This well-known bear warns us about the country's heavy debt burden, rising interest rates, surging oil prices and more problems brewing.
By Jennifer Schonberger, February 25, 2011
Fears of a double-dip recession have moved to the back burner, and most forecasters see a slowly improving economy this year. But Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, a brokerage based in Westport, Conn., says that the majority is way off base.
Known for his bearish views on the U.S. dollar and bullish views on gold and foreign stocks, Schiff has also made forays into the political arena. He served as an economic adviser to Ron Paul’s campaign for the Republican presidential nomination in 2008 and unsuccessfully sought the GOP nomination to run for the U.S. Senate in Connecticut in 2010. He is the author of Crash Proof 2.0: How to Profit from the Economic Collapse (John Wiley & Sons, 2009) and How an Economy Grows and Why It Crashes (John Wiley & Sons, 2010).
Here’s an edited transcript of our conversation.
KIPLINGER: What is your current take on the U.S. economy?
SCHIFF: I still think we’re in the early stages of a depression. People assume the economy is recovering because the numbers look better. But the numbers only look better because of the additional debt we’ve accumulated. When you borrow and spend trillions of dollars, the numbers look better in the short run. People will spend that borrowed money, so there will be some jobs created in the process.
But once that borrowed money is spent, it’s gone. The interest burden, however, remains. So the economy ends up in worse shape, and we end up digging ourselves into a deeper hole.
So we’re living on borrowed time. When do you think the effects of the stimulus will run out? I don’t know. Can we make it through 2011? Maybe. It would be a long shot for us to go through 2012 without returning to a recession.
Then what happens? Over the course of the next several years, a hangover will set in and interest rates will rise. Interest rates are rising now. They’re still low only because they’re rising from such a depressed level.
The next downturn will be worse because we never allowed the economy to recover from the damage caused by the housing mania, and economic imbalances were never fully addressed. We put too much of our resources into housing, education and health care through government subsidies and debt guarantees. Interest rates were too low for too long, so consumers were able to borrow too much.
What’s your assessment of the housing market now? Home prices are still too high. Housing prices need to fall to a level where the average home buyer can put 20% down and get a mortgage without a government guarantee.
But aren’t houses more affordable? Affordability is only getting better because mortgage rates are artificially low. The federal funds rate [the short-term interest rate that the Federal Reserve controls] is at 0%. The rates for 30-year fixed-rate mortgages are almost identical to rates on 30-year Treasuries. Basically, the government is absorbing all the risk of mortgage lending.
What needs to be done? We need to do something relatively quickly about our debt because we’re adding $1 trillion to $2 trillion of red ink each year. But the economy also needs to be restructured. For instance, the government has to get out of the housing market completely.
You’re suggesting phasing out Fannie Mae and Freddie Mac. But won’t that destabilize the economy? Yes. But do we want to continue inflicting more damage, or do we want to correct the problem? The problem is that real estate prices are too high. If the government gets out of the housing market, prices will come down.
How will higher oil prices affect the economy? They’re hurting the economy already. Our trade deficit has risen sharply from last year -- roughly 30% -- largely due to higher oil prices.
How much of the rise in oil prices is due to the turmoil in the Middle East? The Middle East is not the cause of higher oil. It’s the catalyst. Oil prices are moving up because money supply is growing rapidly around the world. What will happen now is that the Fed will conclude that higher oil prices will hurt consumer spending, which will hurt the economy, and so it will print even more money. The result will be oil prices rising even further.
And that will boost inflation. Inflation is already out of the bottle as a consequence of low interest rates designed to prop up the housing market and keep this phony expansion going. The Federal Reserve is creating inflation. The problem now is that the impact is being felt more broadly by our trading partners. Countries such as China are absorbing the lion’s share of the dollars that the Fed is printing. So we’re causing prices to go up in China. To combat inflation, the Chinese could raise their own interest rates or simply allow their currency to appreciate. Or China could get rid of the dollar as its reserve currency.
Will China let the yuan rise? I think we’re getting very close to that. The alternative is runaway inflation in China. And when the yuan goes up, watch out. The standard of living for the average American is going to tumble. The vast majority of what Americans spend money on will be energy and food. I don’t think there’ll be money left over for things such as new clothes.
What should investors do to protect themselves? People have to think outside the box. Municipal bonds, Treasuries, CDs and high-quality corporate bonds are usually considered safe investments, but I think they’re among the riskiest investments right now.
Assuming the federal government bails everybody out, so no one is left to default, the risk is not that you’re going to lose your money, but that your money loses value. If you have a $10 million bond portfolio and prices go up ten times, that’s the same thing as losing 90% of your money. So you have to be willing to assume a different type of risk -- that is, buying foreign stocks that pay dividends or buying foreign government bonds.
Where are you investing overseas? We try to find the countries that have trade surpluses, high savings rates and sound monetary policies. We’re invested most heavily in Canada, Australia, New Zealand, Norway and Sweden. We also have money in Germany, Switzerland and the Netherlands. We also have a lot of money in Asia -- mainly in China, but also in Singapore and Hong Kong.
What kinds of companies are you looking for? I’m pursuing two themes. One is resources and raw materials. For that we like energy, agriculture and mining companies.
The other theme is that the world is going to change dramatically over the next decade as far as distribution of wealth, purchasing power and living standards. Americans have been living beyond their means, while others have been living beneath their means. That’s going to switch. So we’re focusing on companies that are already active in the markets where purchasing power is going to grow. For example, we want companies that are targeting the Chinese middle class. If investors want to invest in the U.S. at all, they need to focus on multinational export groups that derive some of their income overseas.
Wednesday, March 2, 2011
CHINESE PMI HITS 7 MONTH LOW
Two of my five big concerns for 2011 (oil prices and now China) are now starting to flash some warning signs. The latest China PMI numbers showed a sharp decline in the rate of Chinese economic expansion. The headline figure came in at 51.7, down from 54.5 last month. According to HSBC this is the largest month on month decline since 2004. Output was up just slightly, business growth slowed “markedly” and inflation continued to exert pressures on the economy. HSBC summarized the report:
Key points
• PMI falls to seven-month low of 51.7, up slightly from the earlier flash estimate of 51.5.
• New order growth eases to slowest since last August.
• Purchase price inflation hits three-month high.
Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:
“The Final PMI reading confirms that the growth of China’s manufacturing sector is cooling a little, despite the small upward revision from the flash reading attributed to slightly better new orders. This is a positive development as slower growth is helpful to check inflation, while concerns about a slump in growth are unwarranted.”
Source: HSBC
Who Owns the U.S.?
provided by
Regardless of how much closer Obama's budget brings our economy into a balance of payments not seen since 2001, we will continue to run deficits for the next decade, and the national debt will keep growing every year that happens.
While most of the country's $14 trillion debt is held by private banks in the U.S., the Treasury Department and the Federal Reserve Board estimate that, as of December, about $4.4 trillion of it was held by foreign governments that purchase our treasury securities much as an investor buys shares in a company and comes to own his or her little chunk of the organization.
Looking at the list of our top international creditors, a few overall characteristics show some interesting trends: Three of the top 10 spots are held by China and its constituent parts, and while two of our biggest creditors are fellow English-speaking democracies, a considerable share of our debt is held by oil exporters that tend to be decidedly less friendly in other areas of international relations.
Here we break down the top 10 foreign holders of U.S. debt, comparing each creditor's holdings with the equivalent chunk of the United States they "own," represented by the latest (2009) state gross domestic product data released by the U.S. Bureau of Economic Analysis. Obviously, these creditors won't actually take states from us as payment on our debts, but it's fun to imagine what states and national monuments they could assert a claim to.
 ©Radar Communication |
1. Mainland China
Amount of U.S. debt: $891.6 billion
Share of total foreign debt: 20.4%
Building on the holdings of its associated territories, China is the undisputed largest holder of U.S. foreign debt in the world. Accounting for 20.4% of the total, mainland China's $891.6 billion in U.S. treasury securities is almost equal to the combined 2009 GDP of Illinois ($630.4 billion) and Indiana ($262.6 billion) in 2009, a shade higher at a combined $893 billion. As President Obama -- who is from Chicago -- wrangles over his proposed budget with Congress he may be wise to remember that his home city may be at stake in the deal.
2. Japan
Amount of U.S. debt: $883.6 billion
Share of total foreign debt: 20.2%
The runner-up on the list of our most significant international creditors goes to Japan, which accounts for over a fifth of our foreign debt holdings with $883.6 billion in U.S. treasury securities. That astronomical number is just shy of the combined GDP of a significant chunk of the lower 48: Minnesota ($260.7 billion), Wisconsin ($244.4 billion), Iowa ($142.3 billion) and Missouri ($239.8 billion) produced a combined output of $887.2 billion in 2009.
3. United Kingdom
Amount of U.S. debt: $541.3 billion
Share of total foreign debt: 12.4%
At number three on the list is perhaps our closest ally on the world stage, the United Kingdom (which includes the British provinces of England, Scotland, Wales and Northern Ireland, as well as the Channel Islands and the Isle of Man). The U.K. holds $541.3 billion in U.S. foreign debt, which is 12.4% of our total external debt. That amount is equivalent to the combined GDP of two East Coast manufacturing hubs, Delaware ($60.6 billion) and New Jersey ($483 billion) -- which was named, yes, after the island of Jersey in the English Channel. The two states' combined output in 2009 came to $543.6 billion.
4. Oil Exporters
Amount of U.S. debt: $218 billion
Share of total foreign debt: 5%
Another grouped entry, the oil exporters form another international bloc with money to burn. The group includes 15 countries as diverse as the regions they represent: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. As a group they hold 5% of all American foreign debt, with a combined $218 billion of U.S. treasury securities in their own treasuries. That's roughly equivalent to the combined 2009 GDP of Nebraska ($86.4 billion) and Kansas ($124.9 billion), which seems to be an equal trade: The two states produce a bunch of grain for export, which many of the arid oil producers tend to trade for oil.
 ©MS Illustration/Public Domain |
5. Brazil
Amount of U.S. debt: $180.8 billion
Share of total foreign debt: 4.1%
Rounding out the top five is the largest economy in South America, Brazil. The country known for its beaches, Carnaval and the unbridled hedonism that goes along with both has made a big investment in the U.S., buying up $180.8 billion in American debt up to December. That's almost equal to the $180.5 billion combined GDP of Idaho ($54 billion) and Nevada ($126.5 billion), a state that is no stranger to hedonism itself.
6. Caribbean Banking Centers
Amount of U.S. debt: $155.6 billion
Share of total foreign debt: 3.6%
You have to have cash on hand to buy up U.S. government debt, and offshore banking has given six countries the combined capital needed to make the Caribbean Banking Centers our sixth-largest foreign creditor. The Treasury Department counts the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama and the British Virgin Islands in this designation, which as a group holds $155.6 billion in U.S. treasury securities. That's equivalent to the GDP of landlocked Kentucky ($156.6 billion), whose residents may not actually mind if they were ever to become an extension of some Caribbean island paradise.
7. Hong Kong
Amount of U.S. debt: $138.2 billion
Share of total foreign debt: 3.2%
At No. 7 on the list of our foreign creditors is Hong Kong, a formerly British part of China that maintains a separate government and economic ties than the communist mainland. With $138.2 billion in U.S. treasury securities, the capitalist enclave could lay claim to Yellowstone Park and our nation's capital: The combined GDP of Wyoming ($37.5 billion) and Washington D.C. ($99.1 billion) totaled $136.6 billion in 2009.
 ©MS Illustration/Public Domain |
8. Canada
Amount of U.S. debt: $134.6 billion
Share of total foreign debt: 3.1%
They say that a friend in need is a friend indeed, and our neighbor to the north has proven to be a kind and generous creditor in our time of financial need. Canada holds about 3.1% of our foreign debt, or $134.6 billion. If friend were to become enemy and Canada were looking to annex some U.S. land to cover the debt though, the country would have an easy time of it. The combined GDP of Maine ($51.3 billion), New Hampshire ($59.4 billion) and Vermont ($25.4 billion) comes close to Canada's debt holdings at $136.1 billion.
Residents of the three states in our extreme northeast corner should start practicing their French: They might become Québécois one of these days.
9. Taiwan
Amount of U.S. debt: $131.9 billion
Share of total foreign debt: 3.0%
Taiwan, an island barely 100 miles off the coast of China, is claimed by the People's Republic of China, despite having its own government and economic relations with the outside world. Part of those economic relations includes the island's holding of $131.9 billion of U.S. debt, roughly equivalent to the combined GDP of West Virginia ($63.3 billion) and Hawaii ($66.4 billion), which totals $129.7 billion.
Unless we get our spending in check, we risk losing some of our most visually stunning territory (West Virginia, obviously) to our friendly neighbors on the other side of the Pacific Ocean.
10. Russia
Amount of U.S. debt: $106.2 billion
Share of total foreign debt: 2.4%
Starting off the list of our major foreign creditors is Russia, which holds about 2.4% of the U.S. debt pie that sits on the international dinner table. Its $106.2 billion in treasury securities is equivalent to the 2009 GDP of our sparsely populated North: The combined output of North Dakota ($31.9 billion), South Dakota ($38.3 billion) and Montana ($36 billion) matches up nicely with the Russian holdings, at $106.2 billion.
Let's hope Russian president Dmitry Medvedev doesn't come to collect.Post Meltdown Economy Looks More Like a Pre Meltdown Economy
Based purely on the stock market, the economy should be rockin' and rollin' but while the market's performance has been stellar, the economy is flat.
Will stocks catch up with the economy or the economy with stocks?
Just how strong is the market? The SPDR S&P MidCap 400 ETF (NYSEArca: MDY - News) is trading at an all-time high, the Nasdaq-100 (Nasdaq: QQQQ - News) has surpassed its 2007 watermark, the Russell 2000 (NYSEArca: IWM - News) is closing in on its all-time high, the S&P 500 (SNP: ^GSPC) has doubled since March 2009, and the Dow (DJI: ^DJI) is viewed as the ultra safe haven in a world of turmoil.
How strong is the economy? Real estate (NYSEArca: IYR - News), the biggest wealth builder/destroyer in the country is still weak. The Standard & Poor's Case-Shiller Home Price Index has dropped to the lowest level in nearly a decade. As the Home Price Index has fallen below March 2009 levels, residential REIT stocks (NYSEArca: REZ - News) have nearly tripled since then.
Another huge contributor to a healthy economy - unemployment - shows signs of improvements at a peripheral glance but continues to lag significantly if examined beyond the rosy headline numbers. To wit, if it wasn't for the labor force sliding to a near 30-year low, the headline unemployment number would be around 12% while the real unemployment would be around 20%.
Based on a 11-line surface analysis, stocks and the economy are out of sync. To see whether stocks will catch up with the economy or vice versa, we'll need to slice beneath the service and examine the very foundation of our economy.
Multi-decade Economic Trend
Unnoticed by Wall Street, the economy has been shifting gears, and has gone from acceleration mode to coasting mode. How so?
A few decades ago, sweat-trenched U.S. manufacturing facilities were the most fertile, growth-producing environment on the planet. This growth was fueled by 'Made in America' products. The growth was organic and it was real.
When taking a closer look at the economy over the past 70 years, we see two distinct growth periods. Phase 1 lasted from 1947 - 1966 and phase 2 stretched from 1975 - 2000.
Throughout phase 1, GDP averaged 4.18% while unemployment was low. GDP during phase 2 averaged 3.40% with unemployment inching up.
GE, a company that endured though both phases, provides important clues about the difference between both phases. Up until the end of phase 1, GE was known for manufacturing quality products like light bulbs, refrigerators, jet engines, and aircraft super chargers. GE's slogan was 'We bring good things to life.'
In the second phase, GE ventured into television and high finance. GE Capital, GE Commercial Finance, GE Money, GE Consumer Finance and NBC Universal contributed an ever-growing slice of GE's profit pie.
GE's focus shifted from manufacturing to financial engineering. If GE didn't build a product it would finance the consumer's purchase of a competitor's product. It was just appropriate that GE's slogan was changed to 'Imagination at work.'
The 'New Normal' - New but not Normal
The concept of making money by using money, encouraged by the Fed's interest rate policy, lacked substance and sustainability. The 2000 tech (NYSEArca: XLK - News) crash was more pronounced than what we've seen from the decades before. The real estate boom was as gigantic as its subsequent bust.
The post-2007 financial crisis further highlighted the dangers of an economy low on manufacturing but rich on leverage, accounting tricks, and financial engineering. No wonder the average GDP for the 2001 - 2010 period - dubbed the lost decade - dropped to 1.71%.
But amnesia or selective memory loss, usually triggered by rising prices, is not new to investors. The more stocks rally, the more excited investors become, the more dangerous the stock market gets.
Building an Air Castle?
The post meltdown economy has become a launching pad for the new economy and new key players. Facebook and Twitter are Wall Street's new darlings. Investors can't wait to get their hands on the upcoming IPOs.
According to Wall Street valuations, Facebook is worth as much as Home Depot or Boeing. Home Depot employs 306,000 workers, Boeing 154,000. Facebook sends paychecks to about 1,000 lucky individuals.
A happy go lucky investor looks at the new economy and says 'Wow, that's just marvelous.' A skeptical mind looks at it and wonders 'How long before that blows up in my face?'
Simple Math
As the economy is weakening, the Fed's role in providing sufficient liquidity to keep a faux system running is ever increasing. Stock market tops and bottoms have become more extreme, and the boom-bust cycle is shorter than ever before.
An 80-year trend line that has contained the Dow Jones for much of the 20th century provides an interesting technical reference to this discussion. On February 18, the ETF Profit Strategy Newsletter highlighted this trend line, which runs through Dow 12,400.
Interestingly that very day, the Dow rallied to 12,391 before reversing 300 points lower. Perhaps the tug of war between the economy and stock market has entered a pivotal juncture.
Bullish investors will quote the third presidential election year, a willing Federal Reserve, positive momentum, and cash on the sidelines as reasons for higher stock prices.
Bearish investors can point to extreme sentiment readings, bearish divergences, valuations, and bad fundamentals as culprits for lower prices ahead.
Slice & Dice but Watch your Finger
However you slice and dice it, the market is treacherous and can make you rich or strip you of your wealth faster than at any other time in history.
One way to limit risk and maximize opportunity is to pay attention to trend lines such as the one mentioned above. The market draws trend lines and creates important support and resistance levels. If the market speaks, it behooves us to listen.
A break below support is as bearish as a thrust above resistance is bullish. Being unaware of crucial support/resistance level is like driving down a busy road without paying attention to red or green traffic lights.
Chaos Does Not Lead to Democracy
By Greg Hunter’s USAWatchdog.com
Looking around the Middle East you can find turmoil and conflict almost everywhere you turn. Morocco, Tunisia, Libya, Yemen, Bahrain, Jordan, Syria, Oman and Egypt have all been caught up in a fire storm of anti-government protests. Some appear to be mostly peaceful, such as the pro-democracy movement in Egypt; and some are descending into bloody civil conflict, such as Libya. The multiple revolutions unfolding in the Middle East are really just getting started. Even in the Kingdom of Saudi Arabia, the smell of revolution is in the air and on the Internet. Organizers in the Kingdom are calling for “DAY OF RAGE.” Saudi King Abdullah is so worried he recently announced $37 billion dollars in subsidies and giveaways. That’s enough to pay everybody in Saudi Arabia around $1,500 each. Some look at it as a bribe to encourage citizens not to protest. (Click here to read more.) If Saudi Arabia falls, war will surely follow.
This changing of the guard across the Middle East will be much more impactful to the rest of the world than the fall of the Berlin Wall. The main reason is oil. The Middle East produces most of the world’s petroleum. If supplies are curtailed and shipping lanes are cut, the world could plunge into economic ruin.
It took a little more than 2 years after the fall of the Berlin Wall to collapse the Soviet Union. I look for the same pace of change in the Middle East. The first domino to fall was tiny Tunisia, followed by mighty Egypt with a population of more than 80 million. Egypt has an up-to-date army outfitted with the latest U.S. made weapons. After Egyptian President Hosni Mubarak stepped down, the military took control of the country. A writer at Foreignpolicy.com recently described the fall of Mubarak this way, “I wish I could be there today, in solidarity with the thousands of young and old Egyptians, to celebrate the demise of his dreadful regime. But what we are witnessing is more than the end of a government — it is nothing less than the birth of a new liberal order in Egypt. And that’s not only good news for the beleaguered citizens of Egypt, but also the United States and Israel.” (Click here to read the complete Foreignpolicy.com post.)
History tells us consistently that big revolutions do not directly lead to democracy. After the French Revolution in 1789, there was mostly crisis and conflict. Napoleon took control 10 years later (1799), and eventually became emperor. His reign was bloody, and he took France to war many times until his last battle in 1815—Waterloo. The Russian Revolution of 1917 was another one of history’s grand upheavals; it produced Communism and Vladimir Lenin. Russia is still without a bona fide democracy today. (The American Revolution is one of the few that directly went to democracy.)
Earlier this month, Harvard history professor Niall Ferguson, wrote a stinging Op-Ed cover story in Newsweek dismantling President Obama’s foreign policy in Egypt. Here’s part of what Ferguson said recently on MSNBC’s “Morning Joe” program, “. . . I want to emphasize the risks being run in the region. If you look at history, and I am a historian, most revolutions lead not to happy, clappy democracies but to periods of internal turmoil and also periods of terror. And they also lead to external aggression, because the simplest way to mobilize people who are not very well educated like Egypt is to point to the alleged enemy within and then of course the enemy abroad. The scenarios the Israelis are looking at involve a transition not to some kind of peaceful and amicable democracy but to a Muslim Brotherhood dominated regime which then peruses an aggressive policy towards Israel. This is not a zero possibility scenario. This is a high probability scenario, and as far as I can see the President is not considering it.”
Ferguson also points out Mr. Obama is one of the least experienced Presidents in history, when it comes to foreign policy. Ferguson characterized Obama’s handling of the Egyptian revolution as a “flip followed by flop followed by flip.” The “Morning Joe” crew tried to counter Professor Ferguson but was totally out-gunned and out-classed. Please watch the entire video below:
Printing Enough Money to Buy the World’s Silver
By The Mogambo GuruI thought I had heard all the good arguments to buy silver, mostly from me asking myself two important questions.
First, “Why am I not buying silver when it is so obviously going to go much, much higher in price because of the absurd Federal Reserve insanely creating so much money, which causes inflation, which always makes the prices of precious metals soar?”
A lot of the “soaring prices,” a phrase that rings with a certain pleasant musical quality to investors everywhere, will come as other, loss-ridden investors frantically selling out of stocks, bonds, and real estate to stem their mounting losses plow headlong into gold and silver which will, by that time, be soaring in price, thus attracting the nervous investor, and the greedy investor, and the performance-driven investor, all jamming their trillions and trillions of dollars into a silver market that produces a lousy 900 billion ounces of silver per year, and uses most of it up just to keep industrial things going!
My second question is always, “Is everyone else a moron?” I ask that because, right now, there are so few buyers of silver when silver’s price is a lousy $30 an ounce, which is Too, Too Low (TTL) by a Long, Long Shot (LLS), which is caused by corrupt, manipulative dealings in and around the commodities futures market.
To test the hypothesis “Is everyone else a moron?” whenever I am out and about, running errands or something, I always end up in a line of some kind. So, to pass the time, I ask the nearest people in line with me, “Hey! Are you buying silver to capitalize on the horrific inflation that is being caused by the satanic Federal Reserve creating so much money, or are you a moron?”
Like the other day when, at the bank, I was in a line. So I asked my Mogambo Silver Poll (MSP) question of the others similarly idled. And being a modern, multi-tasking pollster kind of guy, I also ask follow-up questions about other topics, too, like, “If you are, indeed, a moron, which would explain why you are not buying silver, what are the chances that your children are morons, too? Do you have a photo of them so I can see if your stupidity shows up in the faces of your children, sort of a ‘Portrait of Dorian Gray’ kind of thing?”
I thought at least ONE of them would be delighted with my reference to the famous book by Oscar Wilde, showing, as it does, a certain erudition and culture that allows me to look down with disdain on those of lesser station, especially when proof of their incompetence is made so miserably manifest by their not buying silver. (more)
Jay Taylor: Turning Hard Times Into Good times
Jay Taylor’s show will explain the real underlying causes for plunging stock prices, plunging home prices and growing unemployment. By correctly diagnosing the cause of America’s economic decline, rather than listening to excuses from Wall Street and Washington, Jay will offer winning investment ideas to protect and increase wealth. Topics to be discussed will include the cause of the decline of: our monetary system and our economy, the housing markets, the equity markets, and commodities, Why gold and silver are rising in value and how investors can profit from the direction of these markets through specific stocks, ETF’s and precious metals will also be discussed.
click for audio hour #1 hour #2 hour #3
BNN: Top Picks
Barry Schwartz, VP and portfolio manager, Baskin Financial Services, shares his top picks.
click here for video
Why 2011 May Be the End of the Housing Crash
There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.
Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.
For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets.
But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.First, let's recap the economic signs a bottom is close.
Houses Are a Good Deal
Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.
Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.
At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in "real terms" than they were typically during the period 1989 through 2003.
The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.
[More from WSJ.com: Five Signs That Say Buy]
In the end, it will be affordability that will drive people to buy homes.
"Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own," says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.
It is definitely bullish. But what about timing?
"Housing prices will probably bottom in 2011," says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.
Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.
For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.
Investors Stepping Up
Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.
[More from WSJ.com: Only 1 in 4 Got Mortgage Relief]
Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.
It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.
If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, "buy in areas you really know."
Plan to Stay Put
Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.
[More from WSJ.com: Getting a Mortgage Before the Door Slams Shut]
Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.
Home Buying Without a House
There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.
Weiss Research's Mr. Larson says although new homes are oversupplied, home builders might benefit from a rebound as the situation rights itself.
Rather than pick individual stocks, he says, it probably makes sense for small investors to pick broader investments that hold many different stocks. In particular, he points to the SPDR S&P Homebuilders ETF (XHB), which tracks a basket of home-builder stocks.
Mr. Larson also highlights specialized mutual funds such as the Fidelity Select Construction & Housing fund (FSHOX), which tracks home builders as well as home-improvement retailers like Home Depot and Lowes that would also likely benefit from a housing recovery.
Stocks slide as jump in oil prices renews worries
NEW YORK (AP) -- Stocks suffered steep losses as oil prices surged on Tuesday, renewing worries that higher fuel prices could hobble the economic recovery.
Oil rose $2.66 to settle at $99.63 a barrel amid unrest in Iran and Libya. Iran clamped down on anti-government protesters and forces loyal to Libya's leader Moammar Gadhafi launched counter-attacks against rebels expanding control over the country.
Prices jumped 13 percent last week with a rise in turmoil across North Africa and the Middle East. That pushed gas prices up 20 cents per gallon. As a result, Americans are now paying roughly $75 million more per day to fill their gas tanks than a week ago.
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee that a sustained increase in crude prices could pose a risk to the recovery. But he predicted only a temporary increase in inflation, not runaway prices. The Fed chief also said he expected the economy to grow this year, although not enough to lower the 9 percent unemployment rate.
The Commerce Department reported that builders began work on fewer homes, offices and commercial projects in January. The annual rate was near its decade low, set in August.
The Dow Jones industrial average lost 168.32 points, or 1.4 percent, to 12,058.02.
The Standard & Poor's 500 index fell 20.89, or 1.6 percent, to 1,306.33. The Nasdaq composite fell 44.86, or 1.6 percent, to 2,737.41.
Three stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume came to 4.8 billion shares.
Fifth Third Bancorp dropped 4.5 percent after the regional bank said that the Securities and Exchange Commission was investigating its accounting and reporting of commercial loans.
Natural gas driller Range Resources Corp. lost 7 percent after the company's fourth-quarter revenue figures came in below analysts' expectations. Natural gas prices have been in a slump for the past year as a result of an oversupply in the market.
AutoZone Inc. rose 2 percent after the auto-parts retailer said its second-quarter income rose 20 percent as its revenue increased.
On Monday, stable oil prices and more signs of a stronger economy helped lift. All three major stock indexes ended February higher, marking their third straight month of gains. The S&P 500 index had its best start to any year since 1998.
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