The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Former paid subscribers to the printed version are now receiving LIFETIME subscriptions, and subscriptions to the printed version are no longer being accepted. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
But that wasn't our only sticker shock. When the condo association issued the budget for 2007, there were two more outsize increases. One was the insurance bill (for the exteriors of the units), which had doubled. The second was a sharp increase in payments to the reserve fund, following a study which showed that the reserves had been chronically and badly underfunded. Net: Another 2/3 increase.
Now, I know the condo board of directors had no choice about the insurance bill, but it seems to me they could have waited another year before upping payments into the reserve fund, to allow people to adjust. There might be many people living on fixed incomes who would no longer be able to afford to stay in their units, and would have to sell and move into cheaper rentals somewhere else.
I called the manager of the complex (the place is managed by a contracted firm), who has been there forever, it seems, and my wife and I have had many amiable dealings with her through the years. She confirmed my suspicions, that she expected quite a few people to be forced out by the increase, and their units would be put on the market along with the glut of units owned by "flippers" which are already vacant.
There was one bright spot, however. When my wife and I bought our unit in 1990, there were two main attractions that drew us to this particular complex. The first was that it allows two pets (read: dogs) of any size, not just yip-yaps. The second is that the complex occupies only the front half of the property, with the back half essentially undeveloped (except for a tennis court). At the time (1990) I was told that the back part was essentially landlocked, and could be developed only by the original owner of the complex (which was built as apartments, then converted in the 1970s) and following the same style of architecture. Basically, this wasn't going to happen, so for all practical purposes the rear of the property was parkland and big-dog-walking area.
So you can imagine my surprise when, last March, I noticed red surveyor's stakes sprinkling the backland. Then, one morning, I ran into a couple of real-estate agents near the tennis courts who were showing prospective buyers where the new townhomes would be located. New townhomes?, I asked. One of the agents showed me the plans and sketches. I didn't have my reading glasses with me (I was walking a dog), but even without them I could see that what was proposed was densely-packed, three-story townhomes with multicar garages on the first floor. This expansion would about triple the population of the complex and absolutely chew up all the open space. We henceforth would have to piddle and poop our dogs on those little postage-stamp-sized dog-walk patches.
This loss of the serenity and convenience of the open spaces was a primary driver for me in our search (ultimately, unfruitful) last spring for an affordable Florida house (shit-brown or otherwise). So, I had resigned myself to having to live with construction on our next Florida visit, and congestion thereafter.
When I brought up the subject of the new units with the condo manager, she told me the whole project had been a massive fraud. Some operator had convinced the owner of the backland (the original developer of the complex, who is still alive) to partner with him. That was enough to draw up plans and start selling units into the peak of the housing-bubble frenzy. The crook and his wife had taken in and absconded with numerous deposits, delivering nothing in return (except heartaches and legal hassles). They have since been caught and prosecuted, and are now in jail. The manager reaffirmed what I had been told in 1990: Any new construction would have to look like the current units, and certainly nothing could be done without the knowledge and approval of the condo directors (and probably also not without a vote of all of the unit owners).
So the bright spot was that I got my open space back (see picture below); but the question my wife and I had to resolve was, could we afford to continue to carry the cost of our own condo? With the latest increases, our real-estate taxes have almost quadrupled since 1990, and the condo fees have nearly tripled.
Then, since we had decided that Florida would be only a sometime home for us, the question became: Should we ourselves downsize.... maybe from a two bedroom to a one-bedroom or studio unit, to cut the condo fees and real-estate taxes down to a more affordable level?
A brief December trip to Florida gave us a little time to find out. Our real-estate broker friend told us that units in our complex aren't put on the market very often (probably because dogs any size are allowed, a rarity in the condo world). But there were two "deluxe" one-bedroom units currently listed, which she showed us.
The first was an upstairs unit and, surprisingly, had almost as much storage space as our current two bedroom place.... plus a screened-in porch, which we currently don't have. I calculated that all of our present furniture would fit, except for the second bedroom bed. The only real drawbacks were no place for our current washer/dryer unit, and a windowless kitchen. Ultimately, my wife and I decided that we didn't want to climb stairs a half-dozen times a day after piddling and pooping the dogs, so if we moved it would be to a ground-level unit.
However, the first-floor one-bedroom unit which we viewed a week later was a disappointment. It was shy on storage space and the single bedroom was tiny. We had now seen two of the three one-bedroom layouts; the third wasn't available. So we have decided to keep our current unit for as long as we can afford it. (You can look forward to some more aggressive dividend-yield investments in the "Inheritance" portfolio.)
Another significant problem with downsizing, for me, was that there was no financial gain in doing so, other than the reduced monthly expense. Surprisingly, the (asking) prices of these units has declined hardly at all from the bubble peak. (Must be the demand for "two dogs any size" that does it.) This means that the capital-gains taxes we would have to pay would be more than the difference in price (about 13%) between one- and two-bedroom units. I told my wife, I supposed we could downsize if we broke even.... wouldn't really make me happy, but I'd do it.... but I have a real problem paying money to downsize. Especially when the only real beneficiaries would be governments.
Incidentally, the broker/owner of the second unit we
saw was very anxious to sell. Other than that, we
didn't see any "flipper distress" except for "For
Rent" signs in a goodly number of the units.
Perhaps in two or three years, after the housing bust
really bites and flipper distress is much more evident,
my wife and I will revisit a possible downsizing.
Any decline in employment, over a 3-month period,
and a sharp decline in the inflation rate take place
during the recession itself. Average employment
growth over the 3-month period, annualized rate, just
before the US economy entered recessions:
1960 - 2001: 1.9%
1979 - 2001: 1.2%
Current rate? 1.2%!
Employment is a BIG lagging indicator of the economic growth. I can guarantee one thing, no Wall Street or Federal Reserve economist would dare to show you the above graph.
It is very important to note that housing and
manufacturing lead the employment and economic
weakness while services lag the employment and
economic weakness.
Over the past three years, profit margins have widened to record levels, which has detached P/E ratios from other fundamental measures - such as price/revenue, price/dividend, and price/book ratios. The S&P 500 is currently about double its historical norms on those metrics. That isn't a forecast that stocks have to eliminate that valuation gap, but it certainly does suggest that stocks are priced to deliver unsatisfactory long term returns from these prices. It bears repeating that if profit margins were at normal levels - even on the basis of profit margins that prevailed during the 1990s (indeed, anytime prior to the past 3 years) - the price/earnings ratio of the S&P 500 would currently be nearly 25. Unless investors want to speculate on the notion of a "permanently high plateau" in profit margins, the stock market is strenuously overvalued at present. - John Hussman
Part of me thinks that the current mini-mania in equities is a response to Fed-induced liquidity. And yet.... the big central banks of the world.... really aren't spewing out liquidity as aggressively as people think. Of course, if they were, one might expect commodities to be on more of a run than they have been. To me, they seem to be suggesting that the world economy is slowing down at the margin. Therefore, I've concluded that what we may have is the illusion of a liquidity fest. The stock market is acting as though there's an enormous fire hose of liquidity gushing forth -- when, what might actually be the case, is that a wanton derivatives/credit/lending mania is in full force. - Bill Fleckenstein
Insiders sold $4.5 billion worth of stock in November. With a paltry $33 million in buys, this brings the insider sell/buy ratio to 136 to 1 - more than six times its historic average. This is the highest the insider sell/buy ratio has ever been. If it holds up, we're in for a very rough end of the year and fist quarter of 2007. Even if the ratio falls, the market's near future doesn't look too promising. Altogether, 19,976 corporate insiders sold their companies' shares in less than a month. By headcount, that's more than three times the number of insiders buying. - Graham Summers [editor, Inside Strategist]
The only thing foreigners consider worse than owning dollar balances is owning dollar bonds: promises to pay dollars in the future. Yet the bond market shows irrational exuberance in the face of persistent dollar weakness, even in the face of dollar-devaluation as part of the deal now being cut in Beijing. If there has ever been a true conundrum, the bond market it is.... What then is the explanation of the mystery? It is the $400 quadrillion derivatives market growing exponentially. That's what. It represents a latent demand for new bonds, unlimited quantities of it, so that the game of musical chairs could go on and on. Moreover, demand is further fueled by the carry trade. The carry trade sells the high-priced Japanese bonds and buys the low priced U.S. bonds. As I have pointed out, it is the mechanism whereby deflation is imported from Japan to the United States. This arbitrage results in a narrowing of the interest-rate spread. But that spread is still far from disappearing and, as long as it is positive, the carry trade will thrive and interest rates in the U.S. will keep falling.... It is not likely, although neither is it impossible, that China will pull the rug from under the bond market. The game of musical chairs will probably go on, possibly for several more years. The sky is the limit for derivatives, and for the monetization of the U.S. government debt.... Presently, the United States economy is on a life-supporting system. China's hand is on the switch. - Antal E. Fekete
Credit card loans, mortgages and all the rest are no longer the banks' problems, because it's no longer their money. They do the deals, collect their fees, and move on. Because they no longer have a stake in these loans actually being paid back, they see little risk - at least no mortal risk - in churning out as much paper as the market will bear. So the question becomes, how much more can the market take? Who knows, really. It's a big world with a lot of dollars sloshing around. But - and I know I've been saying this for a couple of years - it sure feels like the end is near. - John Rubino
Rest assured a massive "Credit Event" is coming. When it happens, no matter how bad it seems at the time, try to remember that it will be a good thing. Unless and until there is a total and complete repudiation of these excesses, the ultimate consequences will just keep rising. The sooner we have a debt purge the faster the recovery will be. Japan fought deflation for 18 years. Is the U.S. doomed to follow suit? This is NOT the golden age of financing, unless of course you have been investing in gold on account of it. - Mike Shedlock
As I type these words, and as you read them, "cash" is being turned into "trash" at a steady pace. The smart money is buying with abandon because it knows the paper bits floating around today will be worth less than the paper bits floating around tomorrow. How long can this go on? No one really knows. It's sort of like a game of musical chairs. As long as a veneer of psychological stability is maintained - i.e., as long as cash doesn't become trash too quickly - we could continue to see an upward trend in nominal values, even as real values stall out, or even decline.... the Dow marches steadily higher along with gold, calm as a flat and glassy sea; if the fiction of prosperity is maintained, investors might be content to keep riding the merry-go-round, smiling like mildly-sedated children. In this scenario, everyone stays happy except the poor man in the street, who doesn't have enough paper asset holdings to cancel out the steady rise in day-to-day living expenses. A slow debasement of the currency, to the benefit of paper asset holders, is thus a rather ingenious way to rob hundreds of millions of unaware citizens. Not all at once, of course, but in dribs and drabs... a little bit at a time. - Justice Litle
It is clear to all but the most blind mavens that the USFed is finished with interest rate hikes. Inflation fears are cited only by goofy Fed Governors, paid to speak stupidly. The US Fed will, just like in 2001, suddenly act to stimulate the US economy in a matter of a few months, with interest rate cuts. Gold will love it. Unless Europe and Japan stop hiking rates and join with rate cuts themselves, the US dollar will register multi-decade lows. It is really just a matter of time before the Western World (with adopted son Japan) follows monetary policy directed by Dr. Weimar, whose directives will be as desperate as they will be simple. Damn the market torpedoes! Full speed ahead on money printing! We must prevent a global recession! Real money like gold & silver will shine! Hedges like energy deposits will soar! - Jim Willie
Few Americans pay any attention to the value of their currency on world markets. They earn their money in dollars...and spend in dollars.... the fall in the dollar is cushioned by a number of things. Most expenses are homegrown; they don't go up just because the dollar has gone down on global markets. And even imports do not fully react to the lower currency, because so many of them come from China, which holds its own money close to the American brand. What's more, Wal-Mart and other discounters are finding new and better ways to cut costs...somewhat softening the blow. In terms of gold...and euros...the dollar is already worth less than half what it was a few years ago. Keep your eye on it; a few years from now, it will probably be worth only half what it is today. - Bill Bonner
The big news is that the Treasury Secretary and the chairman of the Federal Reserve are in China to hopefully make some deals, in which they will plead ("Please, please, please save our American economic butts!") with the Chinese to use their massive reserves, mostly dollars, and their growing political clout to keep this whole ridiculous economic mess from collapsing, and in return we will agree to give them missiles, weapons, fighter aircraft, war materiel, nuclear technology, supercomputers, a compliant Congress, our land, our businesses, our women, our children, barbeque sandwiches with a side of fries and anything else they want, as much as they want, anytime they want, which they will want because they are on their way to dominating the world. And now it is just a matter of negotiating how, and how much. - Richard Daughty
This week, in what I believe to be an unprecedented diplomatic pilgrimage, the sitting U.S. Secretary of the Treasury and the Chairman of the Federal Reserve were dispatched to China. Ostensibly they were sent to pressure the Chinese into allowing their currency to appreciate against the dollar. In reality, they were more likely sent there to do just the opposite. Despite the hawkish public tone coming from Washington, the private dialogue was likely to have been far meeker. My guess is that Bernanke and Paulson kowtowed to America's biggest supplier and largest lender, and pleaded for them to keep the goods and credit flowing. Although it didn't take place in Macy's window, the affair may qualify as the "mother of all butt kissings." The last thing that Paulson and Bernanke want is for the world to recognize the financial precipice upon which the U.S. economy now teeters, and China's unique ability to push it over the edge. - Peter Schiff
You're dealing with mass psychology here. The central bankers around the world know they are going to take a hit on their dollar holdings. None of the central bankers want to start a dollar panic, but none of the central bankers want to be the last out of the dollar, either.... Raising rates would kill any chance of avoiding a recession, but in terms of the dollar, we can't raise the rates fast enough when the dollar starts to slip quickly.... I believe we're going to have a dollar collapse, but the Fed is going to do its best to slow play the dollar's decline in value, so that it takes a year or two for the dollar value to reach its low point.... There will be a central bank, most probably in Asia, who will start the move away from the dollar and when it happens, you're going to see other central bankers covertly trying to follow. The move will magnify very quickly and it could become a full-fledged panic and a dollar collapse. - John Williams
Technicians studying the USDX think there is a support level for the dollar at 75, but I don't think so.... If the dollar breaks through 78.33 on the USDX, my guess is the dollar will go through a 35-percent correction, which would put it at 55. The key in how low the dollar goes is the interest rates. In January, the Fed is going to have to make a decision which way to go. If Fed rates go up, the dollar will hold in the 78.33 range, but the stock market and the economy will tank. If next year the Fed lowers rates to keep the economy from crashing, the bottom will fall out of the dollar, and I see it going as low as 55. Once the dollar hits bottom, it will take the stock market and the economy right with it anyway. The Fed is in a box they can't get out of. - Bob Chapman [publisher, The International Forecaster]
The key point is that the Fed can only target one variable at a time. This Fed has chosen to target interest rates, and thus money supply and the price of gold will do what they want to at that rate. If the Fed chose to target money supply instead, the market would then determine the interest rate. If the Fed chose to target the price of gold, the market would then set the other variables. Thus the Fed is not really "pumping M3"; it is merely supplying the demand for money at the artificial rate it has targeted (with an emphasis on artificial). This, indeed, is part of the problem, but it is important to state the problem correctly. Remember that the Fed cannot force anyone to borrow who does not want to, nor can the Fed force banks to lend. Regardless of whether the Fed targets money supply or interest rates or the price of gold, the Fed is NOT in control of bankruptcies, foreclosures, job hiring, or the velocity of money. Those last two sentences are crucial to the deflationary argument. Bankruptcies and foreclosures are soaring, consumer spending is sinking, and jobs will follow housing with a lag. The current setup is essentially the liquidity trap that Japan fell into.... Unfortunately, the Fed simply does not know the correct amount of money or the correct interest rate on it, either, anymore than it knows how to set the correct price of orange juice or TVs. We do not let the Fed set the price of TVs, so why should the Fed set the price of credit? The liquidity trap develops because there eventually comes a point at which the central bank simply cannot force additional credit down the throats of prospective borrowers. Practice has shown that although central banks will attempt to fight the resultant deflationary tide, they won't resort to helicopter drop methods. In this regard, the Fed has far less power than anyone realizes, in spite of possessing vast power in theory. - Mike Shedlock
A huge debt casts a shadow on any market; the rapidly growing international debt of the United States is clouding the world economy. It cannot grow perpetually; it will be settled sooner or later either in an orderly and upright fashion or in financial crisis and economic recession. The finale of the scenario may be played by the Federal Reserve System. It may seek to reassure and pacify numerous Asian creditors by maintaining high market rates of interest or at least approximate them, or cater to the notions and wishes of most legislators and their constituents who usually favor monetary stimulation. Sooner or later Federal Reserve governors will have to choose between economic consideration or political preference. Their choice will determine the future of the U.S. dollar. - Hans Sennholz
The Fed knows that the Japanese problem in the 1990s arose out of the leveraged real estate and stock market bubble. Under Mr. Volcker (a hawk), a tight monetary policy with some form of credit controls (increase in margin requirements) would have been used in order to prevent the bubble getting out of hand. But in the monetary philosophy of Mr. Greenspan and Mr. Bernanke, a bubble is never a problem. However, if the bubble bursts, a problem might arise - as was the case in Japan in the 1990s and in the US in 1929/32. So, the central bank must immediately provide enough liquidity to the system in order to prevent the bursting of the bubble having a negative impact on the economy! I hope that everybody understands that this is in the long run a suicidal monetary policy because it leads to one asset bubble after another. - Marc Faber
On the one hand, the only "money" that claims to be legal tender for all debts private and public is Fed-issued paper money. Yet, if a person is caught in possession of more than $10,000 in cash, there's a law enforcement (which is really paradigm enforcement) presumption that such a cash-laden person must be some flavor of nogoodnick; drug dealer, terrorist sympathizer, or other un-American, anti-social sort. - George Ure
I just placed a one dollar bill on my desk, and next to it I placed a hundred dollar bill. What's the difference between the two bills? Both bills are composed of the same thing -- linen and cotton. So what's the difference. The difference is the writing on the two bills. Both say they are legal tender "for the payment of all debt, public and private." The only real difference between the two items is that the Treasury states that one will pay off a dollar of debt while the other will pay off a hundred dollars of debt. Thus, this nation's money has been degraded to the point where the writing on a piece of paper tells you what the thing is worth. This is money by government edict or by fiat. Intrinsically, neither bill is worth a damn thing. And ultimately, they'll both end up as bookmarks or museum pieces. - Richard Russell
Money is too important to be left to central bankers. You essentially have a group of unelected people who have enormous power to affect the economy. I've always been in favor of replacing the Fed with a laptop computer, to calculate the monetary base and expand it annually, through war, peace, feast and famine by, perhaps, a predictable 2 percent. - Milton Friedman
The U.S. is, and has been for many decades, sustaining itself and its empire on borrowed money and imported, and depleting, oil supplies. At what point will the self-destructive fiscal and monetary policies end? When will the energy policies swing toward recognizing the looming decline in available oil supply, at almost any price? What kind of systemic shock will it take? - Byron W. King
Reckoning Day is not far off. And when it comes, it will rush in faster and more brutally than almost anyone expects. The world's financial picture will be redrawn from scratch, and a painful unwinding of the economic dislocations built up by decades of political pandering will begin. While no one can say with certainty how the disaster will play out, there is one truth you can take to the bank. Throughout all of human history, gold has always held its value as a monetary instrument. That sort of shock-proof durability cannot be claimed by any paper currency, certainly not by the dollar, which has lost 95% of its value since abandoning the gold standard in 1971. With the dollar untethered from gold, the worth of the $20 bill in your pocket is headed for its intrinsic value...as a recyclable. - David Galland
Frankly speaking, we liken asset bubbles and associated credit bubbles with drugs. Just like human bodies can become dangerously addicted to drugs, economies can become dangerously addicted to these bubbles. Of course, drugs cause severe damage to body and soul, and so do asset and credit bubbles to the economy and its financial system. In the U.S. case, these damages are highly visible. See the collapse of saving, the monstrous trade deficit, the capital spending crisis, miserable employment and income growth and, on top of that, the debt explosion devastating balance sheets. These are definitely the attributes of pathological, unstable and unsustainable economic growth. These are more than just symptoms, because they exert their own malign effects. - Kurt Richebächer
Our economists and anal-ists can't accurately forecast even next month's level of interest rates, GDP growth or inflation rates and yet they are pretending to accurately project the end of a soft-landing (recession) that hasn't begun yet? Who is kidding whom? - Aubie Baltin
It never ceases to amaze how televised media reports on the U.S. economy are almost exclusively about shopping. Such reports almost always feature images of sales clerks frantically stocking shelves and long lines of consumers swiping their credit cards. In contrast, reports about the economy of Japan or China typically include footage of smokestacks billowing, production lines moving, robots assembling, and people actually making things. Doesn't it ever occur to anyone producing these segments just how ridiculous this is? - Peter Schiff
We produced an enormous housing bubble of unprecedented magnitude. What do we have to show for it? A GDP of 1.6% and sinking fast. It is taking more and more and more credit just to stand still. - Mike Shedlock
Last week I got the bill for the renewal of my homeowner's insurance policy. It sent me into a state of shock. Two years ago it was about $1,000, last year it doubled to $2,000. This year it's $6,200! I'm not alone in being hit with a huge premium. Just about every homeowner here in Florida is getting the same grim news when the bill for their homeowner's policy arrives. For many, especially young couples struggling to keep up with the cost of living on modest salaries and retirees living on fixed incomes, the cost rings a death knell for their current lifestyle. They simply can't pay it; the mortgage holder forces them to carry insurance on their homes they can't possibly afford; and the result is . . . well they will either sell or be forced out. - Philip V. Brennan
An auction was held in Naples [Florida], where people sought to get rid of their houses fast. Supposedly, housing is up 20% in the city. But when this auction put willing and able buyers together with ready sellers, actual prices were much lower than expected. Sellers took haircuts of 15% - 40% from what they paid for the properties a few years ago. Overall, prices were down about 25% from 2005.... These are not the same as the price information reported in the paper. Sellers are reluctant to accept such losses. Instead, they let properties stay on the market. But these auction prices reflect the truth - when sellers are forced to mark their houses to market, prices are lower than they thought. - Bill Bonner
For the majority of homeowners, they are now "lobster potted" for the rest of their lives in the 21st century's version of the Victorian treadmill. Welcome to modern debt-controlled serfdom, where if you lose your job, either through retrenchment or illness, you lose your home.... For those ordinary people who purchased houses over the last three years, at inflated prices, the years of misery and pain are arriving. Debt is a double-edged sword and for most of history the root cause of much pain, suffering and evil. The "have it all now" society we now live in is about to meet its day of reckoning. - Nigel Maund
A company called Ownit Mortgage Solutions - the 11th largest subprime lender - just closed its doors and fired 800 employees this week. It made more than $8 billion in mortgages last year and basically shut down overnight when it ran out of cash because of a surge in bad loans. - Mike Larson
I am dismayed at the low level of U.S. economic thinking. Elementary insights into economic processes that have been accepted by all schools of thought for more than 200 years are unknown, discarded or even put on their head. The facts are that you have serious structural problems that exclude any possibility of a sustained economic recovery... A profits decline, a record savings shortfall, a capital spending collapse, an unprecedented consumer borrowing and spending binge, a massive current account deficit, ravaged balance sheets and record high debt levels. - Kurt Richebächer
78 million is the number of baby boomers who are in or approaching retirement. That's the biggest demographic bulge in U.S. history, fully 26% of the population. And many of those 78 million are in a jam. As they approach retirement, they are still carrying historic levels of debt and, on average, have woefully inadequate net worth -- and much of that based on shaky housing prices. In fact, 25% of the retiring boomers - nearly 20,000,000 in all -- are facing retirement with a net worth of less than $50,000. You don't need to be an accountant to see that, with today's degraded currency and longer life expectancies, they won't get very far on so little. Even more alarming is the fact that those dollar bills are becoming less valuable every single day. And we think the dollar's value will continue to erode, as the U.S. government tries to "print" its way out of the massive debt trap that has ensnared the U.S. economy. - David Galland
I was listening to Sean Hannity's radio show earlier this week. Periodically he sends one of his crew out to find candidates for man-on-the-street interviews.... On this particular day, Thursday, Dec. 7, they were asked why the date was significant in American history.... As always with these tests, a surprising number failed miserably - unable to associate the date Dec. 7 with any important historic event. With some clues, a few remembered something they learned about Pearl Harbor. One recent college graduate suggested it was the date "the Chinese attacked." But what struck me about this simple test was that every single person who flunked the test had voted Democratic in the midterm elections. They did this because they believed the Democrats were "for the people," or "supported labor" or "fought for the little guy." They uniformly agreed with Hannity, as he played the role of devil's advocate, that the rich did not pay their fair share of taxes. They agreed with his suggestion that the wealthy should pay 80 percent of their income to the government so it could be redistributed to the poor and the schools and other worthy causes. On the other hand, every single person who knew the significance of Dec. 7 balked at the suggestion. Some argued articulately that tax rates that high were a throwback to the Soviet Union and counter to a free market system. Not surprisingly, none of them voted for Democrats in the last election. It occurred to me after hearing this shocking series of interviews that the inmates are running the asylum in the USA today. - Joseph Farah
The government tells us that deficits don't matter, and in fact are a sign of our economy's strength, not weakness. Confidently, Americans believe it. Weakness is Strength! The fact that interest is the third biggest item on the Federal budget - after (of course) defense and entitlements - is further testament to this nation's enduring strength: Services such as education, infrastructure, and science funding simply don't require nearly as much money. As a world leader in energy consumption, the US spent only $3 billion on all energy research and development last year. This puts the $2+ billion per day of foreign borrowing required to keep the government running in perspective. But don't worry, friend. Be happy. The US has entered yet another new era, this one in which deficits do not matter. Everything will be fine. - Michael Nystrom
My parents live in Lake Oroville, California. Before China (Wal-) Mart came to town, Oroville was like so many thousands of thriving communities throughout America. China (Wal-) Mart bought off the local city fathers and county commissioners with (1) jobs, (2) jobs and (3) competitive prices that would save people money.... In a heartbeat, after China Mart opened their doors, the entire downtown section of town went under. All those family-owned businesses that had been there for a hundred years and the new ones along the way providing good paying jobs, out of business. There's still a couple of car dealerships, the Chamber of Commerce and the auditorium, but for the most part, it's gone. A ghost town. Those workers all lost their jobs, the owners went under. So where did those workers and former business owners go? Why, to China Mart for minimum wage; take anything to put food on the table. - Devvy Kidd
The sad reality is that it is foreign producers that will eventually have the last laugh. Sure we will screw them by repudiating our debts through inflation, but in the end they will enjoy all of the abundance of their productive capacity and we will suffer the widespread shortages that result from our lack of it. Their standards of living will soar just as ours plunge. - Peter Schiff
Our current tax code is an abomination, and we desperately need.... change. The time Americans spend simply complying with our tax code comes to 5.8 billion hours of record keeping, filing taxes, consulting, legal and accounting services. Breaking those hours down to a 40-hour work week, it translates into a workforce of 2.77 million people. That's more than the workforce of our auto, aircraft, computer and steel manufacturing industries combined. - Walter E. Williams
The reason we have the quality of leadership we have in America today is that the financial considerations of politics are more key than the ideology of the folks we put in office.... Corporations make contributions based on "electability" and "access" and legislative votes in return for the big bucks to front their elections. The Framers didn't envision America being taken over by crooked corporatists, but that is exactly and precisely where we are today. The corporatists on both sides of issue will claim they're only acting as a proxy for the best interests of the citizens. It never seems to work out that way, though. - George Ure [Nick's comment: Unions, too.]
China says it is a 'communist' country. But it seems not to care. Nor does anyone else care what the Chinese call themselves. The only thing anyone seems to care about is that China is open for business. They could throw vestal virgins into Vesuvius or tear the beating hearts out of their enemies so long as their economy grew at 10% per year. The Chinese are the envy of the entire world. Politics has yielded to money. - Bill Bonner
It is truly astonishing that a civilization as organized and materially powerful as Europe today is voluntarily going to its death. The Europeans could certainly forestall the Islamization of their continent, but so far they have shown no stomach for it. Already portions of Europe's metropolitan areas are de facto Islamic states ruled by Sharia law.... The Parisian police have admitted that they are in the early stages of a civil war. The negative growth rates of the native Caucasian populations mean that Europe is committing generational suicide while its Muslim populations continue to grow very rapidly..... Europe has lost its faith and with it the will for self-preservation. The Europeans who fought to defend Europe through the centuries during the major waves of jihad knew what they were fighting for. They had faith in their God and in the inherent legitimacy of their civilization. Their successors today are freely throwing away what their forebears gave their lives to preserve. It is a tragedy on a civilizational scale and should be a cautionary tale for those of us in North America. - Gregory Davis [author, Religion of Peace? Islam's War Against the World]
No matter what you might think about our entry into this war in Iraq, the undeniable reality today is that we are fighting al-Qaida - the terrorist group that attacked this country Sept. 11, 2001, killing 3,000 Americans, destroying the World Trade Center and even damaging the Pentagon itself, something no enemy in America's history had ever accomplished.... Just as Bush and his spokesmen had promised, they came from around the world to engage America - not in an attempt to defeat our troops on the battlefield, which they understood they could never do, but simply to make our stay there costly and uncomfortable. Their goal was the same as the North Vietnamese Communists' goal - bleed America in a dragged-out conflict of low intensity so that opposition forces back home make it impossible to stay. That's exactly what happened. Now, it's just a waiting game for our enemies. They have won. The die is cast. The opportunity to destroy the Islamofascists on the battlefield of our choosing has been squandered. With this bad experience behind us, it is unlikely we will choose to fight them again on any other foreign battlefield. And that means only one thing - we will be forced to fight them here. - Joseph Farah
I don't know all the ins and outs of militant Islamic fundamentalism, but I do know this much: They've hated
Christians since more or less the beginning, and have shown no hesitancy to kill them in huge numbers since
around the seventh century. As unfathomable as this may seem, the Sept. 11 attacks are simply the most
recent offensive of that 1,300-year-old conflict. Like it or not, Islamic extremists view the U.S. as a nation of
Christian infidels... It's just that now, in the age of aircraft, bombs, nukes, and weaponized chemical and
biological agents, the technology to bring their holy war against the "Christian" West to new and terrifying
heights is very real. Killing Americans is no longer just something they pray for Allah to do -- it's something
that militant Islamists bent on martyrdom can do themselves, and relatively easily. The question is: How do
you defeat an enemy with a 13-century blood grudge and not only the willingness, but also the determination,
to die in his quest to kill you? We in Western democracies aren't used to this kind of thinking or fighting -- we
can barely conceive of this level of hatred. That's why we can't hold a blood grudge for more than five years
before we lose our stomach for war! - Jim Amrhein
However, in my opinion systemic risk has returned as intensely as ever, with about 2-in-3 odds that a systemic failure can occur at any time. Up to the time a systemic failure occurs (if it does), I see a return of the bear market.... beginning this month (January 2007), with a long-term top in place in the second or third week, then I see stocks drifting lower into the spring, with a secondary (lower) top in March to May (March most likely). Thereafter, I expect this to be followed by a more substantial decline in the summer and fall. I expect this decline because it will soon become painfully obvious that the economy is in recession and earnings are going to tank. The resetting of interest rates on adjustable-rate mortgages this year will add to the pain.
I expect the bear to continue into 2008 because of demographic pressures.... the first wave of baby boomers will be retiring, and they can't eat stocks; they have to sell them and raise cash if they want to pay the bills. Especially when declining house values restrict borrowing on one's home.... stocks (401(k)s, IRAs, etc) and savings are all that's left.
As stocks are pressured lower, and the "system" is put under increasing strain (bad debts and faulty hedges), the risk level of systemic failure is likely to increase.
It's always popular to make "predictions" at the
beginning of the new year. Though the preceding is
what I expect to unfold (unravel?) during the coming
year and a half, naturally there are no guarantees. The
only behavior to which I would assess a very high
probability is: As the 2007-200? recession gathers
steam, the Fed will drive short-term interest rates
(over which it has a great degree of control) to
absurdly-low levels, as it did in 2001-2003, to soften
the recession's blow, in the process probably creating
yet another asset bubble (private equity? hedge
funds? stocks? commodities? gold?). As in 2002 and
in 2003, money-market funds will definitely not be
the place to be, and now is the time to begin shifting
assets to higher-yielding instruments in expectation
of this repeat-performance Fed panic.
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $108,601.35 (see below)
Increase: $8,601.35 [+8.60%]
COMMENT on "Inheritance": With the price of natural gas (and thus PrimeWest) still depressed, I decided to pick up more PrimeWest shares, primarily for increased monthly income to support retirement. If we have a severe energy-consumption-reducing recession next year.... or if winter continues to be persistently warm.... this position may take awhile to show a paper profit. If we have a surprise geopolitical event or sudden collapse of the dollar, it could be paper-profitable much sooner. It should certainly serve well as a long-term hedge against the abonimable Fed's money-printing; in the meantime, the income stream is nice.
Just for fun, I decided to buy some shares (QID) of an exchange-traded fund which is a double-inverse tracking of the NASDAQ 100 index. (If QQQ declines by 5%, this ETF goes up by 10%). This will, I hope, provide a little offset to the approaching bear; and if Bill Bonner should prove to be right and stocks do crash, it will produce a juicy profit. The December 18 purchase date has more to do with the timing of our trip to Florida than any effort to pick a top in QQQ; but in hindsight, that was not a bad time to take on the position.
The portfolio cost (normalized) is $108,800.96 with $77,714.21 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,373.42
Increase: $9,674.42 [+90.42%]
COMMENT on "PIG": I continue to "roll over" 3-month T-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $35,672.21
Increase: $ 6,896.02 [+23.96%]
COMMENT on Roth IRAs: There is no change from the last issue.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity non-individual-stocks retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 55.18%; T-bills and money-markets, 23.81%; TIAA-CREF inflation-indexed bonds (retirement), 16.26%; TIAA real estate, 4.73%; TIAA-CREF High-Yield II, 0.02%%
TIAA-CREF values, 29Dec2006: stock, 242.14; equity-index, 95.21; MM, 23.73; bond, 79.53; inflation-indexed bond, 46.44; real estate, 273.65; TIAA current yield in SRA, about 4.82%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of July 25, 2006.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given December 29, 2006.
NEXT ISSUE - will appear in late January or early February 2007.