Monday, May 31, 2010

Bond Rating Agencies Yield Junky Results

Think a certain credit rating means something?  Think again!

Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role.  So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.

The meaning of an AAA rating is that the likelihood of default is virtually nil.  Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face. 

The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is.  Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves. 

Another side-effect is that the rating agencies are incredibly slow to issue downgrades.   A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA.  Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points.  When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.

Credit ratings have ZERO informational content.  Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables:  a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.

Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically,  In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line.  A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.

Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings.  The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.

Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market.  Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!

On the corporate side, there are now only 4 issuers carrying Triple A ratings:  Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT).  Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.

Yet, Triple A ratings on collateralized mortage paper was given out freely.

There is no need to even have this industry.  The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer.  CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information.  By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.

If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers.  A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable.  It isn't.  No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks.  Therefore, the problem will eliminate itself.

Marko's Take

Want to know you to fix the ponzi-scheme/FRAUD known as Social Security?  Tune in to our new video, entitled "Social In-Security:  The Solution", which will be posted shortly on You Tube.  To get more background on this heinous, unconstitutional and immoral program, click here

Saturday, May 29, 2010

World War III Continued

Inevitably, difficult financial times lead to more militarism.  Currently, there are more than 50 military conflicts that are active and some, like the Middle East and the Korean Peninsula, are threatening to explode into all-out multi-nation wars.

The continent of Africa has been plagued by no less than 20 civil wars in the last few decades, although these are primarily tribal conflicts which are very localized.  The MAJOR conflicts include the U.S. presence in Afghanistan and Iraq, the threatened nuclear showdown in the Middle East over proposed sanctions against Iran and the recent escalation of tension in North Korea.  Lesser conflicts, tame for now, include the Chechen and Georgian civil wars which have threatened Russia.

Global military spending has grown sharply at a time when few countries can afford it given the massive budget deficits so many of them face.  World military expenditures in 2008 are estimated to have reached $1.464 trillion in current dollars versus just over $1.2 trillion in 2005 adjusted for inflation.

This represents a 4% increase in real terms since 2007 and a 45%  increase over the 10-year period since 1999.  Put differently, worldwide military spending equates to 2.4%  of world Gross Domestic Product (GDP), or $217 for each person in the world.

The U.S., with its massive spending budget, is the principal determinant of the current world trend and its military expenditure now accounts for 41.5% of the world total.

After Washington, the next highest spenders are China (5.8% of world total),  France and Britain (4.5% each) and Russia (4.0%).  The next 10 countries combined represent about 21.1% of the total with the rest of the planet making up the remaining 18.6%.

The total U.S. military budget of approximately $700 billion, if completely wiped out, would not even cut the budget deficit in half!  It represents more than 50% of the entire discretionary portion of the budget.  Of that total, about $200 billion is being spent annually in Iraq and Afghanistan.
Sadly, rising tensions in two key areas of the world, the Middle East and Korea, suggest that a reduction in military spending is very unlikely in the intermediate term.

Korean tensions have resulted from recent revelations that North Korea is responsible for the sinking of  South Korean warship Cheonan in March.  Because nuclear power North Korea shares a border with China, Beijing has been restrained about supporting sanctions against Pyongyang.  That seems to have changed.

During a visit to Seoul yesterday, China’s premier Wen Jiabao said that China would not protect “whoever sank” the South Korean warship, offering Seoul some encouragement that Beijing might not block moves to punish North Korea at the United Nations Security Council for killing 46 sailors.

South Korea has given China the complete technical report on the sinking and has said it would welcome a Chinese delegation should they want to inspect the shattered hull and corroded torpedo retrieved from the seabed.

North Korea has put its oversized army on alert and has threatened to invade South Korea if Seoul breaches any restricted areas.  The last thing China wants is a nuclear civil war on its southern border with millions of Korean refugees seeking asylum.

Russia also has a keen interest in the Korean Peninsula.   Moscow said on Thursday that it would stage large-scale naval exercises off North Korea next month that were planned before the stand-off on the peninsula.  Sailors “will be on a high level of alert and capable of reacting adequately to any threat”, the Russian Navy told Interfax.

Iran sits on the second largest oil reserves on the planet and is vying to join the nuclear club, a policy vehemently opposed by Israel and the United States as well as the United Nations Security Council.  Opposition to Tehran's plans now includes France, China, Russia and Britain - making it virtually certain that sanctions will be imposed.  Iran has responded to the possibility of sanctions by threatening military action in the region and cutting off oil exports which need to go through the Straits of Hormuz.

The criticality of maintaining oil flow virtually assures a multi-nation armed conflict and the possibility of the use of nuclear weapons by Israel or Iran with the inevitable rise in global terrorism.  It is also likely that any regional conflict would draw in nations such as Syria, Pakistan, Turkey, Yemen and Egypt who will oppose any action taken by Israel.

Unfortunately, the militarism witnessed today is only likely to grow worse.  As nations become more determined to "look out for number one", the ability to cooperate diplomatically will be less likely.  Otherwise, passive domestic populations will become more supportive of military actions to protect their countries economic interests.  Defaulting debtor nations will incur the wrath of their creditors.  Protective trade restrictions, which were utter failures during the Great Depression, will become more politically popular.

This is yet another reason to maintain a heavy stake in Gold.  If free trade becomes restricted, currencies will be less useful as a means of exchange and the use of the only globally recognized currency will increase exponentially.

Marko's Take

Our latest video blog which proposes a 7-Step solution to fixing Social Security will be posted in the next day.  If you want to know the important aspects of that fraud and ponzi scheme called Social Security, check out our video entitled "Social In-Security:  The Problem' by clicking here

Thursday, May 27, 2010

Plunging Money Supply Has Ominous Implications

The lifeblood of the world financial system is money.  When there's more of it sloshing around, times are typically good unless there TOO much of it, causing inflation.  Econometric studies have shown that of the 10 components of the Index Of Leading Economic Indicators (LEI), 2 are the most predictive of future economic activity:  growth in the Money Supply and changes in the Stock Market.

It can be argued, quite convincingly, that the Stock Market is itself is highly dependent on growth in money.  In fact, it's possible, that ALL 10 components of the LEI are driven by growth in money. 

The money supply is SCREAMING!  Is anyone out there listening?

The broadest measure of money, called M3, is contracting at an accelerating rate that now rivals the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal orgy in history.

The M3 figures - which include a broad range of bank accounts and are tracked by monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer.  The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%.  The assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever.  While a rising money supply does not always translate into boom times, a FALLING M3 has historically ALWAYS been followed by an economic contraction and a falling stock market.

Record stimulus spending has been an utter failure in triggering job growth and has barely produced any economic recovery.  First quarter Gross Domestic Product (GDP) was revised lower to 3% from 3.2% this morning.  The economy has lost more than 8 million jobs since the downturn began.

The Obama Administratio has an entirely different explanation for the failure of stimulus measures to produce the hoped for results.  They are opting instead for further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97% of GDP next year and 110% by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to approve another  $200 billion stimulus package to produce economic growth.

Federal Reserve head Ben Bernanke no longer pays attention to the M3 data.  The bank stopped publishing the data five years ago, considering it too erratic to be of much value.

Mr. Bernanke has conveniently forgotten that double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control.  The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a very clear warning that the economy and stock markets were about to go into freefall.

The White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4% of GDP) this year and set up a commission to target cuts.  Mr. Obama, clearly a reader of "Marko's Take", has now understood that the second dip of this Double-Dip Hyperinflationary Depression is imminent.

The dominant voices in US policy-making, Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke are all Keynesians who reject monetary theory and have an extreme distaste to any mention of the quantity of money.  Once they read "Marko's Take", perhaps they ought to open up their copies of "The Monetary History of the United States" by Milton Friedman and Anna Schwartz.

The die is cast.  The crash in M3 has ominous implications.  It means the second dip is imminent,  the stock market will have trouble and on the plus side, interest rates will NOT rise for a long time.

Marko's Take

Interested in ideas on how to fix Social Security?  "Social In-Security:  The Solution"  will be posted in the next 24-48 hours.  To familiarize yourself with the ponzi scheme called Social Security, please check out our video entitled "Social In-Security: The Problem" by clicking here

Wednesday, May 26, 2010

Euro-Zone Debt Auctions Yield Mixed Results

As Global stock markets recover from the sudden volatility of the last few weeks, the Euro-Zone nations have been tapping into the bond markets to raise funds to finance their growing budget deficits and maturities on the external debt.

Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.

Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524%  versus 1.492%  ahead of the auction.  However, it remained near a record low of 1.402%  reached on Tuesday. 

Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.

Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.

Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.

Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.

The yield on Spain’s 6-month bill rose to 1.32%  compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7%  from 0.549% .

In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.

The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74%  and 7-year bonds at an average yield of 2.305%

The debt problem is hardly unique to Europe.  The United States is also facing a massive budget deficit and very onerous levels of external debt.  In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control.  Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.

Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is.  Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.

Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy.  Japan, is the highest among the G-20 with a ratio well in excess of 200%.

The proposed solution to the deteriorating situation has been to raise more debt.  Would anyone propose assisting a cocaine addict by giving them more cocaine?  As a result, the liklihood that the debt problem will be fixed is NIL.  The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.

Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets.  This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.

Marko's Take

For new readers with a political bent, come visit us on You Tube.  Our new video blog series covers such topics as The Federal Reserve, Social Security, Peak Oil and Personal Income Taxes.  To access our videos click here

Tuesday, May 25, 2010

Mixed Signal In Residential Real Estate

Homeowners have had little to cheer about for the last 3 years.  For most Americans, the bulk of their net worth, if they have one, is typically the equity of their home.  The financial crisis has pretty much wiped that out.

A solid rise in the value of residential homes is unlikely for the intermediate term.  With joblessness unbearably high and credit nearly impossible to obtain, the pool of new buyers is uncomfortably low.  The overhang of foreclosures and severe delinquencies suggests the prospect of a meaningful recovery can not be immediate.

Recently released data paints a mixed rather than downright pessimistic portrait.  Although economists were expecting a month-over-month increase of 5.5%, the National Association of Realtors (NAR) reported yesterday that sales of previously owned homes rose an unexpected 7.6%.  That continued a year-long rise in housing activity and marked the highest number of sales recorded last November.

U.S. home prices rose 2% in the first quarter from prior-year lows, according to the S&P Case-Shiller broad National Index, the first year-to-year increase in several years.  However, prices were down 3.2% from the end of last year despite ongoing tax incentives, which terminated at the end of April.

Prices in 10 key metropolitan areas were up 3.1% in March from a year earlier, according to S&P Case-Shiller, while the index for 20 major metropolitan areas rose 2.3%.  Compared with February, they fell 0.4% and 0.5%, respectively. 

Optimists are looking to the continuation of low mortgage rates which help spur demand.  But, low rates can only have so much of an effect.  Despite average 30-year rates now below 5%, the Mortgage Bankers Association noted last week that the number of people seeking mortgage purchase applications had dropped more than 27%, reaching a level last seen in May 1997.

Unfortunately, new sellers have been coming out of the woodwork.  NAR reported that the number of previously-owned homes placed on the market has risen quickly to more than 4 million units and that this inventory continues to far outpace the number sold.

Things may get worse.  According to a recent analysis performed by Zillow, U.S. homeowners are so confident in the value of their homes that many of them plan to put up for-sale signs in their front yards. Zillow reported that 7% of homeowners they polled were "very likely" to try to sell their homes in the next 12 months if the housing market seemed to be improving.

If 7% of  homeowners entered the resale market, that would equal about 5.3 million homes, more than the number of existing homes that sold all of last year. 

On the positive side, new home starts, which are a key indicator of where real estate is headed and of builder confidence, increased by 10.2% to hit their highest total since August of 2008.

On a regional basis, starts were even more impressive in some areas.  The Northeast saw a huge jump of 24% for the month.  The Midwestern states were up 17% and the South by 7%.  

So, while the residential market still has some major issues to deal with, it appears to have reached some sort of stabilization in the near term.  However, given the end of the "first-time buyers" tax credit, the residential sector will still be challenged for the forseeable future.

Marko's Take

For those with a political bent, please visit us on You Tube.  We have video blogs posted on such topics as Social Security, Income Taxes, the Federal Reserve and Peak Oil.  We will have more video blogs in the upcoming weeks.  To access these blogs, click here

Monday, May 24, 2010

Has The Rally In Gold Been Short-Circuited?

While there may be legitimate reasons to think so, Marko's Take is an unequivocal NO!

First, let's review the case against Gold, which has merit.  After peaking near $1,250 per ounce, the yellow metal hit an air pocket which took it down a swift $80 per ounce in a matter of a few days in sympathy with the sudden meltdown in Global stock markets.  The "Gold Bugs" Index (HUI) suffered a steeper decline of approximately 16% from peak to trough.

In addition, the recent strength in the U.S. Dollar has given rise to speculation that, rather than inflating, our economy is DE-flating.  Given the unprecedented drop in money supply aggregates, such as M-2 and M-3, it makes sense to believe that a deflationary meltdown is at hand.

Market technicals, however, do NOT support that position.  The situation in the precious metals and commodity markets appears analogous to that which characterized the NASDAQ in late 1998.  At that time, the internet bubble was well into its mania.  However, the blow-up of Russian debt, the RUBLE and ensuing multi-billion dollar losses of hedge fund Long-Term Capital Management, threatened to throw the entire Global financial system into complete disarray.

The NASDAQ lost 25% in a matter of weeks before suddenly reversing and tacking on about 300% in the next 16 months.  It appears that Gold and other commodity markets are following a similar trajectory.

The graph of Gold below demonstrates that the recent correction still qualifies as no more than a temporary "blip".$GOLD&p=D&yr=2&mn=0&dy=0&id=p43086601386&a=191194388&listNum=1

There have been no technical violations of the uptrend in force since the bottom of the financial crisis in late 2008.  The chart still looks quite healthy.

The recent decline in GOLD has been virtually entirely dollar related.  To show that, we can divide the price of Gold by the USD, or dollar index.  Ideally, it is optimal to see this ratio rise, which would indicate that Gold is outpacing the Dollar.  The converse would show intrinsic weakness in Gold.$GOLD:$USD&p=D&yr=2&mn=0&dy=0&id=p97275561041&a=200986161&listNum=1

Recent trading illustrates that relative to the Dollar, Gold has been in a holding pattern.  This is directly opposite to the period from November 2008 to December 2009, when the ratio rose during the rally from $700 per ounce to $1,200 per ounce.  If we should see this ratio decline, as we did from the summer of 2008 through the November, 2008 lows, we'd have reason to believe that a MAJOR correction might be at hand.

Finally, and more auspicious, is the relationship between Gold and the S & P 500.  Ideally, we want to see this ratio rise as Gold outperforms other financial assets such as stocks.  The chart below shows that the ratio is at its highest level in more than a year and is on the cusp of moving to new highs.$GOLD:$SPX&p=D&yr=2&mn=0&dy=0&id=p52824535369&listNum=1&a=199516559

All in all, GOLD remains on a solid footing.  As the imminent mania in precious metals continues to unfold, investors will need to be prepared for substantial intra-day volatility and violent weekly swings.

We expect there to be huge profits in the ensuing weeks, especially in the junior sector, but investors will need to not get thrown off the bucking bull.  The market is at another ideal entry point.

Marko's Take

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Saturday, May 22, 2010

Peak Oil Update

"Peak Oil" refers to an analysis of the likely trajectory of world crude production which suggests that the resource has already, or shortly will, commence an unstoppable decline.  It was developed by a geophysicist named M. King Hubbert, who took into account several factors, such as the properties of oil depletion and market forces to produce a theory that production of any non-renewable resource would follow a bell-shaped curve.  Once the peak had been reached, the resource would inevitably decline in production.  When applied to crude oil, this concept became known as Peak Oil.

Decades ago, Hubbert predicted that world oil production would peak in about 2005.  It did.  However, as crude oil prices skyrocketed in 2007 and 2008 to nearly $150 per barrel, emergency output from giant Saudi Arabia briefly gave oil production a slightly higher peak in 2008.  That high has not been surpassed since.

Oil production peaked in mid-2008 at just under 88 million barrels per day.  Recently released data puts it at about 86.5 million, roughly equivalent to the 2005 level.  Crude production has oscillated in a fairly tight range for the last 5 years, despite much higher average prices.

This plateau is VERY significant when compared to historical trends.  For example, post Oil Embargo, worldwide production dipped to about 60 million barrels in the early 1980's and crossed 70 million in the mid-1990's.  Thus, the failure to grow at historical rates, despite MUCH higher prices, suggests that the planetary capacity for oil production is quite constrained.

On the demand side, the United States remains the largest consumer, currently using about 19 million barrels per day, down from a peak of 21 million in 2007.  China is now number 2 with consumption of about 10% of world production.  Beijing's demand, however, is growing by leaps and bounds, up nearly 13% year-over-year and is expected to grow another 10% or so in the next 12 months.  Should that forecast be realized, China alone will add about 1 million barrels per day to the demand picture.

The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with significant economic and political impact.  Surplus capacity is believed to be less than 4 million barrels per day.

The energy crisis has been outlined in a Joint Operating Environment report from the US Joint Forces Command.  "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report.

Total oil reserves are estimated to be around 1.8 trillion to 2.2 trillion barrels, of which about 1.1 trillion barrels have been consumed through 2005.  Another 1.5-1.6 trillion barrels remain to be extracted, of which 1 trillion barrels are proven reserves with the remaining 500-600 billion barrels consisting of reasonable projections.

About half of all the petroleum consumption has taken place after 1984 and about 90% of all the petroleum that has ever been consumed was done so after 1958.  Most of the remaining oil could be extracted by 2060.

Investors looking to benefit from Peak Oil will have to take an indirect route.  Oil companies will undoubtedly be slapped with a "Windfall Profits Tax", especially as the budget situation gets more desperate.
Therefore, the avenues for investment must be through alternative fuels such as uranium, tar sands, wind or shale.  These are frought with peril since they require a high level of expertise as many alternative fuel concepts are not yet economically viable on a large scale.

Marko's Take

For more on "Peak Oil", we have two You Tube episodes to provide some background.  They can be accessed by clicking here (Part 1) and here (Part 2).

Friday, May 21, 2010

Banking Sector Problems Accelerate

While the banking sector reported a profitable quarter for the first 3 months of 2010, problems are continuing to escalate.

The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.

A small majority of all institutions reported year-over-year improvements in their quarterly net income.  Those reporting net losses for the quarter were 18.7%, compared to 22.3%  a year earlier.  The average return on assets (ROA) rose to 0.54% , from 0.16%  a year ago.  This is the highest quarterly ROA for the industry since the first quarter of 2008.

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses.  While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.

The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009.  This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.

The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion.  These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.

While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009. 
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses.  Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. 

The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009.  In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist.  Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending.  Commercial and Industrial Loans are down 25% from their peak.  The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes.  Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis.  As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
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Thursday, May 20, 2010

California Sinking Amid Its Budget Crisis

A popular wives tale in California is that a huge earthquake on the San Andreas fault would cause the Golden State to sink into the Pacific Ocean.  It doesn't look like an earthquake will be necessary.  California's own budget crisis has the state drowning in an ocean of red ink.

Last Friday, Governor Arnold Schwarzenegger proposed a new budget that would dramatically reduce aid to some of its poorest and neediest citizens.

His $83.4 billion plan would also cap funding for local schools, cut state workers' pay and reduce 60% of state money for local mental health programs.  State parks and higher education are among the few areas the proposed budget doesn't impact.

The budget does not raise taxes, but assumes $3.4 billion in help from Washington, or roughly half of what the governor sought earlier this year in order to help close a budget gap now estimated at $19.1 billion. Billions more would be saved through accounting moves and fund shifts.

Elimination of  the state's main welfare program called CalWorks, would affect 1.3 million people, of which 1 million are children.  The program requires recipients to eventually have jobs and gives families an average $500 a month.  Eliminating those payments would save the state $1.6 billion, the administration said.  It would also make California the only state not to offer a welfare-to-work program for low-income families with children.

Under the proposed budget, local school funding would be frozen.  Education officials claim they are owed a $2.8 billion increase, without which they wouldn't be able to cover scheduled cost-of-living raises and other obligations.  Education spending has already been cut back substantially, requiring many districts to lay off teachers which will increase class sizes.

The governor's plan would reduce prison costs by shifting the responsibility for some state inmates to local governments.  According to his estimate, the state would save $248 million by sending new low-level felons to local jails instead of to state prisons and by shifting supervision of state juvenile parolees to counties.

Sacramento is also looking to borrow $1.2 billion in gas tax revenue and other transportation-related funds to help balance the budget.  Another idea is to raise more than $200 million by installing automated cameras at red-light intersections to ticket speeding drivers.

Schwarzenegger's latest budget proposal is merely a starting point for negotiations that typically stretch well into the summer.  His previous attempts to impose more dramatic spending cuts have been opposed primarily by Democrats who reluctantly agreed to substantial cuts last year.

A main source of California's fiscal woes is pension obligations to civil servants, yet Democrats continue to resist substantive reform.  "The cost of employee retirement benefits this year is $6.1 billion," said Mr. Schwarzenegger. "That is more than what it would cost to keep [the welfare-to-work program] CalWorks, child care, mental health services and in-home supportive services."

Democrats want the governor to agree to another income tax increase on the rich, even though California currently has one of the highest tax rates in the U.S.  Yet, IRS statistics indicate that $10 billion in wealth has been lost from out-migration in the last 5 years.

The ongoing budget stalemate is largely the result of a poorly designed political system.  Gerrymandered districts drawn by the legislators themselves, combined with a semi-closed primary election system, have tended to send the most extreme ideologues to Sacramento in the last decade.  Voters can correct both flaws when they cast ballots this year.

California is the only state with a requirement that a two-thirds majority vote be achieved for both passage of a budget and an increase in taxes.  So, if 51% of voters agree on how to fix the state budget, it still must be approved by two-thirds of each legislative house.  That requirement explains the consistent gridlock.

As a result of the ongoing budget squabbles, Schwarzenegger's job approval rating has descended to an all-time low of only 24% among likely voters.  The Legislature's approval is even lower, 11%, placing them below Attila The Hun.

Relief will likely come from the 2010 elections.  Any shake-up in the political mix will require a new set of faces in Sacramento and a new governor.  Unfortunately, given the rapidly deteriorating condition of California and the rest of world's economies, it may prove too little-too late.

Marko's Take

For new readers with a political bent, we are releasing video blogs on You Tube.  Topics addressed include "Peak Oil", "The Federal Reserve", "Social Security" and "Personal Income Taxes".  More videos to follow.
They can be accessed by clicking here

Wednesday, May 19, 2010

Is The Second Dip Imminent?

For a while, we have expected the "Second Dip" of this Double-Dip Hyper-Inflationary Depression to materialize.  It sure looks like it's here.

While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.

The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity.  The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets. 

In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.

The most ominous is the unprecedented shrink in the broad aggregates of our money supply. 

Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (  While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.

Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying.  If liquidity contracts, the broad economy will inevitably suffer.  The present contraction in broad liquidity is the deepest of the post-World War II era.  Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.

A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008!  If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging.   Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007! 

These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.

The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets.  Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along.  At this point, there are few options left.

Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.

One must ask the obvious question.  Will the economic downturn bring down hard assets like GOLD?  Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity.  These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take

For our solution to the Budget Deficit, we proposed a two-part program last weekend.  The blogs can be read by clicking and

Tuesday, May 18, 2010

Worldwide Inflation Data Reveals Building Pressure

New data for inflation for the U.K. and U.S. was released this morning.  As has been the case since the beginning of the financial crunch, reported data for the U.S. continues to suggest that inflation is tame.  This, of course, is at odds with real life experience, which suggests the opposite.

The Producer Price Index (PPI) edged lower 0.1% last month, the second decline in the past 3 months, the Labor Department said Tuesday.  Core inflation, which excludes energy and food rose 0.2%, slightly faster than expected.  But over the past year, core prices are up just 1%.  Core prices, an invention of the government, are hardly representative of anecdotal experience since they assume that no one eats or drives.

For April, food costs dipped by 0.2%.  It was the first decline in 9 months and came after a 2.4% surge during the previous month - the largest gain in 26 years.  The March increase reflected the impact of a winter freeze in Florida that heavily damaged citrus and vegetable crops.  Energy prices fell 0.8% in April with gasoline prices down 2.7%.

In the U.K., the reported numbers were far less sanguine.

Inflation leapt to 3.7% in April, significantly higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new Chancellor George Osborne.

The annual inflation rate of the British Consumer Price Index (CPI) was up from 3.4% in March and well above the Bank’s 2% target.  Economists had projected inflation to hit 3.5% this month.

The retail price index measure of inflation jumped even higher to 5.3% in April from 4.4% in March and reached its highest since 1991.  The retail price index is used as a benchmark for many public sector contracts, benefits payments and wage settlements.

The further rise in inflation will prove sticky for the Bank of England.  Interest rates are still at 0.5% and the Bank pumped £200 billion in newly created cash into the economy to fight the recession.

This news comes after many Asian countries are also experiencing various aspects of inflation - especially in the form of what appears to be housing bubbles.  The housing price escalation is particularly prevalent in China and Australia.  We have written two very recent blogs on the issues which can be reviewed by clicking and

One has to remain vigilant as to the accuracy of inflation data as reported by the Labor Department.  As we've also pointed out in various pieces, the methodology for computing the CPI has been altered several times since the beginning of the Clinton Administration.  The effect of these alterations has been to substantially reduce the reported number.  According to Shadow Stats (, the CPI would be reported at closer to 6% if the pre-Clinton methodology was still employed today.

The important thing to keep in mind is that the PPI and CPI are not necessarily indicative of what any individual will actually experience.  A better measure is to review your outflows and compare them to the past.  If your expenses are rising at 10%, then a tame CPI or PPI is completely irrelevant.

It's inevitable that even the reported numbers will start to creep higher and this should occur in the very near future.  The most objective measure of inflation expectations is the GOLD market, which continues to surge to new all-time highs.  If that market screams INFLATION, why isn't Uncle Sam listening?

Marko's Take

Some websites we like and urge you to check out are the following:  LeMetropole Cafe ( and Shadow Stats (  Both of these sites, like us, only deliver the unvarnished truth - a rare commodity these days.

Monday, May 17, 2010

ECU Silver Mining Update: It Keeps Getting Better

A few months ago, we introduced what is possibly the best value in the junior precious metals sector - ECU Silver Mining (ECUXF or ECU.TO)  The news on this company just keeps getting better.

ECU has continued to climb the rapid growth curve it commenced early this year.  For the month of March, results were at record levels.  Some of the highlights included a 12% increase in Silver to 33,614 ounces and a 40% increase in Gold to 705 ounces - resulting in a 27% increase in Silver equivalent to 79,443 ounces (using a 65 to 1 ratio of Silver to Gold).

The news got even better in April.  The company realized a monthly sales figure of $2 million.

Recent drilling results have produced some prodigious finds.

In Velardena, the new results represent an increase in precious metals contents of about 10%, but the resources in that area would now be classified as "measured" as opposed to "inferred".  The mineral resources for the CC vein in that area were classified as inferred with average width of 1.51 metres grading 1.94 grams per ton Gold, 127 grams per ton Silver, 0.80% Lead and 2.40% Zinc.  By comparison, the updated results represent an increase in precious metals contents of more than 500% and the mineral resources in that area would also be upgraded to measured.

ECU now has mineral resources of 6 million ounces of Gold equivalent, which at current market prices would be worth approximately $7.2 billion!  Naturally, resources in the ground do NOT take into account the cost of extraction, so the implied "asset value" would need to be discounted.  However, the asset value DOES NOT take into account the in-ground assets yet to be completely delineated - resources which could theoretically multiply the potential value by many times.

Since 2007, ECU has increased its Silver equivalent ounce resource base from 100 million ounces to now more than 400 million ounces.  With drilling results coming in so favorably, one can only imagine just how significant a miner this company is destined to become.

So, how much will it cost you to buy $7.2 billion in Gold in the ground plus the humongous upside of further resource upgrades?  At the closing stock price of $0.75 multiplied by the roughly 300 million shares outstanding, the market capitalization is a mere $225 million.  Yes, $225 Million!  Put differently, ECU has $24 per share of resources, clearly at the extreme upper end of junior miner value.

The company is now profitable, has enough cash to meet future needs and has been successful in paying down its debt.  As of the end of the year, ECU reported more than $7 million in cash and had reduced debt to about $15 million.

As a disclosure item, I continue to hold a decent stake in this company and expect to do so into the future.  I expect to see ECU trading at many multiples its current price in the not-too-distant future - especially if precious metals prices continue their march upward.

Marko's Take

Please visit us on You Tube.  You can access our video blog series by clicking here

Sunday, May 16, 2010

Fixing The Budget Deficit: Part 2, Incentivizing Politicians

Yesterday, we began a series on how to fix the budget deficit by suggesting wholesale changes to how individuals are incentivized through the structures of taxes.  Change how people are rewarded and punished and you'll get them to do what we, as a society, would like to see done.  That was Step 1.

Step 2:  Create Appropriate Incentives For Politicians To Behave In The Country's Interest

Regardless of where someone aligns politically, the sentiment toward politicians could hardly get any lower.  In special elections to replace vacant seats, the incumbent party is being rejected in droves, however, voter anger has mostly been directed at Democrats.  Right now, politicians, especially CAREER politicians, are being looked upon as akin to either ambulance-chasing lawyers or used car salesmen - on a good day!

Let's face it.   Politicians do such a crummy job because their incentive is to do whatever it takes to get re-elcted even if it means voting for a piece of legislation they KNOW will be ultimately harmful.  Ideally, we need them to do the RIGHT thing for the LONG run even if it may affect their re-election campaigns because of SHORT run dynamics.

Do we need to change human behavior?  Do we need to drug them?  How do we get them to do the right thing?

We can get politicians to behave and vote exactly the way we want them to by changing their incentive structure.   How?  The same way a corporation does.  By rewarding them for "success" and punishing them for "failure" in the performance of their duties.

Let's take the budget as an example - an area Congress has a direct hand in determining.  Think of Representatives and Senators as large groups of two separate Boards of Directors for America Corporation.  If we want them to balance the budget, PAY THEM A BONUS if they balance the budget!
That way, it's certain to happen.

Think it would be too expensive?   Hardly!  Let's say we paid a performance bonus to the entire House of Representatives of $100 million for achieving a balanced budget.  If successful, that would produce more than $250,000 per person - more than a year's pay.  We could do the same for Senators.  A $100 million dollar bonus pool would translate into $1 million each.  Think they couldn't balance the budget with that carrot hanging in front of them?

Given the size of budget deficit we now have of nearly $1.5 trillion, that bonus structure would save itself many, many times over.  Suddenly, they wouldn't be so anxious to go on vacations.  Suddenly, hard decisions would be made as to where to make cuts.  Suddenly, we would see FAR FEWER pork projects.

We could also withhold some of that bonus until the goal is actually met.  Since economic data like budget deficits are only known after the fact, we should only release the bonuses when the final tallies are in.  That way, we don't pay them for their lousy projections, but for accomplishments.

This same methodology could be used to achieve other goals like reforming out of control entitlement programs, or trimming defense, or any other goal deemed to be in the best interests of our country as a whole.

The amount of pay could be determined by an executive compensation committee of respected and experienced people from all walks of life.  This committee could be made up of folks such as former Presidents (at least those without a wife who is serving as Secretary of State and wants that Presidency oh so bad!) or business executives or other high profile and trusted individuals. 

Another means of correcting the lunacy of our political ruling class would be to force them to eat their own cooking  You like Obamacare so much?  Sign up!   You like Social Security so much?  Sign up!  There should be no ability to "opt out".

If we forced them to abide by the rules they set out for everyone else, they might just be a tad less inclined to stuff these rules and programs down our throats!

This approach to how we utilize our Congress, if properly stuctured, would completely change the horrendous and inefficient dynamic characterizing Washington, D.C.  The interests of Congress and the populace would be completely aligned.  We would have a more effective governing society.

Marko's Take

We devoted a two-part video blog series to fixing Social Security.  Part 1 of the series, entitled "Social In-Security:  The Problem" can be accessed by clicking here  Part 2 of the series, entitled "Social In-Security:  The Solution" will be posted in the next couple of days.

Saturday, May 15, 2010

Fixing The Budget Mess: Part 1, The Negative Income Tax

It boggles the mind that the United States, along with the rest of the world, could find itself in the budget mess we are now in.  For current information on the nature, size and difficulty of the budget deficit, yesterday's blog is a great place to start:

The solution is a lot easier than one might think.  In fact, just about anyone, on an individual level, has found themselves in a similar position:  too many bills, too much debt and not enough income. 

The difference is that NONE of us can print money and/or change the rules so as to circumvent the system.  Uncle SAM can do both.  Although NEITHER are appropriate options and NEITHER work.

Step 1:  Change incentives to REWARD productive behavior and PUNISH suboptimal behavior.  Sound tough?  Hardly!  As Milton Friedman pointed out time and time again in his prolific writings, if you want more of something, SUBSIDIZE IT!   If you want less of something, TAX IT!

Here are some real life examples of how this has worked in the past.  A couple of decades ago, it was common practice to subsidize dairy farmers.  The result?  A surplus of milk and cheese.  Milk had to be poured down the drain to keep prices from crashing and cheese was given out from huge warehouses.  The oversupply of Milk, in turn, caused farmers to convert dairy cows into hamburger - thereby putting pressure on meat prices.  Instead of helping farmers, the "invisible hand" of government stupidity slapped them in the face.

In the case of oil, the decision was made to impose possibly one of the most idiotic taxes ever created:  the Windfall Profits Tax.  Used as a method to PUNISH the oil companies, the tax was levied to keep them from profiting on the Middle East Oil Embargo.  The result?  A complete cessation of drilling, at a time when new sources of oil were desperately needed to be created.   Once President Reagan ended this tax immediately upon taking office, the price of oil crashed soon thereafter and the next 25 years were marked with ample and cheap oil supplies.

This brings us to the utterly counter-productive income tax system.  Taxing the "rich" is nothing more than a means to curry political favor among the public, which doesn't understand that only the successful are in a position to create jobs.   The result?  Fewer productive people working less at creating jobs and more at discovering tax loopholes.  Less time spent building business and developing technological innovation.  LESS, not more income taxes generated.

As for the other side of the coin, WELFARE subsidizes the non-productive.  The result?  More people on Welfare!  And, more people who become "addicted" to the lifestyle of receiving handouts for fear of losing their benefits should they be able to return to the workforce. 

The solution?  A NEGATIVE Income tax.  First proposed, to my knowledge, by Milton Friedman, the Negative Income Tax would provide a base level of support without strings, thereby eliminating the need for most, if not all, assistance programs. 

Here's how it would work:  Set a base level of income of, say $50,000 per year.  Anyone below that level would qualify for some support.  The negative income tax would be applied to any shortage of earnings below that level.  For example, if someone earned $30,000, they would receive some subsistance.  Using a negative tax rate of 25%, the individual would recieve $5,000 (($50,000 - $30,000) X .25)).  The individual would still keep 75% of additional earnings up to $50,000 and pay the normal income tax rate on anything earned ABOVE that level.  So, instead of being incentivized to stay home and do NOTHING, the person is rewarded for at least doing something.  Society, as a whole, is much better off.

In addition, by being a CASH distribution without strings, the Negative Income Tax would not interfere with the allocation of resources.  Take Medicare... PLEASE!  Because health care is subsidized, it is OVER-consumed by beneficiaries - which results in the entire health care system being stressed to the point of malfunctioning.  If consumers were allowed to CHOOSE the level of healthcare they wanted, the system would be in balance and we wouldn't need to create government behemoths like Obamacare.

Just fixing the reward system, by itself, would go a long way toward generating economic growth, lowering un- and under-employment and alleviating the economic distortions caused by the interference with a free market. 

Tomorrow, we'll tackle the next part of "Fixing The Budget Mess" by reviewing the issues of entitlement spending, which now consumes more than half the budget.

Marko's Take

Our new You Tube channel and our video blog series is designed to focus on topics such as solutions to the problems facing us as a society.  The next episode, due to be posted shortly, is entitled "Social In-Security:  The Solution" and goes through a 7-step solution to undo this ill-concieved and immoral wealth transfer scheme.  Currently posted is "Social In-Security:  The Problem" which can be accessed by clicking here

Friday, May 14, 2010

U.S. Budget Deficit Continues To Spiral Out Of Control

Yesterday, we wrote about the huge budget deficits plaguing the Euro-Zone.  Greece, the center of attention, has a budget deficit equivalent to approximately 14% of Gross Domestic Product (GDP).  The United States, thought to be much more fiscally prudent, is current running a deficit of 12% of GDP.  Latest monthly budget numbers for April indicate a rapidly deteriorating fiscal situation.

The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department reported on Wednesday.

It was more than twice the $40 billion deficit that economists had forecast and was ominous since April marks the filing deadline for individual income taxes that are the main source of government revenue.

In prior years, there was a surplus during April in 43 out of the past 56 years.  The government has now posted 19 straight monthly budget deficits, the longest string of shortfalls in history.

For the first 7 months of fiscal 2010, which ends September 30, the cumulative budget deficit totaled nearly $800 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009.  Government spending for April was a historical record.

Receipts in April were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.  The year-over-year reduction reflects lower income tax collections as receipts from individuals fell to $107.31 billion from $137.67 billion in April 2009.

Historically, the current deficit is the highest as a percentage of GDP with two exceptions:  toward the end of World War I when it hit nearly 12% in 1918 and then 17% in 1919.  During World War II, the deficit exceeded 20% of GDP from 1943-5, peaking at nearly 30%.

Post Second World War, the percentage hasn't breached the 10% level until this year when it is expected to hit 12%.  In 2009, it came in just under at 9.9% of GDP.

One of the major stumbling blocks to deficit reduction is the composition of the budget itself.  More than 60% of the deficit is made up of non-discretionary items such as Medicare, Social Security, Welfare and interest on the National Debt.

The math gets very ugly here.  Total spending is running at $3.8 trillion.  The deficit is expected to reach $1.5 trillion this year.  Even if defense were cut ENTIRELY to zero, the defict would STILL EXCEED $500 billion!  If all non-discretionary spending were cut to zero, the budget would barely balance.

The math gets even uglier.  The bulk of Government spending is destined to rise sharply without a major and politically unacceptable restructuring.  Social Security and Medicare cater to the old who are the fastest growing demographic.

Interest on the National Debt has been kept artificially low because of the ZERO interest rate policy of the Federal Reserve.  Even if rates stay low, this year's deficit alone will result in an increase of more than 10% to the National Debt.  So even if rates DON'T rise, the interest portion will still grow by leaps and bounds.  Once rates do rise, the interest portion will explode and constrain future policy makers even further.

The freight train also known as government spending can only climb on a parabolic path without a major overhaul of the entire government.   As unemployment is expected to stay high for an extended period of time, the U.S. can't look to income taxes to make up the growing shortfall.  Clearly, the day of reckoning is fastly approaching.

Marko's Take

For readers with a more political bent, our new You Tube channel has video blogs covering "Peak Oil", the Federal Reserve, the Legality of the Personal Income Tax and Social Security.  You can access these and the others to follow in coming weeks by clicking here

Thursday, May 13, 2010

PIGS Go To Slaughter

Now that the Greek bailout has been undertaken, the marketplace is turning its attention to other nations believed to be under economic or financial stress.  The term "PIGS" originally referred to the "fearful foursome" of Portugal, Ireland, Greece and Spain.  Italy has appeared to be on the verge of joining this uneviable assemblage of financial wreckage - creating the revised "PIIGS".

As has been written here in recent weeks, the so-called austerity program enacted by Greece is a farce.  It is hardly "austere" to force lazy government workers to actually work!  It is hardly austere to reduce the absurdly generous early retirement packages which allow some civil servants to retire as young as 45.  Where can I sign up for that deal?

The other PIGS are now enacting their own "austerity" measures in an attempt to be more pro-active before their nations hit the crisis fever that was triggered by the Greek financial meltdown.

José Sócrates, Portugal’s prime minister, is expected to announce tough new austerity measures today, including a “crisis tax” on companies and wages, to reduce the country’s massive budget deficit.

Portugal's new austerity package, which follows similar moves by Spain, Greece and Ireland, is being introduced under pressure from Lisbon’s European Union partners for sharp budget cuts in support of a €750 billion emergency plan to defend the Euro.

Angry trade union leaders immediately called for a “mobilisation” against what they called “harsh and unjust” measures, expected to include a 1 % increase in value added tax to 21%  and increases of up to 1.5 % in income tax.  Unions opposed to cuts?  Shocking!  (Sarcasm intentional)!

The increases are expected to include a 2.5 % increase in corporate tax to 27.5 %.   Politicians and public sector managers will also see their salaries cut by 5 %.

The new measures are designed to reduce the budget deficit by an additional €2.1 billion, from 9.4 % of Gross Domestic Product (GDP) in 2009 to 7 % this year and 2.8 % in 2013.  Portugal’s original deficit target for this year was 8.3 % of GDP.

José Luis Rodríguez Zapatero, Spain’s prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 % cut in civil service pay to accelerate cuts to the country’s budget deficit.

In what he called one of the hardest speeches of his life, Mr Zapatero told parliament how Spain planned to reduce its deficit by an extra 0.5 % of GDP this year and another 1 % of GDP in 2011, a total of €15 billion.

The new measures should help bring the deficit down from 11.2 % of GDP in 2009 to just over 6 % of GDP in 2011.

Surprisingly, trade unionists were outraged at what they said were harsh measures.  One regional leader of the small United Left political party called for “rebellion and a general strike”.  Shocking!  (Sarcasm intentional)!

Thus far, Ireland has surprised the market skeptics by pro-actively embarking on a draconian plan to tackle its debt, which includes large public sector pay cuts, and resolve the bad loan problems at its banks.

Pledging to cut public sector spending by 7.5 % of GDP this year alone has not spared Ireland  market pain.  Last week its bonds were trading at a spread of 3 % over German Bunds.  The moves have prevented the country from being deemed a full-blown basket case.

Italy, has been on the cusp of becoming the 5th member of this elite group.  However, a very well received bond sale indicates that Rome is not yet ready for inclusion.  Italy just sold €3 billion of 2015 notes at an average yield of just 2.57 %, which was 2 basis points lower than existing comparable debt. This demonstrates a substantial level of market confidence.

The problems in the Euro-Zone only BEGIN with Greece.  Bail-out or not, the key to success will be a return to economic growth for all the affected nations.  Greek unemployment is now more than 12% and is expected to rise to 14% over the next year or so.  Until the European Union economies start to show growth, the budget deficits will continue to widen and the threat of a massive round of sovereign debt defaults will be an ongoing issue.

Marko's Take

Please visit us on You Tube.  You can access video blogs covering topics such as the Federal Reserve, Income Taxes, Social Security, Peak Oil and a mock "State Of The Union" address by clicking here  Our most recent video is on the FRAUD and Ponzi Scheme known as Social Security.  It can be accessed by clicking here

Wednesday, May 12, 2010

Greek Bail-Out Destined To Fail

Now that the collosal bail-out of Greece has been enacted, it's time to take a step back to analyze both the prospect for success and examine the appropriate remedies. 

As has been written in Marko's Take numerous times, the problem with Greece is its system.  The problems in Athens were decades in the making and can NOT be fixed by throwing around a few measley hundred billion dollars.

Greece suffers from an entitled population that has been coddled by the promises of socialist governments - allowing the people to expect to be taken care of.  The problem with that reasoning is that the more people who are recipients of the government dole, the less productive they become.  The people who are pulling the cart are taxed into oblivion and eventually wonder why they should be made to support the corrupt and lazy.

Greece is known for its corruption.  It has a very high proportion of it work force employed by the government.  Many government employees have been given lavish early retirement packages. 

The rather modest budget cuts will NOT fix the problem.  The only impact of these cuts in the short run will be to remove stimulus from the economy and facilitate a further downward spiral.  Greece has one of the largest deficits as a proportion of Gross Domestic Product (GDP) in the world.   Unless the economy grows, this will only grow worse. 

The formula applied to Greece is hardly novel.  The identical remedies were tried with Argentina in 2001, which suffered the world's largest debt default in 2001.  They failed.  According to Cristina Fernandez, Argentina's President, the bail-out repeated "the same recipes they applied to us, which provoked what happened in 2001". 

Argentina, as an IMF member, voted for the Greek bail-out, but “critically”, Ms Fernández said, adding that the enforced austerity will have “terrible consequences” on the economy.

In the 1990s, Argentina was a devotee of the pro-market Washington Consensus and pegged the Peso to the Dollar.  But it racked up debt and its economy crashed.  Argentina savagely devalued its currency and became a pariah on international financial markets.

Speaking at an event on Monday night to refinance debt for Argentina’s provinces, Ms Fernández defended the demand-driven economic model, which has delivered several years of high growth, championed by her husband, Néstor Kirchner, in his 2003-07 government and which she has continued since.

The long-term solution for Greece is a complete overhaul of its economy and changing the mind-set of the population.  This will be no easier there than here in the United States, where out-of-control social programs like Social Security and Medicare threaten to bankrupt us.  Socialism has NEVER worked and NEVER will.

Only a return to a market-driven model, after a period of austerity, can possibly return Athens to a positive trajectory.  Let's hope that Greece gets the message, the rest of the Euro-Zone gets the message and American gets the message.  If we don't, we will suffer the same fate as Greece.

Marko's Take

Please visit us on You Tube at   Our lastest video, on that Ponzi Scheme also referred to as Social Security, can be accessed by clicking here   Our 7-step solution to this mess will be uploaded shortly.

Tuesday, May 11, 2010

Rising Chinese Inflation Augurs Well For Gold

The Chinese economy is growing at double-digit rates, yet, instead of rejoicing, the Chinese leadership is worried.  Beijing has slowly begun to take steps to begin to cool its economy and an increase in interest rates is thought to be coming sooner rather than later.  The various stimulus plans appeared to have done their job, but now comes the inevitable effect on prices.

Recently released data indicates that the Chinese economy is overheating and that prices are beginning an upward creep.  Consumer prices in China rose 2.8%  in April from the same month a year earlier, the fastest pace in 18 months - but below Beijing’s full-year target of 3% , data released on Tuesday showed.

Adding to fears of potential overheating, Chinese property prices jumped 12.8% in April from a year earlier, the biggest increase since records began in 2005, although sales volumes have already fallen substantially in many big cities in reaction to a string of government measures to cool the market.

More disturbing was the news that Producer prices rose 6.8% in April, up from March’s 5.9% rise, indicating that consumer prices are likely to increase faster in the coming months.

Food prices make up about a third of China’s consumer price index and were the main driver of higher inflation in April, rising 5.9% from a year earlier, while non-food prices rose a mere 1.3%.

With the benchmark one-year bank deposit interest rate at 2.25% , Chinese savers are already faced with negative real interest rates, making investments in the booming property market more attractive.

The fear of Chinese policy tightening has dogged commodities markets in recent weeks, with base metals well off their mid-April peaks.

This morning,  copper for delivery in three months fell 2.1% to $6,970 a tonne on the London Metal Exchange.  Aluminium was off 2.9% at $2,075 a tonne, while lead – particularly exposed to moves in Chinese demand as it is used in car and electric bike batteries – dropped 3.7% to $2,022 a tonne.

As inflation creeps up in China, as well as the rest of the Asian-bloc, it will undoubtedly spill-over into the rest of the world.  Just as Chinese infation is rearing its head, so should that in the United States.  Washington has also enacted substantial stimulus programs and the accompanying inflation is inevitable.

Especially in a low interest rate environment, this can only be bullish for Gold.  It's no surprise that the yellow metal has taken center stage, broken out to new all-time highs and will undoubtedly explode higher as the world scrambles for the only bona-fide infation hedge.  Investors would be wise to jump on board before its too late.

Marko's Take

Please visit us on You Tube at  Our latest video, explaining the Ponzi Scheme known as Social Security, can be accessed by clicking here

Monday, May 10, 2010

U.S. Gold Corporation: A Junior Explorer Ready To Go Big Time

While the Euro-Zone's problems continue to make the headlines, investors should NOT lose sight of the emerging opportunity in the precious metals market and junior miners.  Against a backdrop of a 1,000 point intra-day loss in the Dow Jones Industrial Average last Thursday, GOLD surged above the $1,200 level as it begins the long-awaited hyperbolic growth phase.

That said, we wish to continue our series on junior precious metals companies with incredible promise to make huge gains in this very exciting phase of the bull market.  Today's featured company is U.S. Gold Corporation (UXG), an American-based explorer with significant land holding in Nevada and Mexico.  UXG continues to report excellent drilling results and appears poised to take this relatively unknown company to the next level.

Rob McEwen, Chairman and CEO of US Gold, is also the Company's largest shareholder with 21% of the stock and does not draw a salary.   Previously, McEwen was the founder and former Chairman and CEO of Goldcorp Inc. (GG), where its Red Lake Mine in northwestern Ontario, Canada is still considered to be the richest gold mine in the world.

During his tenure at Goldcorp, McEwen transformed the company from a collection of small companies into a mining powerhouse, growing its market capitalization from US $50 million to approximately $8 billion.  The shares of the Company produced a compounded annual growth rate of 32%.

UXG's Nevada holdings are concentrated in the Cortez Trend - of the Battle Mountain-Eureka Gold Belt that includes American Barrick's (ABX) Cortez (35 million ounces of gold) to the north and the Ruby Hill mine (4 million ounces) to the south.  US Gold's combined properties on the Cortez Trend sit 10 miles south of Barrick's recent discovery. 

While the Cortez Trend remains under-developed, recent discoveries indicate that it could rival the famous Carlin Trend which is located approximately 30 miles to the northeast where reserves and mineralized material are estimated to be 180 million ounces.

The Company also owns approximately 500,000 acres of mineral rights in Mexico's Sinaloa State.  Exploration work was initiated in early 2008 and has produced encouraging results including the exciting El Gallo discovery announced in November 2008.

McEwen believes that GOLD will rise to $2,000 per ounce this year and to an ultimate high of $5,000.    Sounds pretty familiar.  Could he be a reader of Marko's Take?

The company's investor presentation could be accessed by clicking here

According to UXG's most recent financial statements for the quarter ended March 31, 2010, liquidity was ample with more than $35 million in cash, short-term investments and GOLD bullion.  The Company is debt-free.

As an asset play, UXG's value should be viewed based on its resources.  All holdings have been independently audited with an "NI 43-101" - a national instrument for the Standards of Disclosure for Mineral Projects.  The Instrument is a codified set of rules and guidelines for reporting and displaying information related to mineral properties owned by, or explored by, companies which report these results on stock exchanges.

According to the most recent review, UXG has "measured and indicated" holdings of 3.3 million ounces of Gold, primarily in Nevada and 9.8 million ounces of Silver in Mexico.  Based on 122 million shares outstanding and current prices of the metals, this reveals an asset value of approximately $30 per share.  UXG closed Friday at $3.27 per share. 

Naturally, this valuation doesn't include the costs of development and mining, nor does it include the potential value of FUTURE discoveries.  Since 2007, "measured and indicated" Gold resources in Nevada have nearly tripled!  Given the prodigious history of the Cortez Trend, further resource discoveries would seem highly likely.  The company intends to invest $18 million in the coming year to add to its resource base.

UXG is traded on the Amex and is quite liquid - trading approximately 1 million shares per day.  The Company intends to list on the NYSE as soon as it can.

As a disclosure item, I hold some UXG.  This stock is not for the feint of heart.  The stock traded at nearly $7 per share in late 2007 before declining to about $.50 at the bottom of the financial crisis in late 2008.  This stock should only be considered by aggressive holders with a high tolerance for risk.

Marko's Take

Everything you never wanted to know about Social Security is revealed on our latest You Tube video which can be accessed here   Our subsequent video, to be released in the next week, will propose a 7-step solution to the Social Security mess.  For information on "Peak Oil", the Federal Reserve, Income Taxes and a mock "State of The Union" address, you can access all by clicking here

Saturday, May 8, 2010

Iran Nuclear Showdown Looms Closer

Iran's nuclear program is one of the most controversial issues in one of the world's most volatile regions.  American and European officials believe Tehran is planning to build nuclear weapons, while Iran's leadership mainains that its goal in developing a nuclear program is to generate electricity and preserve its vast oil reserves.

Top American military officials said in April 2010 that Iran could produce bomb-grade fuel for at least one nuclear weapon within a year, but would most likely need two to five years to manufacture a workable atomic bomb.

Pronouncements from Tehran have been all over the map.  In a recent statement by Iranian cleric Ahmad Khatami, Iran has entered the world's "nuclear club" and major powers should accept it.

Khatami, a conservative hardliner also warned the major powers that Iran could "endanger your entire world" in any future confrontation.

The United States and Israel, Iran's arch foes, have not ruled out military action if diplomacy fails to resolve the row.

Iran, a predominantly Shi'ite Muslim state, has said it would respond to any attack by targeting U.S. interests in the region and Israel, as well as closing the Strait of Hormuz, a waterway crucial for global oil supplies.

One key to reaching a non-military solution has been the cooperation of the United Nations Securtiy Council.  China, which imports 12% of its oil from Iran, has been the most reluctant to endorse stringent sanctions.

President Nicolas Sarkozy of France told President Hu Jintao of China that nations would have to impose new sanctions on Iran if it refuses to curb its nuclear program, official Chinese news organizations reported on last week.

France has joined with the United States and Britain in pushing for a new package of economic sanctions from the United Nations (UN).  Those countries accuse Iran of using its nuclear program to try to develop weapons.  Iran has said it is interested in pursuing nuclear power, not arms.

Addressing the UN, President Mahmoud Ahmadinejad of Iran said that relations with the United States might never be repaired if new sanctions were imposed against his country, that the United Nations atomic agency had no authority to interfere into matters like missiles and that, despite his contested re-election last year, Iran had not become a republic of fear.

Later in the day, he suggested that relations with Tehran might never recover from a United States push for new economic and military sanctions against Iran through the United Nations Security Council.  New penalties would “mean relations between Iran and the U.S. will never be improved again,” Mr. Ahmadinejad said at a news conference.

Of major concern is what options the U.S. has in response to a threatened attack by Iran against Israel or in attempting to sabotage Middle East oil supplies.

Defense Secretary Robert M. Gates has warned in a secret three-page memorandum to top White House officials that the United States does not have an effective long-range policy for dealing with Iran’s steady progress toward nuclear capability, according to government officials familiar with the document.

One senior official, speaking anonymously, described the document as “a wake-up call.”  But White House officials dispute that view, insisting that for 15 months they had been conducting detailed planning for many possible outcomes regarding Iran’s nuclear program.

Mr. Gates’s memo appears to reflect concerns in the Pentagon and the military that the White House did not have a well prepared series of alternatives in place in case all the diplomatic steps finally failed.  Separately, Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, wrote a “chairman’s guidance” to his staff last December conveying a sense of urgency about contingency planning.  He cautioned that a military attack would have “limited results,” but he did not convey any warnings about policy shortcomings.

Thus, as Iran continues the development of its nuclear arsenal, options available to contain the situation appear limited.  Israel has repeatedly warned of a pre-emptive strike if diplomatic initiatives fail.  So far, the Obama Administration has successfully convinced Israel to remain patient while discussions are taking place.

However, given the stated intention of Iran to retaliate if sanctions are imposed, the potential outcomes are strewn with high risk.  The last thing the sputtering world economy needs is a major disruption of Middle East oil supplies or an all-encompassing regional war.

Marko's Take

Our latest You Tube video, entitled "Social In-Security:  The Problem", which tells you everything you need to know about the world's largest Ponzi scheme is now posted here  Our subsequent video, entitled "Social In-Security:  The Solution" outlines a 7-step program to fix the mess.  Hope you tune in!

Friday, May 7, 2010

Plan To Audit Federal Reserve Thwarted By Obama Administration

Chalk one up for our wonderful Congress and President!  Possibly the most important piece of legislation on the docket and one supported overwhelmingly by the populace just "withered on the vine".  Time to pop those champagne corks, ladies and gentlemen of  Washington, your need to obfuscate has once again taken precedence over the rights of the American people to understand what is being done with THEIR money!

Of course, we have to allow for the fact that politicians view tax collections as belonging to THEM.  They don't!  The Federal Reserve (Fed), so expert at creating asset bubbles, then justifying their existence by rushing in to fix those bubbles, remains shielded from any oversight.  What's a few trillion among friends?

Political pressure from the Obama administration, along with the Treasury and Fed, led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum.  It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.

Sen. Sanders, after the intense lobbying by the Obama administration and Fed officials, removed language in his amendment to the financial-regulation overhaul that would’ve opened the Fed’s monetary policy deliberations to audits by the congressional Government Accountability Office (GAO).  The original Sanders amendment eliminated those restrictions, which were passed by the Senate in 1978.  The bill prevented the GAO from reviewing the Fed’s monetary policy actions, discount window lending, open market operations and transactions with foreign central banks or governments.

The watered-down Sanders amendment requires a one-time audit of the Fed’s emergency credit facilities and an inspection of Fed governance, a review of the selection of regional bank directors and the operation of regional banks’ lending facilities.  The measure still requires the Fed to publicly identify borrowers from its emergency lending facilities and other special programs by December 1.  But, it doesn’t stipulate ongoing disclosure.  So what good is it?

The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis.  It would also require a one-time audit of those loans and a one-time review of Fed governance.  A formal vote was pushed back until next week.  Its endorsement by the Treasury is proof the bill has ZERO teeth.

"At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer," Mr. Sanders said. "The American people have a right to know."

Fed Chairman Ben Bernanke, while insisting on a commitment to "openness" at the Fed, said in a letter to Congress the original Sanders measure would "seriously threaten monetary policy independence, increase inflation fears and market interest rates and damage economic stability and job creation."  Mr. Bernanke fails to mention in his letter that the Fed itself has caused economic and financial instability and has utterly mismanaged monetary policy and set the level of interest rates to cause the very financial crisis we're in. (Sarcasm intentional!)

A House bill sponsored by Rep. Ron Paul (R., Texas) that passed in December, contains a proposal similar to the original Sanders measure.  If the Senate bill were to pass, it would need to be reconciled in a conference committee.  Given the "compromise" bill, the reconciliation process cannot possibly lead to any legislation that would be effective.

Before the last-minute compromise, the Fed's foes appeared to be winning  and got a major boost when Senate Majority Leader Harry Reid (D., Nev.) said he would side with Mr. Sanders.

At least half a dozen Obama administration officials joined the high-pressure campaign, including Treasury Secretary Timothy Geithner and Rahm Emanuel, the White House chief of staff.  Administration aides credited Mr. Dodd with pushing back against the original amendment and developing an acceptable alternative.

The corrupt wheels of Washington continue to turn.  The fact is that an audit of the Fed is not opposed because it could interfere with the great job they do.  Rather, it is a desperate attempt to hide their utter incompetence and mismanagement, along with their surreptitious market operations designed to interfere with a free market to serve their political masters.

Marko's Take

Our latest You Tube video titled "Social In-Security:  The Problem" is now posted and can be accessed by clicking here  We will post "Social In-Security: The Solution" subsequently.  Stay tuned for a 7 step plan on how to fix this mess.

Thursday, May 6, 2010

Euro-Zone Budget Deficits Go Parabolic

While the topic du jour, every jour, has been Greece and its whopping budget deficit, fiscal problems within the Euro-Zone hardly end there.

Athens' budget deficit, which ran at 13.6% of Gross Domestic Product (GDP) in 2009, is not the highest in the bloc.  Ireland had the biggest fiscal deficit in the European Union last year – larger than both Greece and the UK - according to revised figures published recently by Eurostat, the European Commission’s official statistics office.

The deficit was revised up from 11.8% to 14.3% of GDP after Eurostat ruled that the Irish government’s €4 billion of aid to Anglo Irish Bank must be treated as part of current spending.

Ireland has raised approximately 60% of the €20 billion it needs this year to finance the deficit.  Its repayment schedules are manageable with around €1 billion of redemptions due this year, €4 billion next year and €6 billion in both 2012 and 2013.

European Commission's spring forecasts put the UK budget deficit THIS year at 12% of GDP – the highest projected within the European Union and worse than Treasury estimates.  The deficit, if realized, would put Britain at the highest deficit of the 27 EU nations.

The country's budget shortfall was the third largest in the EU last year, but will overtake both Greece and Ireland this year, according to the forecasts.  Greece's measures to tackle its public finances problems are projected to reduce its deficit to 9.3% of GDP in the coming year.

The commission's forecasts are for a worse deficit than predicted by Alistair Darling at his March budget.  In 2010-11, the commission puts the deficit at 11.5% of GDP, compared with Darling's forecast for an 11.1% budget gap.

Even Germany, easily the healthiest economy in Europe, is finding itself struggling.  Germany's budget deficit will soar well above 4% of GDP in 2010, breaching European Union rules, Finance Minister Peer Steinbrueck was quoted as saying on Wednesday.

Under the EU's Stability and Growth Pact, Euro-Zone members are required to maintain public deficits below 3% of GDP and public debt at less than 60% of GDP.

This sharp increase in deficit spending stems mainly from the stimulus package enacted by Chancellor Angela Merkel.  At €50 billion,  it is the largest since 1945.

Unfortunately, budgets are far easier to expand than contract.  Politicians have a vested interest in their own re-election and nothing works better than promising something today while postponing the cost for future years.  Austerity measures are never embraced by the domestic populations - keeping even the honest politicians from imposing these fixes.  The recent riots and violence in Greece is proof that an entitled populace is loathe to take responsibility.

Marko's Take

Our latest You Tube video entitled "Social In-Security:  The Problem" is now posted.  You can access it by clicking here