McAlvany Weekly Commentary, June 23, 2010

Growing Numb to Crises: Don’t Let it Happen to You

Posted on 23 June 2010.

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Expert: US Debt Bomb to Now Explode Five Years Sooner

The Treasury Department’s projection that U.S. debt will reach $19.6 trillion by 2015 brings the ticking debt bomb five years closer to exploding than previously projected, says Delta Global Advisors’ Michael Pento.

He warns that time is running out to do something to avoid such an economic doomsday.

The Treasury also estimated that total U.S. debt will top $13.6 trillion this year and rise to 102 percent of GDP by 2015, and that publicly traded debt would reach $14 trillion by 2015, up from last year's debt of “just” $7.5 trillion.

“The problem is that growing GDP when debt levels are so high is extremely difficult,” Pento wrote in a note to investors. (more)

Two Leading Indicators Pointing to Another Recession

There are two well-known and important leading economic indexes for the U.S. economy:

• The Conference Board’s Leading Economic Index (LEI), and

• The Weekly U.S. Leading Economic Index published by the Economic Cycle Research Institute.

I use them both in my analytical work to better understand the economy’s actual position in the business cycle. And in 2007, they gave me clear, recession warning signs. (more)

Small Banks and Big Risks

Congress is planting the seeds of the next big bank bailout.

Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week would allow all but the 100 largest banks to pretend they haven't made bad loans. The goal is to prompt them to lend more readily to small businesses.

The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately. (more)

Euro's Fall Brings New Bargains Overseas

Europe is on sale.

A friend of mine left this week for Paris and a charming Left Bank hotel for less than $200 a night. A quick glance at some Internet travel sites indicated a slew of bargains, including cruises of the Greek isles for travelers who want to contribute to the country's struggling economy.

With the euro worth about $1.23, it might be time to book a long-delayed visit to a euro-zone country. But it’s not only hotels and restaurants that are attractively priced. Everything priced in euros is cheaper than it was as long as a buyer is paying in a currency that has appreciated against the euro. That’s not just dollars, especially since China said over the weekend that it would allow the yuan to appreciate. (more)

Find a personal money coach, free

Can't control your finances? Get yourself a coach.

Financial coaching is a relatively new concept, and it's available -- free -- to folks who realize they're headed for trouble as well as to those in crisis situations like collections or foreclosure.

Most programs are set up for low-income workers. Action for Boston Community Development, for example, is designed for Beantown residents living at 200% or less of the federal poverty level.

Other programs don't have income limits. After all, it isn't only the working poor who have financial problems. Tiffany, a 33-year-old Connecticut resident, says she and her husband both have good jobs. But one month they couldn't find the money to pay a utility bill. (Last names have been withheld for privacy.) (more)

2 ETFs for any market conditions

With the last few years' volatility and major indexes still below highs last seen more than ten years ago at the beginning of "The Tech Wreck," many investors are wondering if there are any "safe harbors" or investments that can still generate a decent return on investment for the long term.

While there's no "sure thing," one can look back over the last ten years and find various asset classes that have steadily outperformed the S&P 500 and might continue to do so in the future.

In this article we'll take a look at two of these and examine how they've fared and how and why they might continue to outperform in the future. (more)

Fed stands pat on rates as data worsen

Disinflation, high unemployment, tumbling housing starts and European debt woes.

Acknowledging significant cracks in the economic recovery, Ben Bernanke and his U.S. Federal Reserve colleagues voted again Wednesday to keep priming the pump with record-low interest rates.

The decision to leave the central bank’s key interest rate ultra-low at zero to 0.25 per cent wasn’t unexpected.

But Mr. Bernanke put some fresh concerns on the table, including a surprising plunge in new home sales, pushing the likely date for an eventual rate hike until well into next year. (more)

Shout Bubble From the Mountains

It’s now official, Gold has broken it’s perfect cup and handle formation. It’s heading much higher here and now, with a very high degree of confidence. To buy or not to buy is the question. I’ve always liked to buy on weakness. Gold is not weak right now.

That being said, trading the move may be a great way to increase that pile of cash and buy all the more oz’s once gold does exhibit some weakness.

Surprisingly the all-time high gold prices are attracting little more than a headline, or if a story is done it’s usually bearish. That’s bullish!

Sentiment is abysmal. If this were tech stocks, it would be touted everywhere and talk of a bubble would not even be tolerated, let alone given credence. (more)

Where's All the Gold? Start with the Federal Reserve

The bull market in gold shows no signs of abating, as investors big and small pile into bullion, coins, mutual funds and exchange-traded funds (ETFs) -- and who can blame them? With the world awash in more than $200 trillion in household, corporate and government debt, it's not unreasonable to question the long-term value of fiat currency like the almighty dollar.

It sure looks like a bunch of country's central banks have caught the gold bug. The dollar might be the world's reserve currency, but something about the U.S. being $13 trillion in debt -- or roughly the equivalent of its gross domestic product -- has other nations taking on greater reserves of the yellow metal. (more)

Getting Out of Dodge

Were I without family ties, I might consider expatriating to one of the quiet, out-of-the-way towns in Central- or South America that I drove my VW bus through in 1977-1978. Spending a year and a half living life at a slower pace and speaking in a second language was world view- opening for this California born American. Through it all, I met many wonderful, amazingly generous people. Unfortunately, I also saw a lot of grinding poverty and misery. I finally lost count of how many times I stared into the barrel of a loaded submachine gun held by an edgy 19 year-old soldier at some border crossing or roadblock.

My experience was life-changing, and made me appreciate the blessings of life in the United States - such as they were then. Thirty years later, I am not sure what I would feel coming home from such an adventure. I am saddened that governments at all levels have completely lost self-control. I am distressed that corporations now find it more profitable to pay off politicians for special subsidies and protections than to compete. I am depressed that Americans now walk away from commitments and belly up to the entitlement bar without any compunctions. We have spent the last forty years eating our seed corn and frittering away our wealth on trifles. (more)

How to ride an up-and-down market

Volatility in the stock market is a lot like turbulence on an airplane: scary, nausea-inducing, and, if at all possible, best to ignore. Just as a plane almost certainly will land safely despite the uncomfortable bumps, the market usually rises over time (the gruesome past decade notwithstanding). Yet while for the vast majority of investors the sensible thing to do in the face of choppy markets is nothing at all, some yearn to seize the day. After all, seesawing prices can mean opportunity.

By that measure there has been plenty of opportunity of late. The Dow Jones industrial average (INDU) registered triple-digit gains or declines 22 times between April 20 and June 9, the most since the financial crisis of late 2008. Here, then, are three approaches to volatility that anyone can take -- provided you have the stomach and the attention span to do so. (more)