Sunday, November 29, 2009

California's Crisis Deepens... Part 2

When the words bankruptcy and default come up in the context of California's financial crisis, they have the tendency to unnecessarily scare the heck out of many people. As we pointed out in Part 1 last Monday, the situation IS dire, in fact, VERY dire, but let's discuss what all this rhetoric really means.

First of all, a default differs materially from a bankruptcy.  A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement.  Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due.  In the case of California, the use of "IOUs" has precluded, for the time being, a default.

Therefore, a series of defaults must occur BEFORE a bankruptcy.  So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.

There is precedent for individual states to be in default.  According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843.  One of which was Florida, which was, at that time, considered to be a territory,

Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.

According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY.  The Constitution currently precludes enforcement of these debt through lawsuits.  Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.

California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis.  Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.

The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic.  Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.

None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate.  State defaults have precedent, while State bankruptcies DO NOT.

Finally, I do appreciate feedback and comments, pro or con.   I will continue to provide regular updates on California as they become material.  In the meantime, I will cover Gold, Silver and other timely and relevant topics.

Marko's Take

Crime Wave Cometh

It actually already HAS in many places!  The idea to write about crime occured to me a few days ago, when, while taking a long walk on a well known hiking trail near my house, I ran across a hysterical lady who's car had just been  broken into.  I've done this same hike at LEAST A THOUSAND times over the course of the nearly 20 years that I have lived in this same house. In that time, I have never seen this happen once.

What made this ESPECIALLY amazing, is that it was a gorgeous day brimming with people coming in and out of the entrance and very near to a busy boulevard. The victimized lady had had all her valuables  taken.  It was "prime time" for walks. The number of hikers were at their peak.  As far as I could tell it was inconceivable that, given this traffic, no one saw the incident.  If someone had, they sure as hell didn't report it!  Finally, the victim's car was parked in the closest possible spot to the entrance gate. There were at least 50 cars parked there at that time.

In the last several months, I've heard anecdotally about an incredible amount of recent crime.  Personally, I , MYSELF, have been robbed of a few valuables by someone who worked for me for years. The first time ever!!  Also, a close friend of mine was robbed of HIS wine collection worth thousands by someone that apparently was working for HIM! It was the only time he had suffered such a fate.  I've informally surveyed other friends and they tell me the same thing. Almost all of them had heard of recent, first-time victims, who live in "safe" areas.

Here in the U.S., comprehensive crime statistics are compiled by the Federal Bureau of Invesigation and Department of Justice. These numbers are only available through 2007.  However, more recent
numbers ARE available, through a Reuters article.  In January, the Police Executive Research Forum (PERF), a Washington-based law enforcement agency, reported increases in crime attributable to the current economic downturn among 44% of its agencies surveyed. 

PERF also found that 6% of these police departments had already been saddled with budget cuts and that 63% were making plans to deal with expected FUTURE cuts. PERF spokesmen expected the crime rate to continue rising.

According to most sociologists, crime has risen in every recession since the 1950's, although that conclusion remains somewhat controversial.

The crime rise has not been limited to the United States.  According to a very recent report by The Straits Times, a website sponsored by Singapore Press Holdings (, crime is on the increase in Great Britain as well, led by domestic burglaries.  Bicycle thefts have risen year-over-year by 22%, while other forms of crime, such as fraud and violence, have actually fallen.

The phenemenon is apparently spreading world-wide with vigor. Severin Sorenson is President of Silkyur LLC, a security management consulting firm.  Sorenson writes an occasional blog on crime-related issues (http://d2crimewave,com/). In a mid-March essay, he remarks that a world-wide "crime wave" has taken hold.

Sorenson reports that, as of the writing of his blog,  increased crime waves were being experienced in a remarkable number of diverse countries, such as Argentina, Australia, Israel and Mexico.  And, OF COURSE, the U.S. and U.K.  Finally, he remarks that the situation is especially acute in developing nations.

I hope you manage to stay free of this wave of crime.  It's important to note that the liklihood of crime depends on many factors, such as location and demographics.  I live in Los Angeles, which is especially prone.

As always, you're comments are welcome, pro or con.  Tomorrow, we'll publish Part 2 of "The California  Crisis Deepens".  So, we hope you'll tune in. 

Marko's Take

Saturday, November 28, 2009

Are We Staring At ANOTHER Banking Crisis?

A few short days ago, Sheila Bair, the head of the Federal Deposit Insurance Corportion (FDIC), released details of the agency's quarterly report.  The findings were downright alarming.

The FDIC operated "in the red" for only the second time in history, showing a quarterly loss of approximately $8 billion. The only other quarterly loss was in 1991 with a $7 billion shortfall. To be clear, this means that the amount  "paid out" to depositors, along with the associated costs of doing so, were greater than the income earned from fees paid by banks for this insurance.  The fees were raised last year and may have to be raised yet again. 

Bair reports that, as of  last quarter, it DOES still have $23.6 billion in cash, but private estimates project that ANOTHER $100 billion will be needed to be shelled out by 2013. Of course, at taxpayer expense!

This informtion isn't meant to scare you or anyone else. Fortunately, the FDIC has the ability, at its discretion, to access a substantial credit line from the Department of Treasury. Thus, as things stand, the deposit insurance of $250,000 per institution is not immeditely threatened.

The FDIC insures nearly 8,100 banks. Of these, they now consider 552, or about 7%, to be on its "problem list", up from 416 at the end of the second quarter.  The "problem" institutions are not disclosed for fear of triggering bank runs, but their assets total nearly $350 billion!

Bank industry profits were $2.8 billion in the third quarter, which represents a stark reversal. However, losses are expected to resume in the 4th quarter as large write-offs are expected.  Unfortunately, according to research by the Associated Press, 40% of the "profit" could be accounted for by a one-time mystery accounting gimmick.

The problems don't come close to ending there.  The Office of Thrift Supervision, which monitors an entirely different set of institutions, reported that its "problem list" rose from 40 to 43 in the third quarter. Thrifts differ from banks in that they are subject to a requirement that mandates 65% of their lending be done in the form of consumer loans and mortgages.  That requirement makes them heavily dependent on housing and unemployment.

Among the most disturbing aspects of the FDIC report was its disclosure of lending activity. Loan balances FELL by the largest amount in any quarter since the data began to be compiled in 1984: $210 billion or 3%. To be fair, a large part of the decline is a result of stricter regulations meant to ensure greater prudency.

Finally, the growing banking problems extend to Europe as well.   Last week, as reported by Dominique Strauss-Kahn, chief of the International Monetary Fund, or IMF as it's more commonly known, HALF of the losses suffered by European banks could still be hidden in THEIR bank balance sheets. 

I hope everyone had an enjoyable Thanksgiving.  I have a number of topics I plan to cover in the upcoming days and weeks, including regular updates on Gold and Silver. And, this coming Monday, Part 2 of my essay on the California Fiscal Crisis will be published.  I welcome your comments, pro or con and will respond to each and every one of them.

Marko's Take

Tuesday, November 24, 2009

Taxes on Taxes

It's property tax time in California. YAY!!  I looked at my bill very carefully, since, like a lot of folks, I'm watching my pennies these days.  What I noticed was downright shocking. The actual amount owed was 25% greater than the levy that would prevail under Proposition 13, which set a limit of 1% of assessed value.  The bill contained 12 additional "assessments", including one for "mosquito abatement'!

The bulk of the remaining assessments went to the public school systems. Interestingly, in 1984, the California Lottery was ALSO established for the express purpose of funding schools.

To be fair, all of these extra charges were voted for by the appropriate electorate in some form of referendum or special election.  So I'm not alleging "foul play".  I'm as guilty as anyone else. What I AM saying is that this has gotten so out-of-control that voters MUST pay careful attention when they vote on any future referendums. I know it's difficult because these referendums seem to be purposely written vaguely and most people simply lack the time to gain a true understanding.  And then, of course, there are the incessant commercials which are also, for the most part, misleading.

But tax quirks don't stop there.  One is a concept known as "double taxation", which is defined as two layers of tax. One common example is the policy on corporate dividends to shareholders.  Any corporation must pay these from "after-tax" earnings, while the recipient  is ALSO being subject to tax on the income received. By comparison, debt interest is paid out of "before-tax" earnings.  Countless examples of "double",  "triple", or even "mulitiple" taxation exist. 

THE major form of "multiple taxation" occurs with the personal income tax system.  Some people are taxed federally, by their state and even by their city. Typically, the state and city taxes are deductible against the federal. However, the social security tax is not. And, of course there are a host of smaller assessments, such as State Disability Insurance, that get tacked on as well.  Are you starting to think we desperately need tax simplification?

Next we have "surtaxes", which are an extra and ostensibly temporary tax on personal income.  President Johnson employed a "surtax" to help fund the Vietnam War and it was later repealed, well before the war ended. More recently, President Clinton passed a "surtax" on higher incomes only to have them rolled back by President Bush.

Currently, Charles Rangel, Chairman of the House Ways and Means Committee, is seeking a 5.4% surtax on certain taxpayers to fund the new proposed Obamacare. Despite the implication that they are "temporary", history has shown that they are very hard to roll back once enacted. While a fool and his money will be soon parted, the exception to that rule is politicians!

Another form of "double taxation" is the "Windfall Profits Tax".  It's defined as a higher tax imposed when some entity is deemed to be in receipt of a "windfall", such as the oil companies subsequent to sudden and substantial rises in the price of oil.  President Carter enacted one only to have it repealed by President Reagan. Another Federal "Windfall Profits Tax" has been proposed in light of the oil price rise last year and again now as oil prices have rebounded. So far, they have been defeated, but I believe that this potential source of revenue will be too tempting to not ultimately pass. 

Yet, in 2008, the state of Alaska DID impose its own "Windfall Profits Tax" on state oil.  That tax was approved by none other than Sarah Palin!

I'd like to wish everyone a Happy Thanksgiving, especially to those that are really struggling in this economy. We have major challenges ahead and I'll keep plugging away at raising public awareness as long as it takes.  But, no matter what, virtually everyone has something to be grateful for, and I hope that this brief holiday break gives you a chance to reflect on that.

I'll take some time off myself and return to the blog in a few days.  As always, I welcome opinions and comments, pro or con .  If  by some chance you're bored and have liked this essay, there are now a dozen to read in our easy to access archives. 

Marko's Take

Monday, November 23, 2009

California's Crisis Deepens... Part 1

California's financial situation is so complex it could fill up a book.  So, I'll begin with the way things stand NOW and, in Parts 2 and 3, I'll tackle other aspects, such as the ramifications to the state.

There has  been no shortage of talk regarding the worsening financial condition of the Golden State.  Increasingly, people are speculating that California will default on its debts.  Recently, Governor Arnold Schwarzenegger has stepped up the rhetoric by repeatedly warning of a default.  He has even contacted former Treasury Secretary Hank Paulson to ask for assistance in arranging an emergency Federal loan of $7 billion.  This was reported in the LA Times last week when a copy of the email correspondence was obtained.

John Chiang, the State Controller, publishes official records at his website ( According to the most recent report, Chiang notes that the year-to-date deficit is already up to $794 million and he provides breakdowns of which sources of revenue are up and down. Since California's fiscal year starts July 1, a deficit that large so soon is quite troubling.  He notes some positive items, though.  For example, sales taxes were UP last month and even UP year-over-year.  He also acknowledges the positive impact of "Cash For Clunkers", but that program was temporary. What Chiang does NOT acknowledge in the latest report, is that only one month earlier, he warned the Governor and other lawmakers quite starkly of the emergency conditions that were prevailing.

California recently enacted a significant increase in withholding taxes and, it is believed, that state finance officials intend to issue "IOUs" to anyone receiving a  tax refund.  This would be at least the fourth time "IOUs" have been used.  The problem  is that an "IOU" is a form of currency which, in California's case,  carries a yield of 3.75%. Given the state's problems, they may ultimately prove to be worth FAR LESS than face value.  At the moment, a small trading market has evolved, but apparently, a few banks are still honoring them. So for now, no sizable discounts that I know of exist. However, there are numerous reports of opportunistic buyers bidding as little as 85% of face value on places like Craigslist.

There is historical precedent to what the true market worth of "IOUs" might become, albeit from the 1840's.  The states of Indiana and Michigan and the city of Chicago all issued some form of scrip, or "IOUs", only to have them ultimately drop to 40% of their original value.

If you listen to independent sources, the budget situation is far, far worse than Chiang implies. Very recently, The LA Times reported that a study by a man named Marc Taylor, who is described as a "non-partisan Legislative Analyst", estimated that over the next 18 months, ANOTHER $21 billion in budget deficits would be realized. The reality is that no one really knows how bad the deficit will actually become because of all of the constantly moving pieces. It is even conceivable that the deficit could go LOWER.

Finally, I want to re-iterate that  Fitch, a respected rating agency, has given California a BBB rating, shared only with Louisiana.  A rating of BBB is barely above junk bond status. Only one month ago, California tried to sell $4.5 billion worth of bonds to help finance its deficit.  The issue size had to be scaled back by nearly 10% despite a hike in yields.

I hope this gives you a small glimpse into just how tragic the state's financial situation has become.  Next Monday, in Part 2 of this series,  I  intend to cover the likelihood of  California's potential descent into bankruptcy. As for tomorrow, my topic will be "Taxes On Taxes".  Meanwhile, I hope you keep coming back and review some of the other topics we've covered.  Your feedback, pro or con, is always welcome.

Marko's Take

Sunday, November 22, 2009

Keeping Your Valuables Safe...Some Surprising Findings

Imagine if you held valuables in a safety deposit box, paid your bills and had a checking account with that bank. You also had all your papers in perfect order, including your name and address. Then, you find that your box has been seized, important documents shredded and valuables taken. Furthermore, the valuables have been sold at a fraction of their value.  You weren't even notified.  Well, a report by ABC claims that this exact scenario happened not too long ago to a woman named Carla Ruff at the Noe Valley Bank near San Francisco.

Carla apparently isn't alone.  Attorney Bill Palmer has represented her and countless others in a class action suit against the State of California. I believe that Carla's case was settled by Bank of America, which owns the Noe Valley Bank.

California, which is in desperate financial straits, has passed a law that if a box has been unvisited in 3 years, it should be considered unclaimed. Therefore,  it is subject to seizure.  Other states have passed similar laws.

Risk of seizure of safety deposit boxes doesn't stop there.  According to the ACLU, the "Patriot Act" allows for citizens engaged in "civil disobedience" to be labeled as terrorists. This permits the government an even greater right to seize property like that contained in safety deposit boxes, especially Gold and Silver. To be fair, the law may have been well intended since it is conceivable that a group of terrorists could rent a bunch of boxes and place explosives in them, wreaking havoc on the financial system.  To my knowledge, this has never happened...  but it could!

I want to make it clear that my intention is neither to engage in conspiracy thinking nor to unnecessarily scare anyone.  I'm merely trying to inform those that may not be aware of this information.

So, the obvious question is: Just what is the best way to keep valuables safe?  Safes are probably better, but far from fool-proof.  In addition to professional safecrackers, a new device has been created to systematically and quickly "auto dial" combination locks. Thus, even a non-pro with this device could open a safe. Finally, I've personally been told of safes being hauled out by burglars in their entirety.

Now, I'm not a security expert, but it makes sense to me to diversify your storage of valuables. One possibility would be the old-fashioned "bury it in the backyard" approach at a place that you let your heirs know about or is kept with an attorney you trust. It should also be away from where your gardener spends the bulk of his time, if you have one.  Another approach would involve employing a VERY creative place in which to hide vauables at home. Those should be diversified as well.  Valuables could go in hollowed out books and then hidden in some completely innocuous place, but not your main bookshelf.  Keeping things under the mattress or a chest of drawers, on the other hand, is way too obvious and among the first places a burglar would look.

Another idea I had was to put your vauables in a "zip-lock" bag inside something like a carton of milk or juice in the refrigerator.  The carton could then be filled with the original fluid and made to seem full.

But again, I want to caution you that I'm not trained in safety and it might pay to consult someone like a burglary detective that knows about these things.  So, other than diversification, these suggestions may have flaws. 

As always, I greatly appreciate your support and thoughts, especially if you have interesting ideas regarding protecting valuables.  I've researched the topic at length and found a myriad of suggestions, but some are clearly less then bullet-proof like safes.  I hope you like these continuing essays, find them useful and keep on reading as our library grows.

Marko's Take

Saturday, November 21, 2009

The Interest Rate Conundrum

If the economy were truly in recovery, as we have been  told time and time again, market interest rates ought to be MUCH higher.  For example, according to the U.S. Treasury's own website, as of last Friday, 1 month TBills yielded a scant .04%, 3 month TBills .02% and if you entrust the government with your dough for a year, you'll see a "fat" .26%.  If you're willing to tie up your money for 10 years, the yield jumps to a "juicy" 4.03%!

So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead  accumulating  hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long  way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.

To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.

The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap.  According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (,  the "cost" of insuring $10MM  of 10 year Treasuries is $25,000.   He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars.  Now I ask you, what would a dollar be worth if the U.S. did indeed default?

Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (, puts that figure at 3%.  As you may recall from a prior essay, Mr. Williams computes  key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration.  His measures reveal a much higher level of inflation: 3% and rising.  With the dollar having fallen so far this year, we KNOW that our imports  are costing on the order of 10% more.

California's rating was recently cut by Fitch  to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency.  California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out  to be "worth"  a  fraction of their face value.

Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors.  Safest countries include Denmark, Finland, Australia, New Zealand and the United States.  The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare.  In addition, the already enormous budget deficits are projected to rise as far as the eye can see.  But then, who am I to argue with the market?

I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.

Marko's Take


Friday, November 20, 2009

Silver - "The Poor Man's Gold"

Now that Gold has crossed the $1100 level and appears to be blasting higher, it makes sense to take a day to examine the merits of Silver, sometimes known as "The Poor Man's Gold". Silver is MUCH cheaper than Gold - trading at a little above $18.  However, unlike Gold, Silver has multiple uses including industrial,  jewelry and photography. It has also served as a store of wealth.  Silver has superior electrical  and thermal conductivity so it's industrial use is pretty stable.  In fact, a liquified form of Silver, called Colloidal Silver has medical uses such as preventing colds and as an antibiotic.  Unfortunately, large drug companies have a vested interest in pushing drugs so the use of Colloidal Silver, even with the oncoming H1N1 virus, is not very likely to take off.

Silver and Gold are highly correlated with the Gold/Silver Ratio (GSR) which most typically trades at between 40 and 60. The ratio is currently 62 after trading at a low of more than 70 last November.  By comparison, in 1980, when Gold hit its prior peak of $850, Silver peaked at $50 - a ratio of 17.  At the very least, as the mania in precious metals continues, it will be likely that the GSR climbs to at least 40 and may overshoot yet further on the upside in reaction to the overshoot last year.

Silver is increasingly in short supply.  According to a recent article by Jason Hommell, a noted expert on Silver who also owns a coin store, 19 major dealers are "sold out". These dealers include the Perth Mint in Australia and the Scotia Mint. I can tell you from personal experience that buying Liberty Dollars from the U.S. mint is very difficult in any reasonable size.

Annual demand for Silver is approximately 1000 million ounces, while mine supply runs at 650 million ounces. Part of the deficit, 250 million ounces, is made up of recycling of bulk silver, much of it coming from coin shops selling coins with no numismatic value.  One wonders how long that will continue as Silver rises in price.  Even if not, that still leaves a deficit of 100 million ounces annually. In my personal opinion, Silver has even MORE upside than Gold.

But a few more notes on Gold.  I reported in a prior essay that the tiny country of Sri Lanka had purchased 5.3 million tonnes from the IMF.  What I didn't report was that this represented a DOUBLING of their supply!  Since then,  the even tinier country of Mauritius purchased 1.9 million tonnes from the same source doubling THEIR supply.  Russia's central bank has bought 30 tons for their central bank, although from domestic sources.  The scramble to buy size is on. Finally, noted investor John Paulson, who made billions by betting on a meltdown of subprime mortgages, is reported to be starting his own fund with $250 million of his own money as seed capital.

As always, I sincerely appreciate comments and/or questions and I hope you check out our growing library of topics which include other essays on Gold, a proposed solution for the housing crisis, tax policy and many more.

Marko's Take

Thursday, November 19, 2009

The Cruelest Taxes

It's amazing how politicians, Republican and Democrats alike, LOVE to tax and spend. They need problems even more than dentists need cavities.  The major difference is that dentists actually fix problems, which are NOT their fault, whereas politicians CREATE problems then "solve" them - usually in a way that makes them worse.  Imagine a dentist who filled one cavity and created two new ones!

Yesterday, I wrote "The Fallacy of Federal Job Creation" with emphasis on some aspects of the program that do very little to fix employment.  Tax breaks, like the kind John Kennedy and Ronald Reagan pushed through, absolutely resulted in periods of prosperity. 

The "Stimulus Plan" DOES contain tax breaks, but it misses two of the most important and helpful to Americans, especially benefitting the ones most in need like poorer Seniors. 

Many of us are unemployed and either living off an IRA or 401-K.  If you withdraw early, i.e before 59 and a half, you are subject to a surtax.  The Federal surtax is a whopping 10%, while states' vary.  In, California where I live, the surtax is an additional 2.5%, thus a total of 12.5%. Needless to say, if you need early withdrawal you're hurting, since the tax disincentivizes you from accessing what may be your last asset. You can borrow from your IRA or 401-K, but that requires return of the funds rather quickly to avoid the penalty.  Think about it for a moment, the people who saved and are having trouble finding jobs are being PENALIZED.

If there was ever a chance to repeal that tax its now by executive order - without the endless debates and committees that destroys even good legislation. (Good legislation is a bit of an oxymoron).

But another cruel tax is the one on savers, especially on old folks who receive ridiculously low interest rates anyway.  This is a disincentive from saving, which we badly need to restore to more adequate levels.  In fact, for a period of time last year and this year, interest rates on TBills went NEGATIVE.

But of course, the reasons for low rates are simple.  If you give people no other safe alternatives, this induce them to take risk in search of higher returns.  Secondly, keep the budget deficit from ballooning yet further by  having to pay higher rates on our already out-of-control debt.  Sadly for borrowers, for would the beneficiaries, these low rates don't help either. Loans are rather hard to come by and it is common for credit card companies to jack up rates to more than 25% at the drop of a hat. For these reasons, I expect low interest rates to be kept low for a long time or at least until market forces simply overwhelm the Fed.

Your comments as always are appreciated and I hope you keep on reading.  In our growing library are pieces on the Afghanistan War, Energy Policy, the Dollar, Gold, Congressional corruption, Small business, and more.

Marko's Take

Wednesday, November 18, 2009

The Fallacy of Federal Job Creation

Republicans and Democrats alike have tried this approach.  Gerald Ford tried it to very poor success. Now the current administration has put their own stimulus bill together and its a whopper.  The current bill anticipates spending $787 MM and for some reason is backloaded.  So far, a little more than $60 billion has been spent, while the bulk of the spending is allocated to 2010.  Why?

At the time of the passing of the bill, the admistration claimed that it would produce 3.5 million jobs, but that goalpost has not only been revised vastly lower, but various admistration officials cite different claims of its efficacy. For example, Joe Biden claimed two weeks ago that the savings were 1 million jobs, while the President has recently claimed that it saved or created a mere 640,000 jobs.

The allocation is also a problem.  A huge slice goes to transportation upgrades like building new highways.  An independent analysis by JOBMOD, an  employment estimation model, concluded that for every billion spent on highway construction, only 26,524 jobs would be created - nearly $40,000 per job. 

Other allocations of note include the following:

- an allocation to public agencies of $179 BILLION - amounting to more than 20% of the plan.
- increases in Social Security! That, despite the previously announced 0% Cost of Living adjustment.
- an allocation of at least $70 billion to school districts and states.
- an allocation of $54 to small busines via tax cuts.  Of course, you need to be PROFITABLE to receive this!
- an allocation of $87 BILLION to Medicaid.

There are also a number of errors in the adminstration's own website on the progress of the stimulus plan as uncovered and reported by ABC.  Some of these include the following:

- in Arizona's 15th district, 30 jobs saved or created.  Arizona has only 8 districts.
- in Connecticut's 42nd district, 25 jobs saved or created with ZERO dollars.  It, too doesn't exist.
- in the Virgin Islands, $8.4 MILLION spent in the 40th district which, you guessed it, doesn't exist.
- in Puero Rico, 291 jobs saved and $47.7 MILLION spent in its 99th district, which doesn't exist.

There are many, many more examples. Now I ask you, if they can't even report accurately and keep their stories consistent, is there any possibility that the stimulus bill, or any such federally funded program could really produce any reasonable result?  It would be far better to just send people checks directly.  $787 Billion divided by the roughly 300 million Americans would amount to about $25,000 per person!  I, like most Americans, could use that!

I have proposed, as have others, what is in my opinion, a much better federal solution to enhance employment called CASH FOR JOBS in a prior essay.  But that would be just too simple and transparent now wouldn't it?

The only benefit of the Obama program is that it does get money into the economy which will eventually circulate and THEN start to have more effect than it has had already.  But we're still losing jobs at a higher rate and even the administration concedes that unemployment will continue rising well into 2010.

As always, you're comments, pro or con are welcome as well as questions.

Marko's Take

Tuesday, November 17, 2009

Fool's Gold

It was inevitable.  The rising price of Gold has allegedly spurred a growing counterfeiting industry.  The most common method is to fill a Gold Bar with Tungsten, a metal that costs only $10 per pound.  Tungsten is very similar to Gold in that its specific gravity, or density, is nearly identical to Gold.  Thus, unless you can measure weight very, very precisely, fake Gold might  not  be straightforward to detect.

Reports are surfacing of fake gold bars. Ethiopia allegedly purchased a rather large consignment of Gold which it then sold to South Africa. As the report goes,  South Africa learned that this consignment was nothing more than Gold plated steel. An investigation found that Ethiopia  had itself purchased it from a counterfeiting ring. 

There is also a report that a Chinese investigation uncovered 1.3 million or so of these fake bars which were being manufactured by a well funded and sophisticated operation and that 640,000 of these bars sit in Fort Knox today.  Would that explain why an audit of Fort Knox has not been done since the Eisenhower Administration?

In addition, numerous suspicious reports have arisen with the Gold ETF (GLD).  An ETF is a mutual fund that trades in such a way as to mimic an index or basket of securities.  GLD, which was designed to mimic the price of Gold, has grown to huge proportion and claims to be backed by physical gold.  Its market capitalization is approaching $40 Billion Dollars.  Reports have surfaced of irregularities regarding its holdings.  For example, last September and October, several observers of GLD's holdings noted that the length of the list of holdings went form 1381 pages to 200 pages and then back.

Bill Murphy, who writes a must read letter on Gold topics at, was to my knowledge, the first person to raise this issue in a serious way.  He speculated that the Rothschild's exit from the Gold market  in 2004 was incredibly suspicious.  And, coincidentally, a short time later, GLD was launched. 

This brings up some serious issues.  One is that the practice is likely to grow as the price of Gold rises and one needs to be  especially careful about buying bulk gold or investing in Gold through the GLD ETF.

Now, I'll be the first to admit that I can't independently verify any of these incidents, but, it makes sense that it has been tried and is growing.  The good news is that bulk coin counterfeiture is, so far, rare and there are entities like the Professional Gold Grading Service or Numismatic Guaranty Corp. to protect unsuspecting collectors of rare and much more valuable pieces.

Personally, I believe this has gone on to some extent, at the very least. Counterfeiters replicate art which requires one to obtain "Certificates of Authenticity" and we KNOW that currency counterfeiting has been around for decades.

Tungsten does have a flaw that differs it from Gold.  It is much harder than Gold, which is soft.  Remember the old west when folks bit into Gold? It also has vastly different properties of electrical  and thermal conductivity. But the expertise to employ these tests is not readily available to just everyone.

In addition to avoiding the GLD ETF, I would highly advise NOT purchasing on EBAY, which has a buyer beware policy. I still favor buying high quality Gold and Silver mining stocks, which, to my knowledge have never been accused of selling fake product.  There have been shams and the failure of certain companies who have claimed things like overstating their reserves.  However, if a company has an independent audit of reserves, referred to as a 43-101, you're probably on safe ground.  Nevertheless, the portfolio should be well diversified as these companies are prone to adverse events like nationalization. Two ETFs allowing investors instant diversification exist. One of these is GDX, which invests in the larger companies.  My personal preference is GDXJ, which invests in a fairly large basket of intermediates and juniors, the smaller up an coming companies.

As always, I welcome your comments, pro or con and questions.

Marko's Take

Monday, November 16, 2009

Fueling A Good Energy Policy

There is a clear need to reverse the course of our dependence on foreign oil imports.  In 1970, before the "Oil Embargo", the U.S. imported less than a quarter of our domestic use.  Today, that number is up to 65% and climbing.  We were at one time the world's largest oil producer at something like 20MM barrels of oil per day falling now to less than 5MM.  Oil rich states like Alaska and Texas are leading the decline.

Lets face it, we are at the mercy of a number of unfriendly countries such as Venezuela, as well as some in the Middle East.  Meanwhile, it appears the we have passed the point of world peak oil production in the last couple of years.  Oil is continuously harder to find and more expensive.  Offshore oil fields are being found, but MILES under water, making the cost of extracting it quite high and taking many years to get started. This is not the world in which Jed Clampett shot a gun and accidentally found a gusher!

We can't solve the problem overnight, but we CAN solve it if we commit to an intermediate to long term patchwork of programs that will bridge us into the future. 

Boone Pickens put forth a pretty good plan prior to the 2008 elections which had several excellent and well documented elements.  One was an increase in Wind Power, especially in the Great Plains which tend to produce the most amount of wind.  The cost of using Wind Power has fallen precipitously and estimates are that a KWH of wind could be produced at an all-in cost of only 4-5 cents.  Several countries in Europe, namely Denmark, (19%) and Germany(11%), provide wind to great benefit and doubling output every 3 years.  Our wind power, while growing exponentially, is still at about 1% of power usage. This is not part of the Obama Plan.

Another one of Picken's suggestions is the conversion of cars and larger vehicles to Compressed Natural Gas, a resource less depleted here.  The technology already exists and CNG is much cheaper than gasoline. According to the EPA, the Honda Civic GX is the cheapest internal combustion engine today.

He also suggests more use of Solar Power, especially in the corridor from Texas to California. Solar technology is becoming quite advanced and the price of panels has dropped nearly 40% in the last year alone! Unfortunately, while used to some extent by most countries, in the United States, it currently only provides less than one percent of our current power needs.

Pickens does not favor Nuclear although he doesn't say why not. If its due to safety, studies have shown that the mortality, or number of people killed,  of nuclear is far less than most believe.  It's  about 1% of the death rate associated with coal-powered plants and much cleaner.  France uses nuclear for 76% of it's electric power and there are a number of countries that provide more than 50% of their power usage from this source.  America, by comparison, provides just under 20% from nuclear.  The Obama plan, on the other hand, DOES promote nuclear and I hope that they do not get deterred by misguided environmentalists who have steadfastly stood in the way of any advancements in this arena for years.

Hybrid and electric cars are much less profitable than is believed.  Estimates are that the Prius, the most advanced of any hybrid, are smaller than on an Acura or Corolla.  Prices of the Prius are scheduled to rise next year and technology has continued to improve so it  IS viable and will continue to become more so.  The much ballyhooed Ford Volt, scheduled for 2011, is NOT expected to be anywhere near profitable, despite the company's claims that it will be their savior. The fact is that hybrids and electric cars need to go through many years of technological upgrades before the additional cost outweighs the benefits.  Toyota is light years ahead of Ford.

Finally, there is the Oil Shale debate.  Proponents claim that TRILLIONS of barrels of Oil Shale sit in the U.S alone and they're right. But I don't see it as a solution that can make much of a dent in the short or even intermediate term.  Shale oil is vastly dissimilar to crude oil thus requiring a retooling of refineries or other chemical modifications to make it similar to crude oil. It is heavily capital intensive and environmentally messy requiring in many cases a HUGE pit. But perhaps the biggest issue is that it requires massive use of water, a resource that is becoming more scarce and the water once used will need to be repurified in some manner.  Under current technology, it takes 3 barrels of water, itself a scarce resource, to produce one barrel of oil. To be fair, about 5 countries are exploiting shale already, China being the largest.

However, according to the Rand Corporation it will take 20 years to produce a mere 1MM barrels a day.
Therefore, it's still one for the labs and technology and not likely to put a huge dent in our "Energy Gap" anytime soon.

Finally, we should all take every step we can to conserve through methods like insulation  and more efficient use. That can be implemented immediately, and it is indisputably critical.

There are many more facets to this subject.  However, for the sake of brevity, I'll cover them in another essay down the road.

As always comments pro and con are always welcomed.

Marko's Take

Sunday, November 15, 2009

The Death Knell of the Dollar

On Friday, the Department of Commerce revealed statistics for our imports and exports for the month of September and the results were both surprising and alarming. The trade gap or the difference between what we import versus what we export widened by the largest percentage in a decade!  Exports grew for the fifth straight month, but imports grew even faster.  This is alarming since the dollar has declined by 12% since December of last year and normally one would expect the opposite:  a cheapening of U.S. goods and more expensive imports, thus NARROWING the gap. 

This came as a surprise and it will mean that GDP, which takes trade into account will, in all likelihood, need to be revised lower. 

Most alarming was that the rise in imports  was only about $26 Billion in May with a higher dollar, but has now grown to $36.5 Billion in September, all while the dollar was continually falling.
It's likely to get worse.  Oil, which is a large component of overall imports,  rose in price to the tune of 10% in October.

The U.S. has become a service economy and the small surplus in services grew by only 0.2%. The service surplus has grown by 13%, however, in the last year.  This may indicate that even services are  being  more outsourced in addition to manufacturing: a potentially terrible sign that even our remaining strength in the trade mix is slipping.

Imports surged by the largest amount in 16 months, which is counterintuive since a lower dollar makes foreign goods more expensive. Another key factor in the increase was a large jump in purchases of autos and auto parts, possibly as a result of the termination of the short-lived "Cash For Clunkers" program.
Needless to say, our auto industry remains uncompetitive despite the promises of the automakers that a turnaround was in the offing.

To be fair, there is the possibility that the trade numbers respond to a lag, but a year of a steadily declining dollar ought to be taking effect by now.  Since it hasn't, the U.S. has no choice but to allow, or even encourage, a continued fall in the dollar despite the increase in inflation that will accompany it.

The problem is that markets are hard to control and what is a steady decline now could begin to accelerate, especially as holders of dollar denominated debt, which carries very low interest rates, lose on their holdings.  A 12% drop in the dollar coupled with say, a 4% rate  means that the holder has lost 8%.  As in any market, there will be occasional rallies but the fundamentals are so bad that a vastly lower dollar appears to be a near certainty over the course of the intermediate term. 

Comments and questions, pro or con are welcomed as always.

Marko's Take

Saturday, November 14, 2009

Cleaning Out the House...and the Senate

Ask any Congressperson whom they work for and they will answer with some variant of  "the people" of a district, a state or the United States.  You sure wouldn't know it by the way they act.  I've read in a variety of places that a "study" done in 1998 found, at that time, the following:

36 had been accused of spousal abuse
7 had been arrested for fraud
19 had been accused of writing bad checks.
117 had directly or indirectly bankrupted at least 2 businesses
3 had done time for assault
71 could not get a credit card through normal channels because of bad credit
14 had been arrested on drug-related charges
8 had been arrested for shoplifting
21 were, at that time, defendants in lawsuits
84 had been arrested for drunk driving in the prior year

Now, let me be the first to say that the names were not disclosed, people are often sued frivolously, and I cannot verify any of this.  However, whether true and accurate or not, it's unquestionable that, when it comes to unethical behavior history is riddled with Congressional Scandals: Most recently, the very powerful Charles Rangel,  the head of the Ways and Means Committee which writes tax law was accused of tax evasion.

The problem is that the "employers" of the congresspeople ought to be able to fire them for misconduct that would get anyone of us fired, should we be lucky enough to be clinging on to a job.  However, Congress polices itself, so a powerful member can use his influence to hold on to a job, bring it before an ethics committee,  and often get nothing more than a censure. Case closed.

At a minimum, Congresspeople should be subject to the same penalties anyone working for say IBM or Coca Cola would be subject to.  In reality, because they are fiduciaries of OUR MONEY, they should be held to even higher standards.

But that's not all:  Congresspeople pass laws that apply to all Americans but themselves.  For example, they are exempt from Social Security and have their own private pension plan. A pretty damn cushy one I understand! Congress is also exempt from the new health care plan.  So I ask:  Who works for whom?

The solution to this problem is not straightforward but it can be attacked in a number of ways.  As a society, we have to DEMAND our sovereignty be returned to us.  This won't be easy, but we have to recognize the problem first, and I wonder just how many people do.  If an elected official DOESN'T vote for a new set of ethical laws, vote em out!  Secondly, the practice of gerrymandering must be stopped.  (For those that don't know, gerrymandering is the creation of voter districts by politcians to maximize their chance of re-election.)  If you've never seen a map of the districts, look them up on Google.  Many of them look like a plate of spaghetti after a major windstorm or an x-ray of someone's intestines.

Finally, we need to keep "professional politcians", another oxymoron, from claiming their thrones.  If someone hasn't lived or worked in the "real world", that's as red of a flag as possible.  Politicians should be representative of us. How CAN they when they haven't had to deal with the challenges that the vast majority of American's face, especially today. 

It was most telling when Term Limits were not passed when the Republicans, led by Newt Gingrich, won control of the House of Representatives in 1994, despite the fact that it was a much ballyhooed component of the Contract With America.  The other provisions were passed in one form or another.

There are good congresspeople out there.  As to me, I do believe there are congresspeople that I would support multiple times.  However, I support term limits because  I believe the benefits of deterring professional politicians would be greater than losing the few that I would vote for successively.

If you have another solution or disagree entirely, by all means, feel free to leave a comment.

Marko's Take

Friday, November 13, 2009

More Good News For Gold

Until recently, Gold and Silver have been all but ignored.  One reason, undoubtedly, has been the inflation/deflation debate.  Another has been the experience of 2008, in which a supposed safe haven got walloped along with everything else but cash.  Some folks just plainly don't understand the reason Gold has value.  I think it was John Maynard Keynes who called it a "barbarous relic".

Things are changing.  Gold bottomed last November, months before the overall market and has outperformed it ever since. In February, companies began to access the capital markets and liquify their balance sheets.  But the most recent refinacing, American Barrick (ABX) has been the most telling. 

Gold companies break down in several ways: explorers, miners, majors, intermediates, and juniors. In additon, dozens of micro cap companies trade on the Toronto Venture Exchange. Another VERY important distinction is whether a particular miner hedges future output by preselling at the prevailing fixed price.
Hedgers want to "lock in" a certain price upon delivery to avoid selling at a loss.

Barrick and many other of the majors are hedgers.  The impact of hedging is that as key mining costs such as energy rise, which they inevitably do, the price realized stays fixed and the company's contracts do not keep up with the appreciating asset. This scenario can create large losses.

Barrick is a major,  meaning big. In fact, as measured in market capitalization, Barrick is currently the largest. The company also mines and explores.  Other majors, such as Anglo Gold also hedge.  Last quarter alone, Barrick took a "charge" of nearly $6Billion against earnings as the result of losses on hedges.

Barrick has decided, after the rise in Gold price, that it needed to buyback their hedges. In order to achieve the buybacks, Barrick recently raised approximately $5Billion in  debt and equity offerings.  It's my bet, that other hedgers will, or are in the process of,doing the same. With sovereign nations turning to buying as opposed to selling, this sets up greater odds for a rapid spike up in price.

A second development, mostly unnoticed, is the creation of a new exchange traded fund, or ETF's as they're known, to purchase smaller cap miners. It will hold a basket of approximately 30 juniors and smaller intermediates - giving investors yet another way to participate in the smaller up and coming companies.  ETFs trade like a stock, but they are also similar to a mutual fund. They're advantages are a lower cost to operate because the holdings are mostly fixed and don't require active management. ETFs also save the less-informed investor who doesn't have the inclination to pick individual stocks and wants instant diversification.

The GDXJ, which is the symbol of the new ETF, started trading today and will create a new source of demand for gold related companies. Because it holds smaller companies, this indicates a growing appetite to take risk in this sector.

One could argue, and many do, that this represents the sign of a top.  However, mining shares publicly traded in Gold and Silver companies  are worth less combined than Microsoft.  Rather than the sign of a top, this strikes me as the sign of growing demand in a very small sector. It wouldn't take much new money to drive these stocks substantially higher.

Finally, gold supply is on the decline. Output has been declining since 2000 on a world wide basis and the quality of recent finds have been less "rich".  I don't doubt that higher prices will begin to incentivize companies to continue to explore, but most of the "low hanging fruit" has been picked. Therefore, the scramble to acquire physical Gold and Silver and quality companies is likely to accelerate.

Marko's Take

Thursday, November 12, 2009

Home Appreciation Rights

It's no secret that the residential homeowner, as the result of the real estate bubble, is an endangered species.  Some estimates are that by 2011, half or more of all homes will be worth less than their mortgage obligations. As I mentioned in a previous essay, the central culprit was politically driven artificially low rates and other market interference which incentivized home buyers to do the wrong thing.

Unfortunately, that all can't be undone. Since unemployment hasn't turned up yet, the ability to ride this out for many will become a tougher and tougher task. 401k's are being depleted, and of course taxed. Even those that were prudent, have been penalized with savings that return virtually nothing and are taxed to boot. The unemployed or underemployed are unable to even take advantage of the mortgage tax deduction, raising the net cost of housing.

So far, the administration has responded by bailing out the banks and  home mortgage derivatives that were created to re-package and sell them to others.  But other than an $8000 incentive for first time home buyers, a pretty small demographic, little has been done to assist the homeowner under stress. Published estimates are that 19 million homes now sit empty.

We know, or at least believe, that facilities to take these underwater loans off banks' hands have been created. We don't know how much has been deployed and in what manner because, like so much else, it hasn't been disclosed and estimates vary.  So I'd like to suggest another approach.

Now keep in mind that I don't want to specify the details,  just relay the concept.  I call it Home Appreciation Rights and it ought to be seriously considered.  Here's how it would work:  The Federal Government pays off either a portion of a homeowners mortgage  in the form of a lump sum or it agrees to make payments for a period of time.  That way, the funds benefit  the homeowner directly. It would also benefit the banks or other entities holding the distressed assets. In exchange, the homeowner tenders a portion of the appreciation in the house from above some predetermined level:. Possibly the assessment or fair market value, whichever is lower. 

The homeowner would not be completely bailed out, and the upside surrendered to the government would be fractional.  Therefore, if housing prices were to recover, the homeowner would keep most of the appreciation.  The probability of a recovery would increase with time, which so many are running out of.

Unfortunately, one could argue that the Home Appreciation Rights concept would  produce greater interference in our lives via Big Brother, but if OUR government doesn't do this, the large dollar- holding foreign governments just might. Wouldn't it better if the US gov't owned an option on the appreciation in our houses than some foreign government scooping up distressed properties? Think back to 1990, when Japan began to buy marquis U.S. real estate before their bubbles forced them to retrench. The circumstances are different this time and the purchase of sizable amounts of U.S. real estate at distressed prices might prove quite tempting.  

Marko's Take

Wednesday, November 11, 2009

In Honor of Our Military and The Cost of War

Today is Veteran's Day.  While the mistrust of the government is growing exponentially, virtually all Americans appreciate and admire the tremendous sacrifice that the young men that serve make,as well as the expertise and bravery they demonstrate.  Where opinions start to differ in how they're used and the motives for using this incredible group of men and women.

I am of those that believe that the misuse, or overuse, of the military especially in the last couple of decades has grown to alarming proportions.  In the first Gulf War, Bush 1 was able to establish an alliance of something like 90 countries.  Contrast that with today. The current administration, in response to the General McChrystal and other senior military advisers, concerned about Afghanistan, have taken the position that another "surge" in troops is desperately needed.  Reportedly, the administration is looking to form a 40,000 troop alliance to add to our resources there.  In contrast to the alliance formed in Desert Storm, only TWO countries are even willing to consider sending anyone: Great Britain and Turkey.

What's worse about our inability to pursuade any countries of our moral high ground, is that  hostilities are becoming more possible in Pakistan and Iran.  It is suspected that Pakistan has been aiding the Taliban all along, which partially explains our diminished prospects there. 

The dollar cost of the wars in Iraq and Afghanistan are believed to be in excess of $1Trillion: Funds of that magnitude are desperately needed to PROPERLY deploy to revive our own economy. The problem becomes circular.  Without a strong economy, the stress of war costs become significant. Just ask the old USSR.

But the cash cost may be vastly understated. Early official estimates were a fraction of what the actual costs have become.  The fact is, we don't have accurate information on just about anything having to do with the use of government funds, so who knows what our wars really cost or wll continue to cost?   Even a total withdrawal would be very expensive. 

Let's not forget the human element.  While we have been largely shielded from pictures of caskets of soldiers returning from the combat by the media, human casualties among military and civilians has been well into the tens of thousands. Perhaps more.  Many of these civilians are innocent: collateral damage as it's called.

In addition to the physical, the mental cost is vastly underreported and staggering.  Suicides among our troops are at unaccepably high levels and some have reported that returning troops are suffering from Post Traumatic Stress Disorder at rates of near 25%.  Who can put a cost on that kind of suffering?

The USSR, when it was called that, invaded Afghanistan in 1979 and few doubt it was a factor in the downfall of the empire. They were also occupying several Eastern European countries and had a poor  centrally controlled economy.   History has  also shown that exessive military adventurism was a prime cause of the fall of the British empire.  We have enough of a challenge right now here at home and a military so stretched that we are in over our heads and paying a dear price. 

I have no way of knowing all of the intelligence that our admistration has that leads to the decisions being made and therefore, want to be careful about the way I question the military's use.  But I do know the cost of our adventurism is high, our respect in the world is low, and we have MAJOR problems here at home to solve demanding appropriate use of our limited resources. 

God bless our troops and I know we all pray that these efforts are worthwhile.

Marko's Take

Tuesday, November 10, 2009

Small Business Failures Leading the Recession

It's no secret that California has been among the hardest hit states.  Not only have housing prices been hit with more force than the national average, but the unemployment rate is among the highest in the nation.  But another equally destructive force is occurring that seems to get little press: the failure of small businesses. 

I live in the Los Angeles area, and virtually every major boulevard and thoroughfare is littered with "going out of business" or "for lease" signs, even in posh places like Beverly Hills and Santa Monica.  By small business, I'm referring to the types of business in strip malls or specialty businesses.  Particularly hard hit are restaurants and other types of enterprises selling non-essentials or services like spas. 

I've looked up statistics for small business closings on Google but found very little which quantifies it. Most of this commentary is based on my anecdotal experiences and observations.  It's well understood that small businesses, especially start-ups, carry a higher level of risk than say Coca Cola, but they are critically important to the economy.

Most of the country's employment growth has historically come from the creation and expansion of small business. Microsoft, for example, was started out of a  garage. But as they reach a certain size their growth prospects slow. Then, we read of large company's laying off tens of thousands of workers.  What we don't read about is how many are affected by the closed dry cleaner or pizzeria and I contend that this is the bigger problem.

The reason why is that the closures are contagious.  Once the first strip mall shop closes, less foot traffic will be created putting the next store in jeopardy and so on.  I suspect that this trend is not anywhere near over. Most retail survives because of the jump in sales at Christmas. At this moment, anyway, unless the adminstration creates a "Cash for Christmans Presents" program , it's hard to imagine the ones still holding on by their fingernails will get any kind of bump they would need to give them some breathing room and fighting chance to survive.

Another problem is that credit has dried up for small business as a key lender specializing in these enterprises went bankrupt last month: CIT.  This company is not a household name, but it's capacity to lend, even if it wanted to,  is down to perhaps 20% of what it was last year.  It was the fifth largest bankruptcy ever. That is how important this company was to "Middle America".  Now, not only will the most credit worthy companies  be unable to access temporary seasonal credit, but far less of it.

Furthermore, commercial real estate like malls and office buildings are losing tenants. From what I've been told anecdotally, landlords are often reluctant to negotiate lower rents, possibly fearing the repercussions on other tenants, who would want similar concessions. 

The solution to this disturbing trend isn't obvious, but I don't even see it being discussed.  Companies like GM and AIG which are sucking up billions of dollars and NOT producing jobs are getting assistance while the little guy is on his own.  We would produce far more jobs diverting assistance to small business than   pouring undisclosed billions into the old dinosaurs.  I'd rather bet the future of our country on the possibility of the next Microsoft than the old GM anyday.  And, as I've written in previous essays, the more little guys we save, the fewer jobs we lose and the sooner our real estate problems will self correct.  The only problem to this solution?

Unions, though smaller than they once were, are a big voting block and we all know how incredibly important it is for politicians to get re-elected, now don't we? Just ask the automakers.

Marko's Take

Monday, November 9, 2009

What Gold is Telling Us......

This morning, Gold surpassed $1100 for the first time as the dollar dropped.  In my opinion, Gold and Silver have much higher to go, albeit at a path I'm unable to predict.  However, I do think the rise will be quite large and is likely to accelerate in the coming months.  Thought the internet bubble got nutty?  Well, there is no fever like Gold fever!

I believe that Gold is telling us that many currencies are on their way out and that hard assets on their way in.
It isn't just the United States that has spent oodles of money on stimulus packages.  Europe has and so has China, to name a couple.  A lower dollar, in terms of purchasing power is inevitable eventually, since the "plan" appears to be to facillitate a controlled decline in the dollar in order to make our exports cheaper. A second benefit would be to surreptitiously "devalue" our debt to other countries.  However, as we allow our dollar to fall, other countries engage in a practice known as competitive devaluations.  The purpose of this is to prevent THEIR exports from falling. 

The danger in this policy is that a full blown currency crisis or trade war can erupt at any time, and, as in the Great Depression, be to NO ONE'S benefit.  Economists agree on very little, but they all agree free trade is in everyone's good. 

Personally, I'm quite baffled as to why the US stock market has continued to rally but markets are often very hard to understand.  I'm starting to suspect that inflation is creeping itself into the economy.  Another reason for that suspicion is the price of oil, which continues to go up despite a clearly poor economy and no growth in demand.  The most recent case of hyperinflation occurred in Zimbabwe very recently and their stock market multiplied many times over and did so in record time.

Other countries are starting to realize their appetite for Gold. That has recently begun to change.  India just bought 200 tonnes from the IMF.  Sri Lanka bought 5.3 tonnes and countries like Russia have been accumulating, too, although they have been coy about their plans.  Hong Kong, which had until recently kept its Gold in London just demanded delivery back.  Germany has asked for return of its Gold that the U.S. was holding for them.

All of these are the early signs of a new Gold Rush.  Until recently, Central Banks were selling Gold, but now we hear about buys and LARGE ones.  Meanwhile, the world mine supply of Gold has been falling for years and a physical shortage is a distinct possibility.  The Federal Reserve has been doing everything possible to keep the price of Gold DOWN using sales of Gold futures contracts and other market interference mechanisms. When pressed, they've admitted to market involvement.  They NEED a low Gold price to keep people from realizing that inflation pressure is building and they will NOT under any circumstances allow any type of audit. If we acknowledge higher inflation, cost of living adjustments will be higher and drive the budget deficit even more. Ron Paul initiated legislation to audit the FED co-sponsored by more  than 300 Representatives.  Don't we have a right to know?

Finally, there hasn't been an audit of physical gold supplies at repositories like Fort Knox in more than 50 years.  Why not?

It is quite possible that a massive shortage is in the making or already exists.

If you have the ability to purchase some Gold or high quality mining shares with new discoveries, this might be the time to give it more than just a passing thought.

Marko's Take

Sunday, November 8, 2009

The Negative Income Tax

There are so many forms of public assistance: welfare, food stamps, public housing, social security, unemployment benefits, disability and on and on. Yet many people qualify for NONE of these.

How do you assist the long term unemployed or those that just fall through all of the cracks?
Yeah, I know, give them  "Cash For Clunkers" so they can get further in debt!  But what's the point of inducing people to buy a car when they could use assistance for more pressing matters? Oh, here's an idea, bail out the banks whose unbridled greed magnified the level of distress the country is going through! And God forbid, don't prevent unjustifiably large bonuses.

For many of us, there exists no safety net whatsoever. Personally, I never thought I'd need one. But, then see what happens when your business meltsdown and you lose a huge chunk of the value in your house. Watch your other investments get smashed and suddenly you find yourself in a place you've never contemplated. Even if we saved and now are forced to live off our much smaller IRA's or 401Ks, we're hit with a surtax on withdrawals.

The problem with most assistance is that it comes with strings or conditions that not everyone in need can meet. But a Negative Tax could be implemented with no new bureaucracy.

The idea of a "Negative Income Tax" was first suggested, to my knowledge, by the late Milton Friedman. The idea is simple. Pick a zero level, like $50,000 and if the individual or family does not show income of that amount, have the state and/or federal goverment provide a tax rebate. If that rebate amount were 25%,  and no income was received, for example, the individual or family would receive $12,500. The money would be spent anyway the recipient chooses, unlike, say food stamps or  the proposed "Cash For Appliances".

Once their earnings exceed the zero level of $50,000, they would pay taxes just as prescribed.
Of course, there might have to be certain tests to qualify, like a maximum level of wealth. However, the idea is both simple and fair.

The program could probably replace some existing but inefficient ones in existence today. "Cash for Clunkers", although temporary, reportedly cost $24,000 per car. And, there is talk that the assistance will be taxable. The Negative Income Tax shouldn't require a new bureaucracy: we already have the much beloved IRS. Other assistance programs are undoubtedly as inefficient as the "Clunkers" program was and upcoming appliance program will be.

Marko's Take

Friday, November 6, 2009

A Partial Solution to the Unemployment Crisis...CASH FOR JOBS!

This morning, our very own Bureau of Labor and Statistics (or is it Lies and Statistics?) reported the monthly "payroll report", which is released the first Friday of every month. Great news! ONLY 190,000 more jobs were lost. Never mind that prior months' numbers were revised higher. As a result, we are now told that unemployment is 10.2%, the highest reported number in this cycle.

Yet, we're in a recovery! or so goes the position of our leadership. Somehow, it seems like the government has thrown the kitchen sink at rescuing the economy and yet all we have for our efforts is a new oxymoron: "The Jobless Recovery".

Even with an unemployment rate of 10.2%, virtually everyone suspects it to be much higher. For example, income tax revenues are down closer to 25%: putting many states, like California, in severe financial jeopardy. An amazingly large number of small businesses are on life support , if they're alive at all, and praying they last to Christmas.

What most people don't know exactly, but suspect, is that this already unacceptable 10.2% rate WAY understates the true magnitude of the problem. They're right! During the Clinton administration, the approach to calculating unemployment and inflation changed. The new approach produces a VASTLY lower number than the approach used when Reagan was President.

Fortunately, some economists still produce these statistics the old way.
The most well known is a guy named John Williams, who runs a paid site called I have no financial relation with this site. However, as of last month, according to Shadow Stats, unemployment, calculated as it would have been reported in 1980, would stand at 22%!

A rate that high, better reconciles with what we observe and with the major dropoff in tax revenues.

So, what's the way to attack this problem? I propose an approach called "Cash For Jobs". Instead of paying people to buy cars or appliances, pay companies to hire. The general idea would be to create a multi-year plan whereby any company able to raise its headcount would be subsidized with some sort of tax break to bring on  new workers so as to grow overall payroll. That way we don't reward replacing existing employees with cheaper subsidized employees. That approach has already been done by companies outsourcing to China, India and the emerging countries that have systematically taken our manufacturing base and are now taking services.

Under the CFJ approach, the cost of hiring NEW, incremental people, would be accomplished through some sort of subsidy and phased out in increments over, say, 5 years.

Why should this work? Well, its axiomatic that subsidizing something creates a surplus and taxing it creates shortages. Want proof? If you're old enough, you remember giveaways of surplus cheese and milk being literally thrown down the drain. The reason was the existing agricultural subsidies. When we overly taxed something like oil, we got massive shortages like in the late 1970's. Yes, some of it started with the old "oil embargo", but the "Windfall Profits Tax" discouraged drilling for new oil and it wasn't until Reagan lifted this idiotic tax that supplies improved and prices dropped almost instantly.

One quirk of employment is that it doesn't respond as flexibly to changes in supply and demand. Most employers would prefer to drop headcounts than cut wages and thus supply and demand doesn't tend to clear well.

Wouldn't CFJ make it easier to employers on the fence to begin hiring, especially if it weren't token. But could we afford it? Sure, those newly hired employees would still pay income taxes and be able to modify their mortgages, which in turn would have some positive impact on the housing market. It would also instill a sense that programs were being created to help those that are falling through the cracks.

It's high time we stopped helping those that need it least like banks, and instead create programs to encourage helping those that need it most.

Marko's Take

Thursday, November 5, 2009

Marko's Take: The Economic Mess....Who's Fault Was It Really?

It's not nice to fool with Mother Nature and the economy follows many of the same rules. Let me explain. In 2000, I went on a vacation to Yellowstone and learned of a great fire that took place in 1988 wiping out nearly 40% of the park. It wasn't arson. It wasn't terrorism. It was the result of approximately 20 years of a faulty theory propogated by misguided environmentalists.

These folks argued that immediately responding to fires would be beneficial to the park. The problem was that they failed to realize that a forest is a regenerating eco-system which NEEDS fires to clear the way for new growth. As a result, by 1988, the accumulation of deadwood that otherwise would have been cleared in smaller amounts had reached incredible proportions. All it took was some lightning in June and three months later the Park was nearly destroyed. Virtually every firefighting resource in the western United States was used to try to put it out.

Sadly, it wasn't until an early September snowfall that the fire was contained.

So, what's my point? Well, politicians like to get elected and re-elected. In order to do that, they learned that recessions were to be avoided at all costs, and that they could artificially juice prosperity by a variety of measures. For example, interfering in the markets was employed to artificially juice the economy. The most obvious of these was interest rates artificially low thus penalizing savers and rewarding over risk taking.

They "bought votes" by encouraging the quasi-public lenders like Fannie Mae and Freddy Mac to promulgate loans that artificially fooled people into over consuming houses. This caused the so called real estate bubble. It wasn't the buying public's fault: the vast majority were merely acting in their own self interest. The bubble created illusory wealth, which then lead to overconsumption via credit cards for example. Sure, some folks were reckless, but the VAST majority were merely making decisions based on faulty information.

Same reason doctors discourage the overuse of antibiotics. Occasional sickness like colds are NECESSARY to restore the immune system just like recessions restore a healthier economy.

As our economic forest fire continues to burn, there is no secret that our political leaders are throwing around a lot of money. The problem is that the continued series of bubbles, first in the Nasdaq, then in real estate, then in derivatives (a topic I'll explain later) is the result of decades of trying to keep anyone from feeling any economic pain by the political collective. There are a few exceptions, but the people who warned about the problems, like Ron Paul, weren't given the time of day.

So what's the point of all this? Politicians, worried about being re-elected and not the long term good, made decisions that were in THEIR OWN self interest not those of the country and they were given a pass because the period of prosperity we ended caused few to question their motives. This is not the fault of Democrats or Republicans alone. And, most importantly, not the fault of Capitalism either.

The truly sad part of all this is that the same incentives for this to keep happening are still in place, and market interference has grown steadily. And, worse yet, the quality of information is getting more obfuscated making it harder to have the proper corrective mechanisms put us back on course.

Marko's Take