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The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

The Tax Rebate: Spend Or Save?

It’s official. Earlier today President Bush signed a $168 billion “economic stimulus” package that will extend rebates to American taxpayers, give tax breaks to businesses, and make more-expensive mortgages available through government and government-sponsored mortgage finance companies. Approved by lawmakers last week, the package provides a tax rebate of up to $1,200 per working couple, plus $300 per child. Businesses get tax breaks to invest in capital equipment. In addition, there are provisions to make more-expensive mortgages available through the Federal Housing Administration and government-sponsored enterprises Fannie Mae and Freddie Mac. According to MarketWatch reporter Robert Schroeder this afternoon:

Surveys show most consumers say they’ll save the tax-rebate money, or use it to pay down debts. Only a minority of consumers say they’ll spend it. To be an effective short-term stimulus to the economy this year, the money would have to be spent.

However, a number of groups and individuals are arguing that the tax rebate should be used to improve one’s finances instead. Financial columnist Eileen Ambrose said in the Chicago Tribune on February 3 that:

Consumers for years have done more than their share of propping up the economy. And what do we have to show for it? Steep credit card debt. Rising bankruptcies. More late payments on car and home equity loans.

Yet now, with the economy in danger, politicians are calling on consumers to spend more. They’re even planning to give us the cash to do it.

Instead of spending the tax rebate the government wants to send us, use it to improve your finances. Pay off high-rate credit card debt. Invest in a 529 college savings plan. Start an emergency fund. Salt away money for retirement. Do something that will leave you in better financial shape — not just for a week or month, but longer term.

Thomas Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, the group which spearheads a savings campaign called “Feed the Pig,” said:

You listen to some people and it’s almost unpatriotic if you don’t take the money out and spend it right away. You can be patriotic and save the money.

Daniel Wishnatsky, an Arizona-based certified financial planner with Special Kids Financial, told Edward Gately of the East Valley Tribune (Arizona) on January 25 that:

It’s not patriotic to be in debt. You could argue that that’s why the markets are in the condition they are today. There’s really too much debt.

However, Ambrose said that using the rebate for other purposes is not what politicians want to hear. The rebate was meant to stimulate a slowing economy through consumption. Spend, spend, spend! David Wyss, chief economist for Standard & Poor’s, offered this advice to the country:

You need some to go out and spend money and eat more meals out and stop cooking for yourself.

However, according to Ambrose, Wyss admitted that if he were advising an individual, he would suggest using the money to pay off credit cards.

Joanna Smith-Ramani, director of the Baltimore CASH Campaign, which provides tax preparation and financial counseling for the type of workers the rebates are targeting, said:

What drives me most mad about this tax rebate is that it’s all about more consumerism. They are saying, “Buy, buy, buy.”

Maryland-based financial planner Peg Downey said the call to spend “infuriates her.” She warned, “It reinforces bad behavior. You’re training people to overspend.” Personally, I don’t believe additional training is needed when it comes to learning how to overspend. When it comes to buying things we can’t afford, Americans excel in that respect. In fact, it seems I’m not the only one who feels this way…

Source: Google Video
(High-speed internet connection is recommended)

World’s Highest Paid Advisor: ‘Financial Tsunami Is Upon Us’

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend). I talked about him in my November 21 post where I discussed gold as a hedge and investment. Back then, Schultz said that gold will advance past the thousand dollar mark in 2008. Earlier today in his MarketWatch commentary, Peter Brimelow said that Schultz’s latest newsletter issue is “absolutely apocalyptical.” Schultz warned, “A financial tsunami is upon us,” which he attributes to lax credit and complications from the derivatives craze. MarketWatch’s Brimelow says:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

 Bank run from “It’s A Wonderful Life”

Sound terrifying? According to Brimelow, Schultz’s advice for protecting one’s self from the coming financial storm and vulnerable U.S. banking system included, most urgently, closing out time deposits and buying non-U.S. government bonds. Regarding the future of the U.S. dollar, Schultz warned:

…the second biggest danger is owning U.S. dollars in any form, (it) has crashed and going much lower … use dollar rallies to exit dollars or sell short … This is not a time to seek profits, but to protect what U have … Portfolio diversification is essential in troubled times.

Brimelow noted Schultz’s favored currencies are, “In order of preference: Swiss Franc, Australian dollar, Euro, and Canadian dollar.”

On the topic of gold, Schultz recommended that:

Exposure to gold shares and bullion should be a minimum of 35-45% of your total portfolio, with at least 10% in physical gold bullion and coins, and/or very rare coins…

The public is still not in the gold market. They will be in 2008 as the derivatives and credit crises bring down more financial institutions (amid recession) and eyes will be opened, via pain. While Rome burns, gold will smash through its old unadjusted-for-inflation $850 high on the way to $1,600, & who knows how far beyond …

Wow. Apocalyptical indeed. By the way, Brimelow noted that Harry Schultz is up 21.42% over the past year according to the Hulbert Financial Digest, versus 7.51% for the dividend-reinvested Dow Jones Wilshire 5000. Looking back over five years, Schultz is up 34.38% annualized versus 12.85% for the Dow Jones Wilshire 5000.

Paulson Predecessor Says U.S. Recession Likely

In Sunday’s Financial Times (UK), former U.S. Treasury Secretary Lawrence Summers said that the odds now favor a U.S. recession that will slow growth significantly on a global basis. Summers, who served with the Clinton administration and now teaches at Harvard University in addition to serving as a managing director at hedge fund D.E. Shaw Group, concluded that the U.S. economy will stall out, based on the following:

1. The U.S. housing slump marches on.

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

2. The U.S. financial sector will be rocked— hard.

Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

3. Credit, necessary for economic expansion, will become tougher to come by.

Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Add the following:

Then there are the potentially adverse effects on confidence of a sharply falling dollar, rising energy costs, geopolitical uncertainties especially in the Middle East, or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfill its traditional role of importer of last resort.

And you have the recipe for an economic recession in the United States. Summers said:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.