Vigilant Investor

That might be an overstatement, but not a massive one. Rich Noyes, over at NewsBusters has a piece summarizing how much the government gets from big oil profits — You know, the same government run by those in Congress who are vilifying the oil companies.

Observes Noyes correctly, “As for ExxonMobil, in 2005 the company reported paying just under $99 billion in taxes - $23.3 billion in income taxes, $30.7 billion in excise taxes, and $44.6 billion in “other taxes.” And yet politicians are preparing to extract still more in taxes from the big oil companies, as if those costs won’t ultimately be incurred by consumers.”

Again, the whole obsession with oil company dollar profits is a distraction from net profits as a percentage of sales. To quote our own study from a detailed piece on the opportunists in D.C. a few weeks ago:

“Are the oil companies as greedy as Dick Durbin says? Certainly oil company profits in dollar terms are up. When the price of a product is driven up from $13 a barrel in 1998 to the $60 range, in the face of increased demand you can expect gross sales in dollar terms to rise. So when we look at Exxon Mobile’s gross revenue of 1996, at $134.2 billion and compare it to $204.5 billion in 2002, 2005’s gross revenue in simple dollar terms seems simply massive: $370 billion. Hence, politicians and greed pundits love to throw that number around to rile the masses into voting action.Others like to use the term “record profits” to describe the situation. In 2005, that number for Exxon, after taxes and expenses is $36 billion compared to a mere $11 billion a few years earlier in 2002. Talk of record profits mixed with talk of greed — all on the backs of the consumer — is sure to resonate with stretched pocket books, never mind reality - after all, while certainly Durbin knows better, profits in companies in dollar terms are essentially meaningless. A more valid indicator of profitability is profit relative to sales in a percentage form, as well as to total operations.

When we look at profits in those terms, we can see that Exxon in 2005 had a net profit of about 9.75%: Hardly record breaking. Consider, for example, that McDonalds 2005 profits were 12.72%. Microsoft’s were 31%… and Halliburton’s 11.5%…and Verizon at 9.85%.

Where’s Dick Durbin breaking down the door of those companies and trotting their executives in front of the Cameras so he can grandstand for votes?”

Companies doing the scale of business Exxon is doing are inevitably bound to have larger profits by the simple fact that the commodity in which they deal has been going through the roof thanks to a host of reasons other than “greed”, although the latter is what appeals to the worst in voters who have grown to expect everything from Nanny Sam down in D.C.

We encourage readers to discount the demagoguerycoming from the vote-desperate lunatics running in the Asylum On The Potomac — and be leary of whatever knee-jerk, populist policies they might implement –, and instead focus on the host of reasons referred to in our article linked just above; you’ll come away with a better sense of what’s really going on in our economy, an by inference, be prepared to act vigilantly regarding your own finances.

So much in the U.S. economy has been dislocated thanks to the asinine monetary policy being run by the Fed with full support of conventional economists. By dislocated, we mean our finite wealth resources — our capital stock of savings — has been artificially knocked out of its natural place. From that, we can infer that efficiency of utilization has declined, and resources have been wasted. How you weigh the consequences depends on if you are considering from the U.S. perspective or a global perspective.

Now, first time readers of Vigilant Investor may be asking, why is this important? Why should I care? The answer is simple: if the assumptions upon which your investment valuations are based are faulty, it implies that eventually once the market sorts that information out, their will be a correction.

Some might respond, but are the markets not supposed to be efficient? After all, is that not what we are told by modern asset allocation theory, from Wall Street, to Main Street, all the way to mainstream consumer magazines, and on to “Saint” John Bogel of the index heavy Vanguard Fund family?

To that we would respond, at best markets can be efficient only on average, keeping in mind that “average” does not mean “always”, although much of the retail investment industry acts as if the averages apply to everyone and all circumstances. We have come to often refer to this as “What, Me Worry? Syndrome”.

Of course, we are not alone: Warren Buffet once observed Continue Reading »

“A broad scale economic crisis as a result of a credit expansion and inflation policy in the past would most certainly lead to a new wave of government intervention, posing a threat to the idea of a free market oriented societal order. The crisis will be attributed to the failure of the capitalist system rather than the failure of a government controlled monetary system. That said, today’s short-sighted monetary policy runs the risk of not only destroying the value of the currency but also poses a serious threat to the free market society.”–Thorsten Polleit, Honorary Professor at HfB - Business School of Finance & Management, Frankfurt

Yes, readers, we are talking about the boom bust cycle, which if you are paying attention, can be traced directly to monetary policy and artificial rate manipulation by central bankers. Political expedience is always the norm, as well as self-serving collusion between the banking cartel running the Federal Reserve in cahoots with the U.S. Congress.

For those who truly want to understand on their own why this is such a crucial concept, we encourage you to read the rest of Thorsten Polleit’s article quoted above. It’s a bit thick, but those ahead of the curve are never too busy to roll up there sleeves every now and then.

Again, we are talking about those economic storm clouds and if they’ll mix up for us the perfect financial storm and a new Great Depression.

Read up. Stay vigilant!

Arbitrary complexity is the hallmark of the U.S. tax code. If you have the fleets of attorneys and CPAs to handle the load, most any company can make itself more competitive vs. smaller players without the critical mass to play ball. Of course, the tax industry — all those CPAs and attorneys — want the code to be as complex as ever, as well as ever-changing. For without a tax code whose pages stacked are over six feet thick, $ billions of fees would be gone overnight, forcing tax careerists making six and even seven figures navigating such complexity to get real, non parasitic jobs. That’d be a boon to the economy, as those $billions of dollars of troll-bridge tolls would be redirected to more productive purposes.

We could write for hours on the subject, but at this point we’ll just refer you to an MSNBC article that elaborates on the punitive complexity of the U.S. tax code.

Just remember the next time you see jobs going abroad that its not just big labor to blame for the inefficient economic environment that’s been arbitrarily created in the United States. And don’t forget what professions — and their lobbies– benefit the most thanks to the legislation that makes it happen.

We’ve long complained about how CPI is a rigged number. It is nice to see the mainstream at MarketWatch take a look at the slight of hand with Core CPI, but it still misses the bigger point that CPI is understated by 3% or more.

To the point, gas prices are forcing folks to adjust their spending habits and consumption choices. It seems downright silly to not include gas prices in the core CPI.

With that in mind, the GOP appears ready to cave to political expedience by meddling with reducing gasoline prices — as if fiat dictates can somehow suspend the laws of economic gravity. Should Bush and the GOP — and the Democrats who are looking for any opportunity to make hay — start capping prices, expect all sorts of ancillary problems like those of the 1970s mess — the last time the government intervened in gas prices.

Meanwhile, the housing bubble continues to unwind in front of us. RealtyTrac is noting that foreclosures up up 38% nationally. [UPDATE: The Chicago Trib is reporting that those same figures are up 72% from one year ago! ]

Yet in the face of it all, consumer confidence is at its highest in four years.

Oddly enough, often times when folks are the most bullish on the economy that reality hits them squarely in the mouth. Many traders view the bullish index as a contrarian indicator because when folks are all too comfortable, they are often complacent.

We, along with our readers, hope we are not on the cusp of something more severe than the usual recession. But we remind everyone that hope is no substitute for a plan.

The biggest problem with money supply fueled bubbles is that they dislocate so many resources in the economy in directions that they otherwise would never have gone.

That includes lots of money that evaporates either quickly in a pop, or slowly over time once the gig is up.

It also includes the human carnage that occurs during the unwinding to all those people who quit their old jobs and moved to new ones directly aided by all the money supply liquidity that encourage the speculative boom.

But like all things bubble related, they are based on artificial, unsustainable stimulation - via low credit rates, in the case of housing. Much of the activity is nothing better than a temporary illusion. Soon enough, once the charade is revealed, folks are left to salvage what they can in desperation as they wake up to reality with a real doozie of a hangover.

Bill Fleckenstein over as MSNMony has a nice article detailing the carnage revealing itself as a housing crash:

• The housing bubble has popped

Meanwhile, Mike Shedlock has a fine entry with more first hand accounts from Florida, where the condo conversion boom is now the condo reversion scramble:

“The converters have failed at selling the condos, so they have decided to revert back to apartments. A year ago they tried selling the condos starting at $249,000. Lately they have been offering them as low as $185,000 . . . and still no sales…I realize the media is taking a hit for reporting on the negative issues, but you haven’t even scraped the surface of what is going on here . . . statewide. The snowball effect will be horrible. More than 30% of the jobs created in Florida last year were in construction. We are now in a strong negative mode for construction jobs. As builders slow down and shut down, these guys are out of work.”

We also recommend “Condo conversions revert to rentals” from the South Florida Business Journal.

As we mentioned yesterday, the question remains open as to how virulent this contagion will be to the rest of the U.S. housing market and economy as a whole. Given the vast dislocations throughout the whole economy, we suggest that vigilant folks create plans that are prepared for the worst. Then, we can more safely hope for the best.

Paul Kasriel at Northern Trust points to yet another indicator — the index of Leading Economic Indicators — that is supporting our assertion that a recession is imminent, if not already in full swing given the official fudging of CPI and GDP.

With politics taking over on the issue of China’s currency valuations and the trade deficit, we thought the following is appropriately timed:

“The irony, of course, is that Washington has no one to blame but itself for this predicament. The combination of chronic budget deficits and a negative personal saving rate has all but obliterated the saving capacity of the US economy. To blame China for this is the height of hypocrisy. America’s saving shortage is an outgrowth of America’s wrong-footed policies — not China’s. US fiscal authorities have squandered the budget surplus of the early 1990s, and the monetary authorities have condoned a series of asset bubbles that have encouraged wealth-dependent American consumers to abandon time-honored income-based saving strategies. We even have a new Federal Reserve chairman who all but dismisses the US saving problem as an innocent outgrowth of a “global saving glut.” And we also have a president who continues to pound the table on making temporary tax cuts permanent. America is going nowhere on its saving agenda and, therefore, nowhere in reducing the macro pressures that virtually guarantee large current-account and trade deficits. China bashing — like the Japan bashing of 20 years ago — is apparently much easier than getting your own house in order.”

– Stephan Roach, From “Bad Advice” April 21, 2006

“We need to be vigilant about risks from oil market developments, the unwinding of global imbalances, protectionist pressures and balance sheet vulnerabilities…”

That’s Treasury Secretary John Snow in remarks made to an International Monetary Fund committee. It is nice to get a candid, behind the curtain look at some of the government’s worries regarding the economy.

Of course, in the face of rising prices (such as a $2.80 gasoline national average) that are only modestly showing up in the officially understated CPI figures, these issues are now well out of the bag. Hedge funds and institutional purchasers have begun dipping into the commodities and precious metals markets.

Meanwhile, the politicians in the U.S. are talking tough about trade with China. However, given that the U.S. is ‘hat in hand’ regarding its deficit situations, the political posturing for U.S. voter consumption is thinly veiled. The relationship between these two nations is one of vendor financing, where China keeps loaning back to the U.S. the same dollars venting back to China via the massive U.S. trade deficit.

This recycling of deficit dollars had artificially suppressed borrowing rates in the U.S. That was good for the reeling economy on the ropes in 2001, but done nothing other than paper over then existing, sever structural economic problems with hundreds of billions of dollar so new debt. We traded a stock bubble in the late 1990s for a credit bubble.

Consequently, as we push forward in 2006, the U.S. consumer’s balance sheet has only deteriorated further, and then it has managed to remain above water thanks to the lowest lending rates in 50 years. For example, in both 2004 and 2005 U.S. consumer propped up GDP by yanking out of their homes over $600 billion in home equity. We can thank low rates and easy money supply at the Fed for enabling the credit bubble to vent into the housing market by driving up prices, thus enabling massive home equity extraction. The contribution of home-equity withdrawals to the economy cannot be underestimated, nor should the fact that it is a one-time effect (given the stagnating housing market) be ignored.

This brings us to one of the biggest stories of the week: Bond rates in the United States. Early in the week both the 10 and 30 year Treasuries blasted over the 5.0 mark, sending borrowing rates to their highest in five years. The payment pinch is on. As consumers find their monthly payments climbing, we are about to see just how dependent the U.S. economy has been on low rates courtesy of the Fed created credit bubble. We will also learn just how U.S. centric the global economy truly is.

Combined with the points made by Secretary Snow, these are serious headwinds facing the U.S. economy. We’ve been saying we are already in recession. We’ll se if the rigged government numbers will finally confirm as much.

While the rest of the world remains on auto-pilot, vigilant folks are taking note and adjusting accordingly.

Credit Bubble

When things turn ugly, as they are bound to when bubblemania unwinds, you can expect the peddlers of class envy to emerge from under their rocks and gather populist momentum.

So, at Brad DeLong’s site the rock is lifted: Delong is reproducing the Krugmeister’s (Paul Krugman) latest missive published in the pay for access portion of the NYT which returns to the same old drumbeat of disparity of income between the rich and poor.

Sure enough, the numbers speak for themselves. But what the Krazy Krugster fails to consider is that many of the redistributive policies he claims solve the problem merely temporarily reshuffled assets, and in the process, dislocated the economy with each dollar moved. Krugman, for example, is trumpeting the great gains of unionism without considering that it came at the expense of all other workers who had to pay more for their goods, and whose jobs never came into existence because the union mandated inefficiency.

This is nothing more than robbing Peter to pay Paul. And we should always remember, any politician or pundit who enforces the such a system is sure to have lots of support from Paul.

While the arguments against Krugman are far too many to list, we thought this link George Reisman’s latest at Mises.org is a worthy rebuttal on the unionism front:

But this sort of Krugman talk always has revolutionary appeal, even if it misses the mark regarding the real causes of the economic woes in this country. Vigilant Investors will be monitoring the national mood. My suggestion in the long run is to watch out for your IRAs and other retirement assets if you’ve saved more than your “fair share.” There are just too many trillions saved in there for greedy little hands to ignore.

“No generation has a right to contract debts greater than can be paid off during the course of its own existence.”
– George Washington to James Madison 1789

The Graph below tells the story of just how much debt the U.S. is saddling itself with, and how income is failing to keep pace. For a detailed breakdown, click the graph. It will take you to a summary from Mike Hodges of the Grandfather Economic Report.

This obviously bodes poorly for the U.S. economy considering that the debt the nation is incurring is not invested in productive capacity, but instead into SUVs, overpriced housing, Plasma TVs, and platinum cable-TV packages. In other words, it is tomorrow’s consumption done today.

The Washington Post has a nice info-graphic today on who profits from the sale of gasoline. As we noted before, government taxation is one of the largest chunks. Granted, the cost of gas should include the heavy price of U.S. foreign policy in the Mid East oil region, as well as the cost for highways and roads. But is that any less important than the other facets of getting gas to the pump? Keep in mind, oil company profits are smaller than MacDonald’s and Microsoft.

That said, be very wary of the politicians getting involved in the issue. Capping prices or added tax penalties on profits may sound appealing to the average person suffering from higher gas prices, but it will only make a bad problem worse — much like political meddling did in the 1970s. Meanwhile, the battle for blame on gas prices is reving up with the Democrats excited to exploit consumer anger.
Be that as it may, don’t hold your breath that politicians will do anything but pander to easy votes, and in the process, take advantage of the average voter’s near total ignorance when it comes to rudimentary economics.
Below is an undersized image of the graphic. Click it to go to the Post’s original page.

Gold has been racing quite a bit lately before yesterday’s wild ride up and back down.

For those of you trying to get a better idea of why gold has been clipping along at such a pace, the folks at Bullion Marketing have more than a few reliable opinions on the real causes for the big run in Gold and other precious metals.

Unless you are in the business, you ordinarily don’t get to see the yield curve on bond rates up close.  As the long end of the curve begins to move after stagnating, we think the chart below tells the story of just how unusually tight rates have been as of late.

But as the saying goes, “what can’t last forever, won’t.”

Of course, more than a few “experts” were caught off guard by the higher than expected inflation numbers revealed today. That’s because few are tying inflation to its core cause at the moment: expanding money supply.

Sure, the Fed says it’s fighting inflation with higher rates, but at the same time it has been running the printing press along with many of the major banks across the globe (see previous post).

While the core-CPI figure may still seem small, readers must be aware that the number has been manipulated since the 1970s for political purposes, and it far understands real inflation.

Folks filling up at the gas pump know this. Too bad Bennie and the boys at the Fed appear to be unaware of the root cause.