The Mutual Fund Money Market Fund Dilemma

$3.5 Trillion dollars earning almost zero.

In my comparison to the 1981 economy I noted how savers were paid to save not spend. The dilemma for today's savers is what to do with over $3.5 trillion dollars earning almost zero sitting inside Money Market Mutual Funds. In 1981 you could have locked in a 5 year CD earning 12%. Today you would be lucky to get 3.4%. This is just another reason contributing to the 55% rise (with only small temporary pull backs) in the American stock market since its march lows. Now that the major 10% pull back you were waiting for never came what do you do? Now you feel it's just too risky moving into the stocks that have risen the most.

What to do now is the dilemma. Here are some possible options cautious conservative investors can consider. These options were researched by Glenn Rogers a longtime contributor for BuildingWealth.ca and Seekingalpha.com.
Dividend ETFs

There are some relatively low-risk ETFs where you could park some money while we see how all this plays out. For example, take a look at these three funds, all of which are designed to track baskets of U.S. companies that offer respectable dividends.

The three are the iShares Dow Jones Select Dividend Index (NYSE: DVY), the Vanguard Dividend Appreciation ETF (NYSE: VIG), and the Power Shares High Yield Dividend and Equity Achievers (NYSE: PEY). Although all three of these ETFs have the same general goal, it's somewhat surprising to find that their performance has varied greatly. At the time of writing, DVY was down 12% year-to-date, VIG was flat, and PEY was down almost 20%. So, interestingly, these issues have not participated in the market rally so far, which may make them have much less down side risk if a 10% market correction does come in October.

Take a look at the holdings of these three baskets you'll notice some fairly dramatic differences. PEY is made up of the 50 highest yielding companies with at least 10 years of consecutive dividend increases. DVY is composed of companies that have provided relatively high dividend yields on a consistent basis over time while VIG looks a lot like the Dow Jones 30 Industrials to me.

Currently, PEY has a trailing 12-month yield of 5.3%, based on last Friday's closing price of $7.45. However, I should note that the monthly payments have dropped off significantly this year and I would expect the yield will be lower over the next 12 months. This ETF has the most diverse collection of holdings among the three, split between industrials, materials, utilities, telecommunications, and a few healthcare, media, and consumer goods stocks. About 40% of the fund is in the financial services sector. The portfolio emphasis is weighted heavily towards small to mid-cap companies, which explains why this fund fared worse than the other two in the market meltdown. However, it also appears to have more upside potential if the rally continues. The Management Expense Ratio (MER) is 0.59%.

The iShares ETF (DVY) has 101 positions and is a mix of large, medium, and smaller companies. Some names in the portfolio are immediately recognizable such as Kimberly-Clark, Chevron, and Dow Chemical. Others will only be known to dedicated stock-watchers, Watsco Inc., PPG Industries, and Scana Corp. among them. Distributions are paid quarterly and the last two have been about 39c a share (figures in U.S. currency). The trailing 12-month payout totalled $1.79 which would translate into a yield of 4.4% based on Friday's closing price of $40.78. But based on the payouts for the last two quarters, I suggest it is more realistic to expect distributions in the $1.60 range over the next year for a projected yield of 3.9%. The MER is 0.4%.

The Vanguard ETF (VIG) is the most conservative play. It is designed to track the Dividend Achievers Select Index, which is administered exclusively for Vanguard by Mergent, Inc. There are 186 securities in the portfolio with a focus on large-cap stocks. Top holdings include Wells Fargo, IBM, Coca-Cola, PepsiCo, Wal-Mart, and Johnson & Johnson. As I said, it looks a lot like the Dow 30 Industrials, only bigger. It pays quarterly distributions which have recently been running at about 23c a unit. The trailing 12-month payout is 99.5c for a yield of 2.26% based on Friday's closing price of $43.99. My yield projection for the next year is around 2%. The MER is a very low 0.24%.

Bank of America preferreds

If you are looking for higher yields and are prepared to take more risk, consider the preferred shares of Bank of America. They were downgraded to junk status last winter amid fears that BoA might not survive, however Moody's announced last month that it is reviewing their B3 rating with a view to a possible upgrade now that the company is profitable again.

The Series J issue, which trades on the NYSE under the symbol BAC.PR.J. This is a fixed-rate, non-cumulative preferred that pays a 7.25% dividend based on its issue price of $25. That works out to $1.81 a year so based on Friday's closing price of $21.50 the yield is 8.4%.

These preferreds traded for as little as $4.02 last February at the height of the credit crunch and the U.S. banking crisis. Obviously, they have recovered strongly since then as confidence in the banking system was restored by the massive U.S. government bail-out. The high yield indicates there is still some concern about BoA's future, but at this stage I think the company is recovering well and that the dividend is safe. There is also some capital gains potential here. The preferreds are not callable until Nov. 1, 2012.

Naturally holding only one bank preferred stock is more risky than a basket of dividend paying stocks so this is for more aggressive investors looking for more yield. However, note that they are very thinly traded so enter a limit order.

PowerShares Financial Preferred Portfolio

If you prefer more diversification, consider the PowerShares Financial Preferred Portfolio (NYSE: PGF) currently trading at $16. It is based on the Wachovia Hybrid & Preferred Securities Financial Index, which tracks the performance of about 30 U.S. listed preferred shares issued by financial institutions. At least 90% of the assets are normally invested in these securities.

As you are aware, the U.S. financial sector has gone through an extremely rough period and it is not clear that the full extent of the damage is known even yet. As a result, preferreds issued by the banks, insurers, etc. have been beaten down in price and are offering unusually high yields. The situation is not dissimilar to the one we saw in Canada late last year, except it is more extreme in the U.S.

This has resulted in preferred share yields that have never been seen before and may never be seen again. Currently, this ETF is paying monthly distributions of 11c to 12c a unit. Projecting this forward for 12 months, using the 11c figure, we could be looking at a cash yield of 8.25% based on last Friday's closing price of $16. But a word of caution: the distributions are not eligible for the Canadian dividend tax credit and will be subject to a 15% withholding tax if paid into a non-registered account in Canada. (The same holds for the BoA preferreds.)

PGF units dropped all the way to $5.16 but have since rallied strongly. However, they are still well below their 2006 issue price of $25 and I believe there is upside potential here in addition to the handsome payout. Top holdings include preferreds from Bank of America, Wells Fargo, Barclays, and JPMorgan Chase. About 69% of the assets are rated BBB or better by Standard & Poor's. The MER is 0.74%. This is my top pick for this month and we are adding it to the IWB Recommended List.

All the above are fairly defensive plays given the uncertain market we are likely to have over the next few weeks. Generally, I think the trend will continue higher after a correction, but it is wise to protect yourself on the downside, play a little defense, and add some more yield your portfolio. So hold your breath for the next few weeks. It's going to be an interesting October.

Here is are the highest paying FDIC insured CDs

7 dividend stocks you can count on

The 80's vs 2009 Economy

Did you think a 6.5% mortgage rate was high? How would you like a 1981 18.5% mortgage rate?

You can bet those 1981 Paul Volcker (Treasury Secretary) induced interest rates prevented the housing bubble created by the 2001-2005 monetary policy.

This chart is for all those not old enough to experience truly high interest rates and those who forgot how we earned 9-12% risk free in our Bank CD's back in 1981. Back then it paid to take no investment risk.

Today there is around $3.5 trillion dollars inside mutual fund MMFs earning just a speck more than zero (1/4%). Today is the inverse of 1981. The savers are subsidizing consumer spending, business borrowing and the big federal government bail-outs for the financial industry.

So, if you happen to be in this boat, go find yourself a good dividend paying mutual fund or portfolio of high quality dividend paying stocks in different industries. Stocks like Lilly (LLY) or Verizon (VZ) which both pay 6% yields and give you the possibility of appreciation. Neither of these two stocks have not participated in the markets 55% because they were considered defensive stocks by money managers.

Here are some recent articles on dividend paying stocks worth reading.

Dividend stocks for low excitement, high returns

The World's Best Dividend Stocks

Seeking Alpha dividend stock articles

disclosure: On 9/23/09 I invested in Lilly and Verizon.

Eleven Reasons These Charts Are Worthless

Recently an individual (who unfortunately liquidated most of his stock holdings close to the market lows) ask me to explain how it was possible for the Stock Market to go up 55% when he had these two charts as proof (in his mind) it should be back to 1945 levels with earnings so low and P/E's at such an outrageous levels.

He showed me a "Blogger" he followed had also advised selling everything after posting these charts and his commentary. The "Blogger" saw these (among other information) as clear and present doom the market would fall back to the March lows by August. Yes, last last month we were to have a 3,000 point drop. Why didn't it happen he's wondering. Perhaps, he's more upset about the reality he missed the explosion up.

After I ask what formal investment education and experience the "Blogger" had he said he had no idea only that he like his postings (more like he like his rants). It's best I skip my response to that response and get right down to and example of the valued "Blogger" words of wisdom below:

"Forget hoping for the rally to continue and forget "buy and hold" for the long term. Without earnings to support them over the next year, stocks are toast. And where are the earnings going to come from while banks are failing in increasing numbers (yes, it's getting worse not better), unemployment is rising (no, it's not stabilizing), and the residential and commercial real estate crash continue unabated (no, they're not stabilizing either)? If a business is not part of the fascist keiretsu business model that has evolved in this country, that business is likely to be in trouble.
.....
It's official: Gold Versus Paper is calling the top in the stock market (I think it was yesterday and today confirmed it).....next comes a re-test of the March lows before mid-August (i.e. at least a 25-30% drop in less than 12 weeks). General stocks, corporate bonds and commodities are going to get shellacked.....Now I am not saying the March lows will hold in the general stock markets - there's a good chance we go right through them. But this is a minimum downside target for the major indices....This bear is hungry for some bull meat. GRRRRRrrrrrrrr!"

Now aside from the GRRRRrrrrr ,which I thought was cute, I hope no one gets hurt by this type of financial entertainment.

Now, to be fair, I've heard many non-financial professionals with excellent educational backgrounds and desire to be viewd as a "guru" with thousands of followers, give similar commentary. Commentary on why these charts are proof the market is not rational and must fall to 1945 levels now. Over the last three months they keep modifying their perdictions to: "any day now".

You can bet, if I didn't know what I'll share with you these charts would have caused me to not have invested any money into the market during November Q4 2008 and February Q1 2009 too. But ask yourself why no Goldman Sachs type analyst hasn't published the same warning using these charts? Perhaps they can not afford www.chartoftheday.com charts? Oh, there free. Well, maybe its a world wide conspiracy? No, then lets get into more plausible explanations.

I've learned if the market is not responding to my logic maybe there is something I don't know.I'll give you eleven detailed reasons why the these charts have caused so many people to be wrong. Wrong because they do not understand the accounting of the numbers and wrong because they do not understand how interest rates and inflation and foresight not hindsight impact investment decisions.





1. The way S&P computes its PE is open to honest debate. Famous Finance Prof. Siegel (later joined by another Famous Finance Prof. Shiller) brought this up in February, creating a debate.

2. The often-quoted "earnings of the S&P 500" is a highly massaged number. There is no GAAP or annual audit process by an independent outside auditor. Not that an Accountant would understand Voodoo Math. It is not the actual total earnings (which are available on a separate page in the S&P spreadsheet, labeled "Issue Level Data"). S&P has to massage the numbers so that, when they replace a stock in the index, it doesn't create a discontinuity in the index's value. You know when comparing an apple to an orange you fell better if the orange is painted red.

3. S&P has replaced about 40 companies in the last 12 months. Most of the companies responsible for the biggest earnings losses have been removed from the index. e.g. GM, Fannie Mae, AIG. So when you replace companies with no earnings with other companies with earnings the smart money knows the future S&P EPS will be better than those who only follow trailing earnings expect. No fair you say...the accountants principle of consistency is broken. Your comparing an apple to an orange. L.O.L. You need to understand Wall Street is a jungle and without a guide you may get eaten alive.

4. Therefore, many of the companies presently in the index did not contribute to the TTM "earnings" that S&P uses in computing its own current PE. They do not go back and restate past earnings to reflect later changes in the index's companies. Once they close out a quarter's "earnings," that number is locked in forever. So if you getting the picture comparisons to the past are difficult at best and at worst worthless.

5. Wall Street analyst know that the current P/E in this chart is grossly distorted by the Q4 2008 banks that had to take massive write-offs against toxic loans. But two points: 1) many of those companies are no longer in the index. and 2) If you're smart enough to understand accounting, finance and math you know the financial sector was the largest sector in the index and at the market peak FAS 157 require banks use market-to-market models for mortgage valuations.

6. FAS 157s impact makes comparisons to periods prior to 2007 almost impossible without a team of CPAs and MBAs restating S&P EPS and P/Es back to 1938 when it was banded (you can guess why). Much has been debated about the role mark-to-market accounting rules played in driving down the values of financial services companies, including many large life insurers. Mark-to-market accounting was prohibited in 1938, but the Financial Accounting Standards Board reinstated and strengthened it through actions in 1993 and in 2007. Forbes magazine publisher Steve Forbes has been particularly outspoken about the 2007 action. Some analysts, even insiders, say banks like Citigroup and Lehman Brothers marked down some of their C.D.O. exposure by more than 50 percent when the underlying mortgages wrapped inside the C.D.O.’s may have only fallen 15 percent. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup, said at a conference last month that the bank had “securities with little or no credit deterioration, and we’re being forced to mark these down to values that we think are unrealistically low. Who's right or wrong is not the point. The point is how it impacts the math going forward and makes comparisons to the past periods to difficult.

7. It is a philosophical or mathematical question what the PE of an index should be, anyway. Should it be the median PE of all companies in the index? The arithmetic average? Should it be weighted in the same way that S&P weights the companies in computing the index itself? Should it be equal-weighted? All of these could have arguments made for them.

8. In computing the P/E, S&P substitutes the value of the index for "P," price. So you have a derivative number, the index value, standing in for P, and another derivative number, the massaged "earnings," standing in for E, in the equation P/E. You see the simple becomes complex enough to require a math genius to figure if it has an value for comparing one period to another.

9. The P/E is based on TTM "earnings" and current "price." It is backwards-looking. Wall Street makes investment decisions for the future based upon forward-looking EPS estimates. When someone says the P/E is not sustainable, or has not dropped to the typical lows of 8 or 10 seen in the 70's and early 80's recessions, that's an uninformed statement (to be polite). They also forget the financial sector earnings

10. Using the logic the chart implies with its lines you should do what? Buy when market trailing P/Es average 7 or 10 ? Can you name me a time in the last 20 years when P/Es on the S&P averaged 7? No. 10? No. So, this person would be waiting 20 years for something that's not going to happen for a reason they do not understand. The problem with these charts is they don't come with a team of financial analyst to figure this out for you. www.chartoftheday.com is in the daily cranking out of charts and Internet hits not making or losing money on stock market investments business. And if you had used a P/E cut off of say 20 you would have sold Apple Shares at $25 instead of $150 or Google at $100 instead of $500.

11. Last one and most important point, if it were not for the preceding ten points: You can't compare a $1 of earnings in a 1975-82 environment of 10-15% annual inflation and 10-20% Paul Volcker induced prime rates to a $1 of earnings in an under 5% inflation environment of the 90's or under 1.5% with a discount rate of almost ZERO in 2009.

Now you know why your wait for average P/Es on the S&P 500 to hit 7 to 10 like they did in the 70's and 80's caused you to just miss the greatest Bull Market or Bear Market rally of our life time.

Three Point Bottom Line:

1. A mediocre investment plan consistently executed in good times and bad is worth more to you over 20 years than any chart you'll every use to make investment decisions. Combine this with a strategic asset allocation plan and semi-annual reviews and focus on your profession, not the market. People do not plan to fail they fail to plan.

2. Time in the market is better than timing the market if you lack experience and training.

3. Research constantly shows just a few months of the year account for the majority of the gains. Now I've never know a person smart enough to consistently be right on that prediction. GRRRRRrrrrrrrr will come to that conclusion too, in about 20 years.

Why It's Not 1982 Again

Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified sane men based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic Economist and Novelist Thomas Wolfe who concluded "You Can't Go Home Again". Still, the Perma-Bears need to face the trillion dollar fact. There is a trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year end on are way back to pre-Lehman Brother levels. Still, the 2001-2002 market is fresh in my memory and my worry.

Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant is a student of financial history and Perma-Bear who just been converted to a Bull believer.

"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

"Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten.
...
At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
...
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."

Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -

"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again.

Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.

All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
...
Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."

Two excellent articles -with one common comparison flaw. They both use the 1982 Ronald Regan bull market beginning to make their case but ignore what happen in 2002 after a much smaller recession ended in 2001.

Both point to how Economist were too pessimistic in their growth forecast and correctly pointing out how the actual recovery starting in 1983 had six quarters of outstanding GDP growth (5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%).

They make an excellent point about Economist forecast but even rosy glasses Ex-Chief Economist Mussa is forecasting only 3.3% GDP for the USA next year.

This leads me to ask three questions:

1. How can 3.3% 2010 GDP led to six quarters of quarterly growth like the 1983 time period they reference?

2. Why do they ignore what happen in 2002 when the market declined for three straight quarters back to the 2001 lows, after the recession official ended in 2001?

3. Is America's 2009 economy similar to 1982-83?

Unfortunately (for me) 2009 is not like the 1973-83 stagflation economy. Back then Treasury Secretary Paul Volcker's needed to crush inflation with the highest interest rates in American history. ( I wishes this was 1982 so my savings would be earning 9-12% in my MMFs instead of 0.25%. I feel like I've been robbed by the 2001-2009 federal reserve policy ) .

If you are under 40 and think mortgage rates are a little high take a look at the 1979 to 1981 Bank Prime Rate in America. Notice how in 1981 the banks started lowing the Prime Rate (resulting from the Federal Reserve lowering the discount rates) from 20%to 11% in 1983. Yes, I said 20%.

This move alone allowed Stocks to rise as the value of each dollar of revenue or profit became more valuable in a lower inflation and interest rate environment. This phenomenon is call P/E expansion. You can see the proof from 1982 to 1999 as the average Standard & Poor Stock P/E rose from 7 to 32 as inflation and interest rates declined and the economy became more robust.

The decline from 20% in 1981 to 11% in 1983 also generated that fantastic six quarters of high GDP growth. I'd conclude that cannot be repeated in this environment.

Now just think about Car, Clothing and Appliance sales in 1982. The big three were all American. Imports were a much small percentage back in 1982. Today most appliances and clothing (just to give two examples) would be made outside America. In 1982 as those lower interest rates increased sales, American factories employed more American workers, who in turn had more money to buy more stuff (of which a much higher percent was made in America and nothing was made in communist China or Vietnam).

Now flash forward: Federal Reserve discount rates are already close to ZERO (no spending is being held back by high interest rates like 1981-82). Consumer debt is still at high levels and a recession like this causes even dual income employed families to want to spend less. Today when Americans do spend more money a much larger percentage goes to employing people outside America (than 1982-83).

Janet L. Yellen President of the Federal Reserve Bank of San Francisco (far more qualified then I) sees no comparison. And Nobel Prize Economist Paul Krugman explains why there is no comparison using the same logic.

"A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.

... Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. And that means that the Fed can't just cut interest rates and boost housing. This recession is very different than the early '80s".

The Bottom Line

NO, this is not the beginning of the 1982-87, Ronald Reagan, Bull Market style economy. No I'm no Bear, just a Bull (on tip toes) who remembers the 2001-2002 market. Yes, we can defy gravity and remain in Bull mode for the remainder of the year. Still, this decade will not be remembered for the great American Bull Run. This decade will be remembered as the decade for emerging market stocks.

1982 will be remember for many things like the Jackson Thriller album.



July 27, 1982 | GetBack Media

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Slow Economic Growth Ahead

Recently I had the opportunity to listen to a presentation by Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco given to the local Society of Certified Financial Analysts(CFA) San Francisco, CA. on September 14th, 2009.

Now with the benefit of hindsight we know the market and economy did not fall off the cliff as many believed possible in March 2009. But now comes the guessing game over the next 12 month economic outlook. In my life time, I've learned that forecasting the economy over the next 12 months is always easier then predicting the stock markets next 12 month moves.

Below are my Cliffs Notes of her economic forecast, extracted from her presentation.

.....I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility. Much of the recent economic data suggest that the economy has bottomed out and that the worst risks are behind us....

That’s the good news. But I regret to say that I expect the recovery to be tepid....In particular, the unemployment rate will remain elevated for a few more years.....Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial........gives us plenty of room to grow rapidly over the next few years.

.......At first glance, history suggests that a vigorous expansion could very well take place. Following previous deep recessions, the United States typically saw V-shaped recoveries. For example, the economy grew at an average rate of nearly 6 percent during the two years following the severe recession in 1981-82. This time though rapid growth does not seem to be in store. My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. And I’m not alone. The Blue Chip consensus forecast, reflecting the views of nearly 50 professional forecasters, anticipates by far the weakest recovery of the postwar era over the next year and a half. A large body of evidence supports this guarded outlook. It is consistent with experiences around the world following recessions caused by financial crises.

For those interested in listening to a similar presentation Janet gave to The Commonwealth Club of California you may view the complete presentation broken down into small component video segments at Window To Wall Street Economics. Here is a complete PDF transcript of her speech on September 14th to San Francisco's Society of CFAs.



Historically Economist have been horrible at forecasting economic turning points and have a similar dismal record at forecasting stock market trends. Still after recently listening to seven economist speak most have mentioned a very important point regarding inventories and GDP trends that maybe a clue to the markets next big move.

Remember the stock market is a leading economic indicator. So, the door swings both ways. As I've pointed out it has an excellent track record at guessing where the economy will be 6 months from now but it doesn't have ESP to know where the economy will be in 12-18 months. If the collective wisdom of money starts believing a disappointment is coming it can turn downward even as the current good news the market was anticipating is coming true. One need only study the 1997 to 2003 American market moves for a quick lesson on this topic. And for those amazed by this markets 3,000 point DJIA climb one need only look back to the 2003 market or 1982 economy compared to the major market move.

Paul Krugman, a professor of Economics and International Affairs at Princeton University and recent Nobel Prize winning economist, published in his blog The Conscience of a Liberal, that he agrees with Janet's economic outlook. Everyone agrees with Janet's forecast which is nothing more than the current economic community consensus.

But it is Paul's chart of historical inventories and GDP changes that causes him to conclude there is good possibility of a double dip economy ahead. His basic chart was worth a thousand words to me for another reasons. It helps provide a missing link to explaining why the stock market fell for three quarters in 2002, after the recession had officially ended in 2001 and the market had advanced for three quarters. Given the much higher unemployment rate and more fragile economy today a 2002 Stock Market repeat in late 2009 to early 2010 is a very real possible.

If the economic outlook is improving but more problematic than after the 2001 or 2003 market advance it would be prudent to review your asset allocation now. Keep in mind more people than ever now see the market advancing to the pre-Lehman Brothers bankruptcy levels of 2008. Still, even the Bulls believe that would be the best one could hope for in 2009.

Those fortunate enough to have 70% to 100% gains in the China and India markets should most certainly consider downsizing your positions, if you believe the USA GDP bounce we are getting in the 3ed quarter will not be repeated (into the 4th quarter 2008 and 1st quarter 2009).

In the 60's, 70's and 80's the correlation of major foreign markets to the USA was only around .65 resulting in the notion international investing added an extra level of diversification protection. Today the correlation is closer to .90. Basically this means all major stock markets move more in tandem than they use to because of todays global trade dependences. You only need to examine the 1999 to 2003 market to see the USA and European markets and sectors moving in lock-step with each other.

Economic Indicators all Positive for the First Time Since November 2007

Philadelphia Fed -- The region’s manufacturing sector is showing some signs of stabilizing, according to firms polled for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered slightly positive readings this month. For the first time since November 2007, all of the survey’s broad indicators were positive.

Although firms reported continued declines in employment and work hours this month, losses were not as widespread. Most of the survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives expect business activity to increase over the next six months.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‐7.5 in July to 4.2 this month. This is the highest reading of the index since November 2007 (see chart above). The percentage of firms reporting increases in activity (27%) was slightly higher than the percentage reporting decreases (23%). Other broad indicators also suggested improvement. The current new orders index edged six points higher, from ‐2.2 to 4.2, also its highest reading since November 2007. The current shipments index increased 10 points, to a slightly positive reading.



August 30th 2009 bloomberg report.

Black Monday Anniversary

September 15th 2008 was another historic black monday for the USA market. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government just the week before and the worlds largest (market capitalization) insurance company, AIG needed billions to stay afloat.

September 15th is the one year anniversary of Lehman Brothers' demise. The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management, but not the global credit crunch.

Lehman was the 400 pound gorilla that broke our over leveraged financial camel's back. Lehman was the nuclear bomb that set off a world-wide financial winter. Fortunately that nuclear winter ended this spring. Now we've begun the long economy road to employment recovery.



Lehman Brothers was the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market. Based on assets, Lehman also far surpasses WorldCom as the largest U.S. bankruptcy ever.

Lehman had assets of $639 billion at the end of May, while WorldCom had $107 billion when it filed for bankruptcy protection in 2002.

At the end of August 2008, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company's billions of dollars of mortgage securities.



The Lehman failure was the straw that broke the fragile USA financial camel's back. In 2008, a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government. Lehman Brothers declared bankruptcy on September 14th after failing to find a buyer. Bank of America agreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.[1] Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history. In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007. These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone.



The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped blend the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system and world in the form of CDOs and other complex derivatives in order to disperse risk; however, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of insolvency with many being forced to raise capital or go bankrupt. These firms had become so highly leveraged that just a small 5% to 10% decline in asset values required masses amounts of new capital to be raised or file for bankruptcy.

For those wishing a refresher course in the fall of 2008 financial crisis, CNBC has an excellent summary of the headline stories of that time. Wall Street in Crisis.

The World Wide Stock Market Recovery

World stock markets rallied on Thursday, with London following Wall Street, striking its highest level so far this year, as investors grew more optimistic about the prospects for a global economic recovery.

Tokyo shares surged 1.68 percent on Thursday, tracking overnight gains on Wall Street where New York stocks climbed to the highest level in 11 months on upbeat factory data. Markets were also lifted by rising commodity prices which gave a shot in the arm to the energy and mining sectors.

Elsewhere in Asia on Thursday, Hong Kong jumped 1.71 percent, boosted by resource stocks on the back of rising commodity prices, dealers said.

Chinese shares closed up 2.02 percent on Thursday, also led by oil and metal stocks.

The USA economy and employment outlook may be an L shape or W shape recovery. But for now the world markets are clearly in a V shape recovery mode similiar to 2003. Lets hope it's not similiar to 2001 when we had a major market recovery after the 9/11 market colapse only to decline back down in 2002.



The MSCI World Stock Market Index reached a new 11-month high yesterday, rising to the highest level since early last October. From the March bottom, the index is up by 65% (see chart above).



The Bloomberg U.S. Financial Conditions Index reached a two-high yesterday, closing at the highest level since August 8, 2007 (see chart below).

Sales Up - TED Spread Down - New Market High

CNBC's Larry Kudlow looks at indicators of an economic recovery, including the TED spread. Larry breaks down the details of the recent positive economy sales report.

The TED spread is the difference between the risk-free three-month T-bill interest rate and three-month LIBOR (includes a credit risk premium), and is considered to be a good indicator of the overall amount of perceived credit risk in the economy.

A year ago on September 15, 2009 the TED Spread jumped by 65.5 basis points (from 134.855 bps to 200.3588 bps) as Lehman Brothers filed for bankruptcy and fears about credit risk soared. Two days later on September 17 as fears about credit and financial risk intensified, the TED Spread jumped by another 82.6 basis points (bps) to more than 300 bps, setting a new record (back to at least 1990) for the largest one-day increase in the TED spread (that record still stands), and setting a new record for the highest TED Spread to date.



At the height of the financial crisis about a month later, the TED Spread hit 456.485basis points on October 13, 2008, an all-time record. As the credit and financial markets have gradually healed, the TED Spread has fallen by more than 450 bps to the current level of about 15.75 bps, the lowest level in more than 5 years, since June 8, 2004 (see chart above). One more sign that the recession has ended.

No doubt these positive economic signs were responsible for the VIX index ( a measure of fear in the stock market) hitting a new low and the USA stock market hitting a new high on Wednesday.

Yes - There Is Economic Life

More signs of economic life seen.

This week in addition to the improving economic signs contained within the Federal Reserve Beige Book Report, two more measures of improving optimism were released. And Friday's news from FedEx and Cliffs Natural Resources was more proof of the existence of green shoots.

Now we often have to remind researchers that what consumers say and do can be two very different things. Still, in an economy driven 70% by consumer spending consumer and small business owner sentiment is important.

Consumer Sentiment Continues to Rise

1st - The Reuters/University of Michigan preliminary index of consumer sentiment increased to 70.2 this month from 65.7 in August. This increase exceeded expectations. The University of Michigan measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars and homes is part one of the survey. Part two - The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending also rose.

Small Business Owners Becoming Optimistic About Future

2nd -The National Federation of Independent Business, which surveys its members each month, said its index of business owner optimism rose 2.1 points to 88.6 in August, an increase that NFIB chief economist William Dunkelberg called "a big gain." The optimism, though, is about the future, as owners still have a dim view of current economic conditions. Dunkelberg noted that small businesses generally aren't planning big capital expenditures or to start hiring again. "First you have to feel better before you'll spend your money," Dunkelberg said

Sales Rose And Inventory Declined.

In a separate report, the Commerce Department said orders for durable goods — products that are meant to last a number of years — soared in July at the fastest pace in two years. Orders in the transportation sector had their biggest gain in nearly three years. No-doubt that was the result of cash-for-clunkers which is now over.

In yet another sign that future business should improve A Commerce Department report showed wholesalers’ inventories fell again in July, after a drop in June. Wholesale inventories have had the longest series of declines since records began in 1987. Given durable goods sales, have rose for three consecutive months, the belief is firms will need more workers to build inventories back up.

Friday's News from FedEx and Cliffs Resources showed two more positive signs

We closed the week with FedEx tacked on $4.66, or 6.4%, to 77.32, after the package delivery giant said its fiscal first-quarter earnings will exceed its previous expectations and projected a profit this quarter above analysts' estimates as the company benefits from international improvement.

And Cliffs Natural Resources rose $2.13, or 7.6%, to 30.23, after saying it expects its North American iron-ore and coal sales this year to be slightly better than it previously thought as customers increase steel production.

Beige Book Shows Green Shoots

One important report institutional investors and economists monitor is called the "Beige Book". Why is it called the Beige Book? If you guessed because it's a Beige colored printed report -you are correct. The U.S. Federal Reserve reported Wednesday in its latest Beige Book survey of the region’s business executives.

On Wednesday, the Fed's Beige book was released for July and August. It summarizes reports from the 12 Federal Reserve Districts and pointed to economic activity that continues to stabilize.

Compared to the summary from the Fed's last Beige Book report, 11 out of 12 regions asserted that economic activity had either stabilized or improved. Even in the 12th region -- St. Louis -- their read-out pointed to a pace of decline that was moderating.

Almost all regions remarked that among business leader contacts in their territories, the economic activity outlook is now cautiously positive.

The reports underscore what we've been hearing, that clunkermania boosted auto showroom traffic and subsequent new car sales in all regions. Several regions confirmed that the program has also resulted in increases or planned increases in automobile-related production. Beyond the auto industry, most regions reported general improvements in manufacturing production. Next month's auto sales report will likely drop off without the government incentive. But others are betting it will be better than last September.

Most territories also reported improvement in the residential real-estate markets. It has been estimated that the $8,000 first-time home buyer credit accounted for up to 35% of sales.

It also came as no surprise that with labor markets on the mend, 8 of 12 regions report upticks in demand for temporary workers - usually a leading indicator of a return to job growth.

The report is prepared at the Federal Reserve Bank of Atlanta and based on information collected before August 31, 2009. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Formally known as the “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the Beige Book is published eight times a year

Worst Housing Decline Since Depression

The worst U.S. housing market since the Great Depression appears over after prices rose in 18 of 20 U.S. cities in June, existing home sales hit a two-year high, and new home sales gained for a fourth consecutive month.

Lower home prices and government stimulus efforts have spurred demand and pared the supply of existing homes to the fewest in two years, while sending new-home inventory to a 16-year low.

While the American commercial construction and real-estate market is getting worse, there can be no denying the residential housing market has been improving. Many people along with myself still believe prices in some areas have more to fall. But that doesn't mean new housing sales and starts can't continue to grow. And new construction creates jobs more than falling prices.

Declining new home sales markets tend to bottom in January. And this seemingly endless 5-year continuous decline ended this January 2009 at new historic lows. This bust surpassed every other American real-estate decline since the 1960's. The magnitude of this decline is even more amazing when you consider America has more than double the number of house holds we had back in the 60's.


Sales of new homes rose for the fourth month in a row in July, increasing an estimated 9.6% (highest percentage increase in 4 years) to an annual rate of 433,000, the Commerce Department reported Wednesday. Economists had estimated new home sales would increase to a 390,000 rate, according to the median of 71 projections in a Bloomberg News survey. July’s sales pace was the highest in 10 months and exceeded all estimates. The seasonally adjusted sales rate was the highest since last September. The fourth consecutive increase in sales adds to the growing body of evidence that the residential housing market is finally expanding again after sinking to a record-low sales pace of 329,000 in January (see chart above).

Sales are being boosted by more affordable prices, low mortgage rates and government incentives to buy homes. Still, unemployment, rising foreclosures and falling prices are keeping some buyers on the sidelines.

With historic high unemployment there remains ample reason to doubt whether this increase in sales can be sustained in 2010, particularly given that the first-time buyer tax credit is set to expire Nov. 30th. It's believed to have accounted for around 35% of the sales increase this year. You can bet the real-estate industry has been lobbying for an extention.


This chart (above) plots the unemployment rate (inverted) againest new housing starts. It's no suprise there is a relationship. But note how unemployment usually continues rising even as new home sales begin rising. Just more proof New home sales are a leading economic indicator while unemployment is a lagging indicator.

Improvements in the unemployment rate lagged behind the start of a recovery by an average six months, according to Berson, the former chief economist of Washington-based Fannie Mae.

Existing home sales already have reached that marker, gaining for the last four months. Single-family housing starts improved for the last five months, two months short of the recovery average, and new-home sales jumped 9.6 percent in July, the most in four years, halfway toward the average eight months of consecutive gains before the onset of economic improvement.

The American housing sectors importance has grown

A review of the last 10 USA recessions since World War Two shows 80% (8) of them were preceded by substantial problems in housing and consumer durables. Except for the downturn after the Korean War and the 2000-01 internet and telecom collapse in business equipment and software investment, it has been a consumer cycle not a business cycle. And with 35 years of a declining American manufacturing sector the housing sectors importance to America's GDP and jobs has risen.

Economist Dr. Edward Leamer (UCLA Professor) published a report back in 2007 whose conclusion summation was the report title: Housing Is The Business Cycle

Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Home resales gained strength an average four months before the end of a recession, single-family housing starts improved for seven months, and new-home sales grew for eight months.


This chart (above) shows how New Home sales grew off the bottom of the last four biggest housing down markets and includes the current market. The above graph compares the current recovery with four previous housing recoveries. The recoveries are labeled with the month that single-family housing starts bottomed. Notice how we've now had four months increase but you can see how weak this looks realitive to the past. And if this chart were adjusted for the current number of households relative to the much lower number of the past the size of this historic bust is gigantic.

The second graph (below) shows the same data, normalized by setting the bottom for single-family housing starts to 100.

This graph shows that housing starts usually double in the two years following the bottom. Starts increased 80 percent over two years in the recovery following the Jan 1991 bottom, and 136 percent in the recovery following the Jan 1970 bottom.

Housing starts usually double in the two years following the bottom.

If starts doubled over the two years following the Jan 2009 bottom, single-family starts would recover to 715 thousand by Jan 2011. And looking at the first graph some people might think single-family starts might recover to a 1.1 million rate within 2 years. Bill McBride at CalculatedRisk.com who created these charts believes that's very unlikely.

Bill McBride does believe the bottom is in for housing but expects the recovery to be sluggish due to an excess in existing housing units, and decline in homeownership rate. His view does appear to represent the consensus view of everyone I've heard speak. I'd add a return to more historical higher down payments and tighter underwritng standards will hold demand down, along with high unemployment and underemployment.


Fresh "Green Shoots" can be found in multiply locations.

Exhibit A: Portland home sales jumped in July, marking the first year-over-year increase in sales for any month since early 2006. A total of 3,375 new and resale houses and condos closed escrow last month in the Portland metro area. That was up 9.3% from June and up 5.8% from a year earlier. The number of homes sold in July was the highest for any month since August 2007, when 4,242 sold.

Exhibit B: Seattle home sales rose above last year's level for the first time in more than three years last month amid relatively robust sales below $300,000. The median sale price fell, ending its three-month streak of month-to-month gains. A total of 4,221 new and resale houses and condos closed escrow last month in the Seattle area. Last month's sales rose 2.5% from the prior month and were 8.8% higher than a year earlier. July's sales total was the highest for any month since October 2007, when 4,434 homes sold. Last month's annual gain for total sales ended 37 consecutive months of year-over-year declines.

Exhibit C: Phoenix-area home sales climbed above a year ago for the seventh consecutive month in July but dipped below June as purchases of foreclosed properties continued to wane. The region’s decreasing reliance on sales of heavily discounted, lender-owned homes helped the median sale price inch higher for the third consecutive month. A total of 10,288 new and resale houses and condos closed escrow in the Phoenix metropolitan area in July, down 4.1% from June but up 27.7% from a year ago. Total home sales were the highest for the month of July since 2006.

Exhibit D: Las Vegas home sales rose above a year ago for the 11th consecutive month in July as investors and first-time buyers continued to target lower-cost, post-foreclosure properties. A total of 5,311 new and resale houses and condos closed escrow in the Las Vegas metro area last month, down 3.8% from June but up 28.5% from a year ago. It was the highest sales total for any July since 6,530 homes sold in July 2006. July marked the 16th consecutive month in which sales of existing single-family detached houses rose on a year-over-year basis. The 3,925 single-family house resales last month were the highest for any July since 4,555 sold in July 2005. Resale condos have seen an annual sales gain for 13 straight months and in July sales were the highest for that month since 2005.

Get the most current real-estate regional news from DQNews.com

Commercial Construction Hurting Banks

Commercial Loans Now Nightmare for smaller Banks.

In my life time commercial real-estate markets have always been a lagging economic indicator not a leading indicator. When my younger brother who owns a Florida excavation company told me business was still booming in 2007 despite the tumbling housing market, I predicted he'd see a big fall off by 2008.



Now that it has come true, just how bad is it? The "experts" I listen to, including FDIC chairwomen Sheila Bair expect more defaults and bank losses on commercial loans. The FDIC agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses.

The New York Times (Sept. 4th) published an article which stated,
Even as the economy may be recovering, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.

There are no "green shoots" for commercial construction and real-estate.


Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.

Construction loans were a primary source of revenue for many banks, particularly smaller ones without a national presence. Other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.

So, while plenty of leading economic indicators show positive signs and that the American single family housing market has improved...commercial real estate construction seems likely to get worse.

Banks have been taking losses and cutting back their commitments for a couple of years on home construction. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming. At the end of June, $291 billion in commercial real-estate loans was still outstanding, (down only a few billion from the peak reached earlier this year).



“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.” Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

Now do not assume the American stock market must fall too, just because lagging indicators like commercial real-estate markets and unemployment are horrible. Yes, it can easly fall a 1,000 points, even if the worst is over. In fact, most bulls expect a 5-10% correction between September and October. But plenty of people perdicted in June when the DJIA was only at 8,200 it would fall back to 7,200 too. Those who listen to that advice lost another 10-15%.

The lesson to remember, is the stock market is a leading economic indicator. You'll recall it started falling in the fall of 2007 when few news reports foresaw any issues in commercial real-estate. In fact the usual Donald Trump disciples were touting real-estate investments while only a few outcast Economist like Nouriel Roubini were predicting doom. Even Ben Bernacke said he saw no real-estate bubble in 2007. If you are only investing when the news is great -you missed the boat along with 75% of the gains. Just one more reason I advise people to have a long term plan before they start worrying about what stocks to buy.

Last year, we learned the regulators, like the bankers, and Wall Street investment bankers did not comprehend the risks of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making. At the very time bankers should have been reducing commercial loans they were expanding, thus pushing the real-estate bubble into the stratosphere.

We're all hearing about empty malls due to over building which resulted in a glut of malls. Maybe we're just all shopped-out? Perhaps someone will do a research paper correlating our mountain of personal debt to our glut of malls.

Here just one example of a funeral being held in my area for what was to be the city's downtown area rebirth.

Columbus City Center was developed by the city as part of the Capitol South development, opening on August 18, 1989. It was pitched to investors and taxpayers as a "must have" to revitalize Columbus downtown. Now a building wholes economic life should be 50+ years is being torn down in less than 20 years (to make room for next big idea).



Ok, after writing this article and listening to these experts -I'm depressed.

If you're depressed over the economy and short on Prozac then go get a shot of inspiration at The Wright Inspiration Station TM or if you need an accounting or finance refresher course go to The Wright Education Station TM

Zimbabwe, Hyper-Inflation Are We Next ?

Yes, it's real money. Or at least it was until just recently when the government of Zimbabwe declared its own paper money worthless

This recently printed One Hundred Trillion Dollar Zimbabwe note (above)use to buy only 300 America dollars. Now it's totally worthless. The 100 Billion Dollar Zimbabwe note (below) was said to have bought just three eggs.

Could this happen in America? Is this the destiny of the American dollar?Zimbabwe is a place where our poor American dollar is still King Dollar. Do your homework and read this article before you decide.


Had Americans sold their S&P index fund holdings in 1999 and just purchased gold bullion to bury in their back yard they would have tripled their money. No question the new 21st century has seen the decline of the American dollar and rise of emerging markets. Certain trends have been evolving for years. For this reason I posted a link to a free educational webcast hosted by U.S. Global Investors CEO Frank Holmes and world famous Dr. Marc Faber.

The Republic of Zimbabwe formerly known as Southern Rhodesia, and the Republic of Rhodesia like most African countries has a history that one must understand prior to making the usual economic shock jock comparisons to America. The shock jocks want to use "shock and awe" tactics to garner listeners while the gold bugs want to talk up the value of their gold and commodities investments.

Now I know predictions of total doom for America win 90 out of 100 times in the blogosphere. If you want to increase traffic talk smack and doom. One word of green shoots is political readership suicide. It's understandable. People are anger, many unemployed. The economies in the dumpster and real American unemployment rates are around 16.5%. You, can bet that I have no rosy story to tell. As former President Bill Clinton use to say, "I feel your pain".



Yes, the current financial crisis and our declining American dollar is a symptom of decades of mounting debt and economic decay. It's a major nightmare. And it's debatable if we're seeing the light of daylight at the end of a tunnel, or if that's the head light of a 28,000 pound, on-coming (debt burden) locomotive -roaring towards us.

I'm posting these stereotypical shock jock video's for four reasons: 1) Maybe we need "shock and Awe" to wake us up. 2) They contain some excellent education information. 3) In 1975 to complete my minor in Economics, I took a course in African Economics, so I've an understanding of histories impact and desire to stay abreast of African issues. 4) They show how Economist Greenspan and Bernacke had no understanding of how holding interest rates so low was like pouring gasoline on a real-estate forest fire bubble. Given their advance education and age, even I was shocked by boomer brother Ben's lack of real-estate knowledge. See my post on California Day Dreaming Homes.

But please, for your own education learn more about Africa and Zimbabwe's history. You'll gain an understanding of what led to its current social and financial debacle. These video's provide a glimps of the Zimabwe nightmare.

I'll give my followers more insight than those whose only goal is to pump up the value of their gold bullion bars. You may disagree with me. But in the process we may both learn something. And that's the value-added of this blog.



How bad is Hyper-inflation in Zimbabwe? Well, the words hyper and inflation were two separate words now made into one word in Zimbabwe's vocabulary. Hyperinflation in 2007 and 2008 made Zimbabwe's currency virtually worthless despite the introduction of bigger and bigger notes, including a 5, 10, and 100 trillion dollar bill !

Yes, I said Zimbabwe issued a 100 trillion dollar bill (top photo)

Zimbabwe recently announced the official suspension of the Zimbabwe dollar for at least one year. Can you image having earned a 100 trillion dollar bill that your government will no longer honor?



Extra Credit Education for advanced learners below:

Yes, excessive paper money creation combined with a our transition to a debtor nation is very problematic. Now the usual gold bugs and financial fear mongers are talking up their gold investments by comparing the USA dollar decline to the now worthless Zimbabwe dollar. We do need to learn from Zimbabwe's financial chaos. But their simplistic comparisons fail to discuss how the once wealthy nation (by Africa standards) with the highest literacy rate has been mismanaged and micro managed for decades by a dictator. Robert Mugabe ranks number one on the charts of The World's Worst Dictator.

The valuation of any currency has numerous variables which impact the currency’s value and exchange rate . The value of a currency is affected by exports, imports, foreign currency reserves, balance of payment position , economic activity and many other factors.

You don't need a Ph.D. in Economics to know if Zimbabwe has nothing to sell to the world and imports everything, that's a problem. If no wants to invest in Zimbabwe or put money in their banks, thats another problem. Yes, America has problems. But we still have things the world wants to buy and considered among the worlds stable governments. Although demand for the dollar is falling it's still the worlds most used currency. During the peak of the World Financial Crisis money from around the world sought safety by buying US Treasuries. The gold bugs perdiction of gold $2,000 was proven to be a folly as the fear of deflation cause it to lose value as fast as stocks. You can bet no one wanted to invest in Zimbabwe during the crisis, nor does anyone wish to keep money in a Zimbabwe bank.

Zimbabwe has had decades of social and economic problems. The recent confiscation of farmlands from white Zimbabwe citizens led to a sharp decline in agricultural exports, traditionally the country's leading export producing sector. No sane western country would want to invest in Zimbabwe with Robert Mugabe in charge. As a result, Zimbabwe is experiencing a severe hard-currency shortage, which has led to hyperinflation and chronic shortages in imported fuel and consumer goods. In 2002, Zimbabwe was suspended from the Commonwealth of Nations on charges of human rights abuses during the land redistribution and of election tampering.

The general health of the civilian population also began to significantly flounder and by 1997 - 25% of the population of Zimbabwe had been infected by HIV, the AIDS virus. Life expectancy at birth for males in Zimbabwe has dramatically declined since 1990 from 60 to 37, among the lowest in the world. Life expectancy for females is even lower at 34 years. All this under the leadership of Mugabe.

Warning these videos are not for those who want to walk in the park and smell the roses. Finding Gold for daily Bread. Here is what's left of a once propsperous country. This is how a dictator gets votes to proclaim he runs a democracy. Democratic Apocalypse - Zimbabwe

Namibia-based tribunal of the Southern African Development Community ruled in October 2008 that Zimbabwe’s land reform program was racist, discriminatory and illegal. This Robert Mugabe dictator policy dates back to 1999. And like most so called "Freedom Fighters" of the past e.g. Castro brothers (Cuba) and Idi Amin (Uganda)they use their nations initial admiration to leverage themselves into a lifetime Dictatorship in President's clothing.

Global Investing Webcast Sept. 9th

What's the forecast for the global economy?

If you asked Dr. Marc Faber, he'd probably tell you "mostly gloomy with scattered signs of boom."

There is hope out there for global investors. Dr. Faber believes global markets are entering a new world where demand is driven by developing countries.

In addition to publishing a monthly newsletter, The GloomBoomDoom Report, Dr. Faber is the author of Tomorrow's Gold: Asia's Age of Discovery. He is a memeber of the Barron's Roundtable which is a collection of investment industry titans. Dr. Faber is also one of the most sought-after speakers at investment conferences around the world.

Tune in and listen to Dr. Faber and U.S. Global Investors' CEO and chief investment officer, Frank Holmes, discuss the possibility of hyperinflation, the new role for gold and silver in a portfolio and where investors can find the best value in the world.

Still time to sign up.

Most investors know Dr. Faber. Frank Holmes is a fantastic guy too. I had the opportunity to meet Frank and hang out with him in the early 90's, at Investment Company Institute (ICI)conferences. He's a Canadian who purchased U.S. Global Investors mutual funds and investment advisor, when it was one gold fund run by a famous 70's and 80's Texas gold bug. The man was famous for writting Warren Buffet style shareholder messages about owning gold.

At the time of Franks late 80's purchase the 70's gold rush fear was dying, as the value of the dollar was rising. We've now had ten years of the opposite trend. Dr. Faber and Frank will no-doubt talk about the world economic drivers and American economy. I'm sure gold and commodities trends will be on the agenda too.

Steve Forbes son of Malcolm Forbes and the editor-in-chief of Forbes magazine always said we need a strong dollar and when gold gets above $400 an ounce, thats a bad economic sign. With gold once again pushing new highs near $1,000, I'm sure Steve would say that's a really bad sign. Not so bad for those who own gold bullion.

If you believe in global markets and have inflation worries you'll want to listen in on the webcast. It's free-----Frank is picking up the tab. See you there.

Here is some excellent free education at Window to Wall Street's website on the value of the Dollar vs. Oil trends.

California Day Dreaming Homes For $750,000

This "California Dreaming", foreclosed home, was purchased for $750,000 in December 2004 with what appears to have been only $25,000 down. You may find it in San Francisco at 126 Chester Avenue where the bank had to take it back in November of 2008, white picket fence and all. Back on the market and asking $447,000 in 2009. With a sale for $360,000 in March of 1999, a sale at asking would represent average annual appreciation (CAGR) of 2.1% over the past ten years, but a 40% drop in value over the past five.

The accountant in me looks at these two homes and says only a fool would pay $750,000 for these properties. And only another fool would loan $700,000 on a 40 to 60 year old home that would be lucky to sell for $125,000 in the Detroit Michigan area. Why not just tear the property down and build a new home, fools?

I bought a new SAAB Turbo CD sedan in 1992. Fantastick car. I kept my baby for 17 years, putting a new engine in it in 2001. I spend thousands over the years to maintain it in excellent running condition. Yet, at the end of the day it was still 17 years old. No auto dealer was willing to give more than a $1,000 trade in value for a Car who's replacement value would be $41,000 today. So, why is it buyers and bankers think a 60 year old home in a declining area should keep rising in value forever?

By my standards these old homes are still over-valued, given their 50-60 year old economic life. Putting expensive fixtures and remodeling into one of these old timers, doesn't change the 60 year old wiring and structure or location.


This "California Day Dreaming" foreclosed home was Purchased for $720,000 in September 2005, the bidding for 399 Leland Avenue in San Francisco opened at $306,000 and generated one bid. It sold for $306,000.01 which represents a 57% haircut from its previous sale price, but also average annual appreciation of 2.4% since its sale for $240,000 in 1999 for this single-family. Again to complete the 2005 $720,000 purchase it took two fools. A buyer and a banker, both fools, for paying such an outrageous price.Details for both homes and other area "deals".

Financial Charts and Graphs are often cold and lifeless. But a picture, as they say, is worth a thousand words.

Twenty five years ago during the 80's great American real-estate bust I drove down to the San Francisco Bay Area to bid on some Lake Tahoe time share properties. I had skied Lake Tahoe and fell in love with the area. So, after staying at a new resort that had been built on the side of a mountain I attended sales presentations. The offer sounded reasonable but hearing of some owner foreclosed property auctions in the Bay Area I decided to check it out while on vacation. I easily purchased a unit at the Tahoe resort for 60 cents on the dollar. I never thought the price was a steal, I thought it was a reasonable. Still own it, plus a few more. For business I had the good fortune of attending conferences in San Francisco Bay and LA areas during the 80's and 90's. Absolutely loved that area too.

So, I became familiar with California real-estate prices. But it wasn't until 2005 when I watch a news report on the CA real-estate boom, that I realized just how big the tulip blub mania had gotten. If you show me a new suburban CA home for $1.8 million I have no idea if that is or is not reasonable. I'd need an area real-estate advisor to know. And new commercial real-estate is another story. Even after a bust you still have a new building not a 100 year old home restoration money pit. But when I saw 1,100 sq. ft. two bed room, one bath room homes built just after WWII, which sold for maybe $25,000, now being sold for $750,000 in 2005, I knew the buying frenzy had reached the point of madness.

The finance guy inside me could understand the Wall Street financial engineering and the Treasuries low interest rate policy funding the speculation. But Wall Street and Greenspan was not mandating you had to buy a pig for the price of a triple-crown stallion horse price.

The accounting guy in me still cannot figure out why people want to take an old home built in the 1920's to 1940's for $10,000 to $25,000 and refurbish them with fixtures made for a million dollar home. Sure fixer-upper homes requiring limited expendentures make great values. But when you feel the need to put $150,000 into something that looks worth $100,000...stop. It's time to tear down the old and build new!

Why weren't more bankers and appraisers screaming this is economic madness?

Below is a $550,000 4 Bedroom 3.5 Bath 3,780 sq. ft. home in a more reasonable priced mid-western town. Listing

See New Home Sales Hit Historic Bottom In First QTR. 2009.

Below is an old refurbished Detroit Mansion for $149,000
NEW LOWER PRICE. Exquisite Boston Edison home. Beautifully maintained and featuring 3natural fireplaces, gleaming hardwood floors, and very large room sizes. Elegant foyer with graceful stairway leading up featuring stained glass stairwindow. Potential for 5th (12 x 18) bedroom attached to 4th. Completely finished 3rd floor with separate forced air heating and new windows. Newer Boiler. Pre-appl req'd. Alarm. Short Sale.

"California Dreaming" This my friends is the real deal.