Vigilant Investor

Yesterday we posted some comments on the housing bubble… here are few more clipped from Peter Schiff:

“Does it seem feasible that the biggest real estate bubble in U.S. history would bottom out after a mere 1.7% price decline? What signs could he possibly see to confirm that the housing market has bottomed? Let’s see, national home prices fell for the first time in 11 years, with 2006 likely to be the first calendar year in 70 where that occurred. Inventories are at record levels and still rising, sales have fallen for five months in a row and are down 12.6% in the past year, foreclosures are surging, builders are offering additional incentives to sell houses, reporting higher cancellation rates, and repeatedly lowering their earnings estimates. Further, over-stretched homeowners are facing a wave of ARM resets beyond their abilities to pay, the economy is headed for a recession and everyone is still expecting a soft-landing. Yep, it sure looks like a bottom to me.”

Soft landing? Hard landing? Or Goldilocks landing? The verdict is far from out.

Mike Shedlock has a great post today with a few excellent graphics worth noting.

The first is a chart where he plots the U.S. housing bubble as an overlay to the Housing Bubble in Japan during the 1980s with a few comments.

The second is a clipped advertisement from a newspaper down in Florida.

Mike’s comments about the reality of the bubble are worth reading right now, especially those where he points out the hypocrisy in the self-serving spin coming from the real estate sector in order to keep sales going no matter what the future holds.

Sometimes it’s too easy to let the complex details of finance interfere with the bigger picture. During tonight’s episode of Vigilant Investor live streamcast radio, we’ll have the usual updates and commentary, plus a review of ten important books to listeners quickly cut to the chase regarding the less than desirable situation of the U.S. financial environment. Feel free to call in and ask questions during the broadcast.

Other topics: Today’s wild ride in the Dow, oil and gold.

For more information, click the talkshoe icon below:

Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects the present value of unfunded health care and other non-pension benefits at between $600 billion and $1.3 trillion.“There’s a good chance some government entities are going to go bankrupt,” said California Assemblyman Keith Richman, a Republican from Chatsworth. “But the issue isn’t just bankruptcy, it’s governments dying of a thousand cuts in services. The costs of promises that have been made are going to be astronomical.”

That’s from and ABC news article titled Retiree Health Care May Overwhelm Governments

That’s because new accounting rules ordered by The Government Accounting Standards Board in 2004 are to take effect in 2008. These rules will enable taxpayers to see — for the first time –just how much they’re paying to provide benefits to active and retired state and local public employees. The new rules don’t require governments to fund liabilities right away. However, they must disclose the present value of these future costs and estimate how much more money is needed to pay for them. In other words, politicians will no longer be able to promise to win elections, and then walk away, leaving hidden problems to blow up years down the road under future regimes. Continue Reading »

The Federal Reserve claims to be a vigilant fighter of inflation and responsible steward of the dollar, when in reality it is a banking cartel in the business of earning profits off the very principle of lending money functionally printed out of thin air. Hence, perhaps this clip is just a touch oversimplified regarding how quickly inflation hits the system, but fundamentally it hits the nail right on the head.

Perhaps rising prices are not so severe as when this clip was made in 1980; you can thank the trade deficit for hiding the fact that the running printing presses have been hidden by cheap import infrastructure created as newly minted dollars vented abroad. In other words, U.S. consumers dodged rising prices by buying from abroad. For now, at least, lest we ignore $60 oil and gas prices that are still well above their prices of just a few years ago even if they’ve dropped a bit in the past few months.

I was conversing with Doug Wakefield a moment ago (see our 9/20 recorded interview). We both agreed that the nature of the material we produce generates one of two reactions. Either it is with an immediate rejection (usually heavily reinforced by the nature of both of herd mentality and safety in numbers), or it is with open arms. Many in former group will tell you, point blank, that you are nuts, dangerous, or a just a self-promoting fear-monger. The latter, of course, sees the other side of the coin that the first group is missing.

Otherwise, there really is no in between, with the exception of the increasing numbers of folks for whom an internal-thought-switch was suddenly flicked. This last group is just emerging from the self-limiting mental box of “conventional wisdom”, and is now in search of the answers – the truth, if you will.

Anyway, Doug and I both agreed that we enjoy helping this last group, and conversing with our peers among the enlightened. As for the former group, we’ve given up attempting to convert them since there is no point in beating ones head against the wall. As the sayings go, “you can lead a horse to water…” and “when the student is ready, the teacher appears”. We can afford to be patient.

At any rate, the discussion – especially the part about those who are often insulting to people like me and Doug because of our warnings against the conventional wisdom – well, it reminded me of one of my favorite proverbs from the days when those speaking Latin “ruled the world”. We think our readers would benefit remembering it as they go through life and contemplate their financial future. It might not hurt to think about it during election season, either.

Here it is in T-Shirt format:

The translation (on the back of the T-Shirt): “The world wants to be deceived, so let it be deceived.” Human nature is timeless.

Mundus vult decipi, ergo decipiatur. by intelligentdesign
Get this custom t-shirt at Zazzle

The largest profile hedge fund implosion since Long Term Capital Management LP (LTCM) failed in 1998 has taken place this past month, but the commodity markets appear unphased.

Amaranth, once a $12 billion hedge fund, dropped to $9.5 billion by last month. Today, Amaranth is left with less than $3.5 billion of investors’ assets thanks to massive losses in the energy markets caused when Amaranth’s hedged bets went wrong as natural gas prices fell 12% last week. The losses became staggering when they were forced over the past week to unwind trades to prevent the potential for margin calls that could not be met.

So far Amaranth is able to meet its obligations, but according to Bloomberg, they are shopping for a cash infusion to help keep the fund in business. Citigroup — a Fed friendly bank that helped bail out LTCM — is in line.

One wonders what could happen if the markets really took a swing the wrong way in unexpected fashion. Amaranth is alone in this situation. But, given the high volume of programmed trades, many are expecting to find the exits will work at reasonable valuations to support their risk models. Combined with the fact that derivatives continue to explode in volume, and have been written in amounts far exceeding the market value of what many of them have been written on, the concept of gridlock emerging should the markets encounter a repeat of something like the 1987 equity plummet, the nuclear meltdown of cascading defaults could become a reality.

I’d be dramatically less worried if the most of the market, the Fed, and anybody else who matters, were not so supremely confident that there is no chance of a serious problem thanks to all the geniuses residing in and around the Wall Streets of the world.

So, for now, Amaranth is contained. For those interested in what can happen, click on the book icon above “When Genius Failed.” Don’t forget, when The Fed bails these things out, you — the citizen who uses dollars — pays for it via inflated dollars issued from thin air by The Fed.

Live — Vigilant Investor now!

Doug Wakefield from Best Minds Inc. and Vigilant Investor’s Johannes Ernharth discuss why paying attention to the economy is more important than it has been in a long time when it comes to your financial future. For a long time it seemed like those who talked about problems in the economy translating into problems in your pocket book were always wrong, or at best, too early. But since 2000 and the bubble burst in technology stocks and then the S&P and Dow, times have changed. Stocks have not regained their 2000 highs, and after a recession dip in 2001, the economy is again slowing and facing a deflating housing bubble. Should you be paying attention, or should you stick with auto pilot, buy and hold asset allocation that worked so well from 1982 to 2000?

Tune in right now live (9:00 pm Eastern), or check out the podcast that is always available on talkshoe.com or through iTunes.
Also, feel free to call in to talkshoe for your questions. For more information, click the talkshoe link below!

“The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”

Fan Gang, member of China’s central bank monetary policy committee, August 29th, 2006

With the recent flight to safety (U.S. bonds and the dollar), the decline of dollar dominance in the global economy seems like a distant concept. Yet when a country that holds nearly $800 billion of your debt is contemplating the end of the dollar era, you had better be considering the options as well. (Don’t forget, the British never foresaw the end of the GB Pound era.)

We don’t know what the replacement will be, but we are fairly sure that the long term trend of the dollar’s decline as a store of wealth will continue to gain momentum.

Moreover, with the Fed publishing white papers questioning the solvency of the U.S. Government thanks to $80 trillion of unfunded liabilities (those are the cumulative costs of all the promises U.S. politicians have made over the last 100 years to buy off voters)… and the clear history of Central Banks and governments working together to deal with solving such insurmountable debts, we can only presume inflation is on the horizon. And when we say inflation, we mean the continued expansion of dollars circulating in the global economy measured in ways that don’t fudge price increases as is now the case with official CPI.

Ladies and gentlemen, it is time to recalibrate how you measure real vs. nominal returns. And it is time you recalibrate your expectations regarding the volatility required to stay ahead of real inflation.

Few can imagine the dollar not being the dominant world currency. We doubt it will lose the role vs. other currencies being equally inflated at a pace to maintain trade parity. But even a backing off of dollar demand for diversification purposes could spell a new era for the global economy.

For years there have been more than a handful of personalities predicting severe corrections and / or collapses in the U.S. economy, the bond and equity markets, and even the banking system. Predictions have varied, but the core concern is argued to be an unsustainable deterioration of the U.S. balance sheet, combined with a systematic flooding of the economy with freshly minted currency (e.g., inflation), all of which will lead to varying degrees of collapse.

Yet as any investor of the last twenty five-years knows, more often than not such predictions have been wrong, and when right, frequently so early that they have been costly for most who heeded them. For example, contrarians abounded through the 1990s –and had you listened to them in 1992, for example, you might have missed a great deal of the bull equity market run. This reality has lead the mainstream investment industry to dismiss most contrarians as unnecessary worry-warts and profiteers of doom and gloom, and as a crowd that always cries wolf and costs you money when you listen.

Yet, as regular readers of Vigilant Investor know, today there are more and more analysts suggesting that the the evidence is clear that the U.S. economy is in trouble. But given the history of contrarian sentiment often being too early or wrong, why should you bother to care this time through?

This week on Vigilant Investor Radio, our guest interview is author, contrarian and shorting expert, Doug Wakefield of Best Minds, Inc. Our topic of discussion: Why this Time it is different. Even in Aesop’s The Boy Who Cried Wolf, eventually the hungry wolf shows up to eat. Only, unlike the fable, the when the wolf arrives in our story, he’ll have your wealth in his sights.

So be sure to tune in, Wednesday September 20, 9:00 pm EST. Hosted by:

From Genworth Financial

Housing and the consumer are intertwined as a source of both historical strength and possible future weakness of the U.S. economy. An oft-cited fact is that the U.S. consumer spending accounts for over two-thirds of U.S. GDP[i]. Many investors will realize that perhaps a significant source of cash for consumer spending has been realized through the housing market’s boom, at least up until the present, either cash from realized gains on home sales or cash from cash-out refinancing activities. However, there are a few important facts to help quantify that significance

Continue Reading »

“Today, as I write this article, a financial storm continues to build. Still, most people don’t want to be bothered with the details. With such pretty pie charts predicting fair winds, they feel secure aboard the “USS Stocks for the Long Term,” chanting the “Buy-n-Hold” mantra should they ever feel a tinge of concern. Yet, when this modern marvel collides with the iceberg of science and history, the pain will cause them to begin searching for what went wrong. Understandably, they want their lives to go as normal. Unfortunately, the thinly disguised marketing materials most investors (and advisors) look to for guidance carry a heavy consequence which will affect many for the rest of their lives.”

That’s Doug Wakefield (with Ben Hill) in his most recent piece “Please, Proceed to the Nearest Exit” — a highly recommended read on the institutionalized bullish bias of Wall Street.

We, too, are prone to comment on how Wall Street seems to be bullish no matter what the underlying variables might be. In the aftermath of the crash of 2000-2002, it was revealed that many brokerage houses had their own self interest ahead of their clients, with many buy recommendations on stocks only because very profitable investment banking opportunities existed with the same company whose stock was getting stock boosting positive reviews.

Today we’d argue that the buy-and-hold, near auto-pilot methodology pushed by most of the industry is a profitable distant cousin to prior problems in the industry. The world could be coming to an end and most advisors would tell you “you don’t know that the world is coming to the end… so you are better off playing the averages and investing for the long haul.”

The world is not coming to an end (so far as we know), but the economy is facing the most extreme structural headwinds it has faced since the Great Depression (leaf through the evidence we’ve presented on this sight for the past year and a half if you must), yet the industry plods along indifferently complacent to each issue. Meanwhile Wall Street keeps assuring us that all is well, and the fees roll in.

But there’s a lot more to the bullishness on Wall Street — the bullishness that trickles into all forms of investment media, and into Main Street retail investment houses. This bias should not be ignored. Again, we encourage you to read Doug’s article.

Note: Doug Wakefield will be our guest interview on The Vigilant Investor live streamcast radio this Wednesday evening.

What? Test Non-Lethal weapons on Americans? That’s the stuff of conspiracy nuts living in Idaho militia compounds, you say?

Not so fast.

It turns out Air Force Secretary Michael Wynne thinks it is a good idea. His target testing audience? Crowd control situations. The purpose? To make sure these weapons are safe for battlefield use!

“If we’re not willing to use it here against our fellow citizens, then we should not be willing to use it in a wartime situation… If I hit somebody with a non-lethal weapon and they claim that it injured them in a way that was not intended, I think that I would be vilified in the world press.”

While the very topic may seem outlandish to you (this will never be allowed to happen, you probably think) , consider that MSNBC.com is currently polling this question — with 28% of the population in favor! The gradual and complacent acceptance of such lunacy being considered as acceptable reminds me of Orwell’s ‘Animal Farm’, and the ready acceptance of gradual authoritarianism for the good of all farm animal society: “No animal shall kill any other animal… without cause.”
It also reminds me of this forgotten, quickly dismissed, – and, more than ever today — terribly inconvenient quote:

“Those who would give up an essential liberty for temporary security deserve neither liberty nor security.”
–Benjamin Franklin

We post this because this is the cultural climate — the way people are thinking today in the U.S. It’s almost as if it has been forgotten that liberty, freedom and free markets — resting with the consensual authority of the individual, not on an all-powerful “ruled by the collective masses” government — made the United States great. Lost is the understanding that liberty and freedom should be guarded jealously; yet it would appear that, for ever more trivial causes, our country is willing to sacrifice it.

Freedom and liberty is not a birthright or an entitlement, and indifferently allowing it to slip through our fingers as a nation will catch up with the country… and its economy… and it is affecting how you grow and protect your wealth.

“What worries me … is that our luck is about to run out in the financial markets because of what I would consider a gambler’s curse: We have already won this long, let us keep the money on the table….the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random distribution of wealth, and the diversion of financial human capital into the acquisition of wealth. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Whenever we do it, it is going to be painful, however.”–Fed Governor Larry Lindsey, 1996

Larry Lindsey’s observation is correct. But instead of facing the problem head on, Alan Greenspan and the Fed continued to flood the economy with more liquidity — more money supply and more credit — through the end of the 1990s, when finally a modest cutback resulted in the stock bubble bursting in 2000, and horribly so for investors in the tech heavy NASDAQ.

But at least the bubble was burst. The consequence of the dislocations of resources common to manias and bubbles is ordinarily a very necessary recession that is inversely proportional to the bubble itself. The economy would go through the painful process of reallocating wealth back to its most efficient and productive uses — instead of funding sock puppets blowing tens of millions dollars on 30-second Super Bowl ads promoting profitless dot coms trading at $200 a share being run by twenty-seven-year-olds. Continue Reading »

Since the mid 1990s, retail investors have been fed a steady diet of information on “how to invest like a professional”. Whether they read investment magazines, receive direction from do-it-yourself discount brokerages or use an investment professional to help out, the consensus recommendations are almost always the same: Diversify your portfolio among stocks and bonds according to your risk tolerance and time horizon; use professionals; monitor your investments; stay true to your asset allocation; and — whatever you do — never, ever try to time the market.

On the surface, this is sound advice. However, is it always the best? That may depend.

First, — like anything good taken to an extreme–, it has led the industry to produce simplified and easily duplicated, assembly-line client solutions. Too much auto-pilot is never a good thing. Second, rooted in theory that relies on the long term averages of different investment styles and classes, this methodology fails to recognize that not all times are “average”, or to acknowledge that certain situations can present substantial evidence to suggest a different course is in order.

Tonight’s episode of the Vigilant Investor live net-radio show will engage the pros and cons of conventional investment management methodology. Make sure to tune in 9/13/2006, 10:10 p.m. Eastern, and call in with your questions!

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