If you have traveled by air any time in the last few years you known the routine: Stand in huge security lines . . .take off your coat, belt and shoes . . . put all change and metal objects in a tray . . . unpack your laptop . . and be prepared to be patted down or interrogated if you sweat a lot, someone thinks you look suspicious, or you just have bad luck.
Then there are the “no-fly” and watch lists, secret government databases which now have over 119,000 U.S. citizens on them, and hundreds of thousands more non-citizens. Many on the lists have no business being on them. 60 Minutes recently obtained a copy of the lists and found that everyone
named “Robert Smith” in the U.S. is on the watch list because some alleged terrorist allegedly once used that name as an alias. “Unlikely Terrorists On No-Fly List,” 10-8-06, 60 Minutes, http://www.cbsnews.com/stories/2006/10/05/60minutes/printable2066624.shtml
You would think the TSA could tell the difference between the 20-something alleged terrorist who once used the name “Robert Smith” and 80-year-old men or 7-year-old kids, but no, everyone named
“Robert Smith” gets extra scrutiny and sometimes is denied boarding. The president of Bolivia is also on
the list because his name is similar to that of some alleged terrorist, as is Democratic congresswoman Loretta Sanchez, who has been a strong critic of TSA lists.
What’s more, thousands of people are added to the lists every week, and the TSA has no provision for ever getting off. Even the criteria for being listed is a government secret. At best, if you are
erroneously put on a no-fly list, you may be able to get on another “correction list,” which may help you get on a plane at some airports. All of this “security” might make some sense if it worked or if it made us much safer, but it doesn’t.
TSA tests earlier this year found that undercover agents were able to get knives, guns, and simulated bombs on planes more often than not, and at about the same rate as before the TSA was created — despite a cost of billions of your taxpayer dollars. (Many TSA employees are paid 2-3 times what their private counterparts get.) Some “security” measures make no sense whatsoever. For example, while shoes are routinely screened for explosives, an April 2005 Department of Homeland Security report found that current X-Ray machines are unable to detect explosives. (“Quit Xraying Shoes,” Contra Costa Times, 8-16-06.)
The same is true for most liquid explosives. Yet the TSA continues with the charade of “checking them,” “because it makes people feel safer.” Worst of all, while airline passengers are heavily screened, 5 years after 9-11 there is no screening for mechanics, food-service personnel, baggage
handlers and dozens of others who enter airports through largely unscreened “employee-only” entrances.
In addition, some 90% of air cargo is still unscreened, and much of it is picked up from cargo bins in unguarded lots, where anyone could put in a package with a time bomb. I don’t know about you, but I’m a lot more concerned about food-service personnel, mechanics, and cargo handlers smuggling in bombs and poisoned food, than I am concerned about passengers with “illegal nail files” or lipsticks.
One final note: In the rush to staff the TSA, background checks on thousands of employees were delayed or waived, resulting in the hiring of thousands of convicted felons. The bottom line: TSA-enforced safety is largely a fraud, which at best makes people feel safer — at the cost of our privacy, dignity, and freedom to travel.
Some post-9/11 airline security measures certainly make sense, such as securing cockpit doors, arming pilots, and screening baggage and cargo for explosives. However, treating passengers like dangerous cattle makes no sense at all.
What should be done about current TSA security?
-Drastically cut security for passengers, including immediately ending the X-raying of shoes and bans
on liquids and gels.
-Accelerate arming pilots.
-Screen all cargo for explosives as soon as possible, and screen all airline food.
-Limit “no-fly” and watch lists, and have a clear and simple procedure for getting off the lists for those
erroneously put on.
-Abolish the Transportation Security Agency. It is far cheaper, safer, and less intrusive to let airlines
and airports handle their own security.
[To skip the commentary and go right to the 6 ways to profit from the falling dollar, scroll down until you see large, green headlines. Otherwise, enjoy the article!]
The U.S. dollar is plummeting. However, select commodity and metals stocks are rising even faster. Gold recently hit a 27-year high, and top-performing commodity, agricultural and energy stocks are up over 50-100%+ in one year. Here are 6 ways you can cash in big on a falling dollar and insulate your portfolio from recession.
One of the most consistent financial trends of the past half-century has been the falling U.S. dollar. Indeed, the U.S. dollar has been falling against major foreign currencies for over 39 years. In the last few years, the dollar’s fall has been accelerating: The dollar has dropped against 15 of the 16 major trading currencies, including the euro, British pound, Swiss franc, and Japanese yen.
Between 1969 and 2007, the dollar fell by 74% against the Swiss francand Japanese yen, and 65% against the euro. Based on economic fundamentals and world geopolitics, a falling dollar is likely to continue for many years. Indeed, at this point, even hyperinflation and the replacement of the dollar by a new currency, such as the proposed North American “amero,” cannot be ruled out. Take a look at this CNBC interview with Steve Previs, VP of Jeffries International Ltd.
All of this is terrible news for many U.S. stocks, any savings you keep in U.S. dollars, and the U.S. economy in general. However, the falling dollar is also creating some of the greatest profit opportunities I have ever seen. While the dollar has been going down, select commodities, strong foreign currencies, and foreign commodity stocks have been going up even faster.
In the last year alone, oil is up 48%, gold is up 26%, and the Canadian dollar is up 28%. Even better, select investments linked to these commodities and currencies, including options and futures, were up anywhere from 150% to over 2,800%!
So while the dollar decline is going to be terrible for most investors, it is great news if you invest in the right stocks, currencies and commodities. In this blog and my website which is coming soon, I will show you those opportunities, so be sure and bookmark this page, subscribe to the RSS, and tell all your friends about it. But first, it’s important that you understand the . . .
Causes of the Dollar Decline
Like all currencies, the more dollars the U.S. government creates, the less each individual dollar is worth. The quasi-government agency responsible for the U.S. money supply is the Federal Reserve (“Fed”), which is actually a private corporation representing major U.S. banks, with a chairman appointed by the President of the U.S. Since its inception in 1913, the Fed has been an engine of monetary inflation, increasing the U.S. money supply so much in the past 95 years that the dollar is now worth less than 3% of what it was in 1913.
During the last decade alone, the U.S. money supply has been growing at anywhere from 6% to 13% a year, with consumer prices rising proportionately. The most comprehensive measure of our money supply is a statistic known as “M3,” which includes all coins, currency, checking and credit account balances (M1), plus all savings, small time deposits and non-institutional money-market accounts (M2), plus large time deposits, and repos of maturity greater than one day at commercial banks and institutional accounts.
Increases in M3 are by definition monetary inflation, which results in higher prices. The economics of inflation are simple: When more money chases the same goods and services, prices go up. The more dollars there are in circulation, the less each dollar is worth (this is also known as “currency debasement.”)
With the U.S. money supply now growing at 10-12% a year, it is no surprise that the U.S. dollar continues to lose purchasing power, and just about everything we buy is getting more expensive fast. Since few workers get annual raises anywhere near 10-12% a year, people are seeing their living standards deteriorate and more and more are facing bankruptcy as their homes now lose value.
The Fate of the Dollar
For hundreds of years, gold and silver were money. However, because gold in particular was so valuable, carrying it put owners at risk of theft. So gradually people substituted paper “warehouse certificates” redeemable in gold and silver, for the gold and silver themselves.
Unfortunately, this also opened the door to counterfeiting and even more serious, currency debasement by government. Bit by bit, in the 19th and 20th centuries, most governments broke the link between silver and gold paper certificates and any precious metals — first by decreasing the gold reserves backing up their paper . . . then by refusing to redeem silver and gold “certificates” for silver and gold . . . and finally by eliminating all precious metals backing for their currencies.
The new paper money looked like the old gold and silver certificates, but in the end it was nothing more than paper. Indeed, historically all paper currencies eventually become worthless, including the first U.S. currency, the continental . . . Confederate Dollars issued by the Confederate States of America during the Civil War . . . and German marks issued by the Weimer Republic of Germany prior to the rise of Adolph Hitler.
The same process is now well underway with the U.S. dollar – creating enormous risk to anyone holding dollars or dollar-denominated assets. Bit by bit, one country after another is turning away from the dollar. Indeed recently, China, which holds some $1.33 trillion in U.S. dollars, has threatened to dump their dollars. And more and more Arab oil states have said they are considering demanding payment in euros or gold, rather than depreciating U.S. dollars.
Any move by major economic powers to dump the dollar could result in a dollar panic, in which the dollar loses 40-80%+ of its value in a matter of weeks. It is impossible to know precisely when or even if this will happen. Indeed, such a move by a major U.S. trading partner like China could amount to economic suicide, destroying the value of their own dollar hoard, and crippling trade with the U.S.
However, whether it’s slow or fast, a continued fall in the value of the dollar for the foreseeable future is likely because the U.S. government has little alternative.
Why Governments Inflate
There are only three ways for government to acquire the wealth they need to operate and expand: 1) They can tax it. 2) They can borrow, or 3) They can create it through monetary inflation. The problem with taxes is that no one likes them, and people inevitably take measures to minimize their taxes, such as concealing their wealth, working less, or opening businesses in areas where the tax man can’t get it, such as foreign countries.
Borrowing money isn’t a long-term solution. When you borrow money, you have to pay it back plus interest later. Further if your currency is being debased, fewer and fewer people want to lend you money, because the dollars you pay them back with are worth less than the dollars you lend them. So that leaves only monetary inflation as a method of financing expanding government programs and obligations.
Governments LOVE monetary inflation because not one person in a thousand realizes what is going on, and how they are being robbed by expansion of the money supply. Indeed, our government does everything possible to minimize “official inflation levels,” for instance excluding energy, housing and food costs from official inflation figures. This enables officials like Federal Reserve Chairman Ben Bernanke to say with a straight face that the Fed is “successfully fighting inflation.”
In fact, the Federal Reserve controls the U.S. money supply, which has been soaring, and the Fed in reality is the engine of monetary inflation in the U.S. Thus, even as government has been reporting that “core inflation” has been a mere 2% or 3%, the Fed has been increasing the money sup-
ply the past few years by anywhere from 8% to 13% a year. One result has been the recent acceleration of the dollar decline, as shown by the chart above.
Consequences of the Dollar Decline
While monetary inflation is a convenient way for governments to increase the wealth they control, the consequences for most businesses and individuals are terrible.
1. Higher prices and deteriorating standards of living.
First and foremost, monetary inflation means that the price of virtually everything you buy goes higher and higher. The price of imports and commodities, in particular, soar. Also when monetary inflation becomes rapid, like it is now (easily 10-12% a year), salaries and wages rarely keep pace, resulting in falling purchasing power and deteriorating standards of living.
Today, the middle class is being incredibly squeezed by 10-50% annual increases in the price of everything from gasoline, to food, to housing, to college tuition and health insurance. Indeed, the only reason middle class living standards have not been falling like a rock during the past few years, is because of easy credit and people using the equity in their homes like ATM-machines, thanks to soaring real estate prices.
However, now with tightening credit and with real estate prices falling in much of the U.S., that game is over. So you can expect huge increases in middle-class bankruptcies in the next few years.
2. Savings are wiped out.
Another serious consequence of monetary inflation is that over the long term, the value of savings is gradually wiped out. Thus in 1950 $25,000 in savings could buy a modest home. Today, it won’t even cover the down payment in most of the U.S. As monetary inflation wipes out savings, people invariably save less and less. Indeed, for the past few years, savings rates in the U.S. for individuals have actually been negative. Today, the average American saves less than any citizen of any western nation.
3. Less capital to build and expand businesses.
Low or negative savings also have dire consequences for businesses. Normally, savings provide the capital needed for creating and expanding businesses. When savings are low or negative, it becomes difficult or impossible for businesses to get the capital they need, resulting in lower wages, fewer new jobs, and more business failures. So what has financed U.S. business expansion during the past few decades?
The answer is primarily foreign investment, particularly from China, Japan and Europe. However, as the dollar continues to fall, foreign investment in the U.S. is now faltering.
4. Faltering foreign investment.
As CNBC reports:
“Investors seem to be moving money outside of the U.S., which leads us to believe they are planning for a continual U.S. dollar decline,” said Mark Meadows, currency strategies at Tempus Consulting in Washington.
“What they are saying, he added,” is they are not going to receive as much in return as it will cost them to hold dollars.” In fact, many foreign nations – including key global financial players like China (the world’s most populous nation) and Saudi Arabia (the world’s largest oil producer) – have been slowly moving out of dollars, and have announced they could dump the dollar entirely if it continues to fall. Thus on 10-8-07, the London Telegraph reported this disturbing development:
“Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion of foreign reserves as a political weapon to counter pressure from the US Congress.” “Described as China’s ‘nuclear option’ in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.”
“It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession.” Ambrose Evans-Pritchard, “China threatens ‘nuclear option’ of dollar sales,” http://www.telegraph.co.uk, 10-8-07.
Death of the Dollar May be Imminent
The only practical way for the Federal Reserve to stop the collapse of the dollar is by reversing its policies and a) ending (or at least drastically slowing down) monetary inflation, and b) increasing interest rates. Unfortunately, the Fed shows no signs of doing either. Indeed, just a few weeks ago they lowered interest rates, in an attempt to inject more cash to bolster the US housing market and our sagging economy.
While it is true that ending monetary inflation and increasing interest rates would cause recession and many business failures in 2008, that is far preferable to the alternative, which is the destruction of the dollar.
Why is the Federal Reserve pursuing such a potentially suicidal financial course of action?
First you need to understand that the people running the Fed aren’t stupid, and don’t believe their own propaganda that inflation is a mere 2% to 3%.
They know full well that inflation is now many times higher that official levels, and that continued and accelerating monetary inflation will eventually destroy the dollar. They also realize that warnings from China, Saudi Arabia, and other nations that they might dump the dollar, are no idle threat. I can only draw one conclusion from all this: The decision has been made at the highest levels of the U.S. financial community to abandon the dollar.
Indeed, a new North American currency – the amero, designed to replace the U.S. dollar, the Canadian dollar, and the Mexican peso – is already being pushed at the highest levels of government, as part of their program to create a single North American financial and political community.
While it would take 5-10 years or longer to fully realize this program, there is little doubt that it is already in the works.
What the Falling Dollar Means to You
If I am right, and the plan is moving ahead to dump the dollar and institute a new North American currency, we are about to live through the most dramatic financial changes since the founding of the U.S.
However, even if I am wrong, and the Fed reverses its course, and the dollar is eventually saved, for the immediate future there is little doubt that the dollar decline will continue. Here is what that means for you and your finances:
1. Price inflation is about to get much worse and the price of nearly everything you spend money on – from food, to heating oil, to taxes – will go up sharply. Price inflation could easily be 15% to 20% a year within the next two years.
2. If your income comes from wages, salary or government benefits, your living standard will likely sharply decline.
3. Government programs and benefits will be cut sharply, particularly services for the poor and sick.
4. A recession will likely begin in 2008, and could continue for years. There will be many layoffs and business failures.
5. Housing prices will bottom out in 2009 in most of the U.S., and then start to rise again, as a result of inflation. In some parts of the country such as exurban and rural areas which did not experience the sharp price increases which we had in many major cities, prices are steady or slowly rising. Real estate in these less-expensive markets should continue to do well.
You will be able to make spectacular profits in the next few years from precious metals, energy, commodities, strong foreign currencies, and foreign commodity and energy stocks – although there will, of course, be ups and downs.
6 Ways to Profit From A Falling Dollar
As with all financial events, a falling dollar results in financial winners as well as losers. Here are some potential big winners. But be careful. Currencies and commodities are notoriously volatile, and profitable investing requires excellent timing and patience.
#1. Invest in strong foreign currencies.
As the U.S. dollar declines, comparatively strong foreign currencies are gaining value fast. Here are some of the biggest recent winners. Price increases are from March to November 2007.
Australian dollar: Went from US $0.79 to US $0.95, a 20% increase.
Canadian dollar: Went from US $0.87 to US $1.11, a 27% increase.
Euro: Went from US $1.34 to US $1.50, a 12% increase.
Swiss franc: Went from US $0.84 to US $0.925, a 10% increase. Even better, call options which we recommended on these currencies in our premiere Intelligent Options Service — and which move much
faster than the underlying currencies — were up as much as 3,000% (30- fold), in just 3-4 months!
Longer-term (6+ months in the future), I don’t think these currencies will go anywhere but up. Look for
these currencies to rise in 2008.
How to invest in foreign currencies
The easiest way to invest is by getting a foreign-currency denominated account from EverBank of Florida, www.everbank.com. With strong foreign currencies like the Canadian dollar, Australian dollar, and euro now appreciating as much as 20% a year against the dollar, this is a no-brainer, and a far better investment than dollar-based CDs.
Two other ways are by buying shares of indices based on these currencies, or by buying call options on these currencies, which we recommend in Intelligent Options (link coming soon).
Australian dollar: Australian dollar Fund (FXA, NYSE), up about 25% between December 2006 and November 2007. Currently up about 20% for the last 12 months.
Canadian dollar: Canadian dollar Fund (FXC, NYSE), up about 27% between December 2006 and November 2007. Currently up about 17% for the last 12 months.
Euro: Euro Fund (FXE, NYSE), up about 10% for the year-to-date.
Swiss franc: Swiss franc Fund (FXF, NYSE), up about 12% between January and November 2007. Currently up about 5% year-to-date.
#2. Buy property in top-performing, non-bubble U.S. markets
Here are the top-performing U.S. markets, as of the end of November 2007:
Salt Lake City median home sales price: $246,700; Percent change: +14.1%
Charlotte, N.C. — $220,000, +11%
San Jose, CA. — $852,500, +9.4%
San Francisco — $825,400, +8.6%
Raleigh, N.C. — $229,500, +7.5%
Austin — $188,200, +7.2%
Pittsburgh — $127,700, +6.1%
Seattle — $394,700, +6%
San Antonio, TX, $154,700, +5.7%
Portland, OR. $299,700, +5.2%
Source: Forbes, Matt Woolsey (11/21/07)
In addition to these cities, there are still bargains to be found in many small U.S. towns and rural areas.
#3. Invest in Precious & Strategic Metals
With the continuing global development boom, the price of both precious and strategic metals has been
going up fast. We also recommend that all investors have at least some precious metals in their portfolio, including coins, stocks and precious metals funds.
Here is one conservative precious metal fund you may want to consider.
Gold ETF: StreetTracks Gold Shares (GLD, NYSE). Up about 25% in the past year. P/E 39.4. Price 78.48.
#4. Invest In Housing Puts
Housing prices have been falling sharply for the past 9 months, and likely will not bottom out for at least 18 months. With some 2 million subprime loans scheduled to reset in the next 18 months, you can expect housing prices to go a lot lower. One good way to profit from this trend is by buying puts on the new Case-Shiller housing-price index (CME, NYSE).
These investments go up as housing prices go down. With housing index put options, you can get up to 30-1 leverage, meaning you make up to $30 for each dollar the index declines Through this new index, you can buy puts (and calls) on any one of 15 different cities, or on a composite housing index covering all 15 cities.
Orders have to be placed through a broker who trades on the Chicago Mercantile Exchange. You can find out more by going to www.CME.com/housing.
#5. Agriculture-Related Stocks
With a rapidly-growing global population and increasing worldwide demand for food, select agriculture and related stocks are well-positioned to prosper as the dollar falls. Here is one enlightening (and frightening) quote:
“The risks of food riots and malnutrition will surge in the next two years as the global supply of grain comes under more pressure than at any time in 50 years, according to one of the world’s leading agricultural researchers.”
“Recent pasta protests in Italy, tortilla rallies in Mexico, and onion demonstrations in India are just the start of the social instability to come unless there is a fundamental shift to boost production of staple foods…”
“The growing appetite of China and other fast-developing nations has combined with the expansion of biofuel programmes in the United States and Europe to transform the global food situation.” (Jonathan Watts, “Riots and hunger feared as demand for grain send food costs soaring,” Guardian, 12-4-07.)
Top-performing agricultural stocks should do well. Here are our stock picks. Prices are as of market close 12-3-07:
Agrium, Inc. (AGU, NYSE). Agrium is an agricultural retailer and fertilizer producer. The company operates 436 retail centers in the U.S., Argentina and Chile. It distributes seeds, agricultural chemicals and fertilizers to growers in the U.S. Shares are up 95% in the past year, and 484% in the past five years. P/E is high at 37.9. Price 60.98.
CF Industries Holdings (CF, NYSE). CF manufactures and distributes nitrogen and phosphate fertilizer in North America. Its core market is in Midwestern grain-producing states. Shares are up a huge 311% in the past year, and 473% in the past 2 ½ years. P/E is 21. Price 95.16.
Deere & Co. (DE, NYSE). Also known as “John Deere,” this company is world-renowned for their farm and garden equipment. Shares are up 85% in the past year, and 272% in the past five years.
P/E 21.6. Price 88.5.
Monsanto Co. (MON, NYSE). Monsanto is one of the most successful chemical companies in the world. They operate in two business segments: seeds and agricultural productivity. Shares are up 111% in the past year and an incredible 1,129% in the past five years. P/E is high at 60.1. Price 101.61.
Mosaic Co. (MOS, NYSE). Mosaic sells fertilizer and animal feed ingredients. It has global sales, including in the U.S., South America and the Asia-Pacific region. Shares are up 224% in the past year and 508% in the past five years. P/E 49.7. Price 72.20.
#6. Energy Stocks
The world’s need for energy now seems insatiable and has nowhere to go but up. The world’s two largest countries – India, with 1.1 billion people, and China, with 1.3 billion – are rapidly industrializing, creating enormous demand for oil, gas, and every other form of energy.
At the same time, cheap oil and gas are rapidly being used up – pointing to much higher energy prices in the future and huge profits from well-managed energy companies.
Here are our top new picks:
Diamond Offshore Drilling (DO,
NYSE). Diamond Offshore Drilling, Inc. (Diamond Offshore) provides contract drilling services to the energy industry worldwide and is also engaged in deepwater drilling with a fleet of 44 offshore drilling rigs. Shares are up 50% in the past year, and 416% in the last five years. P/E is a reasonable 17.8. Price 118.59.
Foster Wheeler Ltd. (FWLT, Nasdaq). Foster Wheeler designs and builds onshore and offshore oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, oil refining facilities, and related infrastructure. Through their Global Power Group, Foster Wheeler also manufacturers steam and electric power generating facilities. Shares are up 181% in the last year, and 519% in the last five years. P/E 28.1. Price 154.85.
Oceaneering Intl (OII, NYSE). Oceaneering International, Inc. is a global oilfield provider of engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. The stock is up 54% in the past year, and 441% in the past five years. P/E 21.5. Price 67.07.
Schlumberger Ltd. (SLB, NYSE). Schlumberger is an oilfield service company supplying a range of technology services and solutions to the international petroleum industry. Schlumberger’s products and services include the evaluation and development of oil reservoirs (controlled digging, pumping and testing services), well construction and production consulting, and sale of software programs. Shares are up 39% in the past year, and 350% in the past five years. P/E 23.4. Price 93.84.
Transocean, Inc. (RIG, NYSE). Transocean is an international provider of offshore contract drilling services for oil and gas wells. As of February 2, 2007, the Company owned/had partial ownership interests in, or operated 89 mobile offshore and barge drilling units. Shares were up 75% in the past year, and 480% in the past five years.
Surviving a Dollar Collapse
The rapidly falling dollar unquestionably presents a major challenge to investors. But in fact it is nothing new. The dollar has been falling for decades, and still many investors have been able to make excellent profits. So long as you take prudent steps to protect yourself — such as owning precious metals, stocks that rise as the dollar falls, and strong foreign currencies — you should be able to prosper even if the dollar plummets without warning.
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U.S. real estate runs in 18-year cycles, according to Santa Clara university economist Dr. Fred Foldvary. Foldvary writes: “The last real estate recession was in 1990, and real estate has been on an
18-year cycle, with the next downturn scheduled for 18 years after 1990, thus 2008.”
“My article on the business cycle in 1997 predicted real estate troubles by 2008. Theory gives us the cause and effect, and history gives us the timing…Only when the next recession occurs will some people pay attention to the real estate cycle story. But few will heed the really important lesson
— how to eliminate the business cycle.
“There are two causes and two remedies. The financial cause is the manipulation of money and the interest rate by the monetary authority. [Namely, the Federal Reserve.Ed.] We need to replace central banking with free-market money and banking…Free banking and land-value tapping would eliminate the real estate and business cycles. But intervention is so deeply rooted in the economy that federal money and real estate swings seem natural to most folks. But there is nothing natural or free-market
about depressions.
“Recessions and depressions are caused by statist interventions that distort the economy… Freddie Mac and Fannie Mae [the two huge quasi-federal lenders] are themselves government-sponsored
consolation prizes rather than free-market enterprises, and are ultimately part of the real estate problem rather than the cure…
“While Freddie and Fannie have indeed helped lower-income folks buy their first house, ultimately this
is a futile subsidy… Subsidized housing ends up driving up land rent and the price of land. By expanding the demand to buy land, facilitating the secondary mortgage market ends up hurting the
lower-income folks, as their mortgage amounts go up with the price of real estate, and by being induced if not fooled into buying a house, many just end up in foreclosure.
“Also many renters are being forced out of their homes, as ‘investors’ and speculators sell or get
foreclosed when real estate prices stop rising.”
Source: “Fred E. Foldvary, Freddie’s Big Loss? No Surprise!, The Free Liberal, 11-27-07, www.freeliberal.com
The property of millions of “homeowners” is now at risk due to the mortgage meltdown. As interest rates reset, not just subprime borrowers but millions of prime-rate borrowers are now facing imminent foreclosure.
According to CBS News (12-6-07) in the first quarter of 2007 alone, some 994,000 homes were foreclosed. Horror stories of monthly payments going from $1,000 a month to $2,000 in a heartbeat, are now reported by newspapers across the country. And it’s getting worse:
Some 2.5 million borrowers are now behind on their mortgages, and millions more will likely slip into arrears in the coming year. Also at risk are banks, insurance companies, and thousands of independent
lenders. Moody’s Economy.com now reports that “Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30% before the housing crisis is over.
And the financial damage isn’t confined to the U.S. Millions of U.S. home loans have been bundled together and sold to banks across the planet as CDOs — collateralized debt obligations. As a result, if the mortgage meltdown continues, we could see many bank and business failures . . . hundreds of thousands of families out on the streets . . . and a major recession in 2008.
In the wake of all of this calamitous news, it isn’t surprising that the government has taken action. Specifically, President Bush has called for a “voluntary” 5-year freeze on low introductory mortgage rates for families now making payments but unable to afford higher rates. Only primary home owners would qualify, and they must have a perfect record of home payments.
Once such a measure is introduced, it would likely expand. Indeed, others, are already proposing a permanent, mandatory freeze in rates. While the desire to “do something,” about the mortgage crisis is natural, a mortgage rate freeze is unlikely to do more than prolong the grief and could well turn what would have been a short recession into a protracted depression.
You see, the fundamental problem isn’t that so many families are facing default and foreclosure. The problem is that many of these families simply do not have income sufficient to make house payments and shouldn’t have borrowed the money in the first place. Consequently, freezing rates could well create even worse problems a few years from now, because freezing payments for people who aren’t even able to afford interest (much less interest plus principal) means their total debt will continue to increase while rates are frozen, resulting in them being hit by even higher payments a few years from now, and an even worse crisis.
There is also the legal problem of the government unilaterally rewriting mortgage contracts for millions of borrowers. What lender in their right mind would loan funds when the government can force them to take “payments” that don’t even cover their costs, and blocks them from repossessing their property when borrowers default? If banks, insurance companies and other lenders stop making loans, the mortgage crisis will get far worse. Any freeze of interest rates also inevitably means huge losses and failures by banks and other lenders which were counting on higher, reset interest rates to make a profit on their loans, after a few years of loss-leader low teaser rates.
There is also the sticky question of how Chinese, Japanese, and European banks will react when they told they can’t collect increased payments that they were anticipating. Loss of their investments would be economically disastrous for our economy. For all of these reasons, freezing interest rates and mortgage payments for subprime borrowers could well be a cure much worse than the disease.
Certainly living through a 2008 recession would be painful, and no one wants to see lots of families lose
their homes.
But that would certainly be far less painful that creating an international depression that lasts for many years and harms billions. As documented in the late Murray Rothbard’s brilliant book America’s Great Depression, that is precisely what happened in 1929, when government “help” turned what should have been a 6-month recession into a 10-year long depression. Let’s hope history doesn’t repeat itself today.
We ended 2007 with a worsening mortgage meltdown, plummeting consumer confidence, huge equity market volatility, and ever-more expensive war on terrorism, there seems little doubt that 2008 will be a lackluster year for most stock investors, at best.
However, since 2008 is a presidential election year, you can expect the Bush administration to go all out to boost the economy and make the Republican Party look good. We are already seeing signs of this in the Fed’s recent interest rate cuts, and the pending deal to bail out desperate subprime borrowers. (See “Mortgage Bailout Could Make Crisis
Worse.”)
Will they succeed or will 2008 mark the beginning of a major recession?
My guess is that official economic statistics will continue to paint a rosy picture, while middle
class Americans suffer even more pain from rising interest rates on credit cards, higher mortgage
payments, and higher prices for everything they borrow.
What About the Stock Markets?
As I have argued here for several years, just to compensate for the real rate of inflation (which is
now about 12% [source: Agora Research], in contrast to the “official rate” of 2% to 3%), you will
need to get a 12% return on your investments in 2008.
I don’t expect most stocks to return anything like that much. However, there will be exceptions.
I expect agriculture-related stocks, for instance, to be among the top-performing stocks, as well as
energy-related stocks. (See our new picks at TheInvestorReport.com)
Precious Metals & Foreign Currencies
I also expect precious metals (particularly gold and platinum) and strong foreign currencies
(including the Canadian dollar, Australian dollar, and euro) to resume their meteoric rise in 2008. The recent downturn in prices for these investments is in my opinion principally a result of end-of-
the-year profit-taking, and investors selling to cover their 2007 taxes, combined with investor
nervousness over extreme market volatility.
Preparing for Recession
Typically authorities don’t admit a recession exists until long-after the fact. This will be doubley true in 2008, as the Bush administration does everything in its power (including refusing to acknowledge economic reality), to win as many votes as possible for their party in November 2008. The current 12% real rate of inflation alone combined with stagnant wages is enough to further depress the living standards of most middle class families.
The by-words for 2008 will be “frugality,” and “preparing for the worst,” while hoping for the best.
Stock markets have been particularly hard to figure out during the past few months, with their
roller-coaster performance. One day, they’re up 200 point, and the next day they’re down points.
There are two major factors I see involved:
1. First, economic news is very contradictory. On the one hand, many companies are reporting record profits, while at the same time the housing market continues to deteriorate and jobless claims are rising. Many U.S. companies on paper are doing better than ever, thanks to outsourcing of jobs (which cuts labor costs), growing foreign sales (aided by a weak dollar), and tight inventories.
On the other hand, many U.S. workers — particularly those with large debt — are discovering that their finances are deteriorating. This contradictory economic news is causing investors to quickly take profits, whenever stocks rise appreciably.
2. Very jittery investors. Increasingly, investors are aware that serious problems could quickly cause our economy to go into recession. Big problems including deteriorating housing
markets (which include many European countries), and more fundamental economic problems in the U.S., including the soaring cost of debt, faltering economic growth, and increasingly-tight credit requirements. Investors realize that those problems could cause the economy to fall into
recession in the next 6-12 months, and send stocks tumbling. At the same time, for now, there are still excellent profits being made in many stocks.
In a sense, investors are on a razor’s edge, vacillating between bull and bear.
What Crazy Markets Mean For You
In view of continuing, huge fluctuations in the market, we have the following advice.
First, limit your exposure in stocks by investing no more than 30-40% of your money in stocks. Also, take interim profits on your positions, by selling 1/2 when they are up 30% or more.
Second, keep another 30% of your investment dollars in cash or cash-equivalents, such as strong
foreign currencies or short-term bonds.
Third, keep 10%-20% of your funds in gold and silver. They should soar next year. I recommend that you own both bullion coins, and for large amounts of savings — Perth-Mint Certificates — in which your gold and silver are held in depositories in Perth, Australia. (www.perthmint.com.au)
Fourth, for the possibility of some very large profits, open a commodity and currency options account. There are no guarantees, but in September, our average Intelligent Options currency option recommendation was up 389%, turning $10,000 into $48,900 in 30 days. Our top-performing Australian dollar calls were up an incredible 1,580% in five weeks, turning $10,000 into $168,000 (now our all-time, top-performing option). Call 1-800-297-8288 to order or for questions call 1-707-746-8796 and ask for Jim Elwood.
A minimum of $10,000 is required to open a commodity and currency account, and $20,000 is
preferred. The required paperwork also take a few weeks to process before your account is functional.
Soaring mortgage defaults and the end of easy money are creating a devastating credit crunch and sparking investor panic across the country.
The bankruptcy of companies like American Home Mortgage and subprime lender Bear Stearns … the wild, 100-400 point daily swings in the DOW (which Bear Stearns Chief Financial Officer Sam Molinaro calls “the worst he’d seen in 22 years”) … and the growing wave of home defaults and foreclosures are just the beginning.
How bad is it? Here are some examples:
Home foreclosures are skyrocketing across the nation. In San Joaquin County, California, there were 785 foreclosures in the second quarter of 2007. That’s 12-times the number of foreclosures in the same period in 2006.
Nationwide, foreclosures were up in June 87% over the previous year.
Losses are spreading among mortgage lenders. Freddie Mac, a huge quasi-governmental lender, reported a loss of $211 million in the first quarter of 2007.
Home prices are plummeting. In Detroit, Fannie Mae has a “charming colonial” on the market for $7,000, despite $59,000 outstanding on the loan.
In many of the most-affluent areas of California, homes are now being sold at auction for 50%-75% of the price they garnered just six months ago. Some less desirable homes are not selling at any price.
Interest costs are soaring. In early August 2007, the prime lending rate hit 7.50%. That’s up over 50% from the sub-5% rates available just a few years ago.
In addition, many would-be borrowers with even small blemishes on their credit are finding that no loans are available to them.
As we have been warning for several years (see “Surviving the Coming Real Estate Crash,” IIR, June 2005), thousands, or even millions of investors will be devastated by these dramatic events.
What’s more, the real estate crash has begun to trigger an even-more worrisome collapse of derivative investments, which could dwarf the effects of the real estate crash.
Fortunately even in these frenzied markets you can not only preserve the value of your assets, but you can actually add to them handsomely.
More on that in a moment. But first, you need to understand how the growing credit crunch is about to affect your paycheck, business, assets and investments.
A CLASSIC INFLATIONARY BUBBLE
The frenzy we are now witnessing in real estate and financial markets is nothing less than the collapse of a classic inflationary bubble.
A combination of low interest rates, easy credit, and government monetary inflation encouraged millions of Americans to finance homes they couldn’t afford, buy luxury cars and boats they didn’t need, and take expensive vacations they couldn’t pay for.
Just 12 months ago, anyone with a pulse could get hundreds of thousands of dollars in credit to buy a new home.
Indeed, at the peak of the mortgage mania, in some areas mortgage brokers were giving borrowers up to 120% of the cost of their home loan! In other words, lenders paid you to borrow money from them. Or at least, so it appeared.
Just fill out the paperwork for a “no-doc, negative amortization loan” and you could get a 40-year mortgage plus a check for $20,000 or $30,000 from some unscrupulous lenders. Then you make payments for less than your interest costs for a few years.
Lo and behold, hundreds of thousands of deadbeats who couldn’t qualify for an unsecured $1,000 credit card, suddenly became proud “homeowners.”
Of course, it was all an illusion. All these borrowers really owned was debt. As I warned in June 2005, when creative mortgages reset to higher payments, thousands of new “homeowners” would discover that they couldn’t afford the homes they were living in … and then the housing bust would begin.
The Center for Responsible Lending warns: “If foreclosures continue to rise as predicted … though some people will become first-time homeowners due to subprime loans, there will be significantly more borrowers that will lose their homes to foreclosure.”
What no one is talking about is the root cause of the easy credit and creative loans which made this insane credit bubble possible.
It all goes back to George Bush and former Fed Chairman Alan Greenspan, and their “ownership society” initiative launched in 2002.
A key element of that initiative was the idea was that America would be much better off if more people owned homes. To make this possible, these officials did two things that encouraged millions of low-income wage-earners who rented their residences to take out mortgages.
First, they created the money needed to finance all of these new loans. How? By inflating the U.S. money supply at the fastest rate we have seen for decades.
Between 2004 and 2007, the Federal Reserve doubled the rate of increase of the money supply (M3) from 6% to over 13% a year, as shown by the chart.
Awash in new currency, banks had to put the money somewhere. That turned out to be real estate.
No one asked, “How could low-income workers who could barely afford rent, make house payments?”
In 2002, President Bush launched his “Ownership Society” initiative, including programs to greatly increase the ownership of homes by low-income Americans. Here’s how the White House web site describes this initiative:
“Expanding Homeownership. The President believes that homeownership is the cornerstone of America’s vibrant communities and benefits individual families by building stability and long-term financial security.
In June 2002, President Bush issued America’s Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities.
The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade.
Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent.
Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago.President Bush’s initiative to dismantle the barriers to homeownership includes:
American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families;
Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes;
Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and
Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.
A key mechanism to expand homeownership was liberalizing mortgage qualification rules, making it possible for millions of previously unqualified low-income people to finance homes.
What no one asked was: “How could low-income workers, who could barely afford rent on a small apartment, suddenly afford much larger mortgage payments on a house?”
As recently as the fall of 2006, as home inventories were soaring, former Fed Chairman Alan Greenspan was still strongly recommending “creative mortgages.” The money was provided by the Federal Reserve, and much of it was disbursed through the two 600 pound gorillas of the lending industry, the quasi-federal agencies Fannie Mae and Freddie Mac.
These creative mortgages included . . .
Interest-only loans, in which no principal on the property was initially paid.
“No-doc” loans, in which the borrower’s word was accepted without documentation regarding his or her income.
These loans are an invitation to commit perjury. A study by Mortgage Asset Research found that 90% of borrowers with no-doc loans grossly inflated their income, often by 50% or more.
Negative amortization loans, in which the borrower could – for the first few years – pay less than his interest on the loan; meaning he or she owed more every month on “their” property.
Subprime loans, in which people with bad credit could (initially) get low-interest loans with little or no downpayment … only to much higher payments a few years down the road.
What many borrowers who never read the fine print in their mortgage agreement failed to realize was that the low payments on these loans were only good for a few years.
After that, their payments would go up and their interest rates could skyrocket, adding hundreds, even thousands of dollars a month to their payments.
For many subprime borrowers who could barely make minimal payments, the financial effects of mortgage resets have been devastating. In some cases, the re-set payment is higher than their entire take-home pay!
The result was inevitable: Skyrocketing mortgage defaults and home foreclosures.
Nationwide, mortgage defaults (borrowers 3 months or more behind in their payments) were up over 83% in March 2007 compared to March 2006.
In many areas, foreclosures – lender repossession of homes – are up 5-to-10-fold over the previous year!
In addition, foreclosures and defaults are now spilling over into the primary lending market, and more and more borrowers with good credit and traditional loans are going into default and facing foreclosure.
In the near future, the U.S. may have no choice but to look to countries like India and China to buy our assets, to avoid a continuing implosion of real estate
But the worst is yet to come. BusinessWeek says that the increase in home foreclosures won’t peak and begin to fall until at least March of 2008. However by then, foreclosures are expected to be several times higher than they are today.
As home inventories increase, credit becomes much harder to get, and real estate prices fall, problems are spilling over into the primary mortgage loan market. More and more would-be home buyers with good credit are finding it difficult or impossible to sell their old home or finance a new one. It could be years before real estate prices again experience sustained increases.
Another huge wild-card is the retirement of millions of Baby Boomers in the next ten years, many of whom will be selling their large homes, and moving to smaller houses or apartments.
According to Yale economist Robert Schiller (interviewed in the July 2006 issue of IIR), the only way we can prevent a continuing implosion in U.S. real estate prices is by selling assets to countries like China, India, and Brazil, which have large, emerging middle-class citizens with more and more cash to spend.
THE HIDDEN DERIVATIVES CRISIS — 2004-2007 —
Subprime borrowers unable to make re-set monthly payments are only one of many groups affected by the growing mortgage credit crunch.
What most people don’t realize is most lenders no longer retain ownership of their mortgages, but rather bundle them together and then resell to other investors — such as pension funds, insurance companies, private equity companies, and foreign banks. Many major investors are foreign companies and banks.
Worldwide there are now over $365 trillion in derivatives. That’s an incredible 12-times the GDP of the entire world.
Large banks in China and Japan have been two of the biggest purchasers of U.S. mortgages – so a bank in China or Japan may already own your home if you have taken out a mortgage any time in the past ten years.
Once mortgages are bundled and resold they morph into securities such as Residential Mortgage-Backed Securities (RMBs). Such securities are just one example of derivatives – debt or investment derived from other debt and investments.
In addition to mortgage derivatives there are also insurance derivatives, pension fund derivatives, stock derivatives, and futures derivatives.
The important thing to understand about derivatives is that they create an enormous, inverted pyramid of debt and financial obligations based on comparatively small real assets.
According to the Economist, credit derivative product companies (CDPCs) can leverage their capital up to 30-times. Thus $1 trillion in mortgage debt can turn into $30 trillion in derivatives.
Derivatives themselves are also bundled together and resold, creating debt upon debt.
Because they have been so profitable, in the last few decades hundreds of trillions of dollars in derivatives have been created.
Derivatives are now owned by many of the world’s largest and most trusted financial institutions, such as Bear Stearns, Citibank, and the Bank of China.
Worldwide, Agora Research estimates there are now some $365 trillion in derivatives.
That’s an almost unimaginable sum, amounting to over twelve times the gross domestic product of the entire world!
Today many banks, hedge funds, pension plans and corporations that have invested in these derivatives are in a very precarious position. According to NewsMax.com, many derivatives are so highly-leveraged that “a fall of a mere 2 percent in the value of the underlying assets could wipe out the entire portfolio.”
The recent bankruptcy of American Home Mortgage and several divisions of Bear Stearns is just the beginning of the effects of the real estate meltdown and derivative crisis.
Most at risk are funds and institutions which are heavily invested in derivatives, including many banks, pension funds, insurance companies and large companies. Indeed our entire economy is now at risk of recession.
10 WAYS TO PROTECT YOURSELF
Recommendation #1:
Find out if your bank and the other institutions you depend upon for financial security are safe. If you don’t like what you learn, switch.
You can do this by getting an objective, independent safety rating on your bank, insurance company, pension plan, Medigap insurer, and stocks from Weiss Ratings, 15430 Endeavour Dr., Jupiter, FL 33478, 1-800-289-9222.
Some of the country’s largest banks, insurance companies and pension plans are most at risk from bad real estate investments and derivative debt.
On the other hand, many well-capitalized smaller banks, insurance companies, etc. are much safer.
Recommendation #2:
If you are having difficulty making your mortgage payments, take action immediately. Cut your spending, get a second job, take in a roommate, do whatever you have to do to preserve your property.
If you have already received a default notice, contact your lender immediately. You may be able to get them to let you skip a payment or two, reduce your payments temporarily, or get a lower-interest loan from a local savings and loan. Perhaps you can borrow money from a friend or relative. There are also some new federal and state government programs to help. The worst thing you can do is to do nothing. By the time you receive a foreclosure notice, it will be too late.
Be very cautious about any company that offers to “save” your home for you. It could be a scam in which they strip your home of equity, sell it out from under you, and then saddle you with even larger debt. Have an attorney go over the paperwork for any such deal. If the company refuses or pressures you to sign up immediately, say thanks but no thanks.
If you are deeply “underwater” on your property (i.e., you owe more than the property is now worth), your only option may be to sell your home for as much as you can, work out a deal with your lender, and move.
Recommendation #3:
Make sure your job or business is safe. Most at risk in a recession are businesses that depend upon good financial times, low interest rates, and free spending by consumers – such as new cars, boats, vacation condos, expensive vacations, music lessons, etc.
Funding for anything to do with the arts is also likely to plummet. If your job is at risk, do everything you can to make yourself irreplaceable at work, including taking classes to upgrade your skills, working free overtime and initiating projects to cut costs or bring in more revenue. If your business is at risk, think of how you can modify your products and advertising to bring in more revenue during a recession.
Recommendation #4:
Consider businesses and careers that prosper during a recession. These include auto repair (people fix up rather than replace cars in a recession) … discount grocery stores (people still need to eat) … a bar or liquor store (liquor sales go way up in a recession) … gun repair and other basic skills.
Recommendation #5:
Sell any stocks you have in at-risk companies such as home builders like Lennar (LEN), Ryland Group (RYL), and Hovnanian Enterprises (HOV). According to
BusinessWeek, lenders particularly at risk include ECC Capital Corp. (ECR), New Century Financial Corp. (NEW), Long Beach Mortgage Corp. (a unit of Washington Mutual), NovaStar Financial Inc. (NFI), and Fieldstone Investment Corp. (FICC).
Recommendation #6:
Keep lots of money in cash or cash-equivalents, such as gold, silver and strong foreign currencies. Consider getting an account with EverBank, www.everbank.com which enables you to keep your money in savings accounts and CDs denominated in gold, silver and any of several strong, foreign currencies.
If you prefer to keep your funds in a local bank, be sure to shop around for the best CD rates.
Remember: With the U.S. dollar now depreciating at over 13% a year, even if you get 6% interest, you are still losing 7% a year in purchasing power.
Recommendation #7:
Invest in strong foreign corporations. Economies of many foreign companies are now largely independent of the U.S. And nations like China, India, Indonesia and Brazil are experiencing tremendous growth, even as the U.S. falters. You will find many recommendations for foreign stocks in our current portfolio and future newsletters.
Recommendation #8:
Seriously consider opening a commodity and currency options account. Even if stocks tank you can do great investing in these options which profit from a falling dollar and rising commodity prices.
My Intelligent Option Service recommendations, for example, have been going up 100% about every six weeks in 2007. Of course, there are no guarantees. But at that rate, $5,000 grows to $80,000 within six months. For more information, call 707-746-8796
Recommendation #9:
Prepare now for a major downturn in the U.S. economy. Pay off high-interest credit cards, cut your expenses, move to an area with a low-cost of living, but good jobs. There are many such medium-sized towns in the Midwest and Southern U.S.
Recommendation 10:
Be kind to yourself. Use a tightening economy as an opportunity to strengthen your connections with family and friends, and take joy in life’s everyday pleasures. Weekly family dinners and recreation don’t have to cost a lot. Take walks in a park, volunteer to help out in your community and relax.
Even if we hit a rough patch, the economy will eventually recover.
The Dow is at an all-time high. The Fed just cut the prime Fed funds rate by 0.5%. Paychecks are growing. So why are so many analysts — including former Fed chairman Alan Greenspan — talking more and more about the possibility of recession next year?
Despite the rosy indicators mentioned above, many leading economic indicators forecast recession next year. Those indicators include:
The Consumer Price Index (M2) and the Producer Price Index. Despite occasional, official claims to the contrary, both are rising. The basic cause: expansion of the money supply, which is controlled by the “inflation-fighting” Federal Reserve. In reality, the Fed is the engine of monetary inflation and hence the primary cause of price inflation. Expect lots more of both in 2008.
Productivity and Labor Costs. In the 12 months ending June 2007, U.S. labor costs were up a huge 4.9%. At the same time, productivity fell. This is a recipe for falling profits, increased bankruptcies and higher inflation. Source: Bureau of Labor Statistics
Non-Farm Payrolls. Falling non-farm payroll is a leading economic indicator of economic contraction ahead. Between August 2006 and August 2007, non-farm payroll declined by 4,000 jobs. Source: Bureau of Labor Statistics. New jobs are needed each month to absorb new workers.
Jobless Claims — First Time. First time claims for unemployment benefits have been rising since this past April, and now are at 334,000. This is another recession indicator. Source: Department of Labor.
Consumer Confidence (U. of Michigan “Consumer Expectations Index”). This indicator has been trending lower since December 2006. Source: University of Michigan.
Retail Sales. Year-over-year, inflation-adjusted retail sales have dropped sharply over the past six months. At the same time, same-store sales fell to the lowest level in July 2007 since March 2003. Source: U.S. Census Bureau.
Business Inventories. Year-over-year change in business inventories has fallen sharply over the past year, and could soon turn negative. This indicates the U.S. economy is about to enter a recession. Source: U.S. Census Bureau.
Durable Goods Orders and Non-Defense Capital Goods (other than aircraft). Durable goods are items designed to last at least three years, such as cars and refrigerators. Some 15% of consumer discretionary spending goes for durable goods. When durable goods and non-defense capital goods orders fall — as they are currently — that indicates recession soon. Source: U.S. Census Bureau.
New Housing Starts and Building Permits. Directly and indirectly, housing construction has a huge impact on the U.S. economy. In the wake of the subprime mortgage meltdown, housing starts have fallen through the basement, and have now fallen 74% through
July of this year. Source: U.S. Census Bureau.
Corporate Profits. The year-over-year change in corporate profits is a major leading indicator of where our economy is going. This indicator is down sharply during the past three quarters. Source: Bureau of Economic Analysis.
Recession in 2008?
The title of a new article by- Robert Murphy — author of The Politically Incorrect Guide to Capitalism, published by the free-market Von Mises Institute — summarizes what may be ahead: The Worst Recession in 25 years? http://www.mises.org/story/2728
As Murphy points out, we are at the end of an enormous financial bubble, created by Federal Reserve
monetary expansion — and the party is now over.
Note to first-time readers: Over the last 24 months, 5 out of 6 of my stock picks have been winners, with 44% average returns – making IIR one of the top investment newsletters in the world. I write quality articles every month on topics such as “How the Recession in 2008 Will Affect You and How to Profit From It” and “10 Ways to Invest in Foreign Currencies as the Dollar Falls.” Go to TheInvestorReport.com to subscribe. Now back to the article…
With stock markets now displaying some of the highest volatility ever, where can you invest for consistent high returns year-after-year? One good alternative is commodity and international Exchange Trade Funds (ETF). As you know if you’ve been reading IIR for even a few months, we strongly recommend investing in commodities, international stocks, and foreign currencies, which have been soaring while the dollar has been plummeting.
ETFs provide an easy and profitable way for the average investor to invest in commodities, without having to set up a commodity or currency account (which requires a minimum of $10,000). Here are some examples of the huge one-year returns from top-performing commodity and currency ETFs:
• Oil Services Holders Trust (OIH), + 54% (5 yr., +289%)
• Energy Select Sector SPDR (XLE) +46% (5 yr., +255%)
• Vanguard Emerging Markets Stock ETF (VWO) + 55% (5 yr, +115%)
• iShares Singapore Index Fund (EWS) + 54% (5 yr., + 283%)
• iShare Brazil Index Fund (EWZ) + 87% (5 yr., +1,135%)
• iShares FTSE China 25 Index Fund (FXI) +120% (5 yr., +248%)
• iShares Korea Index Fund (EWY) + 45% (5 yr., +271%)
• iShares Hong Kong (EWH) +48% (5yr., +182%)
What is an ETF?
An Exchange Traded Fund (ETF) is an investment company which invests in a particular market sector, a specific group of stocks, or even commodities or currencies. When the underlying investments go up, your ETF shares go up. When the underlying investments go down, your ETF shares go down. Thus, ETFs usually closely track the performance of what they invest in. An Exchange Traded Fund is
similar to a mutual fund or index fund, in that many ETFs enable you to invest in a variety of different
investments for one low fee. For instance, one ETF might invest in dozens of different energy
companies.
Thus while you may not be able to afford to buy shares in 30 different energy companies, you almost certainly will be able to afford to buy shares of an energy ETF. Like mutual funds, ETFs also provide you with diversification, while enabling you to select types of investments which can beat the
market. ETFs also give you a certain degree of protection from risk:
Even if one or a few stocks which an ETF invests in perform poorly, others are likely to perform better,
minimizing your risk of huge losses. Also, like mutual funds, ETFs enable you to control your cost and risks. With ETFs, you can place “limit buy” and “limit sell” orders (which limit your initial cost and enable you to set minimum selling prices), and automatic stop-losses. This is often not possible with mutual funds.
ETFs and mutual funds do have one big disadvantage compared to stocks:
Returns are less than those for top-performing individual stocks. That’s one reason why you probably
should have both in your portfolio.
Differences between mutual funds & ETFs
Although ETFs are similar to mutual and index funds, there are also some major differences:
Difference #1:Trade any time. You can only buy and sell mutual and index funds during normal market hours, Monday-Friday. Some even require you to own shares for months before you are allowed to sell them. However, you can trade most ETFs 24-hours-a-day, 365 days-a-year. That’s a huge advantage when markets are moving quickly.
Difference #2:Lower entry costs. You can buy ETF shares for as little as $200, compared to the thousands of dollars needed to buy shares in mutual funds and index funds.
Difference #3:Lower transaction fees. Most mutual funds pile on the fees. There are fees for buying, fees for selling, and even fees to compensate the mutual fund for its marketing expenses. ETFs don’t usually charge any of these fees.
Difference #4: Lower management fees. ETF annual management fees are a fraction of those charged by most mutual funds. For example, the Barclays i- Share S&P 500 ETF charges .09% a year in fees, versus twice that much for the Vanguard 500 Index Fund.
Difference #5: Easier Asset Management. You can buy a variety of different ETFs – stock, bond and commodity, for instance – in just one, online brokerage account;
then track your accounts in that one account. If you buy several mutual funds, you will have to set up several different brokerage accounts, unless all of the mutual funds are sold by the same vendor.
Difference #6: Greater Transparency. ETFs are openly traded on exchanges, with publicly-available bid/ask spreads. In contrast, mutual funds have to be purchased at set prices after
the U.S. stock market closes, creating the possibility of excessive bid/asked spreads and even fraud.
Difference #7: You Can Short – Sell ETFs. Short-sales – in which you technically “borrow” shares and then sell them (replacing them later), is not possible with most mutual funds.
While short-sales are risky (your risk is unlimited if the market goes against you), they are useful trading tools for advanced traders.
In additional to these differences, ETFs have these further advantages over most mutual funds and stocks:
• International Reach. ETFs make it easy to invest in commodity stocks in China . . . energy companies in South America . . . and banks in Europe.
• Sector Concentration. If you think technology stocks are great and want to save yourselves
the trouble of massive research, just pick a high-returning technology ETF.
• Easy investment in Treasury Bills and municipal bonds. There are many ETFs that specialize in these investments.
• Multiply Your Returns. There are also ETFs designed to go up twice as fast as the underlying index they track.
Major ETFs
There are now thousands of different Exchange Traded Funds throughout the world, and over 300 in the U.S. alone. Exchange Traded Funds have grown from virtually zero in the 1990s to over one thousand today, with combined assets of over $500 billion.
Here are some of the major sponsors of Exchange Traded Funds:
Barclays iShares. With over 100 ETFs with hundreds of billions in assets, Barclays is one of the largest ETF vendors. Most of Barclay’s ETFs are based on equity and fixed-income stocks which are listed by vendors, such as S&P, Russell, Dow Jones, and Goldman Sachs. This makes Barclays the standard for the ETF industry.
Claymore. Claymore issues a number of creative ETFs, including one fund – Claymore/Zacks Yield Hog ETF (CVY) which aims to beat Dow Jones returns. Another interesting Claymore fund is their BNY BRIC ETF (EEB), which invests in U.S.- listed ADRs of companies based
in Brazil, Russia, India and China. An ADR is an American Depository Receipt of ownership in shares of a foreign company trading on a U.S. stock exchange.
PowerShares. PowerShares ETFs are designed to out-perform similar ETFs offered by other vendors. PowerShares has also been appointed by NASDAQ as the sponsor of the widely-followed Cubes (QQQQ) index, which tracks the Nasdaq 100 index, which is heavily-
dominated by technology stocks.
ProFunds Advisors. This ETF-issuer specializes in funds designed to match or out-perform the stock indices like the DOW and S&P 500. ProFunds also has ETFs designed to go up, when the underlying indices go down; essentially bear-market ETFs.
Rydex Instruments. Rydex ETFs are unusual since they are weighted equally for each stock in their portfolio, as opposed to the usual practice of weighing ETFs by the market capitalization of the stocks. In other words, if Rydex buys $20 million worth of one stock in a particular ETF, they will buy $20 million worth of all other stocks in that ETF, giving each stock “equal weight” in the value of the ETF. Rydex equally-weighted ETFs include their S&P 500 Equal-Weighted ETF (RSP), Energy ETF (RYE), and Technology ETF (RTM). A number of Rydex ETFs are designed to double the performance of the underlying securities. Rydex has received a five-star rating from Morningstar.
State Street Global Advisors. State Street created the first U.S. ETF, the S&P 500 SPDR (SPY). They now issue dozens of ETFs, with new ones added all the time.
Vanguard. Vanguard has become internationally famous for the large variety of ETFs that they issue. Their fees are among the lowest in the industry.
How to Invest
With hundreds of different Exchange Traded Funds to choose from, selecting one can be a difficult
task. Here are some suggestions:
1. Be clear on your investment objectives. The first question you need to ask yourself before making any investment, is what are your investment goals. Are you looking for steady income? High appreciation? Consistent returns? An insurance policy for recession? Before you can pick an ETF, you need to be clear about your financial goals. Once you have decided what your goals are, you will almost certainly be able to find an ETF designed to help you achieve them.
For instance, if you are looking for steady income, you may want to invest in ETFs heavily-invested
in dividend stocks. If you are looking for high appreciation, carefully examine the performance of the highest appreciating ETFs currently. If you want an insurance policy for recession, consider ETFs
that go up when equity markets go down.
2. Research any ETFs you are interested in. See what information is available on major financial websites, such as Fortune.com, Businessweek.com, YahooFinance.com and Big-Charts.com. Also be sure to look at recent news
3. Only invest in ETFs that have been going up for both the last two years and the last six months. The two-year record gives you a reasonably long-term trend. Any ETF that isn’t selling for significantly more now (say 50% to 100%) than it was two years ago, is not worth investing in, in my opinion.
Similarly, you don’t want to buy shares while the price is declining. Wait until it bottom’s out and then purchase.
4. Diversify by investing in several types of ETFs. Although buying shares of a single ETF can provide you with significant diversification (for instance a metals ETF might invest in several
dozen different metals stocks), you should still not put all of your eggs in one ETF basket.
Thus you might consider investing in a commodity ETF . . . and an energy ETF . . . and an ETF based on the Indian economy.
5. Buy several different foreign ETFs. If you favor investing internationally, I recommend you invest in ETFs from several different countries – such as India, and Brazil, and Australia.
This will give you an important hedge against problems in a single country or region of the world. For instance, recently, British investments took a hit because of problems in the sub-prime mortgage
markets in that country. And in the 1990’s, Mexican investments were devastated in a matter of days when the peso was devalued.
6. Compare ETFs with mutual funds, index funds, and other alternative investments. Although ETFs have distinct advantages over most mutual funds and index funds, that doesn’t mean they are always the best investment. We all have limited funds, and it pays to shop around.
7. Watch your investments carefully. The days of “invest and forget” for long periods of time are over. You should check on how your ETF shares are performing at least once a week, if not daily. If you don’t like what you see, SELL.
The in/out cost of buying and selling ETF shares is not very much compared to your investment,
and how much you could lose if markets suddenly turn against you.
8. Use automatic stop-losses. As is the case with stocks, we strongly recommend that you put automatic stop-losses on all of your ETF positions, to protect yourself from sudden downturns in the market.
You will need to adjust your stop-loss figures, depending upon the type of ETF that you buy. Thus ETFs based on highly volatile investments – such as currencies and commodities – should have stop-losses set at 25% or 35% below the most recent daily high, as opposed to our normal 15%.
ETFs which have lower volatility, such as those based upon large baskets of Blue Chip stocks,
could have stop-losses at our normal 15% or even less.
9. If you have large amounts of capital to invest, get a professional investment advisor.
If your investments total $100,000 or more, the few thousand you might pay a professional
investment advisor will be well worth the cost. Ask family members and friends for names of advisors they have used and trust. Shop around for a professional you are comfortable with.
10. Don’t make ETFs your only investment. You should also keep at least 30% to 50% of your funds in cash and cash-equivalents, such as CDs, foreign-currency accounts, and precious metals.
Also consider investing in top-performing individual stocks in sectors you like, plus bullion, gold, silver, options, foreign currencies, and — when the market bottoms out — real estate.
Recommended ETFs
Prices are as of market close, 9-28-07. Because of high market volatility, we recommend that stop-losses at 25%, rather than our usual 15%.
Note: This is the end of the article for non-paying readers. I hope you’ve learned something new about ETF’s, and I hope you make lots of money from them. Specific ETF recommendations, along with great stock recommendations, are available for paying subscribers. To find out more about how to subscribe so that you can get hard-hitting analysis and advice month after month, click here or go to TheInvestorReport.com
While the U.S. economy has been experiencing anemic 2% to 3% growth the past few years, foreign economic have been doing great. As the following chart from the International Monetary Fund (IMF) shows, Eastern Europe economies are expected to grow 5.7% in 2007 . . . Developing Asian economies should grow at 9.6% . . . and China’s economy will likely go up an amazing 11.2%!
The IMF says, “global GDP growth should advance 5.2% in 2007. Emerging market countries have continued to expand robustly, led by rapid growth in China, India and Russia.” Henderson Global Investors comments, “Strong growth in emerging economies is boosting global growth to a 35-year high.”
The reality is that a global trading economy has emerged that is increasingly independent. While problems in the U.S. still have global repercussions, strong foreign economies can continue to perform well, even when the U.S. is performing poorly.
The bottom line for investors: If you think a U.S. recession is likely in the near future, concentrate your portfolio in areas largely immune from that recession — such as investments in India, China, and Brazil. Top sectors which we recommend include select agricultural, commodity, mining and technology stocks.
Another alternative to U.S. stocks is commodities. During the last nine years, we have had a major bull market in commodities. Here are some examples of the huge price increases in commodities
(prices as of 7-30-07):
• Crude Oil $78, +759% since 12-21-98
• Uranium $120, +1,870% since 2001
• Copper $365, +605% since 10-30-98
• Platinum $1,300, +357% since 10-98
• Lean Hogs $73, +351% since 12-14-98
• Gold $675, +233% since 2001
Overall, commodities are continuing to rise rapidly. In 2006, the Commodity Research Bureau’s index of
commodity prices rose nearly 20%. That’s following a 32% gain in 2005. There are many factors pushing commodity prices upwards, including enormous, hidden U.S. inflation, soaring global demand from rapidly developing nations – notably, China and India, which together have 2.5 billion people — and the global war on terror, which consumes lots of resources.
Investor demand is also fueling commodity prices, as investors look for safe havens for their money in a troubled and uncertain world. How can you invest in commodities? There are many different ways,
including commodity stocks and options. I particularly like options, since a mere 3-5% movement in commodity prices can mean a 100%-200% movement in options prices.
To find out more about trading options, call 1-707-746-8796 and ask for Jim Elwood.
Posted by lifechanged 
Intelligent Investor Report Blog 