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LOOKING ECONOMIC REALITY IN THE EYE
Dear Mountaineers,
At BFI, we are not friends of an "ostrich strategy" - sticking our heads in the sand in a situation of uncertainty and potential danger. Instead, we prefer looking reality right in the eye and preparing for what lies ahead. In the current environment, we too would prefer a rosier picture: balanced budgets, REAL economic growth, less government intervention, and rock-solid international fiat currencies would all be a nice start. Unfortunately, none of these exists today.
Literally around the world, you find the very opposite. Public debt is growing out of proportion. Deficits of all kind are soaring. Government is intervening at all levels with more regulations, more "bailouts" and a lot more cash backed by nothing but the work and tax money of generations to come. Meanwhile, the real economies are in a dismal state. Thousands of layoffs are reported on a daily basis. The crisis in the real economy is deepening.
While it is happening everywhere, the epicenter of it all lies in America. That is where this crisis was manufactured. Eagerly supported by the central banks and governments around the world, the US Federal Reserve and the US Treasury worked in sync to create the greatest global economic and financial crisis we may see in our lifetime. Therefore, it makes sense to look at a few U.S. FACTS and the REAL indicators of the U.S. economy.
And that is precisely what we will do today. For that purpose, we have asked Ron Holland, who will periodically act as a guest writer to our Mountain Vision Updates and Newsletters, to provide us with some insight into the latest FASB rule changes, as well as the bill proposed by Congressman Ron Paul to audit the Federal Reserve. Furthermore, we will then review a list of 17 economic indicators that paint a very different picture from the one you are served daily on CNBC, et al.
As always, we hope this helps you "turn off the noise" and focus on the big picture facts that will best support you at defining your investment strategy and wealth preservation plan.
Sincerely,
Your Mountain Vision Guides
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A FEW THOUGHTS ON US ACCOUNTING SHENIGANS
by Ron Holland
Remember earlier in the year when the establishment media constantly warned about the credit meltdown, the banking and stock market collapse, and the free fall in real estate values. They said it would truly be Armageddon unless Congress acted immediately!
At the time, the Federal Reserve and its activities received scant coverage, if it were even mentioned at all. Still the establishment trumpeted the coming economic Armageddon and risk of another Great Depression until Congress and the taxpayers were scared into the trillions in bailouts on the backs of future generations.
However, once the flow of bailout money was assured, everything changed. The news media and financial experts immediately switched from doom-and-gloom to an upbeat positive assessment on the manufactured stock market rebound, the expected turnaround in financial stocks and the housing market.
Are Americans Finally Getting "Fed" Up With the Fed?
Many Americans are now waking up to the fact that the entire scenario was just a set-up for taxpayers and future generations to bailout Wall Street and the major banks. As a result, there is now the beginning of a backlash in America over the activities of the Treasury and the Fed.
Maybe it is the growing threat to the AAA status of US treasury debt or the underlying fear of future hyperinflation and a run on the Dollar. But I believe much of the credit should go to the Ron Paul Campaign (www.campaignforliberty.com) and the Ludwig von Mises Institute (www.mises.org). Together, their successful educational efforts are now paying off almost 100 years after the Fed was established. They are now making the secretive Fed and its disastrous policies an open issue and topic for debate in mainstream American politics.
Congressman Ron Paul´s bill to audit the Federal Reserve (HR 1207) called the Federal Reserve Transparency Act now has 179 co-sponsors. Although an actual audit of the Fed is unlikely, this number of co-sponsors is unheard of in the history of the institution and represents a paradigm shift in public opinion away from almost total disinterest to growing opposition and awareness.
Americans want to trust their government, respect their legal and financial institutions, and believe the Fed is working in their interests, but this trust has been shattered beyond repair by the bailouts and economic crisis. We view this new awareness as a positive long-term development for the United States.
Clueless in DC
Opponents of the bill will say the Fed is already audited. But you only need to watch the YouTube video of Federal Reserve Inspector General Elizabeth Coleman responding to Representative Alan Grayson´s questions about the trillions of Dollars loaned out or the $8 trillion in off-balance sheet transactions to know she is totally clueless about her job responsibility, much less the Federal Reserve.
If Coleman is the Federal Reserve watchdog, then the legitimacy and accountability of the Fed and the US banking system is in jeopardy and Ron Paul is right. They desperately need to audit the Fed. Watch the video and be amazed at the incompetence and lack of basic comprehension of the situation (http://blip.tv/file/2104758). As if this wasn´t bad enough, there is now even scarier news from the White House.
A Fox in the Hen House is Not the Answer
The Obama Administration is now proposing that the Federal Reserve serve as the new, all-seeing "Über-Regulator" to detect activities that could pose risks to the entire financial system. Surely, the Fed will know a lot about such matters, as their earlier policies helped create the worst financial and economic crisis since the Great Depression. The Fed is the last institution that should be placed in such a position.
The U.S. regulatory environment must to be revamped to limit cronyism like the Madoff Ponzi scheme and excesses of Wall Street and the banking industry. However, the solution is a professional, independent regulatory environment responsible to the people to protect investors instead of the cozy, incestuous relationship that now exists between regulators and the financial industry in the United States.
Financial regulators should seek to protect the public from questionable investments and activities rather than defend the industry from criticism at home or foreign competitors abroad.
In addition, few in the banking and Wall Street establishments would question the necessity today for a nation to have a central banking institution to regulate their economy and deal with currency issues. The self-regulating benefits of a gold standard instead of the present fiat currency system would be our preferred alternative. But certainly this, along with a truly independent central bank responsible to Main Street rather than Wall Street for monetary policy, would take money creation and credit expansion away from politicians and the financial establishment. This would be a major step in the right direction and provide with a situation similar to what Switzerland has.
The Swiss National Bank is a good study in contrasts to the American Federal Reserve System. First, the Fed is owned by member banks and it pays a 6% dividend to the stockholders with the remaining profits going to the "bottomless pit" of the US Treasury. It is interesting to note that the original 1913 Federal Reserve Act stated that private individuals and companies were prohibited from owning more than $25,000 of Federal Reserve stock. But surprisingly, we can´t find any record of private ownership. It would be interesting to see some enterprising Americans or Ron Paul subscribers attempt to buy stock in the Fed as this would be a great education for the wary American public.
It couldn´t be more different in Switzerland. The shares of the Swiss National Bank are actually listed on the Swiss Stock Exchange (SIX) and although about 55% of the shares are held by Swiss banks, private investors can also purchase shares. You´ll find it interesting that the dividend is also 6% of profits, but 2/3 of all remaining profits then go to the Swiss cantons (comparable to American "states") instead of the Swiss federal government, in keeping with the Swiss decentralized confederation model of government.
The independence of the Swiss central bank is guaranteed in the Swiss Constitution and in the act creating the bank. None of the shares are owned by the Swiss government, the bank can not provide loans to the government, and the bank is prohibited from taking direction from government bodies or undue political pressure.
Beware of the New FASB Accounting Rules - All Smoke and Mirrors
Following tremendous lobbying pressure from Washington and Wall Street, the Financial Accounting Standards Board (FASB) recently relaxed the earlier "mark to market" valuation where mortgage values were based on current market prices of similar investments trading on the open market.
In other words, prior to the new accounting rules, banks and financial firms had to regularly give market prices to securities they held which resulted in loan backed securities dropping dramatically in value. This forced banks to write down billions during the worst of the financial meltdown. The drop in market value with the toxic assets caused many large American financial institutions to become insolvent in what had been accepted accounting terms.
The preferred Wall Street establishment solution was not more capital but rather a government bailout followed by a sudden change in accounting rules. This is supposed to magically transform toxic, almost worthless assets in the eyes of investors into highly valued, secure assets.
For example, on Friday, May 29th, just days before the long-awaited General Motors bankruptcy, GM bonds maturing in 2033 were trading appropriately at almost 10 cents on the Dollar. This would have been the value under "mark to market". But with the new FASB rules, similar bonds would be valued at par, ten times the current market value as if the notes were held to maturity. This is what the banks have done with all their bad assets. They can now separate market-related losses from credit losses as long as the bank can somehow prove they can hold the security until maturity at a date in the distant future.
This change in accounting rules suddenly allowed formerly insolvent banks to announce fantastic profits at the end of the first quarter as they took back losses posted in prior quarters, thus fueling the recent stock market rally led by financial stocks. But it is all smoke and mirrors.
The struggling banks may stay in business longer but it doesn´t change the real value of their assets. As a result, the losses will be even greater in the future when they do ultimately fail. The problem is that the stock market rally engineered by the accounting change will further decimate the portfolios of many investors sucked into the false rally, while solvent institutions will find their ability to raise capital curtailed.
A good example is Bank of America. Their stock price went from a low of near $3.00 to almost $15.00 during the 6-week period when insiders knew the accounting change would take place. Did the value of bank assets or the ability to turn a profit increase by 500% during the period? Of course not. Don´t get sucked into this government-created bear market rally trap - nothing has really changed in the long run but the accounting rules and the toxic assets are still owned by the banks.
Forget Questioning the Validity of the National Debt!
The exploding Treasury debt burden of the United States and their ability to service this debt, along with the desperate need for foreign investors and central banks to continue buying it, are linked together with the corresponding threat to the future of the Dollar. All of this is combined in a maelstrom of misinformation and propaganda designed to hide the fact that there is very little difference except for a timeline in the credit worthiness of General Motors, AIG and the United States government.
Americans are prohibited by Section 4 of the 14th Amendment to the Constitution from even questioning the validity of the national debt: "The validity of the public debt of the United States, authorized by law....shall not be questioned".
This section was passed with little debate or publicity following the War Between the States, just as the creation of the Federal Reserve and the Income Tax were imposed on the American people back in 1913...or just as the recent bailout actions occurred earlier in the year.
Note that the total federal government debt today is in excess of $64 trillion, calculating to around $550,000 per household in the U.S. Go to: www.usatoday.com/news/washington/2009-05-28-debt_N.htm.
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THE REAL ECONOMIC INDICATORS ARE STILL PLUNGING
While Timothy Geithner, other official voices and the mainstream media are doing everything they can to paint a rosy picture and stretch the public´s high spirits a bit longer, it is worth looking reality in the eye with a hard dose of economic facts to keep our perspectives in sync with the reality. Please find 17 economic facts listed below that point toward a somewhat more sobering outlook.
The following is an excerpt from Don McAlvany´s latest issue of the McAlvany Intelligence Advisor (MIA). You should be sure to get a copy.
"All statistics confirm that the economy plunged off a cliff in 2008 and the first quarter of 2009:
1. U.S. FACTORY ORDERS ARE DROPPING AT A 12% ANNUALIZED RATE (down eight months in a row). Total industrial production is dropping at a 16% rate - a post-World War II record. From the 2007 peak through April, industrial production is down a Great Depression-like 16%.
2. RAILROAD FREIGHT SHIPMENTS (i.e. CARLOAD VOLUMES) ARE DOWN 22% versus a year earlier (a strong measure of declining business).
3. TRUCKING TONNAGE PLUNGED 4.5% IN MARCH, and is dropping at a 12.2% year-over-year rate - the biggest decline since World War II.
4. REAL (INFLATION-ADJUSTED) GDP FELL 6.1% in the first quarter of 2009 and over 6% for six straight months. John Williams´ Shadow Government Statistics more accurately calculates the first quarter drop at over 8%.
5. RETAIL SALES PLUNGED AT AN ANNUALIZED 10.1% RATE IN APRIL, the sharpest decline since World War II (except for the Christmas month of December 2008, which was down 10.6% - December is supposed to be the best month for retailing). Retail sales for all of 2009 are down by 9%.
6. THE BALTIC DRY INDEX (WHICH MEASURES OCEAN FREIGHT CONTAINERIZED SHIPPING) IS DOWN 77.4% OVER THE PAST YEAR (May ´08 to May ´09). The big port of Long Beach, California, reported its shipping business in March was down 32% from a year earlier.
7. THE ROLLING 12 MONTH FEDERAL DEFICIT IS $1.3 TRILLION - with total federal debt up $1.9 trillion (the real deficit) over the past 12 months. The 2009 FY deficit is projected to be $1.84 trillion, but in the real world is likely to be half again higher.
8. TAX REVENUES WERE DOWN IN APRIL BY 34% FROM A YEAR EARLIER - THE BIGGEST ONE-YEAR DROP SINCE THE GREAT DEPRESSION - and the first April (tax month) deficit in 25 years. This will prompt liberal cries for higher taxes to soak the "rich" (i.e., actually the U.S. productive middle class, who earn $200,000 or more per family).
9. CONSUMER CREDIT IS COLLAPSING - In the third quarter of 2007, banks issued $44 billion in net new loans on credit cards and other consumer credit (excluding mortgages). A year later (third quarter of 2008), this new credit had collapsed to $8.7 billion - a decline of 80%!
In the fourth quarter of 2008, new credit disappeared and lenders pulled out of the consumer credit market (i.e., reduced loan totals) by $19.5 billion. In the first quarter of 2009, total consumer credit contracted by another $12.2 billion. It is the biggest collapse in consumer credit ever recorded! (see chart).
10. CREDIT CARD LOSSES (DEFAULTS) ARE EXPLODING AT AN 8.5% ANNUALIZED RATE. MasterCard´s profits just fell 18%, while the 19 largest banks (according to regulators) are bracing for $82.4 billion in credit card losses through 2010. If unemployment continues to rise, that number could more than double.
11. U.S. HOUSING STARTS DOWN 77.6% - Three quarters of America´s largest single industry has been wiped out. Housing starts peaked in 2006 at 2.3 million units and are today barely over a half million. (see chart) The housing industry (America´s largest) is not recovering - it is in a state of collapse!
12. AUTO SALES ARE DOWN 44% - At their peak in February 2007, U.S. and foreign-owned car manufacturers sold 16.6 million units. By April 2009, those sales plunged to 9.3 million - a decline of 44% (including the best performers like Toyota and Honda) - see chart. Chrysler has just gone bankrupt, and GMAC (the nation´s largest auto loan lender) and General Motors are in their death throes.
13. CONSUMER WEALTH IS PLUNGING - Robert Altman, who worked for President Clinton, says that U.S. consumer wealth is down by 20% - from $64 trillion to $52 trillion. Steve Schwartzman, head of one of the largest private equity funds (Blackstone Group) believes the number is closer to a 45% contraction in net worth.
14. TEN PERCENT OF THE U.S. POPULATION IS NOW RECEIVING FOOD STAMPS.
15. DIVIDENDS ON STOCKS ARE BEING CUT SHARPLY AS EARNINGS PLUNGE - GE has cut its dividend by 68%; others, like JP Morgan Chase, have cut their dividends by more than 80%. Thousands of such dividend cuts are coming, and will cut into the already dwindling incomes of millions of investors and retirees.
16. SMALL BUSINESSES ARE CUTTING EXPANSION PLANS or new projects due to the recession and the fear of giant new tax increases and increased regulations and controls on business.
17. HOME PRICES HAVE DROPPED 18.6% ACROSS THE COUNTRY THIS YEAR - with the residential real estate collapse (which has extinguished over $4 trillion in wealth, with no end in sight) now spreading to commercial real estate.
[ED. NOTE: Consider these 17 points when you next hear your stock broker or bubblevision shill talking about the recovery and new bull market.] [All charts courtesy of Weiss Research.] "
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NEWS BRIEFS
The Dollar Breached the 80 Mark
The US Dollar has breached an important support level on the downside. As stock markets continue to improve (for another couple of months...), you can expect the Dollar to weaken further.
This may sound counter-intuitive. But once the stock markets go into the "deleveraging mode" again, which is what we expect in the second-half of the year, you may see the Dollar strengthening. That too may sound counter-intuitive. We will explain this phenomenon in our next Update.
The Yield Curve is Steepening - and Bernanke is Scratching His Head in Awe
The following chart, courtesy of www.stockcharts.com, portrays a steepening yield curve. In a recent Update, we warned you of the implications of what we call THE DEBT TRAP. As we discussed, once interest rates start rising - because of market expectations and without any Fed action - Bernanke and Geithner will have much to think about. In particular, they´ll have to consider how to get long-term interest rates under control and to push these down. We doubt any of those thoughts will provide REAL solutions, unfortunately.
The black line is the yield curve.The fading "trails" behind the black line show how the yield curve developed over the preceding days.
The following Reuters article is quite amusing. It actually portrays a picture of the Fed Chairman wondering WHY. Why is the yield curve suddenly steepening? It appears as yet another conundrum, a puzzle too complex and unnatural to comprehend.
When you read the story from Reuters and the quotes of various Fed officials, you may wonder what these people are smoking?!?! Do they really think that treasury yields are rising because investors are more optimistic? Anyway, "enjoy" the read. But take it with a grain of salt...
Go to Story
Yet Another Bailout - GM
June 2, 2009, Bloomberg: GM, the largest manufacturer to go bankrupt, won court approval to auction its assets with the lead bid coming from the U.S. Treasury and a goal of closing a sale in July to create a reorganized company.
Go to Story
A Layman´s Understanding of the Bailouts
This was sent to us by one of our clients. Just think of Freddie and Fanny MAC and the subprime mortgage foreclosure debacle. This is an excellent analogy and easily understandable explanation of derivative markets.
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Heidi´s "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi´s bar. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers´ freedom from immediate payment demands Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi´s gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi´s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the bank´s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don´t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation´s leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi´s bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Heidi´s bar had granted her generous payment extensions and had invested their firms´ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion Dollar, no-strings-attached cash infusion from the government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.
Now, do you understand? |
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| © Copyright 2009, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice. |
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