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Why I Love Redheads

I love redheads. Just one, mind you— whom I happen to be dating. However, I’ve recently warmed up to a certain red-headed anchor who rose to fame with CNBC but now plies her trade over at the FOX Business Network. Liz Claman wrote a great piece back on August 21 about the recent housing bailout and the likely taxpayer “rescue” of mortgage giants Fannie Mae and Freddie Mac. She bluntly stated on her “Liz-Vision” blog:

Am I the only one completely frustrated right now? All this talk about the ‘inevitable’ government bailout of Fannie Mae and Freddie Mac is making this red-head crazy. The bailout is so far unfounded but the smart money says it’ll likely come to pass. You can’t let these mortgage behemoths fail because they’re pretty much the only ones writing mortgages out there during this time of fear.

Okay fine, I get it, make us all feel guilty for not rushing to put a pillow under Fannie and Freddie’s ‘fermischt’ fannies. But they, along with many people who will be bailed out by the housing bill will be getting the biggest financial ‘do-over’ in a generation. Lenders who signed off on mortgages they had no business granting, homeowners who signed on the dotted line of totally inappropriate mortgage loans they could never keep up with, and companies that allowed it all to happen are getting cozy, comfy pillows thrown under them instead of forcing them to suffer for their sins.

Save for a tiny percentage of people who were victims of predatory lenders, most of these people happily pulled up a chair to the roulette table, gladly took the free drinks and began gambling away. Shouldn’t they have to swallow the bitter medicine now of having made a bad bet?

The author of The Best Investment Advice I Ever Received: Priceless Wisdom from Warren Buffett, Jim Cramer, Suze Orman, Steve Forbes, and Dozens of Other Top Financial Experts, asks another question:

Why then will we, along with the millions of honest, hard-working American homeowners who haven’t defaulted on their mortgages, have to pay out of our pockets to help those who blew it? Believe me, I have no problem helping out those of lesser means, those who perhaps got the short end of the societal stick, folks who try but need the extra help from the rest of us Americans. That’s what makes our country great… we are a society that takes care of each other. I’m grateful for that. But this?

I want to scream…

Reminds me of a line I once heard in a movie…

And her with her freckles and her temper. Oh that red head of hers is no lie!

-Michaeleen Oge Flynn, “The Quiet Man” (1952)

Source:

“Stop Using My Money To Bail Out Gamblers”
Liz Claman
FOX Business, August 21, 2008

How Politicians Make Themselves Look Stupid, Part 2

Yesterday, I noted in part 1 that Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” Tuesday morning to scare off crude oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices.

CNN Money picked up on the findings, which you can watch here. The segment lasts 1 minute 46 seconds.

Source:

“CFTC: No oil market manipulation”
Video
CNN Money, July 23, 2008

Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

How Politicians Make Themselves Look Stupid

Earlier today, CNN Money’s Scott Anderson wrote about new legislation introduced by Senate Democrats that is meant to “crack down” on oil speculators, who they claim are responsible for high crude oil prices. The bill, known as the “Stop Excessive Speculation Act,” is sponsored by Senator Byron Dorgan (D-ND) and Senate Majority Leader Harry Reid (D-NV), along with other Democrats. According to Anderson:

It would provide more resources and authority to the Commodities Futures Trading Commission to detect and punish speculation, stop speculators from using foreign markets to manipulate the price of oil in the United States, require more transparency in oil markets and limit the trading of market players who do not intend to take delivery of the oil they purchase.

In particular, the bill will give the CFTC greater power to regulate the “swap” market for futures and differentiate between “legitimate” and “illegitimate” hedge trading that, the Democrats say, has lead to increased prices.

Well, a test vote on the legislation took place today, with the result being 94-0 in favor of. At this point, it’s not clear when a final vote would take place. Senator Dorgan remarked:

First things first. If you are running a race with hurdles, jump the first hurdle first. The reason we have oil at $130, $140, $145 a barrel - like a roman candle going up, up, up - is because we have excessive, relentless speculation in these markets… Nothing in supply and demand in the last year justifies the price of oil.

Now, here’s where it gets funny…

From the Associated Press Tuesday afternoon:

A federal task force set up to examine the sharp run-up in oil prices says in an interim report that fundamental supply-and-demand factors are most likely to blame…

The Interagency Task Force on Commodity Markets, chaired by the Commodity Futures Trading Commission, was formed last month to examine investment practices and fundamental market factors.

I recall something that Jim Puplava said this past weekend on his show “Financial Sense Newshour.” He said:

We’re posturing here, rather than dealing, and that’s why we’re going to be heading into a crisis. Instead of trying to solve the crisis, it’s like Matt [Simmons] said- they’re on a witch hunt. You’ve seen it. They’ve tried to blame it on the weather, the war, the dollar, the oil companies, and now, the latest witch hunt is speculators. And, instead of solving the problem, they’re just making the problem worse, which is why we see a full-blown crisis in the year ahead.

Maybe Congress should focus on something they’re good at, like conducting hearings on steroids in Major League Baseball…

Sources:

“Democrats: Crackdown on oil speculators”
Scott Anderson
CNN Money, July 22, 2008

“Fundamentals led to $130 oil – report”
Associated Press, July 22, 2008

Financial Sense Newshour
3rd Hour, Part 1
FinancialSense.com, July 19, 2008

Say It Ain’t So, Ben Stein

From Ben Stein, a Yahoo! Personal Finance “Financial Advice Expert,” this past Friday:

Now that the three major U.S. stock indexes have hit bear market levels what shall we do? Well, let’s ponder….

First of all I never thought things would get this bad, and I still think the market’s reaction is overdone, to put it mildly.

The aggregate losses in the U.S. stock market since the peak last October have totaled roughly $3.5 trillion dollars. Not billion. TRILLION. That is, the speculators and traders have knocked roughly $3.5 trillion off of the value of all publicly-traded stocks in this country…

Another go as a teacher in Ferris Bueller 2 probably doesn’t sound too bad right now, does it?

Art Insitute Of Chicago Scene
“Ferris Bueller’s Day Off” (1986)

Source:

“Bear Market Advice”
Ben Stein
Yahoo! Finance, July 18, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

More To High Price Of Oil Than Just Speculation?

Turn on the TV, surf the web, or read the paper, and you’ll almost certainly encounter someone screaming that the price of oil has skyrocketed because of speculators. “Speculation! Manipulation! Greedy bastards!” they yell. Granted, that could be a part of it (I guess the CFTC will find out, won’t they?). But, whatever happened to that fundamental economic concept of supply and demand, and how it applies to “black gold”? I rarely hear anyone mentioning it (T. Boone Pickens, Jr., excluded). Which is a shame, because maybe, just maybe, it might play an important role behind the high cost of crude oil these days. Bloomberg reported Wednesday:

Global oil production fell for the first time in five years in 2007 and reserves also declined as prices rose to records, BP Plc said in its annual Statistical Review of World Energy.

Crude oil production dropped 0.2 percent to 81.533 million barrels a day last year, from 81.659 million barrels a day in 2006, the London-based company said today. Proved reserves were 1,237.9 billion barrels at the end of last year, compared with a revised total of 1,239.5 billion barrels for 2006.

The financial news service added that the North Sea and Mexico are both seeing “flagging supply” as well. Bloomberg’s Eduard Gismatullin also noted:

Global oil consumption rose 1.1 percent to 85.22 million barrels a day last year, BP’s review said.

Let’s see. Supply at 81.533 million barrels a day. Demand at 85.22 million barrels a day. Giving us a shortage of 3.687 million barrels a day in 2007. Compare this to a daily shortage of 2.571 million barrels in 2006 and 2.062 million barrels in 2005, and a growing gap between supply and demand becomes apparent— which could help explain higher oil prices. So the next time someone screams “it’s all the speculators fault” when it comes to oil prices, ask them if supply-and-demand has anything to do with it. It will be interesting to see how they respond.

Sources:

“Global Crude Oil Production Dropped in 2007, BP Says (Update1)”
Eduard Gismatullin
Bloomberg, June 11, 2008

Oil Production Table- Barrels Per Day”
BP.com

Oil Consumption Table- Barrels Per Day
BP.com

U.S. Senator Mocks The System

I don’t know about you, but I’m starting to get this feeling that our Senate is evolving into that “legislative” body from the Roman Empire (not Republic, mind you) and from whom they derive their name. Well, at least they’re not assassinating each other in the hallways of the Dirksen Building (at least, not yet).

However, even those among its ranks are starting to mock the establishment and its growing reputation of being out of touch with mainstream America. The Wall Street Journal’s Damian Paletta wrote a great post for the Real Time Economics blog on Wednesday about Senator Jim Bunning (R- Kentucky) and his assault on the system. Paletta said:

The Senate Banking Committee plans to vote on legislation Thursday that would create a new regulator for Fannie Mae and Freddie Mac and allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. Lawmakers plan to file up to 70 amendments during the committee vote, with 31 of those coming from Sen. Jim Bunning (R., Ken.).

According to a summary of all the amendments, Sen. Bunning wants:
• “to stop the bailout of the rich”
• “to prevent the bailout of illegal aliens”
• “to prevent the bailout of homeowners who used their homes as a credit card”
• “to stop the bailout of sex offenders”
• “to stop the bailout of drug offenders”

Another of Sen. Bunning’s amendments would change the name of the bill from “The Federal Housing Finance Regulatory Reform Act of 2008” to the “Bailout of Irresponsible Lenders and Borrowers Act of 2008.”

A good example of how to fight fire with fire, considering all the humorous initiatives coming from Capitol Hill these days. But, what would you expect from a Congress with an 18% approval rating, according to the latest Gallup poll?

Sources:

“Bunning Campaigns Against ‘Bailouts’ in Housing Bill”
Damian Paletta
Wall Street Journal (Real Time Economics blog), May 14, 2008

“Congress’ Approval Rating Ties Lowest in Gallup Records”
Lydia Saad
Gallup, May 14, 2008

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

In Love With Housing? Play Video Games

I’m still seeing a lot of signs these days that America’s love affair with housing is alive and strong. However, is the love a “good” kind of love (think “This Old House”) or is it a “bad,” money-based one (á la “Flip This House”). Personally, I believe our infatuation with real estate is still rooted in its profit-potential. Even in a downturn. For example, not like I watch a lot of TV, but I’ve noticed a significant increase lately in the number of “get rich through foreclosures” commercials. A couple of weeks ago, I was at a Borders bookstore in a Chicago suburb (I don’t buy anything in the City anymore— sales tax is too high) and saw that they were pushing Foreclosure Investing For Dummies. But the following takes the cake. Earlier today I read an article by Jonathan Lansner of the McClatchy-Tribune Newspapers, who talked about a video game for wanna-be real estate tycoons called “Build-a-lot.” According to the game’s website, where you can play the game free for one hour or purchase it:

Become a real estate mogul and take over the housing market as you construct, upgrade and sell houses for huge profits! You can flip houses for quick cash or sit back and watch the rental income pile up. Travel to scenic towns and perform special tasks for the local mayors. Buy blue prints of new buildings to build bigger and better neighborhoods! Can you build an ice rink for the Olympics? A new cinema for the local movie star? Find out in the new strategy game, Build-a-lot!

Despite the ongoing housing woes, the game’s popularity is actually growing. In fact, one of the creators said that the current real estate market:

… has only increased the popularity of “Build-a-lot.” Real estate is a hot topic. For those that can’t become a real estate tycoon in real life, they can also give it a shot by playing “Build-a-lot.”

Looks like a good way to practice home flipping techniques. After all, the housing market’s bottoming, right?

Just in case aspiring real estate moguls may be concerned their virtual world might suffer the same fate as the real housing market, Lansner wrote:

There’s no grand, overarching market force to throw a wrench in your plans. There are no foreclosures to worry about, either.

Whew, let the love affair continue…

Source:

“Virtual real estate resists market slump”
Jonathan Lansner
McClatchy-Tribune Newspapers, April 27, 2008

Quote For The Week

You’ll know that the bubble-besotted housing culture has really changed when the home channels stop focusing on houses as commodities to flip, invest in or date and start looking at them as places to live in.

At that point, it may finally be time to buy.

-James Poniewozik, who talked about the housing boom and home shows in “Pimp My Real Estate Market!” from the April 21 issue of Time.

No Sympathy For Wall Street

“Shanna, they bought their tickets, they knew what they were getting into. I say, let ‘em crash.”

-Airplane! (American comedy film. 1980)

I have this strange feeling that Washington Post columnist Steven Pearlstein is not Wall Street’s biggest fan. Maybe it has something to do with his piece from this morning entitled “Time for Wall Street to Pay,” in which he wrote:

I’d be lying if I didn’t admit there’s part of me that takes some perverse satisfaction from the ever-widening crisis that has engulfed Wall Street, humbling its most powerful institutions and exposing its hypocrisy and corruption.

Pearlstein was just getting started:

Over the ensuing two decades, Wall Street has been brilliant at dreaming up other financial innovations that picked up where junk bonds left off. These included complex futures and derivatives contracts; loan syndication; securitization; credit default swaps; off-balance-sheet vehicles; collateralized debt obligations, or CDOs; and blank-check initial public offerings.

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.

Pearlstein listed how Wall Street’s “innovations” have taken their toll on America and its economy:

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

Regarding this last point, Pearlstein warned that because “huge bonuses paid in the good years are never required to be paid back in the bad years,” this creates an “asymmetric compensation system that encourages excessive leverage and risk-taking.” Furthermore, he lamented at the fact that the prospect of earning untold wealth on Wall Street has attracted “an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.” He asked:

Is it not fair to ask whether the United States can remain the world’s most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become “i-bankers” at Goldman Sachs?

At which point, Pearlstein went nuclear:

So I hope you’ll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.

Yes, I know it’s harsh and vengeful solution, and there will be lots of collateral damage. But as I look out over the destruction sweeping across the financial sector, I just can’t silence the small voice in my head that keeps repeating that old ‘60s expression, “Burn, baby, burn.”

Betting The Farm On A Farm

Even though I live in the concrete jungle, I’ve heard that farmland prices have been doing phenomenal. On Monday, Lynn Hicks and Jerry Perkins of USA Today wrote that even though U.S. home prices continue to slide, the value of farmland is setting records. They noted:

Demand for grain for food, fuel and export, along with low interest rates and a weakened dollar have raised farmland prices by double digits the past two years. Average values have doubled since 2000.

Farm real estate prices rose 20% to 23% in Iowa, Nebraska, South Dakota and Wyoming in 2007, according to Farm Credit Services of America, an agricultural lender.

The Federal Reserve Bank of Chicago reports that prices rose 15% for the first three quarters of 2007 in its district, which includes Iowa and parts of Illinois, Indiana, Wisconsin and Michigan. That’s on top of a 14% increase nationwide in 2006 — to a record average of $2,160 an acre — the U.S. Department of Agriculture says. Figures for 2007 will come out in summer.

Predictably, investors have poured in. Murray Wise of the Illinois-based Westchester Group, which manages $500 million in client assets, told the publication that such growth has attracted “a tidal wave of investors.” Wise said, “It’s everybody from the person concerned about the stock market to large government and corporate pension funds, insurance companies, hedge funds.” Wise explained that the housing bust prompted lenders to shift capital from mortgages to agriculture. But farmland prices have also benefitted from the increased demand for ethanol as well as the low value of the dollar, which makes U.S. exports relatively cheap. He predicted farmland will appreciate 6% to 12% annually over the next three years, on top of an average annual farm income of 4% to 5%.

Apparently, investors are so sold on farmland they are even buying farmland in water-starved areas of Georgia. Ben Hudson of Atlanta-based Hudson and Marshall Auctioneers told Barron’s back on December 31, 2007, that, “People still strongly believe that land is a good investment. The drought had no adverse impact on prices.”

Coming to a farm near you…

After experiencing such a spectacular run-up in prices, could farmland be in a bubble? Jim McTague of Barron’s wrote:

You’ve lived through the tech-stock bubble. The dot-com bubble. The residential real-estate bubble. Now, get ready for the cropland bubble. At year-end 2007, farms- the latest count shows that the U.S. has 2,089,790- are what Miami condos and San Diego McMansions were at year-end 2004: properties so hot that they’re likely to have a meltdown in their future. As city slickers in many parts of the nation see the market prices of their homesteads deflate faster than a New Year’s party balloon, farmers are watching the values of their land swell by annual double-digit percentages. Nationwide, farmland prices skyrocketed 50% over the past three years, to an average of close to $2,200 an acre through August, according to the U.S. Department of Agriculture. While that’s the latest month for which federal data are available, there’s no doubt that prices are still sprinting ahead. Ground zero for the phenomenon could very well be Iowa, which, like a newly active volcano, sits at the center of a massive dome of rising farm and pastureland prices stretching across America’s heart and beyond, from Ohio to the Dakotas.

McTague explained what was behind this “new bubble”:

All bubbles have catalysts, real or perceived. The tech-stock boom was driven by the belief that technology was changing both our lives and investment realities. And the residential-realty boom was driven by faith that interest rates would stay very low and that the baby boomers’ wealth would keep the new, second- and vacation-home markets robust for decades.

The catalysts in the farmland bubble are federal subsidies to ethanol producers and the belief that ethanol demand will keep rising and that China’s and India’s new wealth will keep boosting global commodity prices.

Yet, there are those who would argue with McTague that U.S. farmland is not in a bubble. Mike Duffy, an economics professor at Iowa State University, told Barron’s that farmers are reinvesting their gains in additional acreage, meaning the market isn’t nearly as leveraged as residential real estate was, leaving it less prone to becoming a bubble. Furthermore, Duffy noted that farmers can lock in profits on futures exchanges at current prices going out two or three years. 2008 futures for corn, soybeans, and wheat reached new highs in late-fall and early-winter trading.

Some investors who got into the game early are taking profits. According to Duffy, 56% of Iowa farmland was owned by farmers between 2000 to 2005, while the remainder (44%) belonged to investors. Today, only 40% of the land is owned by investors. McTague talked about Steve Leuthold, who cashed in on the farmland he picked up dirt-cheap during the last bust. Leuthold, chief investment officer of Minneapolis-based Leuthold-Weeden Investment Capital, told Barron’s he sees ominous parallels between today’s farmland boom and those of the seventies and eighties. In Barron’s August 9, 1982, issue, he wrote a cover story entitled “Grim Reapers,” in which correctly called the top of the boom. However, his prediction of a 50% correction was actually too optimistic. Regardless, McTague noted that he ended up buying two Iowa farms at $600 an acre, 75% below their peak prices. Today, Leuthold sees a pullback of 15% to 20% in three to five years, since buyers are employing less leverage and interest rates are lower. However, he is concerned that the ethanol boom rests on shaky economic underpinnings.

McTague believes that the rush for ethanol is easily the biggest factor behind rising farm prices. And the most imminent threat to farmland values is the housing bust. Leuthold noted that, historically, a weakening in one part of the real estate market has affected all others. Already, ranchland and recreational farmland have suffered, having peaked in 2006. And if the U.S. economy goes into recession, that will add additional downward pressure on farmland prices.

Back on January 16, Creighton University economist Ernie Goss appeared on Radio Iowa and said that while housing remains troubled, the next market that needs to be approached with caution is farmland. Goss said:

While metropolitan land is declining in value for much of the nation, farmland prices are running above 15%, 15 to 20% growth per year. Now, that’s the next bubble we are likely to see burst. I don’t expect it to burst anytime soon but there are some real issues related to farmland prices.

McTague added, “At this stage, any investor should be wary of betting the farm on a farm.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Gold: Not So Precious? Part 3

In part one of this series about gold as an investment, I talked about some alleged drawbacks of the precious metal as noted by two Wall Street Journal reporters. In part two, I discussed the points made by Jonathan Burton in his August 15 Journal piece. Today, I’m going to talk about the allegations made by Eleanor Laise in her January 29 article. To assist us, please note this FANTASTIC gold chart that can be viewed on the Journal’s website.

On January 29, Eleanor Laise highlighted several drawbacks of the yellow metal when serving in an investment capacity:

1. At the price that gold commands today, investors may be paying too much for any diversification benefit.

To begin, it’s interesting that Ms. Laise saw a diversification benefit, whereas Mr. Burton didn’t. Gold has risen more than 42% since mid-August 2007 (as of 1/30/08). However, to keep pace with inflation going back to 1980, gold futures would need to be above $2,228. Priced in 1980 dollars, gold appears cheap. A bargain? Not necessarily. However, supporters of gold point out that the yellow metal may have a lot more room to rise.

2. Gold hasn’t always performed effectively as a hedge against inflation.

A quick glance at the “Hot Commodity” tab on the Journal chart shows how poorly the metal has performed in this capacity since 1980. In addition, back in a post I wrote on November 16, I referred to a study conducted by Goldman Sachs, which showed that since 1988, the correlation between bullion and U.S. inflation expectations is just 36% (meaning the price of gold rises and falls with inflation expectations 36% of the time). The relationship between gold and U.S. consumer price inflation is only 23%.

3. The metal has extremely volatile price movements.

As I pointed out in part two of the series, a long-term investor might not be too concerned about short-term price gyrations. Along with the short-term trader, they may actually welcome such a characteristic, as it would allow them to accumulate more of the metal on price dips.

4. Many gold investments come with significant tax consequences.

A drawback, for sure. Ms. Laise wrote:

While the streetTracks Gold and iShares Comex Gold ETFs are popular among small investors seeking easy exposure to gold, the Internal Revenue Service treats them like collectibles, taxing long-term gains at a maximum rate of 28%. That compares unfavorably with the maximum 15% rate on long-term capital gains on securities and qualified dividends.

5. Because it’s seen as a safe-haven, gold attracts “emotional, speculative” investors who “can amplify its price gyrations.”

I wonder if that’s still the case. Laise’s colleague, E.S. Browning, wrote in the Wall Street Journal on January 31 that:

Historically, the world’s most enthusiastic buyers of the metal have been catastrophe-fearing “gold bugs” in places like India, where banks aren’t always trusted and currencies can be unstable.

Today, a different class entirely is powering gold’s rise: mainstream investors and money managers who once shunned it.

6. The dollar’s long decline may be near an end, which could hurt gold.

The dollar’s long decline may or may not be near an end. I’ve seen arguments for both scenarios. Personally, I believe that that any halt in the dollar’s decline would be only temporary.

7. Some advisers are no longer recommending gold to their clients.

Then again, some advisers are. Browning wrote on January 31 that Bessemer Trust, a New York institution that oversees $52 billion for wealthy families, had no money invested in gold three years ago. Today, it has about $300 million, due partly to new purchases and partly to investment gains, and plans to buy 10% more over the next few weeks. According to Browning:

Its managers say they believe the firm’s gold stockpile is the greatest in its 100-year history, in either dollar or percentage terms. That period includes the Great Depression, two world wars and the 1970s oil crisis.

Not only is gold being acquired by advisers for their clients, but also by central banks, whose sales in the late 1990s and early 2000s damaged gold sentiment.

Browning wrote:

Until recent years, central banks around the world were selling their gold holdings, at prices far below today’s prices. Now some central banks are buying.

8. Gold doesn’t always perform in a crisis. A recent study by Trinity College in Dublin found that, while gold generally holds up well when stocks decline substantially, the effect is short-lived.

It depends on what you mean by the term “crisis.” When Ms. Laise refers to the December 2006 study by Dirk Baur and Brian Lucey (which I have a copy of), a crisis is equated to a significant stock decline.

However, gold’s run-up over the past few years might not be as much event-driven as it is due to a crisis of confidence in the U.S. financial system.

The Journal’s Browning wrote:

Gold’s renewed luster shows the extent to which unease has replaced optimism since 2000. The 1990s marked a period of hope about the information-technology revolution, declining inflation and easier global money flows — all in a peaceful, U.S.-dominated world.

Today, optimism is clouded by terrorism, war, declining U.S. prestige, a technology-stock bubble followed by a real-estate bubble and the emergence of China and India as economic juggernauts. Investors’ affection for gold perhaps reflects their shaken faith in the U.S. financial system and a strong dollar — historically bedrock beliefs — as the housing debacle spreads.

9. Gold doesn’t produce earnings or pay dividends, and its returns over the long haul often look less enticing.

Regarding the fact that gold doesn’t produce earnings or pay dividends, Michael Kosares said in his book The ABCs of Gold Investing that:

The fact that gold does not pay interest is its greatest strength. If gold were to pay interest, the return on your gold would be dependent on the performance of another individual or institution.

Marc Stern, chief investment officer of Bessemer Trust, told the Journal on January 31 that one advantage of gold is that it isn’t regulated by any central banker who might be tempted to print money and thus debase its value. He said:

Gold doesn’t have a policy, gold doesn’t have a central banker, gold doesn’t have a printing press. It is a form of insurance.

Regarding gold’s long-term returns, in part two I talked about the importance of where one enters/departs the market. This is due to differing interpretations as to what “long-term” refers to. I’ve found that “long-term” can mean periods ranging from 5 to 25 years or longer, depending on the source. Regardless, Kosares noted in his book that:

Markets cycle. The performance of the stock market has been fundamentally tied to the performance of the dollar over most of the last century, and even though some on Wall Street would like you to believe in never-ending growth and profits, that is simply not the case in reality.

And the U.S. currency has been falling against other major currencies. Brett Gallagher, who helps oversee about $63 billion in international investments as deputy chief investment officer at Julius Baer Investment Management (a New York subsidiary of Zurich’s Julius Baer Holdings), told the Journal on January 31 that because of the Fed’s easy-money policies, “global investors in general are saying, ‘We don’t feel the dollar is a good store of value,’” and they are diversifying into other assets. His fund holds gold-related stocks and other commodities-related shares which may benefit from a weakening dollar. “Our interest in tangible assets such as gold increased in the fourth quarter” of 2007, Gallagher added.

As we have seen, opinions vary as to gold’s importance as an investment. However, to a growing number of investors the metal is still seen as “precious,” and serves as an insurance policy against an increasingly-unstable financial system dominated by paper “assets.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)