Vigilant Investor

The Washington Post is running a decent article on the current investor retreat from global equities, covering some of the reasons they suspect the markets are reacting the way they have been. Obviously, regular readers of Vigilant Investor knows that there is a lot more than meets the eye to the current environment, and that it is our belief it is only a matter of time before we hit a tipping point where everyone else catches on to the massive shifts taking place under our nose. Leaf through our past few month’s articles if you are interested on catching up on what you need to be watching.

Meanwhile, the Bush administration is continuing its policy in Iran, rooted in the belief that it is the prerogative of the U.S. to police the world, and that every country ought to kowtow to U.S. interests. As such, the U.S. is now urging financial sanctions on Iran to pressure it to become more subservient to U.S. interests.

While we tend to agree more with Continue Reading »

Goldman heavy insider, CEO Henry Paulson, is on tap to be the new Treasury Secretary. We find it interesting that Paulson should want the post given the dire straights of the U.S. balance sheet and what it implies for the dollar. Were it several years ago, we’d think much less about that question. But when Reuters is writing headlines such as “Not even Paulson can save the dollar“, you know the ‘dollar is doomed’ cat is out of the bag.

Why is the dollar in trouble, you ask? Consider:

• The official federal deficit is roughly $350 billion. But when you use GAAP accounting principles and require the government to responsibly accrue the promises of future obligations, such as Social Security and Medicare, the number is ten times that: $3.5 Trillion! You can tax 100% of all personal income in the U.S. and you’ll not have enough money to cover all the free lunches politicians have promised.

• Inflation, while under control according to the official government CPI number, is tracking probably closer to 7.5%-8%. That’s if you calculate the number the old fashioned way — without all the fancy gimmicks that have been used more and more over the last 30 years to make inflation seem less than it is. Consider that under the old, more honest CPI calculation last used in the 1970s, Social Security payments would be about 70% higher.

• GDP, like inflation, is a fudged number. First, its helped by an under reported CPI. Then, its padded with spending that didn’t really occur. For example, picture spending $1000 for a computer this year. Your government statisticians consider that this year your $1000 computer is 10% faster than last year, and therefore concluded for GDP purposes that you actually spent $1100. Nice boost to the economy stat’s, but its fantasy. Real GDP is much lower — probably in recession levels already.

• Official GDP had been supported by massive amounts spending financed through debt over the last 5 years. Consider that home equity withdrawal related spending contributed $670 billion of spending in 2004 and about $640 billion in 2005. That’s a massive percentage of overall GDP when you consider how dollars then move through the economy. Don’t forget, their is a limit to debt capacity, and it must be paid down tomorrow!  Moreover, in a rising interest rate environment, the cost for carrying existing and future debts only makes the situation much worse!

And those points are just the tips of the many icebergs dead-ahead in the path of the S.S. U.S. Economy. That said, we can’t help but agree with Reuters — we’ve been saying it for years!

All that in mind, we suspect that Paulson will serve as a solid expert for the less discussed plunge protection team board, for whom his insider perspective will be invaluable. Keeping the U.S. economy afloat will be one heck of a battle.

Hold on tight, folks. The Storm Captain is readying to board the ship! Position yourself for the wild ride ahead!

For Memorial Day this year, we thought it would be valuable to post a series of quotes about War from many wise thinkers over the years. We walk you through the thoughts and comments from all ages, from our founding fathers — Jefferson, Adams, Washington — to the ancients, to famous authors and generals.

We hope you take the time to ponder their wisdom as you remember the dead on this Memorial Day, for it is usually in the midst of war that thoughts are clouded by the mission at hand.

America does not go abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all.
~John Quincy Adams

Always there has been some terrible evil at home or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it.
~General Douglas MacArthur

The most successful war seldom pays for its losses.
~Thomas Jefferson

It is our true policy to steer clear of entangling alliances with any portion of the foreign world.
~George Washington

Commerce with all nations, alliance with none, should be our motto.
~Thomas Jefferson

There never was a good war or a bad peace.
~Benjamin Franklin

I believe in only one thing: liberty; but I do not believe in liberty enough to want to force it upon anyone.
~H. L. Mencken

Guard against the impostures of pretended patriotism.
~George Washington

If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.
~James Madison
Continue Reading »

• Former Federal Reserve chair faults US policy
• Bernanke: Fed Can’t Ignore Stock Movements
• Stagflation Lite, Central Banking Nightmare, May Await Bernanke
• Greenspan Expresses Concerns On Derivatives, Medicare Costs
• Emerging-Market Stocks Slump 10th Day, Longest Rout in 8 Years
• Hike in rates from early in year taking toll on home salesBacklog of unsold homes in U.S. reaches record high
• Oil could top $105 in major supply outage
• Personal Spending in U.S. Increases 0.6% in April
• Consumer prices mount, souring the moodUS economy in ‘rude good health’

“Paper is poverty…it is only the ghost of money, and not money itself.”

“If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

“Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted.”

“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”

“Private fortunes, in the present state of our circulation, are at the mercy of those self-created money lenders, and are prostrated by the floods of nominal money with which their avarice deluges us.”

“I now deny [the Federal Government's] power of making paper money or anything else a legal tender.”

–Thomas Jefferson

We can’t speak for all of you – but we were never taught any of the above in our expensive high schools and colleges. And like all real economics – (which ain’t “rocket science” as the “experts” would have you believe) — it’s beautiful & true in it’s simplicity. It also makes us wonder whether all along we were paying to be formally “un-educated.”

A brilliant observer, Jefferson clearly warns of the dangers ALWAYS related to a paper currency – especially that issued by a private bank. (Newsflash for those already not aware – the Federal Reserve is a consortium of private banks given special powers by Congress). As we like to say — the only integrity paper money has — is that it ultimately reverts to its true value – which is nothing more than the paper it is printed on. The Dollar is following suit to perfection by losing well over 90% of its purchasing power since…lo and behold — the creation of the Fed! The sad, pathetic thing is that the hard earned savings of every American are being stolen in the process.

The money supply in the US is currently being increased at a rate of about 8-10% annually. Remember — what money the Government doesn’t have to meet its “promises” – it simply creates out of thin air in conjunction with the Federal Reserve! If this rate of monetary expansion continues – simple math tells us that in 9 years, your dollar will lose around 50% of it’s purchasing power. Toss in massive amounts of looming un-funded social promises (Medicare, Medicaid, Social Security) – and billions of dollars in un-funded pension liabilities which the Federal Government may well have to bail out – and you tell us where you think the money supply, and the true value of the Dollar are headed!

Jefferson is still right – “Paper is poverty…”

From the chutzpah department, old Benji says the following:

“WASHINGTON (AFX)– Commonly used government price indexes overstate the level of inflation in the economy, Federal Reserve Chairman Ben Bernanke said ThursdayIn a letter to Rep. James

Saxton, R-N.J., responding to questions left over from his recent testimony to the Joint Economic Committee, Bernanke said both the consumer price index and the Fed’s preferred gauge, the personal consumption expenditure price index, overstate inflation, but show that core inflation is well contained. Fed policymakers are well aware of the upward bias in the inflation gauges. That’s one reason why Fed officials have said they want to keep core inflation measures between 1% and 2%; it gives them a cushion to make sure actual inflation rates don’t fall below zero. The Fed has no official inflation target or range.”"According to a recent study by Fed economists, the CPI likely overstates inflation by about 0.9 percentage points, Bernanke wrote.”

We’d laugh if it didn’t make us cry. And, of course, we know that this is probably designed to send a signal to the markets that the Fed is nearing its rate hike end.
But, fundamentally, its not true. Moreover, consider these quotes:

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it’s issuance”. — James Madison

“The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the currency… I do not like to think that any law can be passed that will make it possible to submerge
the gold standard in a flood of irredeemable paper currency.” — Henry Cabot Lodge Sr., 1913




 ”The financial system has been turned over to the Federal Reserve Board. That Board asministers the finance system by authority of  a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money” — Charles A. Lindbergh Sr., 1923
“By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”–John Maynard Keynes (the father of ‘Keynesian Economics’ which our nation now endures) in his book “THE ECONOMIC CONSEQUENCES OF THE PEACE” (1920).

“The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favors, that there will be no opposition from that class.” — Rothschild Brothers of London, 1863

“Give me control of a nation’s money and I care not who makes it’s laws” – Mayer Amschel Bauer Rothschild


“Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States” — Sen. Barry Goldwater (Rep. AR)

The upwardly revised 5.3% GDP figure reported today by the government certainly sounds good compared to prior numbers — it was the fastest in two years. But before you allow yourself to get too worked up, believing the economy is really taking off, or that as a consequence, inflation is being driven by the economy, things may not be as they seem.

Doug Gillespie at Gillespie Research points out that the 5.3% number still is below the consensus estimate of 5.8%, but that’s the least of what vigilant folks are monitoring. GDP has been dramatically padded this month by a higher than usual inventory accumulation number, as well as a reduction in the official deficit number — which acts as a drag on GDP. At $10.4 billion and $8.3 Billion, these reductions equal to almost 141% of the total upward revision of GDP.

Says Gillespie of these numbers, “The quality of the economy’s increased first-quarter strength as reported today is at least somewhat suspect.”

But what should we expect from folks rigging the system by running deficits and destroying the purchasing power of the dollar?

Meanwhile, the stage is set for the market to worry about inflationary pressures generated by too much economic activity — a great distraction from the real inlfationary culprit — years of vastly bloated money supply.

Moneyization Part Twenty-four
by Ned W. Schmidt

Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money in which they have a higher store of faith.

Or, It is what it will buy.

Motivations for today’s writings are two events, one large and one small. The first of those was the report on consumer prices for the month of April 2006 in the United States that was released on Wednesday, 17 May. Subsequent to that release, paper equities took a horrible slide. Gold and Silver followed those markets lower. These market reactions seemed to surprise almost all. Continue Reading »

When there’s a bubble, there’s usually fraud that goes along with it. That’s because investors delude themselves into believing that a New Era for the economy has arrived, and that they can therefore suspend all the old rules that used to apply. As such, they begin to dream up new ways to justify why something has value when before it didn’t, and they go into a more careless / reckless mode of not examining the details as much as they should.Meanwhile, those at the helm of large institutions benefiting from this new era can’t help but believe that they are something special. Since the old rules no longer apply, changes are made that in retrospect are clearly fraudulent or ethically challenged.

So enter Fannie Mae, the world’s largest mortgage institution — and linchpin of the U.S. housing market. Franklin Raines, its CEO did ’such a good job running the organization that he received bonuses of nearly $53 million over a five year period ending in 2003.

For what? Cooking the books, apparently.

Notes the Washington Post today,

“The result was a company whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. The aim, OFHEO (Office of Federal Housing Enterprise Oversight) said, was always the same: To shape the company’s books, not in response to accepted accounting rules but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for executives including Raines, (CFO J. Timothy) Howard and others.” Continue Reading »

Do you think inflating the carry trade bubble was what the BOJ had in mind when they dropped their overnight rate to 0%? Probably not, and admitting defeat is usually hard for policy makers to do — especially in Japan.

Nonetheless, word is that the BOJ has reversed money supply by about 10% by draining excess funds from the money reserves, and that it plans to do more.

Plan A for fixing the Japanese economy — vast amounts of liquidity available for free — is now having the punch bowl taken away, with hints that soon the BOJ will end its extraordinary policy of 0% overnight rates. Soon we’ll see if plan B repatriates yen back to Japan’s markets, boosting asset prices, or if it just slows things down and allows the Japanese economy to further shake out all the garbage that would have been cleaned up absent life support rates. Continue Reading »

The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. There was little interest, and the price was either falling or remaining steady.

Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

The rise in gold prices from $250 per ounce in 2001 to over $600 today has drawn investors and speculators into the precious metals market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should. Continue Reading »

“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

–‘Sir’ Alan Greenspan

We provide that information just in case you believe gold’s run is done.

Alan Greenspan

When it comes to demagoguery, few are as good as those at the pinnacle of politics in the U.S. Senate.

With the giant sucking sound drawing over $800 billion in U.S. consumption towards goods manufactured abroad, capital investment in infrastructureand production are going abroad as well. And, with it, many jobs have been lost.

So that brings out the politicians looking for high profile, easy political solutions to the complex problem of the massive U.S. trade deficit. Notes the Washington Post on the subject,

“At the Senate hearing, lawmakers from both parties derided a Treasury report issued last week that rejected calls to brand China a “currency manipulator.” Senators cited China’s ability to keep the yuan pegged at about 8 yuan per dollar. They also pointed to data showing that the Chinese government has accumulated a hoard of several hundred billion dollars in U.S. Treasury securities over the past few years as it has bought dollars to keep the yuan from rising. “What further evidencedo you need?” asked Sen. Jim Bunning (R-Ky.)”

Of course China is manipulating its currency. But so is the U.S. and every other nation with a central bank at the help of their currency. Moreover, currency revaluation does not change the fact that China and other emerging nations have hundreds of millions of individuals ready and available to the labor pool. Continue Reading »

If ever their was an indicator of the backside of the bubble rearing its head, its the “panic button” added to condoflip.com’s website, where the defiant slogan is ‘Bubbles are For Bathtubs’.

From the website:

“When a condo seller pushes a Level 3 panic button, they agree to give up half of their deposit, thereby reducing their price to less than what they paid for it. This is for the most desperate of circumstances. The price of the condo is the seller’s original contract price less 6%.”

My guess, if they need a patent for the panic button, they must expect to capture a big market niche! I can imagine the thought process… “Gee, this flipping site has a ‘panic button’ — good deal!’

We’ve covered the insanity going on in the real estate markets for a long while now, and its not been pretty. Websites like condoflip.com and flipmycondo.com [now offline!!] have been real indicators that we’d reached a point not dissimilar from the crazed day traders in their underwear at the kitchen table during the tech boom era.

The big difference between housing and stocks, however, is the speed of buying and selling. Housing is glacial by comparison. Hence, while the NASDAQ plummeted when the tech bubble — and equity bubble as a whole — popped, housing will vent off its excesses far more slowly. Given the illiquidity when things lock up, you’ll find lots of folks upside down in mortgages, increasing the incentive to just walk away. Especially worrisome is that the U.S. banks have loaded up heavily on mortgages — representing now over 60% of the average bank’s loan portfolio.

That said, the practice of buying interests in yet to be built condos, and flipping them for huge gains, is over. Now, so is the flip of the existing units. With many a newfangled real estate condo mogul financing their condos with interest-sensitive financing in a wage stagnate environment, our guess is that the pressure to unload these zero or negative return properties is building. Imagine: all money in, prospects of profits slowly diminishing… Well, trouble’s ahead.

Readers, the squeeze is on. Bubbles may be for bathtubs, but when Level 3 panic button needs to be pushed, it’s only a matter of time before levels 4-10 come into existence.

Just a few weeks ago we commented on the vast amount of regulation that strangles the U.S. economy. Well, the U.S. Chamber of Commerce has warned that the US could lose its leading position in global capital markets if it does not reform its regulatory environment.

We’d note that the problem with our market economy is that it is no longer truly a free market. To the degree that it is capitalism, it is better described as a form of parasitic capitalism - -a new-era blend of quasi-fascism and mercantilism. On one hand the largest players in the U.S. economy are best equipped given they have the critical mass to deal with the extra burdens — on staff the have the necessary swarm of attorneys and administrative personnel to more easily absorb such hindrances.

Smaller firms naturally have greater problems, especially those that prefer to remain lean and mean — or startups, for that matter.. A new regulation can be all the difference — the breaking point where startup costs are prohibitive to entry, where new employees are required, or requiring rises in prices. New compliance regulation actually can be a competitive advantage for larger firms, while smaller ones are hamstrung. Consequently, compliance with regulation is itself a huge billion dollar industry — money that could largely be spent better in other places.

From our own perspective as asset managers, we find a great deal of regulation to be geared towards proving no crimes are committed, and that satisfactory oversight is in place to make sure no crimes are committed. That no crimes are or ever have been committed is no longer sufficient. Hours each day must be devoted to providing a detailed paper trail proving such, and is the exact reverse of what is understood as the U.S. justice system. We are treated guilty until proven innocent. Needless to say, our industry is not alone

There need only be an “i” wrongly dotted or a “t” not crossed to find oneself guilty not of any real crime against a citizen, but against the state’s bureaucracy. In such an environment, classic entrepreneurs are pushed aside by technocrats who excel in such environments. The irony is that anyone wishing to commit a crime can still do so by dodging the existing framework. After all, criminals by their nature do not obey the law, so why would they be bothered by a few extra regulations? The implication of such a reality is that there will always be crime by criminals unless there is a totalitarian police state monitoring every facet of everyone’s lives, and even then there is still flouting of the laws in black market economies.

Otherwise, compliance with regulation is itself a huge billion dollar industry with a massive lobby to keep business robust — money that could largely be spent better in other places. While much regulation is well intended, it must be kept in balance so that it does not kill the goose that lays the golden egg. In the U.S. the life of said goose is being slowly strangled. It should always be understood that many regulations, from top to bottom, are a luxury of advanced, freedom oriented economies and totally unsupportable by emerging and collectivist / socialist economies given their inherent inefficiency. You cannot have both freedom’s wealth and over-regulation.

Unfortunately, given the tendencies of democracies — and the growing love affair the U.S. citizen has with the pacifier of nannystatism, I can’t say I feel the prospects for the U.S. will improve until things get much worse. And even then, there are no guarantees.