Archive for April, 2011
Interviewed Wednesday by King World News after the Federal Reserve chairman’s press conference, Euro-Pacific Capital’s Peter Schiff remarked, “Whenever Ben Bernanke opens his mouth you want to sell anything that is related to the United States.” Indeed, gold and silver investors watching the TV screen with one eye and the gold and silver futures screen with the other were probably shouting, “Wait! Keep talking, Benny!,” as Bernanke walked off the stage at 3:15 p.m. Eastern time. But as much as Bernanke and the financial establishment are building the fundamentals for the precious metals, they are also engineering the ruin of a great country. Click HERE to read excerpts from Schiff’s interview. And I highly recommend you read Peter Schiff’s book, Crash Proof.
So, is the dollar going to survive during this decade? Those unfamiliar with the fundamentals of macro-economics may be inclined to say “yes”. Reality is that the national debt is unsustainable and the dollar is on the verge of losing its world reserve status. Keynesian Economics practiced for the past decades is clear that is not working. The decline of the dollar is associated with potentially a major loss in the purchasing power and this is the time to take the bull by the horns and position yourself to not only survive but to thrive.
So, how do you do that? In times such as these converting your dollars into tangible assets may be one of the smartest things in your life. Silver, gold, and other commodities are very desirable. Forget about the optimists that say we’re on the path of an economic recovery and don’t buy into the idea that gold or silver are in a bubble phase. The value of these commodities is being suppressed due to the avalanche of paper gold and paper silver created by Wall Street.
Real estate is another hard asset that if bought today in the long run will make you a happy camper. There are many ways to invest in real estate, you can do it as an active or a passive investor. You can buy the real property or you can invest in a fund that invests in real estate. Whatever your level of comfort is go for it.
When making the decision assess the opportunity by the following factors and ask yourself…
- does it generate substantial revenues during good times and bad times?
- is it made out of real assets that don’t vanish?
- does it maintain its capital value?
- does it keep up with inflation?
- is it made out of assets that satisfy one or more human needs (housing, food, energy, means of exchange)?
- can it be passed on to heirs and generate passive income for them?
Relying on the current main stream media news would most likely make one believe that we’re on the verge of an economic recovery. Despite the high unemployment rate, high number of foreclosures, a depressed real estate market, and rising prices on food and other commodities there’s plenty of optimism that comes straight from the Central Bank and the Treasury. But what the officials don’t take the time to explain in a logical manner is how can our debt burdened economy truly recover after decades of (Federal Reserve induced) bubbles and busts.
Except for a minority of economists and investors the topic of sound money has never been put up for discussion. Because there is a direct correlation between sound (or unsound) money and the economy it is imperative to understand the meaning of sound money and its opposite, fiat currency.
Sound money is characterized as money backed by a tangible asset such as gold, for example. Gold is a commodity that has been used by humans for thousands of years as a form of money. Because it comes with a limited supply it is the ideal specie. A gold backed dollar retains its value because unlike fiat currency (the dollar we have today) it cannot be created out of thin air. It makes our government and our politicians accountable since they would be less able to fund new and expensive government programs. Sound money is at the core of a free market economy and individual freedom.
To better understand the most recent history of the U.S. dollar it’s best to know that we did have a gold standard until 1971. However, shortly after the birth of the Federal Reserve in 1913 the dollar’s position had been weakened. The nation’s monetary policy had since been transferred by Congress in the hands of a few powerful international bankers. Beside managing the nation’s money accounts the Federal Reserve’s main activity consists in actually creating money that distorts production and creates inflation and the business cycle. During World War I the gold standard had been temporarily removed specifically to finance the war. During this time the window of opportunity for the Fed’s creation of new credit and money supply had been fully exploited. The dollar experienced a significant decline however, the return to gold standard (prompting a reversal of inflation) helped regain partial stability.
In 1933 president Franklin Roosevelt had taken the first step of the removal from the gold standard when Americans were no longer allowed to exchange dollar notes for gold. Whatever was left of the old gold standard applied only to exchange amongst Central Banks and between the U.S. government and other countries.
After World War II the Bretton Woods system fixed the value of the dollar to $35 per ounce of gold. Uncontrolled government spending however, led to United States government’s inability to meet its obligation of redeeming other countries’ dollars for gold. More dollars flooded the world and as other countries requested to redeem the U.S. dollars they owned more gold was being sent oversees to these governments. The U.S government’s inability to provide the physical gold to meet the international investors’ needs of redeem-ability may lead us to believe that more dollar notes were printed and used in the world than physical gold existed at Fort Knox. As a result, the value of the dollar began to decline. Finally the government recognized that the United States was no longer able to redeem dollars for gold, so president Nixon completely closed the gold standard by removing all the dollar’s ties to gold in 1971. The dollar has officially become a fiat currency.
Over the long run it’s clear that the prior gold standard kept inflation in check. For example, the value of a 1880 dollar was maintained all the way until 1914, the year after the birth of the Central Bank (Federal Reserve).
Since 1971 the value of the U.S. dollar declined significantly due to its removal from the gold standard. The Federal Reserve continued to increase the money supply by creating new credit and dollar bills out of thin air. The dollar however maintained a powerful position amongst fiat currency for a long time due to the 1971 and 1973 agreements between OPEC and the U.S. that enacted the world’s oil trading to be exclusively in U.S. dollars. These events gave the dollar the status of the world reserve currency. The high demand for (petro)dollars on the international exchange markets gave the government, the central bank, and the politicians the opportunity to abuse it by printing more money to satisfy their desires for financial gains and power.
In his 1966 essay “Gold and Economic Freedom” Alan Greenspan”, former chairman of the Federal Reserve said: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” Sadly, Mr. Greenspan has become one of those central planners whose career at the Fed appears to have influenced his views on gold.
Our history has never experienced such an expansion of money supply like in the past few years. The world has become rather anxious about the U.S. debt, the dollar’s loss of value as fiat currency, and the country’s inability to repay the debt to foreign creditors. As a result, emerging countries – Brazil, China, India, Russia – had already started to work-out a plan towards trading in currency other than the dollar. What that means for us here in the U.S. is that our dollar will soon not be in demand and with that our lifestyles will change. Monetary inflation is the end result of the Federal Reserve’s monetary expansion. It is a hidden tax on the poor and middle class with little impact on the wealthy, the bankers, and the big corporations. China is already experiencing the signs of the inflation triggered by the U.S. and the Federal Reserve’s expansion of dollar supply, and as such is taking a pro-active approach. Just a few weeks ago the Chinese government declared that it intends to strengthen the Yuan to the level of the world reserve currency.
Finally, as Texas Congressman, Ron Paul states in his book Pillars of Prosperity, that “it is our individual responsibility to live within our means. A society that lives within its means can only be accomplished by producing more, consuming less, saving, and investing wisely.” And with that the concept of sound money will not anymore be so hard to grasp.
While the rest of the world, including the U.S. and Ireland, were rushing to heap bank losses on the backs of their citizenries, Iceland was letting its banks fail when its losses became too large for taxpayers to bear. In fact, the losses were so gargantuan — roughly ten times the size of its entire $12 billion economy — that it could not possibly have covered the losses.
By the “too big to fail” hypothesis, the failure to bail out Icesave should have wrecked the economy. But, businesses have not closed shop, failing to meet payroll as credit dried up. And although international banks are retaliating, downgrading its credit rating, the New York Times editorial board reports that, somehow, with no bailouts, Iceland is “pulling through.”
By Matt Taibbi
Most Americans know about the official budget. What they don’t know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.
Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the “other” budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. “Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. “Every one of these transactions is outrageous.”
But if you want to get a true sense of what the “shadow budget” is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall’s haul doesn’t seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn’t seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.
Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley’s investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.
By Alar Tamming
The term “subconscious” is common in psychology. Without unnecessarily elaborating, the topic of the so-called “uncomfortable subjects” falls in the category of the subconscious. Uncomfortable subjects are those that people do not wish to deal with, because they create a feeling of uncomfortableness that fractures peoples’ worldview and forces them to reconsider their beliefs.
The subject of money is one such topic that currently weighs heavily on the global collective subconscious. Apparently, in all nations and cultures, people are perfectly comfortable with the idea that money is a little colorful piece of paper with a picture of a king or president. People don’t dwell on the nature of money, much less on the nature of our monetary system. Most people do not ask questions about how money is created; whether it should be a medium of exchange or a store of value; whether it should be a piece of paper or a commodity.
Another topic that isn’t discussed is related to currency and banking crises. Why? The Nobel Prize for Economic Sciences has been handed out to 64 “economists”, but none has contributed to understanding the banking system or has explored the banking processes. Why is that? The answer is surprisingly simple: because the current banking system contradicts the basic laws of logic, nature, and economics; because it is not sustainable in the long run. A financial system with a daily turnover of transactions exceeding annual global trade contradicts common sense and the time-honored principles of traditional banking.
Continue to read HERE
Today King World News interviewed Barron’s round-table member Dr. Marc Faber. When asked to compare the 70‘s cycle to the current one Faber responded, “Well I think we have had in the 70’s rapidly escalating commodity prices, and in some cases they went up much more than what we’ve seen so far in the last ten years. Of course the financial position of the US is much worse than what we had in the 70’s. In the 70’s, total credit as a percent of the economy was just at 140%, we’re now at 379% and we have the unfunded liabilities which we didn’t have at that time. So I would say the financial position of the US has continuously worsened over the last 30 years.”
When asked about the proposed $5.8 trillion in cuts to the US budget Faber stated, “Well I think what they are discussing in terms of cutting the budget is far too little, and the problem is that you can’t actually cut a lot of expenditures because they have to be met. In other words social security, medicare, medicaid, that you can’t really cut. Also the military budget is really difficult to cut because the military complex in the Unites States, the lobbyists are very powerful.”
When asked about silver specifically Faber remarked, “Well my friend Eric Sprott he maintains that there is a genuine shortage of silver and that may be the case so silver may still move up…Now with the loss of purchasing power of the dollar and other currencies people are concerned if they have say a million or a billion dollars that the value of these dollars will one day be next to nothing.
So they have to invest in something and so they look for Real Estate, they look for equities and of course they come to realize slowly, I have to say very slowly that gold and silver are not commodities in the sense of industrial commodities, but that they are currencies.
Precious metals are basically currencies that are honest because you can’t increase the supply indefinitely. You can’t have QE2, QE3, QE4 in the gold market.
…If you print money everything will go up…and now the money printing doesn’t go into housing because we have an oversupply of housing, but it goes into equities and for Mr. Bernanke unfortunately into commodities. And this is lifting the cost of living of the median household, of the typical household in the US…Mr. Bernanke is a murderer, he’s a murderer of the middle class and the working class.”
The destruction of the middle class will be a huge issue going forward for the United States. As the chasm between the rich and the poor widens, in all likelihood we will see civil unrest in the US. I suspect in the end Faber will be right, Bernanke will continue to be a murderer of the middle class. He will be the “great destroyer” of the standard of living for most Americans.
Listen to the entire interview with Dr. Marc Faber right HERE
If you’re in the market to buy a new residence this advice may come in quite handy for you. If you’re thinking about it but you’re scared, there may be some gains awaiting for you if you do your homework first. Even if you’re not versed in the real estate market there are many good reasons to diversify your investment portfolio with some income producing properties. I like Real Estate as part of my retirement portfolio for more than one reason. First of all Real Estate is a hard asset, it’s real and it does not vanish like the paper assets manufactured by Wall Street. If bought at the right price and with the right terms it can generate substantially better returns than money kept in the bank. Why many Americans found it to not be a good investment is because most of them bought during the peak of the real estate boom, they over-leveraged themselves, and they did not have the right professional to help them make good decisions.
Not long ago a friend of mine asked me for advise. My friend is smart. He knows that buying real estate today is less risky than buying during the real estate boom. He wants a property in which he can move. But he doesn’t just look for a personal residence, he wants something that he can also call investment. A condo he thought would not be a bad idea yet I found other ways that could potentially be better than this type of real estate.
The first property I owned as a personal residence was a duplex. The experience I gained while owning it helped me feel more comfortable investing in other properties. That’s one of the reasons I am fond of real estate. Statistics reveal that most of the owner occupant buyers in the U.S. go for the single family homes. Indeed there may be some benefits to it with one being the privacy issue. When buying a townhouse or a condo the element of privacy is eliminated since neighbors are “attached” to you. Other than that when you own a house there is still responsibility that comes with it. When it comes to your mortgage and money matters however, here are some thoughts worth considering.
Let’s just say for the sake of proving my point we use a hypothetical example where we compare a house to a duplex. This is not geared towards anyone looking to move into a million dollar mansion. It’s for average folks like many of us out there. Buying a $100,000 house and getting a mortgage with a 10% down payment would result in an estimated $700 per month payment (at today’s low fixed rates), that includes property taxes, insurance, and mortgage insurance. You may say that’s not bad considering you’re probably spending that much in rent. But what if you spend only $425 or less on your mortgage and turn your residence into a real estate investment? If you find a duplex (2 attached units in a building) chances are it won’t cost you double in purchase price, taxes, insurance, etc. At $140,000 price with a 10% down payment the total house payment should be at an estimated $975. Of course, you must have a tenant next door from which to collect rent every month. In our example if the rent you charge for the other unit is $550 you end up paying $425, almost $300 per month less than if you paid the mortgage on a house. You can use this example and modify it based on real estate prices and rental market in your area…you may have a very nice surprise.
You can also use this idea and calculate the figures based on buying up to 4 attached units (fourplex). You may end up having all your tenants pay for your mortgage and in some cases – if bought at the right price – you may benefit from a nice little cash flow. If you don’t need to get financing – and you pay cash – your cash flow would be much higher. One other thing worth mentioning is that if you use financing to purchase a duplex you can qualify just as you would for a single family mortgage; that’s because 1-4 units are classified as residential loans. FHA may even be the right program for the smart and qualified first time home buyer.
Before you start dreaming of buying a duplex let me explain the challenges. Your investment comes with responsibility. You must determine however how much of that are you willing and/or able to handle. You can take on full responsibility or you can hire a reliable property manager. When managing on your own you should know how to pre-screen potential tenants, how to handle plumbing leaks or hire the right plumber that will do a good job charging you a reasonable fee, how to make your tenants responsible for the units they occupy, how to write up lease agreements, and other tasks that require your time and effort. If this is not for you hiring a competent property manager is highly recommended. For a charge of about 10% of the gross monthly rents a professional can handle most of the issues. In addition, you are next door so if you see something that a tenant does – that does not comply with his responsibility under the lease agreement – you can immediately notify the property manager to take action.
You may – and there’s a high likelihood that you will – have times when one or two units will become vacant and there may be a month or two until other qualified tenants move in. In the meantime your mortgage payment is due every month. The lender doesn’t care how many units you have vacant. But that’s why it’s even more important to know what to do with the savings that you get during the times when the property is fully occupied. The savings must be turned into liquid reserves. Those reserves will help you when you have vacancies and they will also help you when repairs in the other units must be completed. The savings I am referring to should be calculated based on how much you’d spend on a mortgage for a single family house – in the above example being $700 – and what you end up paying for the mortgage after receiving the rents from the other units on a multi-units property. In the above example the monthly savings are $275 but they could be more or less depending on each individual case. Spending the money instead of saving it in a separate account will end up with a tragic outcome. Being disciplined with your money will help you turn your residence into a successful investment.
As time goes by more of the loan balance will be paid down and more equity will be gained. If you have to move in another city or another country it may actually become one of the best investments in your life. With a great property manager your once primary residence can become part of your retirement portfolio. Sure, it would have to be well maintained and placed in the hands of a competent professional but it will not vanish like the Wall Street manufactured securities.