Wednesday, September 14, 2011

Get Ready for the Next Crash

European leaders may stave off a banking crisis for a few more weeks. Markets may even stage a relief rally as Greek debt worries abate. But make no mistake—a deeper crisis in foreign banks is coming.

Financial markets are behaving as if they expect a European banking crisis that would require the bailout or nationalization of some European banks.

That would feel like a replay of the financial crisis that followed the bankruptcy of Lehman Brothers in the fall of 2008. Only this time, the epicenter would be Europe instead of the United States, and the ripples would expand from the Eurozone outward into global financial markets.

How realistic is that fear? Very, I’m afraid. European banks are facing a very real liquidity and capital crisis that could lead to the need for a government rescue of some globally significant banks.

But the crisis isn’t an exact replay of the 2008 crisis. The effects of the crisis would not be limited to Europe, but the likelihood that a European crisis would take down a major US bank—in a mirror image of the 2008 crisis where problems originating in the United States did lead to the bailouts of banks in the United Kingdom, Germany, and Belgium—is relatively small.

On the other hand, the crisis is potentially worse this time around because the European Central Bank is much less able to intervene as a lender of last resort than the US Federal Reserve was in 2008.

Understanding This Crisis
The current European banking crisis is rooted in the Greek, Italian, Spanish, Portuguese, and Irish debt crises. But the repeated collapse-bailout-collapse-again pattern of the prices of bonds of those countries wouldn’t have produced the current mess without a series of missteps by banks, bank regulators, and central banks.

European banks hold a huge amount of government debt from the countries involved in the crisis. German banks, for example, held $22 billion in Greek government debt at the end of 2010, according to the Bank for International Settlements.

If you add holdings of Greek government debt to holdings of private-sector Greek debt, the exposure gets much higher. For example, in May, Fitch Ratings said that French bank Credit Agricole (CRARY) had $35 billion in exposure to Greek government and private debt. BNP Paribas (BNPQY) and Société Générale (SCGLY) had exposure of about $11 billion each.

The exposure of European banks to Greece, however, is small souvlaki compared with exposure to the much larger Italian economy. BNP Paribas, for example, has an estimated $31 billion in exposure to Italian government and private-sector debt. (more)

SocGen: 100 years of Market History in 3 Charts (for better investment decision making)

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Société Générale’s Cross Asset Research department recently issued its asset allocation report titled, “100 Years of Market History in 3 Charts,” which is food for thought. Among its three front page recommendations/perspectives: 1) Long term interest rates are nearing 100-year lows; 2) Over a long investment horizon, it appears that markets are not cheap enough to spark a sustainable long-term bull market. To begin to buy for the long run, we would probably need to wait for a 3% real dividend yield and a forward P/E of 7; 3) Commodity prices appear to be much too high to invest in right now, and safe haven investments like gold are favoured.

100 Years of Market History in 3 Charts

100 Years of Market History in 3 Charts

Jay Taylor: Turning Hard Times Into Good Times

Prospering in the Midst of America’s Decline

Argentina : surviving without money

Argentina's crisis occurred with the Peso was pegged with the US dollar and was not able to fluctuate. Then you have years of bad management and direction from leaders such as Fernando de la Rúa putting caps on how much people can withdraw per day and how much banks can pay out per day and you get a terrible crisis. After years of lending by the IMF and the peso pegged to the dollar, the situation reached a breaking point in 2001. 20% unnemployment, alternative bons like the Patacon and Lecop being printed since we couldn't print dollars. The elite had moved their money out of the country and when the average citizen tried to close his accounts, they were frozen, to later be converted to devaluated pesos losing 70% of their value. Argentina defaulted on its 132 billion usd debt, largest default in history.

15 Insurance Policies You Don't Need

Fear of the future sells insurance. Because we can't predict the future, we want to be ready to cover our financial needs if, or when, something bad happens. Insurance companies understand this fear and offer a variety of insurance policies designed to protect us from a host of calamities that range from disability to disease and everything in between. While none of us wants anything bad to happen, many of the potential catastrophes that happen in our lives are not worth insuring against. In this article, we'll take you through 15 policies that you're probably better off without.

1. Private Mortgage Insurance

The infamous private mortgage insurance (PMI) is well known to homeowners because it increases the amount of their monthly mortgage payments. PMI is an insurance policy that protects the lender against loss when lending to a higher-risk borrower. The borrower pays for this insurance but derives no benefit. Fortunately, there are several ways to avoid paying for this unnecessary policy. PMI is required if you purchase a home with a down payment of less than 20% of the home's value. The small down payment is viewed as putting you at risk of defaulting on the loan. Put down at least 20% and the PMI requirement goes away. Alternatively, you can put down 10% and take out two loans, one for 80% of the sale price of the property and one for 10%, although interests rates can prevent the economics of this maneuver from working out in the homeowner's favor.

2. Extended Warranties

Extended warranties are available on a host of appliances and electronics. From a consumer's perspective, they are rarely used, particularly on small items such as DVD players and radios. If you purchase a reputable, brand-name product, you can be fairly certain it will work as advertised and that the extended warranty is statistically likely to be unnecessary. If you spend $5,000 on a giant, flat-screen television, the policy is still unlikely to pay off, but might make you feel better. For everything else, forget it.

3. Automobile Collision

Collision insurance is designed to cover the cost of repairs to your vehicle if you are involved in an accident. If you have a loan out on the car, the loan issuer is likely to require that you have collision insurance. If your car is paid off, collision is optional; therefore, if you have enough money in the bank to cover the cost of a new car, collision insurance may be an unnecessary expense. This is particularly true if you are driving an old car, because cars depreciate so quickly that many vehicles are worth only a fraction of their purchase price by the time the loan is paid in full.

4. Rental Car Insurance

Most auto insurance policies offer additional coverage for the cost of car rentals, touting it as a useful feature if your car is ever involved in an accident and needs to spend some time in the repair shop. This may sound like a good idea, but in reality, most people rarely rent a car, and when they do, the cost is relatively low and hardly worth insuring against. Although rental car insurance is relatively inexpensive, amortized over the course of a lifetime you are still likely to spend far more than you will benefit.

5. Car Rental Damage Insurance

Many auto insurance policies already cover rentals, so there's no need to pay for this twice. Check your policy before you pay. Depending on where you rent the vehicle, you may also be able to pay a small fee for insurance on your rental when you pick it up at the rental center. If this fee is less than what you'd pay for a year in your old policy, choose the fee over the policy.

6. Flight Insurance

Flight insurance coverage is completely unnecessary. Despite media portrayal, airline accidents are relatively rare, and your life insurance policy should already provide coverage in the event of a catastrophe.

7. Water Line Coverage

Water companies have made an aggressive push to sell policies that cover the repair of the water line that runs from the street to your house. The odds are in your favor that you will never use this coverage, particularly if you live in a newer home. If you live an average suburban neighborhood and you do need to repair the water line, the distance to the street is short, the likelihood of a problem is low and repair costs are a few thousand dollars or less. The same goes for policies offered by other utility companies.

8. Life Insurance for Children

Life insurance is designed to provide a safety net for your heirs/dependents. Because children don't have heirs to worry about and, statistically speaking, most kids will grow up safe and healthy, most parents should not purchase life insurance for their kids. Instead, use the money that you would have spent on life insurance to fund an education plan or an individual retirement account (IRA).

9. Flood Insurance

Unless you live in a flood plain or an area with a history of water problems, don't even bother buying flood insurance. If none of the homes in the area has ever been flooded, yours is unlikely to be the first.

10. Credit Card Insurance

Purchasing coverage to pay your credit card bill in the event you cannot pay it is a waste of money. A far better idea is to avoid running up your credit cards in the first place, so you won't need to worry about the bills. Not only do you not save on the insurance premiums, you'll also save the interest on your debt.

11. Credit Card Loss Insurance

Federal law limits your liability if your credit card is stolen. Your out-of-pocket costs are limited to $50 per card and not a penny more. In fact, many credit card companies don't even try to collect the $50.

12. Mortgage Life Insurance

Mortgage life insurance pays off your house in the event of your death. Rather than add another policy - and another bill - to your list of insurance plans, it makes more sense to get a term-life policy instead. A good life insurance policy will provide enough money to pay off the mortgage and to cover other expenses as well. After all, the mortgage isn't the only bill your survivors will need to pay.

13. Unemployment Insurance

This coverage makes minimum payments on your bills if you are out of work, which sounds like an attractive proposition. A better plan is to save your money and build up an emergency fund instead. You won't have to cover the cost of the insurance policy and, if you are never out of work, you won't spend any money at all.

14. Disease Insurance

Policies are available to cover cancer, heart disease and other maladies. Instead of trying to identify every possible disease that you may encounter, get a good medical coverage policy instead. This way, your medical bills will be covered regardless of the problem you face.

15. Accidental-Death Insurance

Unless you are extraordinarily accident prone, an accident is unlikely. Major catastrophes such as car wrecks and fires are covered under other policies, as is any harm that comes to you while at work. Accidental-death policies are often fraught with stipulations that make them difficult to collect on, so skip the hassles and get life insurance instead.

When Choosing Insurance

There are so many policies to chose from, and they all cost money. While a certain amount of insurance coverage is necessary and prudent, you need to choose carefully. In general, broad policies that offer coverage for a multitude of potential events are a better choice than limited-scope policies that focus on specific diseases or potential incidents. Before you buy any policy, read it carefully to make sure that you understand the terms, coverage and costs. Don't sign on the dotted line until you are comfortable with the coverage and are sure that you need it.

Too Many Pessimists

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This week: Vanguard MSCI Emerging Markets ( Ticker: VWO )

At an investment conference the other day the mood in the room was optimistic, despite the recent thrashing the market has suffered. Of course, nibbling on oh so delicate pastries in a swanky hotel can have that effect. But really, many of the portfolio managers there, responsible for hundreds of billions, were cautiously bullish on equities because they believed everyone else – individual investors, doom-and-gloom economists – was just too pessimistic.

To be sure, there are problems. Worries over Euro-zone debt, slow growth and a credit downgrade in the United States and signs of slowing growth in emerging markets drove the awful August sell-off and those problems remain today. Yet the market has discounted each of these problems and while they are significant, they are manageable.

Equities in developed market – Canada, the United States, Europe – are down between 12 to 20% from their April highs but have recovered somewhat from their mid-August lows. The price to earnings ratio of the S&P 500 is at about 12 to 13 on trailing earnings, a level not seen since March 2009. Some European equity indices – Germany’s DAX and France’s CAC 40 – are at long-term price-to-earnings ratios of around 10 times, well below their historic average.

These cheap valuations suggest investors fear a double-dip, a recession following recession with tepid growth in between. True, in the absence of action, we likely would fall into a recession. But is that realistic?

When my novice 8-year old and I play chess (on a non-virtual wooden board if you can believe that!) his moves do not yet anticipate my reactions. Similarly, many investors do not anticipate how governments and central bankers will react to fear of an economic slowdown.

President Obama unveiled a fiscal stimulus plan on Thursday worth nearly US$450-billion, much bigger than the US$300-billion flagged. Skewed largely towards tax cuts for workers and business, the package could boost gross domestic product by about 1% and jobs by about a million, according to economists’ estimates. While the plan still must pass Congress, it is expected a good deal of it will be approved.

Federal Reserve Chairman Ben Bernanke, worried about his mandate to maximize employment, (and not just his own), is sending signals of further stimulus to be announced in two weeks. Unlike the last round of Quantitative Easing, this anticipated next round, called “Operation Twist” should bring down longer-term interest rates and that may encourage further investment and spending.

European central bankers are following the same script, buying their sovereign members’ bonds and considering cutting interest rates to spur economic growth. For now, the Euro zone looks like it will work out of its debt crisis though more drastic measures may come in future.

Nor are emerging market actors sitting idle. In contrast to developed markets, emerging markets faced high inflation 10 months ago and began aggressively raising interest rates. They have largely succeeded and have now softened their tone on monetary policy, indicating that further rate increases are unlikely. Brazil has gone a step further by actually cutting rates two weeks ago.

Other indicators agree that we are not recession-bound. Prices for copper, a key industrial metal and a strong leading indicator of economic growth, have remained robust at above $4 a pound. Supply disruptions have helped the price but demand remains firm too.

One of the best economic indicators, the yield curve or the spread between short and long-term bonds remains in positive territory, with the long-term much higher than the short. The curve often inverts with short rates higher than long rates as speculative activity becomes excessive, followed soon after by a recession. There is a question as to how accurate the yield curve would be in forecasting a double-dip recession but the jury is still out on that.

For beaten down markets such as these, buying the most unloved assets can be the best. In this case, emerging markets have suffered the most as investors fled risky assets for the safety of U.S. government treasuries.

Our preferred ETF for broad emerging market exposure is the Vanguard MSCI Emerging Markets ETF (VWO-NY). It holds 910 stocks and China, Korea, Brazil, Taiwan and India make up 65% of the ETF. The fee of 0.22% ($22 per $10,000 per year) is less than a third of its nearest competitor.

Disclosure: We may hold positions in any securities mentioned in this report.


NYSE Short Interest Soars To Highest Since July 2009; Is An Epic Squeeze Forming In Bank Of America Shares?

While two weeks ago the notable feature in the NYSE short interest update was that it had grown by a whopping 1 billion shares, or the most in over two years, this week's highlighted feature is that in the second half of August evil "speculators" did not relent in their negative bias, and brought the total NYSE Group short interest to a two year high or 14.9 billion shares, a 484 million share increase from the prior week, and the highest since July 2009 when the market still was unaware that central planning was the name of the game, and being short actually meant taking on the Chief Printing Officer head on (and fewer still realized that being long gold was the only effective way to "fight the Fed"). And just like last week when we speculated that we can "expect some even more furious short covering sprees to send the S&P much higher on an intraday basis" courtesy of this massive short interest overhang (which will without doubt be used by stock custodians to create a rally if and when needed, just like back in March of 2009, by making recalling shorts in every name), the probability of a massive "face off" rally grows as more and more join the ranks of those believing that the US capital market still plays by the rules. Newsflash: it does not. And anyone trading stocks, on either the long or short side, is guaranteed to lose.

And as an added bonus, we have added the short interest in Bank Of America. Doomed company and stock? Absolutely. But is it overdue for another massive ripfest before it's lights out. Guaranteed!

Paul Craig Roberts : we could see a revolution in Europe

Paul Craig Roberts : in Europe they bailout the banks by taking from the ordinary people , we could easily see a revolution , there are any terrorists they do not exist says Paul Craig Roberts we call Taliban terrorists because they are resiting our occupation to their land.

Census Report Shows Poverty Rate Hits 15.1%; Record 46.2 Million in Poverty; Real Median Household Income Sinks Below Level First Reached in 1989

Please consider Income, Poverty, and Health Insurance Coverage in the United States: 2010. Report released today.

  • Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009

  • Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred in 1999.

  • Both family and nonfamily households had declines in real median income between 2009 and 2010. The income of family households declined by 1.2 percent to $61,544; the income of nonfamily households declined by 3.9 percent to $29,730.

  • Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009. Since 2007, median household income has declined 6.4 percent (from $52,823) and is 7.1 percent below the median household income peak ($53,252) that occurred in 1999.

Poverty Rate

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Real Median Income

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Real median income has been in decline since 1999 and is now back at a level last seen in 1996. Real median income is below the level seen in 1989.

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