Thursday, February 25, 2010

McAlvany Weekly Commentary, Feb 24, 2010

An Interview with Hernando de Soto

February 24th, 2010
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Tax Rates Dropping For Highest Earners

The doomsday cycle

Over the last three decades, the US financial system has tripled in size, as measured by total credit relative to GDP (see Figure 1). Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse – and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse. (more)

What It's Like To Look For A Job These Days

A note from a reader in New Haven, CT, responding to our post on long-term unemployment:

Dear Mr. Blodget,

Interesting story you've written... Did you happen to read the article by Peter Goodman of the NYTimes entitled "The New Poor?"

I can offer further insight...

Do you have any idea how difficult and depressing it is to apply for the jobs that are posted out there?

The other day I read an ad for help at a local coffee shop. Here's what it said.... (more)

Canada Gold Stocks Fail to Tap Metal’s Surge: Chart of the Day

The adage that all that glitters isn’t gold is all too familiar to investors in Canadian producers of the precious metal, whose holdings have lagged behind as the commodity soared.

The CHART OF THE DAY shows the gap between gains in the metal and an index of Toronto-traded gold stocks widened to a record last month as investors took advantage of new opportunities to invest in the commodity directly. Since the end of 2000, the last year gold declined, futures on the metal surged almost 300 percent in New York, about double the advance by the Standard & Poor’s/TSX Gold Index.

“Investors are saying, ‘We would want to buy a gold company because of the exposure to the price of gold. Let’s just skip that and buy gold directly,’” said Paul Vaillancourt, director of portfolio strategy for Franklin Templeton Managed Investment Solutions in Calgary. (more)

Commodity Investing 2010, Palladium Still Shines

Palladium had the most tumultuous decade of all the precious metals. Although it's hard to imagine today, it started the century more expensive than platinum. While gold and silver were languishing in 2000, palladium was soaring. During the technology bubble, a perceived shortage of tantalum caused producers of cell phones and other electronic gadgets to switch to palladium which was then much cheaper. As the price zoomed, Ford feared that it would not get enough of the element from Russia. The corporation bought large quantities in panic, pushing the price over US$1000.
However, Russia continued to unload its stockpile of palladium that it accumulated in the 1970s and 1980s under the Soviets. The cell phone dilemma was resolved by a switch to silver alloys. Palladium’s price crashed back to earth due to a sudden surplus, which led to a loss of $1 billion for Ford. The bottom finally formed in the spring of 2003 at approximately $150, but palladium took more than two years to begin a lasting uptrend due to heavy Russian destocking. (more)

Faber: 30 Percent Chance China Will Crash And Burn

Investment guru Marc Faber says there's a 30 percent chance that China's "soft landing" will turn into a crash-and-burn, taking most commodities with it.

“I think to some extent (China) is a bubble,” said Faber, the editor of "The Gloom Boom & Doom Report."

"Last year, total loans by banks have increased by a quarter of GDP. In addition to this they have large excess capacities across industrie,” he told the Smart Investor.

Faber says he expects the Chinese economy will slow down considerably.

“The bigger question is that, 'Will It Crash?'” he asks. “To that, my answer is: 'Yes, That Is Also Possible.'"

He thinks “there is 99 per cent possibility that China will slow down considerably and I would say there is 30 percent chance that it will crash.” (more)

Underwater Mortgages Hit 11.3 Million

There is a reason that 702 American banks, nearly one in ten, were on the FDIC “problem list” as of the end of 2009. A large number of small and mid-sized banks are burdened with home and commercial mortgages that are in default and may even go into foreclosure.

New data from First American CoreLogic shows why the solution to the problem banks face is so difficult to find. Eleven million, three hundreds thousand homes had underwater mortgages as of the fourth quarter of last year. That number represent 24% of all residential homes loans in America.The mortgage numbers are much worse when homes with equity of less than 5% are included. First American reports that ”an additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity.” That means that three out of ten homes have virtually no financial value to their owners. (more)

FDIC Hits Record "Default" Level As Deposit Insurance Fund Plunges By $12.7 Billion To NEGATIVE 20.9 Billion

The U.S. banking industry continued to struggle in the fourth quarter, as the number of banks on the brink of failure continued
to rise and the government's fund to protect deposits fell sharply into the red.

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund's reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund. (more)

New U.S. Homes Sales Plunged to Record Low in January

Sales of new U.S. homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rebound to an annual rate of 360,000 units.

The January decline will heighten fears about the fledgling recovery in housing. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

Double Dip Recession Risk Is Near: CIO

The global economy looks set to plunge back into recession as the sovereign debt pressure currently rocking Europe intensifies, Ashok Shah, CIO of London & Capital, told CNBC Wednesday.
"There's a risk of a double dip recession round the corner," Shah said. "Given the sovereign debt crisis that is going around the Mediterranean countries, this is going to put a lot of pressure on Europe."

The economic outlook for Europe is deteriorating very rapidly and that is adding to the factors dragging on the economic recovery, Shah told CNBC. (more)

NAR Forecasts No Recovery for Commercial Real Estate This Year

The National Association of Realtors® (NAR) released its latest projections for commercial real estate (CRE). The outlook remains grim as the NAR forecasts no recovery in CRE this year. Rents are expected to decline across all segments (although slightly lower than last year’s rent declines) as vacancy rates remain extremely high. CRE is not expected to recover until after employment materially improves. Since the NAR does not anticipate this improvement until later this year, it is projecting a CRE recovery no earlier than 2011.

The NAR also notes a related index finally stopped declining in the last quarter: (more)

Charts of the Day

Mass Layoffs by U.S. Manufacturers Surge in January

By definition, a mass layoff in the United States is those job cuts that involve 50 or more workers from the same company. Those types of events increased by 35 in January 2010 to 1,761, according to data released.

This is odd in that it has been asserted by government officials that we're on the edge of new jobs being created in the U.S. economy. That doesn't seem likely in the light of the real numbers and not just wishful thinking by politicians.

I believe the reason for the discrepancy is that companies were replenishing supplies, as I've mentioned before here, and those needs have probably been met in general, so as expected, the manufacturing jobs to produce them are no longer needed. At least that would be part of the reason for increase in mass layoffs. (more)