Archive for March, 2010


March 31, 2010

When it comes to the level of U.S. government debt, I hope all of our subscribers pay attention to one key statistic: the amount of the government’s revenues that must go towards paying interest. As everyone who has ever paid a mortgage knows, carrying debts can become prohibitively expensive. My concern is the U.S. already has more debt than it can afford, which puts it at an enormous risk of a debt and currency collapse. While I wish I were wrong, I’ve learned that when it comes to finance, the numbers rarely lie.

… The big problem we face right now is the Treasury has moved more than half of our total debt into the very short end of the yield curve. It did this to minimize interest expense. But as a result, we’ll have to “roll over” roughly $4 trillion in the next 30 months. That’s in addition to funding another $3 trillion or so in additional annual deficits. It’s an interesting question, whether or not we can actually do this. We cannot do it if China stops buying massive quantities of Treasury bonds.

And as of today, China is a net seller of Treasury debt. If we can’t fund our debts in the bond market, the Federal Reserve will be forced to monetize our deficits by buying Treasury bonds. If that happens, inflation will soar and the price of gold will double or triple almost overnight.

The bigger problem, over the long term, is simply debt service. Right now, the federal government takes in roughly $1 trillion in income taxes and a much smaller amount of money in other fees, duties, etc. (The government takes in another $1 trillion from Social Security and Medicare taxes, but it spends more currently on these programs than it takes in. So as a result, this revenue can’t factor into our analysis of debt service.) At the end of 2009, the federal government had $11.8 trillion in total outstanding debt. That’s the official number.

Likewise, officially, the interest we paid last year made up 11% of the government’s revenues – but that measure included all of the social insurance premiums as tax. More importantly, the current budget doesn’t include a number of highly significant obligations that are actually the government’s responsibility, but are held “off balance sheet.”

… By the end of OBAMA!’s first presidency (2013), I believe the U.S. will owe roughly: $17.8 trillion in federal debt, $2 trillion in GSE debt/guarantees, $500 billion in FDIC obligations, and $500 billion in FHA obligations. My only big assumption is $1.5 trillion in additional deficits each year, which is what the president’s budget also predicts.

Please keep in mind… These obligations aren’t future promises to pay. This isn’t Medicare spending projected out until 2040. These are all obligations that either have known maturities or will come due in the next two or three years. There isn’t much guessing about the magnitude of any of these obligations.

What’s a reasonable rate of interest on these debts? Right now, it costs the U.S. government almost 5% to borrow for 30 years. Let’s assume the blended borrowing cost goes to that amount – which is well below the government’s average borrowing costs since 1980. That would equal $1 trillion in interest payments due, per year. That’s 100% of all income taxes paid in 2009.

I hope I don’t have to explain to you why this amount of debt isn’t sustainable. I’m not the only person in the world who can do basic math and has access to the government’s accounts. Says Felix Zulauf, one of Europe’s top money managers, “Eventually the U.S. will arrive at the point where, as Marc Faber says, interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30%, you are done. You go into default or your currency breaks down and your system collapses.”

Or perhaps you will recognize this name: Alan Greenspan. He says, there has always been “a large buffer between the level of our federal debt and our capacity to borrow,” but that’s disappearing now. “I’m finding it very difficult to look into the future and not worry about that.”

Obviously, I can’t know for certain what will happen to the U.S. dollar over the next three years. It is certainly possible for our economy to grow fast enough to support our soaring federal debt. The problem is, that’s unlikely. Meanwhile, the growth of our debt and interest expenses is a mathematical certainty.

No one else is going to give you this stern of a warning. They’re afraid they’ll be wrong and end up being embarrassed. I’m not worried about that. I’d love to be wrong. I would much prefer to be embarrassed than to see my country’s economic power destroyed and millions of people wiped out financially. So just look at the numbers. If I’m wrong about any of them, let me know. Otherwise, please… act now to protect yourself. If you wait until the last minute to get your assets out of the U.S., you’ll never make it.

Porter Stansberry


March 30, 2010

The smell of despair !


March 28, 2010

The largest 500 American companies (excluding financial companies) hold almost $1.2 trillion in cash, or more than 10% of assets. That’s the largest amount since the 1960s. This cash can be used for investments, to increase dividends, or to acquire weaker competitors if the market pulls back.

Interest rates are also at record-low levels. So companies can borrow at next to nothing and invest in cheap assets… like real estate, which is down more than 30% across the country.

The government still has two-thirds of the $787 billion stimulus money to spend over the next 18 months. In the past two months, it has used the cash to increase lending to small businesses, give people money to buy homes, and extend unemployment benefits.

Millions of Americans are also contributing to higher corporate profits. The employed are working harder than ever… People are scared of getting laid off, so they’re working more hours for no additional pay. Workers are also afraid they won’t be able to find a new job with unemployment at 16-year highs, so they’re staying put even at lower salaries. For businesses, this means higher output and increased productivity… which leads to higher profit margins.

Inventory levels are also low. “Inventory” is simply the stuff sitting around that companies haven’t sold. After piling up a lot of inventory in 2007 and 2008, companies cut back on production. Inventory levels fell by 70% for some companies. Today, with the economy growing again, production must come back online. That’s why manufactures like Boeing and Caterpillar are increasing production (and hitting new 52-week stock price highs).

Finally, American citizens have $3 trillion in money-market accounts earning next to nothing in interest. As the stock market continues moving higher, investors will seek more return. And if companies use their $1.2 trillion in cash to raise dividends, we’ll see some cash on the sidelines flow into large caps with strong balance sheets like Verizon, McDonald’s, and Altria.

The bears will tell you the rebound in stocks is coming on weak trading volume… meaning institutional money (“big money”) is not coming into the market.

But a recent study by Standard & Poor’s suggests this is normal. The study showed over the past four bull markets since 1987, money was slow to come into equities in the first year. In the second year, more inflows occurred.

Sure, we will see inflation from low interest rates and reckless government spending. The rich and middle class will see massive tax increases to pay down our huge debt levels. And we may get the 5% to 10% pullback everyone is predicting. But I see any pullback as a short-term buying opportunity.

As long as interest rates are near zero, companies are flush with cash, and productivity is surging, stocks will move higher. I predict at least the next two quarters of earnings will be strong. That means stocks will continue upward for at least the next six months.

Frank Curzio

ndM – He has some good points, but he’s forgetting the first reason why stocks go higher: the progressive destruction of their unit of measure, i.e. the fiat-currencies. In gold terms, since 2000 the S&P500 has lost nearly 90% of its value, exactly as in the Great Depression.


March 27, 2010

There’s more chances of a snow ball in Hell than  CTFC (lead by ex-Goldman boys) stopping silver manipulation.


March 27, 2010
John M. Templeton
Lyford Cay, Nassau, Bahamas

 June 15, 2005


Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.
Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.
In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.
Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.
Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.
Most of the methods of universities and other schools which require residence have become hopelessly obsolete. Probably over half of the universities in the world will disappear quickly over the next thirty years.
Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations.
Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition.
Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries. Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac.
Research and discoveries and efficiency are likely to continue to accelerate. Probably, as quickly as fifty years, as much as ninety percent of education will be done by electronics.
Now, with almost one hundred independent nations on earth and rapid advancements in communication, the top one percent of people are likely to progress more rapidly than the others. Such top one percent may consist of those who are multi-millionaires and also, those who are innovators and also, those with top intellectual abilities. Comparisons show that prosperity flows toward those nations having most freedom of competition.
Especially, electronic computers are likely to become helpful in all human activities including even persons who have not yet learned to read.
Hopefully, many of you can help us to find published journals and websites and electronic search engines to help us benefit from accelerating research and discoveries.
Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.


March 27, 2010

Yeah, sure!




March 26, 2010

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March 12, 2010

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March 8, 2010

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.

2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.

4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.

6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.

7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.

8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.

9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.

10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.

11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.

12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.

13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.

14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.

15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.

16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major fin-ancial institution even to have a ROE goal is to court disaster.

17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.

18. When a government official says a problem has been “contained,” pay no attention.

19. The government – the ultimate short- term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.

20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Seth Klarman


March 5, 2010

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