNN and MSNBC were still saying that the Republicans would hold onto the Senate, Intrade knew better.”

Investors should take caution when making bets on Intrade, and not invest too much at this point. If nothing else, Intrade could prove to be a source of entertainment for investors who want to see if they can outsmart the public. For those investors who want the entertainment value without putting up real money, Intrade also offers play money accounts for free.

Safe Deposit Boxes: They Aren’t As Safe As You May Think

Safe deposit boxes, kept in bank vaults behind thick layers of steel, are widely believed to be one of the most secure ways to store valuables. However, people should make certain considerations and be aware of certain misconceptions before placing their valuables in a safe deposit box.

One major misconception is that valuables placed in a safe deposit box are covered by FDIC insurance. The FDIC only insures bank deposits in FDIC-insured banks, but safe deposit boxes are not considered to be bank deposits and are not covered. In addition, only banks found to be negligent are legally required to cover losses in the event of damage or theft of a safe deposit box’s contents. Some homeowner insurance policies will cover losses, so check with your insurance provider. Bank robberies and major natural disasters happen more in the movies than they do in real life, so these aren’t huge concerns, but safe deposit box holders should understand the limits of their protection.

An interesting story was published in the BBC today that should be of interest to people who keep their valuables in safe deposit boxes. The story is about a man in India who kept his life’s savings inside a safe deposit box in a bank that developed a termite problem. The bank posted a notice warning customers, but the man did not visit the bank on a regular basis and never saw it. On his next visit to the bank, all he found in his safe deposit box was a pile of termite dust where once there had been money and investment papers. Because the bank posted a notice, and because the safe deposit box itself was not damaged, the bank was not found liable.

The lessons of this story are 1) Make sure you understand exactly what is and is not covered by the bank when you open the safe deposit box, and 2) Make sure you have insurance to protect whatever is not covered by the bank. If you put your entire life savings in one spot, make sure it is 100 percent safe and secure.

Safe deposit boxes have their place. Your valuables are certainly much safer in a safe deposit box than they would be in your home, and many insurance companies will charge lower premiums for coverage of certain valuables if they are held in a safe deposit box. If you are storing investments such as gold or other precious metals, a safe deposit box will probably be your best bet. However, it is important that people understand exactly what they are getting with a safe deposit box, so they do not enter the arrangement with any preconceived notions. If you want to make sure your valuables are protected, ask questions and then get additional insurance if necessary.

Corn Prices Surpass $6 A Bushel: Investors, Grab Your Overalls

Corn prices have jumped dramatically during the past few months, hitting a record high of more than $6 a bushel. Demand for corn has increased, and the outlook concerning whether future supply can meet this demand is uncertain. This news is great for agricultural farmers, at least agricultural farmers, but it will have several negative repercussions for just about everyone else. Corn and corn-based additives—such as corn starch and corn syrup—are used in many foods and in animal feed for pigs and cattle. An increase in corn prices is one of the driving forces behind the price increases of numerous other foods.

The use of corn in ethanol production is also driving up the price of corn. The government recently passed legislation calling for more ethanol production, which could result in even higher corn prices. I wrote about the validity of ethanol as a long-term alternative fuel source in a previous post, and you may want to read it for more insight.

The harsh weather in the Corn Belt region is also having an impact on corn prices, but this phenomenon may only affect this year’s crop. A bigger issue could be the amount of land being dedicated to corn production. This year there is expected to be around an 8 percent drop in the amount of farmland planted for corn according to a recent AP article. You may recall that last year, farmers increased the amount of farmland planted for corn quite dramatically in response to the then-record $4 a bushel price. When time comes to plant crops for next year, we can probably expect to see a similar increase, which should eventually help regulate the price a bit.

One thing to keep in mind is that there is only so much farmland, and if farmers choose to plant corn on that land it means they are doing so at the expense of some other type of crop. The last time farmers went to corn en masse, wheat and soybeans saw tremendous gains--maybe this will be an area of opportunity for investors once again in the future.

Investors who want to investigate the potential opportunities available with farmland investment, and see how they might profit from the rise of corn prices, should read our article: Farmland Investment.

Thailand Medical Tourism

Thailand’s medical tourism industry is one of the strongest in the world, so why didn’t it make the cut for NuWire’s recently published list of the Top 5 Medical Tourism Destinations? We received an e-mail from a reader asking why Thailand was not included on our Top 5, which was a valid question. Here is some background on Thailand’s medical tourism industry:.

The main medical tourism hospital in Thailand is Bumrungrad International Hospital in Bangkok. The hospital is state-of-the-art, equipped with top-of-the-line technology and a well-trained staff. According to Bumrungrad’s website, more than 200 of their doctors are U.S. board certified. The only difference between the care patients receive there and the care they receive in the U.S. is that it is much cheaper in Thailand. Bumrungrad serves more than 400,000 international patients annually. It is one of the biggest medical tourism hospitals in the world.

As a medical tourism destination, Thailand indisputably ranks as one of the top countries in the world, but it did not make our list because we were also considering each country’s investment potential. Thailand has been a great place for investors for years, but recent political turmoil there has been cause for worry. The military ousted the former prime minister and the new prime minister is friendly with him, so another military coup seems possible. If Thailand can prove its long-term stability, it could once again be a great place for investment as well as medical tourism.

Investment Opportunities From “The Tourism Time Bomb”

International tourism is ready to explode with investment opportunities, according to an article published in the Harvard Business Review titled “The Tourism Time Bomb.” The writers--Paul F. Nunes, a research fellow at the Accenture Institute, and Mark Spelman, global managing director of Accenture’s strategy practice--state that international tourism is growing exponentially, and that this growth will soon lead to dramatic changes in major tourism destinations as well other locations which are likely to benefit from the resulting overflow

The following are important excerpts from the article:

“According to the United Nations World Tourism Organization, international tourist visits are expected to double soon, from roughly 800 million in 2008 to 1.6 billion by 2020.”

“First, most tourism-related prices, such as hotel room rates in popular cities, will continue to escalate as demand outstrips supply.”

“Second, rationing, and the resulting waiting lists, will become commonplace. Some groups, for example, are already calling for limits on traffic to ecologically sensitive destinations, such as the Incan ruins at Peru's Machu Picchu.”

“Finally, jaw-dropping prices and decades-long waiting lists will prompt the creation and the expansion of destinations in both developed and developing economies. The Chinese, for example, are developing Hawaii-like Hainan island and Macao, a gaming paradise on China's southern coast.”

“Companies and governments are also creating facsimiles of popular destinations.” (for an example read The Brink Tank’s post: How Do You Say Rocco In Arabic?)

“Just as sites and structures can be successfully replicated in new locations, so can institutions. If the swelling ranks of global travelers can't all come to you, you can go to them.”

“As the scarcity of places grows, many companies will find opportunities to profit by meeting new levels of demand for authentic, and inauthentic, experiences.”

“A billion or two additional international travelers represent both a massive potential headache and an opportunity for business.”

Real estate in both urban and suburban areas is one of many investments that may benefit from this explosion. As demand increases, tourism and hospitality businesses should also perform well, and there are many new businesses that could be created to cater to international tourists. An entrepreneur’s imagination is the only limit.

Global Warming: How Could It Affect Future Real Estate Values?

Global warming is on the minds of many people after yesterday’s news that a 160 square mile piece of Antarctic iceberg collapsed. According to an AP article, that ice formation had been estimated to be approximately 1,500 years old.

Most of us have heard evidence for and against the theory that human activity is the cause of global warming. I’m not a scientist, and I won’t debate whether global warming is a natural phase of the earth’s climate or the product of human industry. However, I will discuss how real estate values could potentially be affected if the polar ice caps melt, as some believe is already happening at an unnatural rate.

In an article in USA Today, scientists at the U.S. Geological Survey estimate that the maximum rise in sea levels would be approximately 215 feet, or 65 meters. This estimate assumes that all of the ice sitting on land in Greenland and Antarctica were to melt. That is the worst-case scenario that they predicted, and they said it would probably take a few thousand years to reach that point. For more details, read the USA Today article.

I found an interactive map that helps identify the areas that would be impacted. By changing the estimated sea level rise, you can see how the different areas are affected. As most people know, the biggest threat is probably to Manhattan. The area is home to millions of people and it is barely above sea level. It is also the financial center of the country, if not the world.

In a worst-case scenario, if Manhattan were to go under, millions of people and businesses would need to relocate, and there would be billions--if not trillions--of dollars in losses.

Here are just a few questions to consider: Would property insurance cover some or all of the losses? If they did cover such losses, how many insurance companies would go under as a result? Would the government come to the rescue, and if so, how much would it cost taxpayers?

I don’t believe that the worst-case scenario will happen. Many cities across the world would be lost--not just Manhattan--and the world wouldn't just sit back and let that happen. Scientists are already working on ways to combat the effects of global warming.

But if no action is taken and the sea levels rise, I believe that there will be widespread panic and people will head for high ground. If I were investing with the long term potential effects of the global warming in mind, I would stick to markets and areas that are at least 215 feet above sea level. Even if it will take thousands of years for sea levels to rise that much, people will become extra cautious much earlier on. Real estate values could increase dramatically in these areas as many millions of people are displaced and have to look for new homes.

I don’t think we will probably have to worry about this sort of chaos (at least stemming from the current global warming threat, but who knows what will happen when we start implementing the counter measures I mentioned earlier) but were it to happen, severe global warming would shatter the markets and send the world into financial turmoil such as never before witnessed. Even though desire for real estate in certain areas will increase, there may not be people who enough people who can afford higher prices, and actual demand probably wouldn’t equal investor expectations. Investors who think the effects of global warming will be felt in their lifetime might want to purchase gold. In times of panic, investors have always been able to count on gold.

Housing Market Records Largest Drop In History Of S&P/Case-Shiller Index

The woes of the U.S. housing market are not news to most people, but how bad is it really? This may put things into perspective: The widely-used Standard Poor’s/Case-Shiller index saw an 11.4 percent drop in January—the largest in the history of the index, which was created in 1987.

The index has shown 19 consecutive months of falling house prices. Some people may believe that this is the absolute bottom, but this assumption may prove to be premature. If full-fledged recession takes hold in the U.S., as 71 percent of economists believe, then things are going to get much worse before they get better.

The S&P/Case-Shiller index tracks 20 metropolitan areas as part of its 20 city composite index. Of those 20 MSAs, only Charlotte, North Carolina showed a rise in home prices, but it was only 1.8 percent, which isn’t too exciting. Real estate in Charlotte has held up fairly well during this housing crisis for various reasons. For more background, read our article: Investing in Charlotte Real Estate.

On a darker note, 10 of the 20 cities tracked by the index showed double digit losses (Washington DC, Minneapolis, Phoenix, San Diego, Los Angeles, Detroit, Tampa, San Francisco, Las Vegas and Miami). In addition, all 20 of the cities tracked, including Charlotte, have shown diminishing growth over the past five months.

Investors should make sure that they are selecting investment properties very carefully. If you buy cash flow property that is making money from the day that you buy it, your risks are substantially reduced. Knowing how you will make the mortgage payment each month will help immensely in the volatile housing market we have today.

International Real Estate Investment: Best Countries For Long Term Investment

Many investors are now looking overseas for real estate investment opportunities as the era of globalization grows and the problems in the U.S. continue. Choosing the country in which to invest is one of the first steps, and one of the most difficult.

Investors must first decide what their motivation for the investment is. Is it to make money, or is it a combination of money and personal enjoyment of the property.

Global Property Guide is a great online resource that helps investors evaluate international real estate investment opportunities. The site calculates average rental yields for various countries and provides information on tax policies and long-term growth prospects. Based on the different investment factors, the site rates each country on a scale of 1 to 5 stars. The following is a list of the locations which have a 5 star rating, and are listed as the best places for long term real estate investment by Global Property Guide:

1) Buenos Aires, Argentina
2) Bahamas
3) Sofia, Bulgaria
4) Cairo, Egypt
5) Hagatna, Guam
6) Bratislava, Slovakia
7) Montevideo, Uruguay

Personally, I think that it is a good list, though I don’t know that I agree with the Bahamas’ and Bulgaria’s rankings. The yields in those countries aren’t all that great, and I think that Bulgaria has a serious bubble on their hands. The website offers a great resource for aspiring international real estate investors to start their search, but it should not substitute for real due diligence.

St. Patrick’s Day: Green, Irish, Beer And Investments?

St. Patrick’s Day brings 3 words to my head each year: Green, Irish, and Beer. So in honor of St. Patrick’s Day we are going to take a look at how those 3 words can be looked at in terms of investment.

We all know that if you don’t wear green on St. Patrick’s Day, you are going to get pinched. In addition we also know that green is the color of money, or at least of the U.S. dollar, and the point of investing after all is to make money. The catch right now is that the greenback is losing so much value that investors are better off keeping their hard earned money in currencies other than the dollar. The Euro has been the alternative of choice for most people, but it is not green…oh well.

Irish...this one is much tougher to think of in terms of investment, but an Irish pub might be a good investment for the right individual. For more information about opening a bar, read our article: Owning and Operating a Pub or Bar. The food and beverage industry has some of the highest failure rates for new businesses, so it is not an easy thing to do, but the right person with the right motivation and ideas can have great success. The Irish Pub Company, which offers consulting and design services for bar owners, makes the following claim on their website: “In Britain analysis of the sales performance of Irish Pubs reveals that where an existing pub has been converted in to an Irish Pub outlet the total sales turnover has frequently more than tripled.” That is a pretty dramatic improvement, and although the statistics are based on numbers in Britain, Irish Pubs are gaining popularity in the U.S. and this could well be the reason.

Beer of course is related very closely to the Irish Pub business, but is also possible for investors to invest in beer manufactures or even to start their own brewery business. For a list of the various brewers listed on the NYSE, click here. If you are an aspiring brew master, I wish you the best of luck. Starting a successful new brewery business will not be easy, but nevertheless appears to be a fun venture. To get you started, here is a website with the basics of beer brewing.

Green, Irish, and Beer are obviously not the 3 words that best express the true meaning of this holiday, but they are representative of what the celebration has become in the U.S. For those who want to know more about the history of St. Patrick’s Day, visit the History Channel’s website where they have a great background on the holiday.

$1,000 Gold Has Officially Arrived: A Warning From Ron Paul

It long appeared inevitable, but it has now officially happened: today the price of gold hit the $1,000 mark. Wondering what’s so important about the $1,000 gold price? Well, let's see what Congressman Ron Paul has to say.

The following excerpts were pulled from an article posted on Lewrockwell.com by Paul (all emphasis mine):

“Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress–yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, e.g., gold, however, goes up if the government devalues the circulating fiat currency.”

“Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.”

“A soaring gold price is a vote of ‘no confidence’ in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to reign in runaway spending.” (This was written back in 2006, so you can probably add the uneasiness being felt from the credit crisis.)

“Likewise, a fiat monetary system encourages speculation and unsound borrowing. As problems develop, scapegoats are sought and frequently found in foreign nations (hello China). This prompts many to demand altering exchange rates and protectionist measures. The sentiment for this type of solution is growing each day.”

Congressman Paul then gets in-depth about how the fiat system will inevitably fail, as it has throughout history (which is an interesting truth). If you are interested in knowing the details, read the complete article. It is fairly lengthy, but well worth the time to read, whether or not you agree with his ideas—it will get your mind spinning a bit if nothing else.

I don’t envision the U.S. moving to a gold standard as Paul suggests, and I’m not sure exactly how I feel about that idea one way or the other. Paul makes an interesting—and extreme—point at the end of the article that I do want to bring up:

“Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 (which arrived today) of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.”

We Know That Big Banks Are Hurting, But What About Local Banks?

I think that most people are wary about investing in big banks like Citi-Bank, Bank of America, or JP Morgan at the moment. Even though they appear to be undervalued, who knows what baggage (subprime write-offs) they still have hiding in their closets. It seems that every time they start to rebound and people begin to think that things are turning around for the better, they drop another hammer and the stocks plummet. The yields being offered are appealing, but what if you fear that you might have a heart attack the next time that there is another big adjustment? Are there any banking sector investments out there that might offer something different?

Interestingly enough, it is possible to invest in your local community banks. Of course, some community banks invested in the same troubled subprime debt that big banks did, but many other local banks have taken a different, very conservative approach. For example, there are several community banks in the Midwest that specialize in lending to farmers (who, by the way, are making money hand over fist right now), and subprime debt isn’t even in their vocabulary.

These opportunities aren’t available on the stock market—at least not yet—so not only do they potentially offer access to the banking sector, but they also offer a tremendous amount of growth potential. It is not without risk, as small banks can and do fail much more frequently than large banks. However, there is potentially much more opportunity with small banks, and by getting in on a new bank (or niche one) you can avoid many of the mistakes and problems currently plaguing the industry.

One of our contributing writers recently wrote a “how to” article called, “How to Invest in Community Bank Stock with a Self-Directed IRA.”I recommend reading it if you are interested in learning more about how to do this. As the article title suggests, it is possible to buy this stock inside your self-directed IRA, which can be a nice way to diversify assuming that you have a large enough IRA balance.

Pollution Is Now Officially A Sin: What Can We Do To Avoid Going To Hell?

According to a recent article from Reuters, the Vatican released a list of modern sins, one of which was pollution. I’m really not sure what to say to that other than I guess that it just reinforces the old saying that all of us are sinners. I can’t think of one person in the entire world, let alone the U.S., who isn’t responsible for pollution in one form or another. I’m also not exactly sure how one can avoid polluting altogether, but it is completely possible to pollute less, which is probably what they are trying to suggest with the recent announcement.

That being said, if investors want to avoid the wrath of God, then there are several ways that they can incorporate a little greenery into their investments. Socially responsible investing is one emerging trend that investors can look to follow. In addition, real estate investors can do things like making their investment properties LEED certified, as well as implementing other low cost green additions.

Even if investors aren’t worried about going to Hell for polluting, there is still a big reason for them to pay more attention to the environment. Whether or not they are on board with the green movement, an ever growing amount of the population is. As the number of environmentally conscious people grows, so to will the demand for environmentally sound businesses and properties. Investors who are savvy enough to catch onto this stand to make a lot of money. One has to imagine that a decent number of Catholics who were previously uninterested in the environment will now become interested due to this announcement, which will only swell the growing ranks of the environmentally conscious.

As The Price Of Gold Rises, What Is An Oscar Worth?

With the price of gold sky high right now, how valuable are those Oscars that got passed out yesterday?

According to The Seattle Times, each Oscar Statuette cost $500 this year, up from $400 last year. In only one year the price jumped $100, or 25 percent! That is pretty amazing, and it goes to show how bad inflation is getting, especially for materials. Each Oscar, according to The Seattle Times, is made from pewter that is plated in successive layers of copper, nickel, silver and gold, and then lacquered and buffed. The price of gold itself has jumped around 40 percent in the last year.

Those who think that $500 isn’t much to pay for an Oscar might be disappointed to know that they can’t be bought. There are strict rules forbidding their sales, and Oscar winners sign contracts guaranteeing that they won’t sell their own award. If they were to break that contract, they would probably fetch more than $500 on the black market, but instead of investing in Oscars, one might want to consider the materials that make up an Oscar.

Even though it seems that silver and gold are at ridiculous highs right now, I think there is more room to grow. Considering the rate at which the Fed is inflating the monetary supply, gold and silver are practically a must for investors right now.

Ever Dream Of Being Part Of An Oscar Winning Film?

Watching the Oscars, one can’t help dreaming about being involved in the film industry. Unfortunately for most of us, we have little to no acting ability and no chance of ever getting a role in a feature film. But there is still one way to get your name up on the big screen, investing in films. Aspiring independent (also known as indie) film directors are always on the look out for investors.

It may not be the best investment out there in terms of returns, but investing in films brings something more than just monetary reward. If one has dreamed about having one’s name on the big screen and has money to gamble, then why not? The odds are still better than Vegas, and even if the film is a bust one will always be able to see one’s name in the credits of a real movie (assuming the film gets completed of course).

There are surprisingly a lot of opportunities out there to invest in indie films, and many different ways to do so. Last week, NuWire published an article about investing in indie films, and if you have always had the dream of being part of a feature film, and maybe even an Oscar winning one at that, it is certainly worth reading.

What Is Stagflation?

There is a lot of talk going around about stagflation, but many people have no idea what stagflation is. The term has only been around for about 40 years and is not used all that much, but suddenly it is being thrown around everywhere.

Stagflation is a blend of the words stagnation and inflation. It is used to describe an economy which is stagnating (or not growing) while also facing high inflation.

Typically, the Fed deals with economic stagnation by lowering key interest rates or adding to the money supply. These actions usually work to get the economy growing again.

On the flipside, when an economy is booming and people are making money left and right, inflation begins to rise. When this happens, the Fed typically raises interest rates thus making money harder to get. This slows the economy and inflation with it. So back to Stagflation…

In a period of stagflation, the Fed doesn’t know what to do. The economy is slow, so they want to lower interest rates and get it moving, but making money easier to get only makes inflation worse. The Fed has to decide what is more important: economic growth or inflation.

Right now, the U.S. economy is grinding to a halt, and very likely heading into a recession. Unfortunately we are also facing strong inflationary pressure as prices continue to rise (see inflation post). If we aren’t already in a period of stagflation, then it appears that we are headed straight for it. The last time the U.S. dealt with stagflation was in the 1970’s and it was not a fun experience.

Though the way we run are economy now is different than it was back then, some would argue that our current situation (housing and credit crisis) is far worse then the situation was in the 70’s leading up to that period of stagflation. I don’t know how bad it can get, but something worse than the 15 percent inflation and 9 percent unemployment seen during the past episode of stagflation doesn’t sound the least bit exciting to me. Personally, I will be heavily diversifying into foreign markets and things like gold and silver to protect myself, just in case.

The Fed Seems To Be Surprised By Inflation Yet Again

A report released this morning by the BLS showed an increase in the consumer price index (CPI) of .4 percent for January. The year-over-year CPI grew to 4.3 percent from 4.1 percent the month before (and this is just what is being reported, see a previous inflation post for an alternative view on what the real inflation numbers are). The policies being implemented by the government and the Fed are not favorable to containing inflation, and this news is no surprise to most people in the financial world . Yet somehow these numbers seem to surprise the Fed each month, and then they downplay inflation in order to back up their policies.

I have to believe that the Fed knew good and well what the consequences were going to be for all of their rate cuts and cash injections, They are simply telling people, ‘Be happy now and don’t worry about the future,’ as they keep sweeping the dirt under the rug. That’s certainly how Greenspan ran the Fed, and it doesn’t seem like Mr. Bernanke is any different, but they can’t just keep passing the broom because the rug is going to run out of room someday.

As long as the Fed continues with their easy money policies, inflation will continue to get worse and worse and the dollar will continue to decline. Other countries are already taking notice. The U.S.’ enormous debt is being financed by foreigners, namely China and Japan. As their investments continue to lose value, they might have second thoughts about lending, and if the U.S. loses its ability to borrow at low rates, the economy could be in for a shock like nothing seen before in this country. Since the U.S. relies on borrowed funds even to pay on the current debt, the U.S. would have only the two options: defaulting on the debt, or printing more money. Default probably isn’t the first choice, so that leaves printing a lot more money, which would lead to astronomical inflation.

Financing debt with debt can’t go on forever. It may not be today or tomorrow, or even in the next 20 years, but eventually this thing will have to right itself. I sincerely hope that Bernanke, or even our next Fed chairman, can grow a spine and do what has to be done. It won’t make people happy in the short term, but when they are old and living on their fixed retirement incomes, they will be grateful that the country was able to rein in inflation.

Ron Paul is one of the few politicians that has acknowledged this problem and been willing to speak up about it. His willingness to do so, however, and how the majority of people have responded to it is evidence that it might be some time—and only after some painful realizations—before people truly embrace this message. I don’t expect it to happen anytime soon though, and will be making my investment decisions with that in mind.

Is The Infinite Banking Concept A Scam?

Since NuWire wrote an article about the Infinite Banking Concept, we have noticed many inquiries wondering whether or not the Infinite Banking Concept was really a scam. In order to answer these questions, I thought I’d write a blog post on the subject.

To the question on whether or not the Infinite Banking Concept is a scam, the answer is no. Infinite Banking is just a creative way to use whole life insurance. People have been doing things similar to the Infinite Banking Concept for a long time. They just didn’t know what to call it. The Infinite Banking Concept is a trademarked name created by Nelson Nash (the founder of the Infinite Banking Concept).

Nash travels and teaches insurance agents about the Infinite Banking Concept so that they can generate more sales. This is how Nash makes his money. Those insurance agents are then able to teach their clients about this new and exciting way to use whole life insurance. This opens up a new sales avenue for these agents to convince potential clients who would otherwise have no interest in buying a whole life insurance policy. Since whole life offers large commissions, that are much larger than term life, this is a great tool to increase revenue for the agents.

The Infinite Banking Concept is not something you can buy. It just shows you a new way to use something already familiar and should work with any dividend-paying whole life plan. You can use these concepts without signing up for any special plan or paying Nash any money. Those agents who have been trained by Nash are supposed to have a better understanding of the ways to use this strategy. That being said if you are going to open a whole life plan with those hefty commissions for the purpose of utilizing the Infinite Banking Concepts, then you might as well use an agent who can give you some advice and tips and make sure you do it properly. Using the Infinite Banking Concept in your whole life insurance policy though doesn’t change the policy. As long as you believe that whole life insurance isn’t a scam, then the Infinite Banking Concept shouldn’t be considered a scam either.

I will add that the projected returns your plan experiences could very well be different then what is portrayed in Nash’s book. I believe them to be fairly accurate examples, or were at the time the book was written, but they are in no way guaranteed. It is also possible to use these concepts in a variable life account where base returns are tied to the market. Nash doesn’t recommend that people do this, but these are open concepts and they can be used in any way one sees fit.

Fed Signals More Interest Rate Cuts Could Be Coming

This doesn’t really come as much of a surprise, but Federal Reserve chairman Ben Bernanke signaled that a sizeable interest rate cut could be on its way when the board meets on Mar. 18.

Even with all the rate cuts the Fed has already made, and the $168 billion economic stimulus package that was recently passed, the economic picture for the U.S. still seems bleak. Yet the government seems optimistic that they will be able to stop the looming recession. I’m not sure if they are in denial, or if it is just a public relations ploy, but I don’t see them standing much of a chance of preventing it.

This financial storm (of sorts) has been in the works for some time, and short of completely destroying the dollar I’m not sure how they are going to avoid it. Now, if they were to destroy the dollar and let inflation run wild they might technically be able to avoid a recession; however, there will be costly repercussions stemming from those actions. They have done a decent job of devaluing the dollar, but it is going to take a lot more to accomplish what they want.

This is an election year and the Republicans don’t want to be in the midst of a recession come voting time; that would be a killer for the party. The Democrats have been attacking Bush’s policies for some time, and will not hesitate to redirect their efforts onto McCain who, by the way, is being backed by President Bush. A full on recession will only give the Democrats more fuel to add to the fire. Needless to say, President Bush will do whatever it takes to at least delay this recession, and will put as much pressure on Bernanke and the Fed as he can to do so.

My two cents for investors is to plan for a recession and get out of the dollar. One of two things is going to happen: either we are going to have a recession or the dollar is going to tank, and it is likely that both will happen to varying extents. Moving your investments, or at least heavily diversifying, into assets based in other currencies can help protect from both. The more uncorrelated the foreign market is to the U.S. the better, just make sure to diversify in order to protect yourself. Read our Top Recession Investments article for some other ideas, and if you are looking to buy foreign real estate you should make sure to read our write-up on HiFX, which does currency exchanges and transfers.

How to Invest Your Tax Rebate Check While Still Stimulating the Economy

For those patriotic Americans out there who want to invest their tax rebate from the 2008 Economic Stimulus Package and still stimulate the economy, here is an idea: Yesterday, I read a blog post on Prosper.com that brought up a great point. If you don’t want to buy more stuff, and if you would prefer to invest or save your tax rebate (good for you, by the way), then why not loan that money out to someone who does want or need to buy stuff?

As long as the loan proceeds are put back into the economy, the tax rebate will actually do what it is intended to do, and at the same time you can generate a nice return. This is good for America, and good for your pocket book. You can’t beat that.

For those who are not familiar with Prosper, it is a peer-to-peer lending site where investors can provide small loans for profit. Prosper does all the work for the investors, from pulling credit to paperwork and collection. All the investor has to do is choose to whom they want to lend, and Prosper can even help with that. For more information on Prosper, check out our article: Prosper Peer-to-Peer Lending.

Venezuela Leader Hugo Chavez Threatens To Cut U.S. Oil Supply

Exxon is in the midst of a fierce battle with Venezuela in response to the expropriation of Exxon assets by the Venezuelan government. The value of the expropriated Exxon assets was approximately $12 billion. According to Business Week, Exxon recently won an international court order that prohibits Petróleos de Venezuela (PDVSA), Venezuela’s national oil company, from selling any of its overseas assets pending a court ruling. Naturally, this infuriated Hugo Chavez who is not known for his calm demeanor and friendliness towards the U.S. to begin with.

Chavez has since threatened that he would cut off the Venezuelan supply of oil into the U.S.,but it is unlikely that he will follow through with his threats. According to Money Week Venezuela exports around 75 percent of its oil to the U.S., while the U.S. gets only about 13 percent of its oil from Venezuela. In addition the U.S. is just about the only country which has refineries capable of working with Venezuelan crude. If Chavez were to act on his threats it would cost his country much more than it would cost the U.S. Considering that he is already losing favor in his country (see prior post “Chavez Defeat A Victory For Democracy”), a move such as this could prove disastrous for him.

The announcement did cause a slight rise in the price of oil, even though most feel that these threats are idle. Predicting the price of oil is never easy and even the slightest rumblings from oil-producing countries can have a dramatic impact. Any price movement caused by these threats should likely be corrected over the coming days as threats prove empty. If out of pure spite Chavez decides to follow through and cut off Venezuelan oil exports to the U.S., investors can expect the price of oil to jump significantly. However, it is questionable whether it would reach the $200 level Chavez says it would. I personally doubt it, but with the volatile nature of the market you never know.

Ethanol And Other Biofuels Prove To Be A Bad Investment

A recent study published in the journal Science states that biofuel production actually creates more greenhouse gases than traditional oil-based fossil fuels. For those of us who have been caught up in Ethanol mania here in the U.S. (see the recent passing of the energy bill), this news has to be shocking. According to the energy bill, the U.S. is committing billions of dollars to new biofuel production, but instead of spending money to help the environment it appears that we are spending money to make things even worse.

As this news travels through Washington D.C. it would not be surprising to see some adjustments made to the recently passed bill. If the study proves to be factual, then it would be extremely imprudent to continue on the current path. Of course, seeing as our government loves to throw money away, I wouldn’t put it past them to overlook this, but I would be very hesitant as an investor now to invest in anything related to biofuels.

In the U.S. farmland prices, as well as corn, have skyrocketed largely due to Ethanol. If suddenly the government were to no longer require the use of Ethanol, or other biofuels, the value of corn and farmland would likely take a dive. This would be good news for most of the world, considering the enormous increases in the price of food, among other corn based products. However, farmers and those invested in farmland would not be so happy.

Needless to say investors should stay away from Ethanol producers, and possibly corn as well. In addition farmland investment should be looked at carefully, although there are many other things farmland can be used for other than corn. Commodities in general should still continue their bull run for a while longer. Those who have invested or who are considering investing in alternative biofuel production such as switch grass, jatropha, palm oil, and so on should do more intense research into this report. Not all biofuels are created equal. Some may cause more damage than others, and some biofuels might still be lucrative in certain locations even if this report is correct in its assessment. If biofuels are something that you want to invest in, then it would be wise to do in-depth due diligence about the sustainability of the industry before hand.

The Chinese New Year Has Begun: Welcome The Year Of The Rat

People who are not familiar with Chinese customs may not fully understand the importance of the Chinese New Year, but it's a huge celebration, and one which is not limited to only China and its citizens. The Chinese New Year, also known as the Lunar New Year, is a huge holiday throughout most of eastern Asia and is growing in popularity throughout much of the world.

China has more people than any other country in the world. There is also a growing number of Chinese people throughout the rest of the world. The U.S. and Canada, for example, have large Chinese populations who celebrate Chinese New Year. Many other countries in eastern Asia also celebrate this holiday, even though they are not Chinese. So now comes the question you have been waiting for: how does this impact investors?

With the growing Chinese population, and the significance of the holiday, investors should be able to see that there will certainly be investment opportunities. The opportunities, however, will likely be had by those individuals who understand the Chinese culture and how things work. If you needed another reason to get to know the Chinese culture, here you go. I personally love learning about other cultures, so this type of thing is right up my ally. If you are like me and love to experience and understand new cultures, then why not head to the nearest Chinatown and celebrate the Chinese New Year? You might discover a great new investment opportunity, or you might just have a lot of fun–you can’t go wrong either way.

The Chinese economy is growing at an astounding pace, and has been for some time. It won’t be long until China emerges as the number two economy in the world, and they may even end up overtaking the U.S. for the number one spot sometime down the road. It is my belief that learning about new cultures is never a waste of time, but if you were only going to pick one culture to learn and understand in your lifetime, the Chinese culture would probably be the best one to choose from an investment perspective. The investment opportunities stemming from this country are only going to grow, so why not get in on the front side?

NuWire published an article today about investing in Chinese real estate and last year at this time, we wrote an article about the Golden Pig baby boom in Asia. That article will give a little insight into how important the animals associated with each New Year are.

What Does Fat Tuesday, Or Mardi Gras, Mean To Investors?

Today is Fat Tuesday, which is the English translation of the French Mardi Gras, which marks the final day of Carnival and the last day before the start of Lent. This celebration has a long history and is celebrated in many countries across the world. I’m sure you are wondering how exactly this impacts investors, so let's get to that.

Many people might not realize how huge Fat Tuesday is or how much money these celebrations bring to local economies in areas that celebrate them. The biggest Fat Tuesday celebration in the U.S., as most people are probably aware, happens in New Orleans. Each year on Fat Tuesday--and to a lesser extent the other days of Carnival--hundreds of thousands of tourists gather in New Orleans. Last year more than 800,000 people gathered in New Orleans for Fat Tuesday. It doesn’t take a genius to realize that anytime that many people gather in one spot, there is going to be opportunity for investors.

During this time, hotels in New Orleans run near full occupancy and many locals rent out their homes--or rooms in their homes--to travelers. In addition to lodging, partiers also buy a ton of food and little trinkets (namely beads), among other things, which also spurs the local economy and businesses.

While everyone knows about New Orleans, there are some lesser-known areas that investors might be able to get in on which will see Carnival profits that investors could get in on at lower prices. Real estate prices in New Orleans have dropped substantially because of the damage caused by Hurricane Katrina. Property prices in the French Quarter are still pretty steep, though. If you are set on New Orleans, there is the potential to benefit from Go Zone investment incentives. Some other places in the U.S. that have big Fat Tuesday celebrations are Mobile, Lafayette, and St. Louis. Mobile and Lafayette also qualify for the Go Zone incentives.

In addition to U.S. destinations, there are many international places that celebrate Carnival. The Carnival celebrations in Brazil, the biggest of which happens in Rio de Janeiro, are among the most famous. Another large celebration--lesser-known than that in Brazil--happens in Montevideo, Uruguay.

There are numerous other places across the U.S. and the world that celebrate the Carnival season, and with the celebration come investment opportunities. There is plenty of profit potential in business and real estate across the board. Not only that, but it is also a lot of fun to party, especially--for me, at least--in other countries. To get a chance to experience other cultures and celebrate with them is always a great experience. So next time you go to that Fat Tuesday party, keep your eye open for investment opportunities. If that party happens to be in another country, all the better.

Which Is A Better Investment, The New England Patriots Or New York Giants?

With the Super Bowl coming this weekend I thought it would only be appropriate to discuss which Super Bowl team is a better investment: the New England Patriots or the New York Giants. To get an idea of the overall franchise values, we can consult Forbes, which publishes a NFL team valuation summary every year.

The most recent valuation had the New England Patriots valued at almost $1.2 billion and the New York Giants at $974 million. If you wanted to buy the Patriots, you would have to cough up an additional $225 million--not a small sum by any means. Obviously the Patriots have been a much more successful team this season and may well be worth the additional amount, but let's take a little closer look at some of the numbers.

We need to look at the revenue for each team. The New England Patriots bring in $255 million to the New York Giants’ $195 million--a difference of $60 million. Looking at those numbers, it would take almost four years to regain the price difference between the two teams in terms of additional revenue. Still, four years isn’t all that long a time frame, and after that, if the Patriots were to continue bringing in the additional revenue, they would appear to be a better investment. The key point here is whether or not you see them maintaining their level above the Giants for that entire time span.

Looking at the two rosters, it is my belief the Patriots will continue their success for at least that time period, although I do envision the Giants improving somewhat as well. As Eli Manning matures as a quarterback, the team will only improve. On the Patriots' side, though, Tom Brady is just so good, and the team’s upper management has been excellent. How they were able to get all those high draft picks while giving up hardly anything is beyond me. Even though they will forfeit their number one pick because of this season's Spygate incident, they still have San Francisco’s first rounder, which happens to be seventh pick in the entire draft. So it is plausible that this team could be just as good next year, although matching an undefeated season could be tough.

The Giants seem to be on their way up, but have been inconsistent over the years. They are located in the largest U.S. market, though, so that is a big plus for them. The only downside to that is that they have to share the limelight with the New York Jets. The Giants actually beat the Patriots in franchise appreciation last year. The Giants franchise gained 9 percent in value during the last year, while the Patriots gained only 2 percent. To be fair, though, that number was based on information as of September 2007, and surely the Patriots have gained some additional value after their perfect season.

After looking at all the numbers and various other factors, of the two teams, the Patriots probably represent the better investment. They are more expensive, but they are consistent. The Giants have a lot of potential, but I think I would probably have to go the safe route here.

Enjoy the Super Bowl festivities, and I’ll see you next week!

The Fed Cut Interest Rates Again; Prime Rate Down To 6 Percent

The Fed cut the key interest rates again yesterday, this time by 0.5 percent, following a 0.75 percent cut last week. For alternative investors that means a couple things:

1) The prime rate is now down to 6 percent, the lowest it has been in three years. Investors who are utilizing HELOCs and personal or business lines of credit are probably pretty happy right now, as borrowing is now much cheaper than before. Investors who were not utilizing this type of variable credit in favor of fixed rates are probably much less enthusiastic and might want to think about switching. The U.S. economy is not going to be recovering any time soon, so investors might as well take advantage of these low rates while they can. Chances are they will continue to go even lower before things turn around and the Fed starts hiking them back up again.

2) If you haven’t already started doing so, get out of the dollar now. What was left of the U.S. dollar was burned at the stake this week; the government has shown that they are willing to let the dollar die in favor of the chance that they might be able to fend off a recession. Things are likely only going to get worse though, as the U.S. is probably still going to see a recession, and inflation is going to start eating up people's U.S. dollar savings. If you want to learn more about the importance of the dollar's decline, see yesterday’s blog post: Ron Paul And The Fight To Save The U.S. Dollar.

If a recession does come, which it certainly appears it will, investors need to be prepared. There are profits to be made in good times, and even more profits to be made in times of recession--if investors know where to look. If you are trying to figure out some good places to put your money in the event of a recession, check out our Top 5 Recession Investments.

Virgin Galactic: Blasting Us Into The Space Age

Well, we knew sooner or later, space travel would be made available to the masses. Yesterday, Virgin Galactic unveiled their spaceship design that will allow travelers to take rides into outer space beginning in 2009. Richard Branson, founder of the Virgin Group, is truly paving the way to a new age with his latest entrepreneurial venture.

Traveling on the spaceship will not be cheap: Tickets cost $200,000 apiece. Despite their high price, Virgin Galactic has already sold over 100 of them. Once the prices begin to drop, as they always do when competition develops and the technology becomes more cost effective, watch out for the new millennium of travel.

What’s next--commercialized space stations, space amusement parks, space memorabilia shops, space hotels, space cruises, trips to the moon and beyond? It is mind-boggling to think about the potential in this untapped marketplace. It seems almost a given that there are going to be a lot of new businesses created in this marketplace, and a lot of money made by some savvy entrepreneurs and investors. No space business endeavor would be without risks, but the potential rewards could be almost beyond comprehension.

The space age is coming, but are we ready to embrace it? Most people still seem to think commercial space travel won’t happen in their lifetime. It is coming, though, and those who embrace it early on could find some great investment opportunities waiting for them.

Can The Gold Surge Be Stopped?

As many analysts predicted, the price of gold has continued to rise in 2008 to new record highs, but when will the rise hit the brakes? Some have called for $1,000 per ounce gold, while others have set their eyes at $2,000 per ounce and beyond, but who should investors believe? A recent article published on SwissAmerica.com polled more than 40 financial experts to get their opinions on the future price of gold.

"When the price of gold goes over $1,000, the bull market will be in its bubble phase. The price may go far higher--depending on what else is going on in the economy and the markets. But this will be a time to be careful...when we stop adding to our positions and begin to reduce them. Gold is now cheap and almost hidden. People are buying it for the right reason: because it is cheap. We see signs, though, that gold is coming out of the closet and the financial press is beginning to notice," Bill Bonner editor of the Daily Reckoning said.

A good rule of thumb when it comes to investing is that, when everyone seems to be on the bandwagon with a certain investment, that is the time to get out. The price at which the gold bubble tops out remains to be seen, but when your friends start talking about how they are making a ton of money from their gold investments, you might want to think about taking your profits before the bubble bursts.

That being said, there are many reasons to be excited about investing in gold right now, and there are many ways to do so. One of the best ways to invest in gold is through a gold CD at EverBank. They offer exposure to the price gains in gold but guarantee your principal, which would provide you with protection in case the bubble were to pop sooner than you expected.

Investing In Tax Liens And Tax Deeds: Opportunity Or Hype?

Many investors have seen infomercials telling them that they can make a ton of money buying tax liens and tax deeds, but is that really true? The truth, as with most infomercials, is that the presenters leave out a big chunk of information--namely all the cons to the investment.

First off, investing in tax liens and tax deeds can get complicated. Each state is different, so before you even think about investing, make sure you understand how the process in your state works.

Secondly, tax liens and tax deeds can often require you to wait a long time before paying out. This investment is cash intensive up front, requiring you to purchase with all cash, but it can sometimes be years before you see any money.

Thirdly, these auctions can be competitive; thus, getting incredible deals like the ones they talk about on TV is far from the norm.

As with most investments, though, there is money to be made if you know what you are doing and are willing to put time into due diligence and research. By no stretch, though, is investing in tax liens and tax deeds as easy as some promoters make it seem. For more information on investing in tax liens and tax deeds, read through some of our relevant articles:

Investing in Tax Liens and Deeds
The Benefits of Tax Deeds in Texas
How Texas Tax Sales Work
Georgia Tax Deeds