• Outlawing Bake Sales?
• “Europe is a Mess”
• “Markets are Manic Depressive”
• American Voters are Fed Up
• The Euro is Doomed

Junk Food Ban Affects School Fundraisers

In another bill with unintended consequences, the State of Massachusetts has put in place a junk food ban that is now affecting school fundraisers.  In my book “Economic Consequences” I devote an entire chapter to this topic pointing out that many laws have resulted in unintended consequences.  The Americans with Disabilities Act has actually resulted in lower employment levels among the disabled and the Endangered Species Act has actually resulted in the destruction of wildlife habitat.  In an effort to make sure children eat healthier, the State of Massachusetts has made junk food illegal in some circumstances.  This from an article published in “The Boston Herald”[i] (emphasis added):

Interview of the Week
This week I interviewed Jim Babka, of DownsizeDC.org.  The Downsize DC organization is very active and is promoting ideas like mandating that legislators certify that they’ve read a bill prior to voting on it.  In this interview, I cover many topics with Jim that are based in common sense (remember that?).  You can listen to the entire interview at www.everythingfinancialradio.com

Bake sales, the calorie-laden standby cash-strapped classrooms, PTAs and booster clubs rely on, will be outlawed from public schools as of Aug. 1 as part of new no-nonsense nutrition standards, forcing fundraisers back to the blackboard to cook up alternative ways to raise money for kids.

At a minimum, the nosh clampdown targets so-called “competitive” foods — those sold or served during the school day in hallways, cafeterias, stores and vending machines outside the regular lunch program, including bake sales, holiday parties and treats dished out to reward academic achievement. But state officials are pushing schools to expand the ban 24/7 to include evening, weekend and community events such as banquets, door-to-door candy sales and football games.

The Departments of Public Health and Education contend clearing tables of even whole milk and white bread is necessary to combat an obesity epidemic affecting a third of the state’s 1.5 million students. But parents argue crudites won’t cut it when the bills come due on athletic equipment and band trips.

“If you want to make a quick $250, you hold a bake sale,” said Sandy Malec, vice president of the Horace Mann Elementary School PTO in Newtonville.

Maura Dawley of Scituate said the candy bars her 15-year-old son brought to school to help pay for a youth group trip to Guatemala “sold like wildfire.” She worries the ban “would seriously affect the bottom line of the PTOs.

“The goal is to raise money,” Dawley said. “You’re going to be able to sell pizza. You’re not going to get that selling apples and bananas. It’s silly.”

Food fundraisers have helped send the renowned Danvers High School Falcon Band to the Rose Bowl Parade in California and the 70th anniversary of the attack on Pearl Harbor in Honolulu. Danvers Parents for Music Education sell fudge because “it still works,” said the group’s president, Matthew Desmond. “Even my wife will buy it.”

Middleboro School Committeeman Brian Giovanoni, whose board will discuss the mandatory meal makeover Thursday night, said, “My concern is we’re regulating what people can eat, and I have a problem with that. I respect the state for what they’re trying to do, but I think they’ve gone off the deep end. I don’t want someone telling me how to do my job as a parent. … Is the commonwealth of Massachusetts saying our parents are bad parents?”

No, insists Dr. Lauren Smith, DPH’s medical director.

“We’re not trying to get into anyone’s lunch box,” Smith told the Herald. “We know that schools need those clubs and resources. We want them to be sure and have them, but to do them a different way. We have some incredibly innovative, talented folks in schools who are already doing some impressive things, who serve as incontrovertible evidence that, yes, you can do this, and be successful at it.”

State Sen. Susan Fargo (D-Lincoln), chairwoman of the Joint Committee on Public Health, said the problem of overweight children has reached “crisis” proportions.

“If we didn’t have so many kids that were obese, we could have let things go,” Fargo said.

“But,” she added, “this is a major public health problem and these kids deserve a chance at a good, long healthy life.”

Dr. Smith states that the State is not trying to get into anyone’s lunch box; however, that statement is hardly truthful.  That is exactly what the State is doing.  And, it’s not just happening in Massachusetts.  Here’s an excerpt from a news story published about an incident that occurred in North Carolina.  The story was published in “The Daily Caller”[ii] (emphasis added):

A North Carolina elementary school forced a preschool student to eat cafeteria chicken nuggets for lunch on Jan. 30 after officials reportedly determined that her homemade meal wasn’t up to the U.S. Department of Agriculture’s standards for healthfulness, according to a report from the Carolina Journal.

The newspaper reported that the four-year-old girl brought a turkey and cheese sandwich, a banana, potato chips and apple juice in her packed lunch from home. That meal didn’t meet with approval from the government agent who was on site inspecting kids’ lunches that day.

The Department of Health and Human Services’ Division of Child Development and Early Education requires that all lunches served in pre-kindergarten programs must meet USDA guidelines. Meals, the guidelines say, must include one serving each of meat, milk and grain and two servings of fruit or vegetables. Those guidelines apply to home-packed lunches as well as cafeteria meals.

The Carolina Journal reported that the girl and her mother wish to remain anonymous to avoid public scrutiny, but she did write to her state representative to complain about it.

“I don’t feel that I should pay for a cafeteria lunch when I provide lunch for her from home,” the mother wrote in a complaint to her state representative, Republican G.L. Pridgen of Robeson County.

“What got me so mad is, number one, don’t tell my kid I’m not packing her lunch box properly,” the girl’s mother told a reporter. “I pack her lunchbox according to what she eats. It always consists of a fruit. It never consists of a vegetable. She eats vegetables at home because I have to watch her because she doesn’t really care for vegetables.”

A government agent who is onsite inspecting preschooler’s lunches?

Outlawing bake sales?

Does any of this strike anyone else as way over the top?

But mark my words this is just beginning unless we fight back.  Wait until the government provides all health care to all its citizens; at that point it is preordained that the government will exert an ever increasing amount of control over your personal life.  Not just what you eat, but perhaps even the activities in which you can engage.

Skydiving, football, consuming alcohol, eating a nice juicy steak, car racing and riding motorcycles are all potentially hazardous activities.  Does this mean that at some future point there will be regulations that govern or prohibit these activities and others?

If you think I’m being extreme, ask yourself this, 10 years ago if I’d have told you that bake sales would be made illegal or government agents would be inspecting the home packed lunches of preschoolers, would you have said I was extreme?

I don’t know about you, but to me, this whole loss of freedom is a very troubling trend.  Remember, if you give government the power to do what is right, you’re giving the government power to do what is wrong.

Get involved, write your representatives and remember this when you vote later this year.

Political Change Continues to Follow Economic Turmoil

While it was a close vote in France, it was not surprising that incumbent Nicolas Sarkozy lost to socialist Francois Hollande in the recent French elections.  When times get tough economically, an uneasy electorate makes changes.  France was not exception and is now the seventh European country in the last 2 years to make leadership changes.  An article in “The Financial Post” described the events[iii] (emphasis added):

Europe is a mess — politically, economically, fiscally, economist David Rosenberg said Monday.

“In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis — tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany’s coalition is looking shaky,” the Gluskin Sheff economist wrote in his note Monday.

“This is quite a potent brew — financial insolvency, economic fragility and political instability.”

Investors were shunning risk Monday after an anti-austerity backlash by voters in Greece and France over the weekend shook the eurozone.

Greece plunged into turmoil after a general election boosted far-left and far-right splinter groups, stripping mainstream parties that back a painful EU/IMF bailout of their parliamentary majority. The shock Greek result overshadowed France’s presidential election, in which Socialist Francois Hollande, who wants to change Europe’s German-driven focus on austerity and focus on restoring growth, ousted conservative incumbent Nicolas Sarkozy.

The euro and stocks slid Monday on deepening doubts about the ability of Athens to survive in the single currency area.

Greece’s exit is not only possible (despite there being no provision yet for such exits) it is also probable, said Rosenberg. And that could bring the whole union toppling down.

“In the final analysis, it won’t be the Germans that decide, but the Greeks. The political movement for secession, my friends, is going strong — and could happen this year. And when it does, don’t think for a second as the Drachma printing machines are dusted off that we won’t see a domino effect take hold in the rest of the periphery. Even if it doesn’t, I would be surprised if a Greek exit from monetary union would not trigger a run on Portuguese and Spanish (even Italian and French) banks.”

More uncertainty, volatility and risk aversion likely lies ahead, says Rosenberg, and with it further deterioration of governments’ financial health.

Studying history, one learns that political change, even dramatic political change often occurs after economic turmoil.  As this economic winter season continues to move ahead, I expect that there will be even more dramatic economic turmoil followed by even more political change.

The consequences of excessive debt are unavoidable and are extremely unpleasant.  Unfortunately, as we are now seeing first hand in Greece, where far left and far right groups are gaining power, these excessive debt consequences can create conditions under which rational people begin to behave irrationally.

Gross: More Quantitative Easing to Come

Bill Gross, who manages one of the world’s largest bond funds, is predicting more quantitative easing, or money printing, this year by the Federal Reserve.  Gross’ comments were reported by Bloomberg.[iv] Here’s an excerpt (emphasis added):

Pacific Investment Management Co.’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc. (GS) say investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing U.S. economy.

A decision to buy more debt is “getting closer,” Gross, who runs Pimco’s Total Return Fund, the world’s largest mutual fund, wrote on Twitter yesterday. Hatzius, the chief economist at New York-based Goldman Sachs, predicted in a report the same day that the Fed will announce additional monetary easing when it meets in June.

Bill Gross, manager of the world’s biggest mutual fund at Pacific Investment Management Co., talks about the outlook for another round of quantitative easing by the Federal Reserve and 10-year Treasury note yields. He speaks with Trish Regan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Prospects for a third round of central bank asset purchases, known as quantitative easing, or QE, increased after a Labor Department report May 4 showed U.S. employers added 115,000 jobs in April, the smallest gain in six months. Europe’s debt crisis is threatening to slow global growth. Ten-year Treasury yields fell to 1.81 percent yesterday, approaching the record low of 1.67 percent set Sept. 23.

“In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for U.S. monetary policy makers,” Hatzius wrote. “We have stuck with our forecast of some additional monetary easing” at the Fed’s policy meeting June 19 to June 20.

The central bank bought $2.3 trillion of bonds in two rounds of quantitative easing, known as QE1 and QE2, from December 2008 to June 2011. The Fed is also replacing $400 billion of short-term Treasuries in its holdings with longer-term debt to keep borrowing costs down, under a program scheduled to end next month.

Policy makers have pledged to keep the target for overnight bank lending as low as zero until at least late 2014.

Two Fed officials have questioned whether additional easing will work.

Fed Bank of Dallas President Richard Fisher said yesterday that a drop in equity prices is no reason for the central bank to intervene.

“Markets are manic depressive, they come and go,” Fisher told reporters when asked if slumping markets and slower-than-expected employment gains had changed his outlook for Fed policy. “The key to success here is not further monetary accommodation.”

The Standard & Poor’s 500 Index fell to its lowest level in two months yesterday.

Fed Bank of Richmond President Jeffrey Lacker said May 7 that much of U.S. unemployment results from structural weaknesses such as inadequate training that can’t be fixed by Fed stimulus. The U.S. jobless rate of 8.1 percent is the lowest in three years.

“Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated,” Lacker said. “But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.”

Lacker votes on monetary policy this year while Fisher does not.

The U.S. economy is “dreary,” Hatzius wrote.

Gross domestic product slowed to an annual rate of 2.2 percent in the first quarter from 3 percent in the prior three months, the Commerce Department reported April 27.

First observation: I have been of the opinion that another round of QE was inevitable given that the policymakers continue to try to solve a debt problem by adding more debt to the system.  During the autumn economic season that proceeded this current winter season, much of the economic growth that we experienced was as a result of debt accumulation.  Debt accumulation is made easier when interest rates are low which seems to fuel rapid and healthy economic growth.  The reality, I believe, is that this approach to monetary policy will only be successful until the system reaches its capacity for debt.  I believe the system has reached its capacity for debt and that this approach by the Federal Reserve can only make the eventual problem worse.

Second observation:  if lower interest rates and money printing have not initiated economic growth to this point due to excessive debt levels, the likely short term outcome of more money printing is inflation accompanying economic stagnation or economic decline.  That outcome simply punishes savers and investors, the very folks for whom we should be looking out.

Signs That Voters Are Fed Up

Two news stories last week brought to my attention that American voters are fed up, or, at least voters in two states are.   36 year Washington veteran Senator Richard Lugar from Indiana lost in the Republican primary in Indiana last week and President Obama managed to survive the West Virginia Democratic primary by giving up 41% of the vote to a convicted felon.  First, the Lugar story; this from MSNBC[v] (emphasis added):

Republican foreign policy elder statesman Sen. Richard Lugar, 80, first elected to the Senate in 1976, was defeated in the Indiana primary Tuesday by state Treasurer Richard Mourdock, who was backed by conservatives ranging from the National Rifle Association to local Tea Party activists to the Washington-based fiscal conservative group the Club for Growth.

Mourdock scored a landslide victory, winning more than 60 percent of the vote with almost all precincts reporting.

Looking toward the November election, National Republican Senatorial Committee chairman Sen. John Cornyn of Texas said two weeks ago that “it will probably make it more of a contest if Sen. Lugar is not the nominee, but I’m confident we’ll hold the seat.”

In a statement Tuesday night once the outcome was clear, Cornyn said Mourdock “has the NRSC’s full support and we are committed to helping elect him as Indiana’s next U.S. Senator in November.”

Conceding defeat, Lugar told his supporters, “I hope that Richard Mourdock prevails in November so he can contribute to that Republican majority in the Senate.”

But Lugar also said that unless Mourdock “modifies his approach, he will achieve little as a legislator.”

Within minutes of Mourdock’s victory, leading Senate conservative Sen. Jim DeMint of South Carolina — who’d stayed neutral in the primary — sent a message to supporters of his Senate Conservatives Fund, urging them to donate money to Mourdock.

“A year ago political pundits said Richard Mourdock couldn’t win this race. They said he couldn’t build the support needed to overcome the establishment machine. They were wrong,” DeMint said.

And now a bit on the West Virginia story from The Christian Science Monitor[vi] (emphasis added):

In an embarrassment to President Obama, Federal Inmate No. 11593-051 – otherwise known as Keith Judd – won 10 counties and 41 percent of the vote in West Virginia’s Democratic presidential primary Tuesday.

Mr. Judd is incarcerated at the Federal Correctional Institution in Texarkana, Texas, where he is serving a 210-month sentence for extortion, according to The Charleston Gazette. Judd had paid the $2,500 filing fee and submitted a notarized “certificate of announcement” to appear on the ballot.

He is even qualified to have a delegate at the Democratic National Convention, because he won at least 15 percent of vote. However, no one has stepped forward to fill that role.

But those are just details. The Republicans are having a field day with this slap at the president. Mr. Obama is deeply unpopular in West Virginia and was already certain to lose the small mountainous state in November. But the fact that enough people bothered to turn out in an uncontested primary to register a protest against the incumbent is telling.

“Just how unpopular does someone have to be for this to happen?” says Joe Pounder, research director and deputy communications director at the Republican National Committee, in a statement.

He notes that Democratic Sen. Joe Manchin of West Virginia wouldn’t say whom he voted for in the primary. “Apparently, it’s a smarter political calculation to let people believe you may have voted for the guy in federal prison over the sitting president of your own party. Just saying,” Mr. Pounder writes.

West Virginia’s Democratic governor, Earl Ray Tomblin, has also not revealed his vote. Energy is a big issue in his state – America’s second-biggest producer of coal – and the Environmental Protection Agency’s handling of mining-related permits has angered the local industry, writes the Associated Press.

In addition to being a convicted felon, Judd is also a serial presidential candidate. In the 2008 Idaho Democratic primary, he finished third behind Obama and Hillary Rodham Clinton with 1.7 percent of the vote, per The Charleston Gazette.

According to the website for the secretary of State of West Virginia, the state’s primaries are closed. Major party members are required to “vote the ballot” of their party. But “all the major parties allow members of minor parties and unaffiliated voters to vote their ballots upon request,” the site says.

Still, the 41 percent who voted for Judd had to have included a lot of registered Democrats. One voter, an electrician named Ronnie Brown from Cross Lanes, W.Va., told the AP that he’s a conservative Democrat who voted “against Obama.”

“I don’t like him,” Mr. Brown said. “He didn’t carry the state before, and I’m not going to let him carry it again.”

And yes, Brown did vote for Judd – or “that guy out of Texas,” as he put it.

Read what you want into these stories.  But in this election year, I’d hate to be an incumbent in either party.

Spain Prepares Bailout

While the elections in Greece and France dominated the news last week as is evidenced by the story that follows, there was a “second page” news story about how Spain was preparing a bailout plan that may end up being even more relevant, more quickly.  The story was published in the UK publication, “The Telegraph”[vii]; here is an excerpt (emphasis added):

A new eurozone crisis is looming as Spain signalled on Monday it was ready to bail out ailing banks after markets shrugged off the election results in France and Greece.

Prime minister Marian Rajoy indicated the Government was ready to intervene to save banks wrestling with the collapse of the housing market.

Bankia, Spain’s fourth biggest bank, is the first in line for state aid. Rodrigo Rato, chairman and former IMF managing director, swiftly resigned after it was disclosed the finance ministry was preparing to refinance the bank and introduce legislation to protect the balance sheets of others.

Spain, which also signalled it could dock its only aircraft carrier to save €30m a year, is already struggling to cope with an austerity drive that has pushed the jobless total up to nearly 25pc of the workforce.

Mr Rajoy insisted that any bank bail-out would not compromise the tough targets set by Brussels to reduce the budget deficit.

Peter Kenny, managing director at Knight Capital, said Spain’s action was positive because “it’s them taking ownership of their own issues”.

Fears of a fall-out in financial markets after the election results in France and Greece were short-lived. Shares and the euro recovered after initial falls as investors reasoned any policy changes in the eurozone recovery programme were some way off.

But the turmoil in Greece produced by a backlash against a tough austerity programme and the failure of early efforts to form a coalition government heightened speculation the country would be forced out of the eurozone.

Citi’s European economics team said there was a “rising risk of a Greek exit from the euro within the next 12 to 18 months.”

Angela Merkel, the German chancellor, urged the Greek political parties to stick to the bail-out programme but her pleas fell on deaf ears.

Markets remain more interested in whether France’s new president, François Hollande, will be able to persuade her to support policy changes that would meet demands for more emphasis on growth and economic recovery rather than austerity.

Mrs Merkel said she would welcome President Hollande with “open arms” and was willing to work with him but there was little sign she was ready to meet demands for a redrafting of the eurozone fiscal pact.

The two leaders are due to meet after Mr Hollande is sworn in next week. President Obama has offered to meet him before the G8 economic summit on May 18, when David Cameron is due to meet him for the first time.

Downing Street rejected suggestions that Britain could suffer because of the prime minister’s support for former President Sarkozy.

Christine Lagarde, IMF chief executive, described the eurozone growth versus austerity battle a “false debate”. She used a speech in Zurich to call for more flexibility for eurozone countries struggling to meet fiscal targets.

About one year ago, I made the forecast that the Euro would not survive until the end of 2012 in its current form.  I’m sticking with that statement.

While Spain is experiencing the pain of a deflationary depression with unemployment at 25% largely due to austerity programs designed to keep budget deficits within the guidelines established by Eurozone leaders, the French and Greek electorates revolted against such measures, electing leaders who ran on an “austerity is bad” platform.

There is no fiscal stability in Europe and now, added to that already difficult situation, we have political instability.  It appears that the austerity programs put in place are now going to be abandoned by some European countries which means, in my view, the Euro is all but doomed.  The only question in my mind is which country leaves first – and when.

Core Economic Beliefs Driving Investment Philosophy

Economic Cycles
In 1925, a Russian economist by the name of Nikolai Kondratieff published a book titled “The Major Economic Cycles”. In it Mr. Kondratieff stated his view that capitalist economies move in boom and bust cycles with each full cycle repeating itself every 60 to 80 years. Some present day economists building on Kondratieff’s work have defined these “Kondratieff Waves” as 4 sub cycles, naming the sub cycles after the 4 seasons of the year; spring, summer, autumn and winter. We believe, after a study of economic history, that Mr. Kondratieff’s cycle theory is accurate.

The Spring Cycle
During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle. Interest rates begin to rise from historically low levels and credit gradually expands. At the beginning of the spring cycle overall debt levels are low. (In our view, this most recently represents the time frame of 1949-1966)

The Summer Cycle
During summer, an economy sees an increase in the money supply which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer. Stocks are under pressure and decline through the period reaching a low at the end of the summer cycle. (In our view, this most recently represents the time frame of 1967-1982)

The Autumn Cycle
During autumn, money is plentiful and gold prices fall reaching a gold bear market low by the end of the autumn season. During autumn there is a massive stock bull market and much speculation. Financial fraud is prevalent and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all time high due to high stock prices, high real estate prices and plentiful jobs. (In our view, this most recently represents the time frame of 1983 – 2000)

The Winter Cycle
During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. Unprecedented levels of bankruptcy at the personal, corporate and government levels. There is a credit crunch and interest rates rise. There is an international monetary crisis. There are pension funding problems and the price of gold and gold related equities rise. (In our view, we have been in the winter cycle since 2001)

Investing Overview and Premise
In 1999, economist and financial commentator, Harry Browne, wrote a book titled “Fail Safe Investing”. In his book, Browne presented his idea as to what an ideal portfolio should look like given that economic conditions cycle and as these cycles occur, certain asset classes can be adversely affected while other asset classes might benefit.

In his book, Browne concluded that the best kept secret in the investing world is that almost nothing turns out as expected. We agree. While each season of the economic cycle may be easy to see from an historical perspective, it may be difficult to determine with precision the beginning of one cycle ‘season’ and the end of the prior cycle ‘season’.

Browne designed a very simple portfolio strategy designed to protect and grow assets in each of the four economic cycles:

• 25% invested in Cash. In a tight money environment, cash can be a profitable asset to own. In periods of deflation, cash can gain in purchasing power as prices fall.
• 25% invested in Growth Stocks. In prosperous times, growth stocks can perform nicely while stocks may not perform as well in periods of inflation, deflation and tight money.
• 25% invested in Gold. In an inflationary environment, gold can protect purchasing power.
• 25% invested in Government Bonds. In a deflationary environment, as interest rates fall, bonds can perform nicely. In more prosperous times, bonds can also perform well.

Our Approach
While we agree with Browne’s approach given our belief that evidence suggests that economies cycle, we have modified Browne’s approach due to our belief in the use of exit strategies and our interpretation of current world macro-economic conditions. We believe that our modification of Browne’s original strategy will produce enhanced results. For thoughts on incorporating this strategy into your portfolio or your 401(k) plan, request an Exit Strategy Analysis below.

Exist Strategy Analysis™ Evaluation

If you would like to receive a complimentary Exit Strategy Analysis™ on each of the holdings in your portfolio, visit www.ExitStrategyAnalysis.com and complete the form there. An Exit Strategy Analysis™ is a second opinion on the holdings in your portfolio; however, unlike many second opinions, you will learn at what price you may wish to exit your holding in order to potentially protect profits or limit losses

Additionally, at your option, your Exit Strategy Analysis™ could include the following:

• How to potentially maximize your retirement income
• How to potentially diversify currencies
• A complimentary copy of the book Economic Consequences: Can You Survive, Even Prosper from the Results of 100 Years of Bad Money Decisions?
  

After obtaining some preliminary information from you, you will receive your completed Exit Strategy Analysis™.

Request your complimentary Exit Strategy Analysis™ now by visiting www.ExitStrategyAnalysis.com!

Current View, Positions and Rationale

The company has begun to publish an investment overview “Market and Economic Outlook”. To receive a copy of the most recent issue, visit www.InvestingApproach.com to request it.

Advisory services offered through USA Wealth Management. Any information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed. This entry may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be considered a guarantee. No investment strategy can guarantee a profit. Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professionals should be obtained in order to understand the risks, costs, and benefits associated with a particular investment.

• Get Money out of Politics
• “Spain is Going to Default”
• US Banks are dangerous
• The Proverbial Slippery Slope
• “Fiscal Cliff”

Eating Science Projects

While this topic is a bit off my normal subject matter, it’s a topic that is interesting and important to me.  Not long ago, I read with a great deal of skepticism and, to be candid, disgust, that scientists were close to being able to grow meat in a test tube.  As a big fan of a well-marbled, impeccably seasoned, grass fed steak prepared over a white hot grill and cooked to perfection, the very idea of eating meat grown in a test tube seemed about as appetizing as eating my 10^th grade science project which I would not have done even if my science teacher told me it was O.K. to eat.

Interview of the Week
This week I interviewed Ian Gordon, an economic seasons expert, on the topics of gold, paper money and the history of fiat currency.  Ian gives two examples of fiat currency systems that failed and draws some very interesting parallels to today’s economic climate. You can listen to the entire interview at www.everythingfinancialradio.com

And, while I am not an expert in this area, I’ve done enough research to know that ingesting food grown with pesticides, herbicides, fungicides, and any other “cide” that you can think of, may be a bad idea and may be, according to many experts, detrimental to one’s health.  It always amazed me that the very agencies that were established by the government to protect consumers concluded that consuming poison even in “acceptable quantities” was not a problem.  And, while I’m not a scientist or a food expert, and while these experts may indeed be right, to me it seems like eating genetically altered food or food grown with any “cide” is kind of like eating a science project.

I bring this up because I recently read a news story that discussed the topic of genetically modified organisms – strains of crops that are genetically modified to not die when a “cide” is applied, thereby allowing a farmer to spray his field with a “cide” killing all the weeds and letting the genetically modified crop grow.

I’ll tell you why I’m bringing this up in a moment, but first, this from the article[i] (emphasis added):

Biotechnology’s promise to feed the world did not anticipate “Trojan corn,” “super weeds” and the disappearance of monarch butterflies.

But in the Midwest and South – blanketed by more than 170 million acres of genetically engineered corn, soybeans and cotton – an experiment begun in 1996 with approval of the first commercial genetically modified organisms is producing questionable results.

Those results include vast increases in herbicide use that have created impervious weeds now infesting millions of acres of cropland, while decimating other plants, such as milkweeds that sustain the monarch butterflies. Food manufacturers are worried that a new corn made for ethanol could damage an array of packaged food on supermarket shelves.

Some farm groups have joined environmentalists in an attempt to slow down approvals of genetically modified organisms, or GMOs, as a newly engineered corn, resistant to another potent herbicide, stands on the brink of approval.

Vote on labels

In November, Californians are likely to vote on a ballot initiative to require labeling of genetically engineered foods, which backers of the measure say would give consumers a voice over the technology that they lack now.

The initiative is part of a nationwide drive to thwart the Obama administration’s expected clearance of a new genetically modified corn that could flood the nation’s cornfields with 2,4-D, a 1940s-era herbicide used mainly on lawns and golf courses to kill broadleaf weeds.

More than a million people have signed a petition to the Food and Drug Administration to require labeling of genetically engineered food. That is “more than twice the number who have ever commented on any food petition in the history of the FDA,” said Gary Hirshberg, chairman of organic yogurt maker Stonyfield and a leader of the “Just Label It” campaign.

The stakes on labeling such foods are huge. The crops are so widespread that an estimated 70 percent of U.S. processed foods contain engineered genes. The U.S. Department of Agriculture has approved more than 80 genetically engineered crops while denying none.

Organic farmers have long fought the spread of such crops, fearing pollen contamination of their fields. Environmentalists have warned of long-term health and environmental effects.

Now, even biotech supporters fear collateral damage. Vegetable growers warn of plant-killing fogs that they say will accompany the new genetically modified corn. Snack and cereal makers fear that a new corn engineered for ethanol may escape its fields and turn their corn chips and breakfast cereals to mush.

Midwest fruit and vegetable growers this month petitioned the Department of Agriculture to block approval of the 2,4-D-tolerant corn, called Enlist and made by Dow AgroSciences. Similar crops, including a soybean engineered by Monsanto to tolerate dicamba, a similar herbicide, wait in the regulatory pipeline.

Current forms of the herbicides are prone to vaporization and can travel miles from their target, falling back to Earth with rain or fog. Vegetable growers predict the new corn will unleash rampant use of 2,4-D and dicamba, potentially damaging every broadleaf plant in their path other than those engineered to tolerate them.

“Suddenly we are looking at a very dangerous system, because more dangerous herbicides in America are going to be far more extensively used,” said John Bode, executive director of the Save Our Crops Coalition, a group working to protect nontargeted plants from herbicides. It has asked the USDA to conduct a full environmental impact analysis.

The USDA’s Animal Plant Health Inspection Service, which has chief regulatory authority over genetically engineered crops, has given a preliminary recommendation that the new corn be fully commercialized without restriction.

So why do I bring this up?

In my view, it’s a perfect example of how flawed our system is.

Think about this.

Why would a government agency, the USDA, consider approving for widespread use, the same chemical that another government agency, the Department of Veteran’s Affairs, has admitted causes health problems?

2,4-D is one of the ingredients in Agent Orange, an herbicide used during the Vietnam War and in other regions around the world. The Department of Veteran’s Affairs has this on their website regarding the chemical[ii]:

VA’s Agent Orange Registry health exam alerts Veterans to possible long-term health problems that may be related to Agent Orange exposure during their military service. The registry data helps VA understand and respond to these health problems more effectively.

And, lest you think that I am uninformed about the ingredients in Agent Orange, read this excerpt from an article in “The Huffington Post”[iii]:

A new kind of genetically modified crop under the brand name of “Enlist” — known by its critics as “Agent Orange corn” — has opponents pushing U.S. regulators to scrutinize the product more closely and reject an application by Dow AgroSciences to roll out its herbicide-resistant seeds.

The corn has been genetically engineered to be immune to 2,4-D, an ingredient used in Agent Orange that some say could pose a serious threat to the environment and to human health. Approval by the United States Department of Agriculture and Environmental Protection Agency would allow farmers to spray it far and wide without damaging their crops, boosting profits for the agribusiness giant.

Dow and its allies have insisted that their product is well tested, while industry regulators have so far overlooked critics’ concerns.

“This is going to be a solution that we are looking forward to bringing to farmers,” Dow’s Joe Vertin told Reuters.

More than 140 advocacy groups have participated in a letter writing campaign calling on U.S. Agriculture Secretary Tom Vilsack to reject Dow’s regulatory application for the herbicide and herbicide-resistant crops, submitting more than 365,000 missives ahead of a public comment period that ends April 27.

“The scientific community has sounded alarms about the dangers of 2,4-D for decades,” wrote opponents in their letter to Vilsack. “Numerous studies link 2,4-D exposure to major health problems such as cancer, lowered sperm counts, liver toxicity and Parkinson’s disease. Lab studies show that 2,4-D causes endocrine disruption, reproductive problems, neurotoxicity, and immunosuppression.”

Some farmers have argued that the new herbicide, a combination of 2,4-D and glyphosate — the active ingredient in Monsanto’s bestselling Roundup weed killer — is necessary to combat weeds that have become resistant to glyphosate alone.

Glyphosate has also come under considerable public scrutiny in the wake of scientific findings that demonstrate the chemical causes birth defects in the embryos of laboratory animals. Health professionals contend that 2,4-Dichlorophenoxyacetic acid (2,4-D), an ingredient in the Vietnam War-era defoliant that’s been blamed for public health problems both during and after the war, poses its own risks.

So, here we have one government agency paying benefits to Veterans who have been exposed to this chemical and another agency that may be ready to approve the chemical for widespread use on our food.

Does this make sense to you?

How does one reconcile this?

Admittedly, I’m a cynic, but my take is that lobbying dollars are king here.  Veteran’s organizations are likely lobbying for Veteran’s benefits while agri-business companies are lobbying for widespread herbicide use.

Want to fix it?

Get money out of politics.

Spain’s Economic Mess Could Affect U.S.

Economist Harry Dent stated this week that the recession in which Spain is immersed in could affect US stocks.  Dent predicted that a decline of 10% to 20% for US stocks is likely.  Dent stated in a CNBC interview last week that Spain would default on its debt; the question wasn’t IF the country would default, but WHEN the country might default, and when the repercussions would be felt.  This from the article[iv] (emphasis added):

Spain’s newly announced recession won’t be ending any time soon and it could force the U.S. stock market to fall anywhere between 10 percent and 20 percent, economist Harry Dent told CNBC Monday.

“Spain is going to default. The markets are in total denial on this,” Dent, author of “The Great Crash Ahead,” told CNBC’s “Squawk on the Street.” “It’s a question of whether it’s going to happen sooner or later.”

Dent spoke after Standard & Poor’s downgraded 16 Spanish banks and the nation announced first-quarter gross domestic product figures that showed the country to be in recession.

Spain’s problems are far worse than what happened in Greece, he added.

“Spain has higher unemployment than Greece, higher total public and private debt than Greece,” as well as a bigger housing bubble, a higher percentage of subprime mortgages, and the country has “one of the highest percentages of debt owed to foreigners,” Dent said.

He called Spain one of those nations that are “too big to fail, too big to bail.”

I agree with Dent as far as Spain’s future is concerned.  The question is not if Spain will default on debt, but when.

Europe’s debt issues have not improved. With every bailout package passed, total European debt has increased.  Debt cannot keep increasing indefinitely; sooner or later the trend reverses. My best estimate long term is a continued downturn economically speaking (unless the Federal Reserve engages in money printing although that will only delay the inevitable) with a market bottom lower than Dent is predicting in this article.

Dallas Fed Bank President Fisher – Punish Big Banks

Dallas Federal Reserve Bank President Richard Fisher recently stated that the “too big to fail” banks should be punished if they request taxpayer assistance in the form of a bailout in the future. An article published in “The Huffington Post” reported on the Fed Bank President’s position[v] (emphasis added):

Dallas Federal Reserve President Richard Fisher delivered a May Day gift to Occupy Wall Street.

Fisher, who has argued repeatedly for the end of too-big-to-fail banks, on Tuesday posted a presentation on the Dallas Fed’s web site explaining why the biggest U.S. banks are dangerous and what should be done about them.

And most notably he called for those banks to be punished if they put the economy at risk again, in a way they weren’t the first time around — an oversight that is helping to fuel the Occupy protests today.

In the presentation, Fisher and Dallas Fed research director Harvey Rosenblum argue that the existence of banks that are so big that they essentially hold the economy hostage makes financial crises inevitable, because “implicit government support undermines market discipline.”

Banks take bigger risks when they know the government will be forced to bail them out, in other words, particularly if the bailouts come with absolutely no strings attached, as the 2008 bailouts did.

Fisher and Rosenblum say there should be “a set of harsh, non‐negotiable consequences” for banks looking for bailouts in the future, including:

Removal of CEO and top executive team, replacement of Board of Directors, and making all employment / compensation and bonus contracts null and void as a precondition for taxpayer assistance. No golden parachutes.

Clawback of any bonus compensation (cash and stock) paid to the top management team in the two years prior to receiving federal assistance.

Bottom of Form

Fisher and Rosenblum also say that industry consolidation has made the financial system more dangerous, pointing out that the top five banks today control 52 percent of the industry’s assets, compared with 17 percent in 1970.

“Human weakness will cause occasional market disruptions,” they write. “Big banks backed by government turn these manageable episodes into catastrophes.”

Small banks, meanwhile, continue to struggle, in part because they don’t have the same implied government guarantee that big banks do, which usually translates into lower borrowing costs for the banks and an easier time raising capital. The struggles of smaller banks have been a drag on the economic recovery, Fisher and Rosenblum argue.

Hats off to Mr. Fisher and Mr. Rosenblum.

I’ve always argued that the unequivocal, no strings attached government support of big banks encourages stupid behavior.  One needs to look no further than what happened in 2008 to see that’s the case in my view.

Banks made rate adjustment loans with no money down to unqualified buyers in order to package these bad loans up and sell them as securities.  You don’t need an economics degree to figure out that this type of business activity will lead to a bad ending.  Yet, if you engage in this behavior knowing that the government will cover the downside leaving you with only the upside, there seems to be no reason not to take a lot of risk.

Any parent knows that there is a simple rule that governs human behavior – you reward the behavior that you want and punish the behavior you don’t.  This simple rule of human behavior doesn’t apply to only children; it applies to all humans.

Yet many policymakers do just the opposite. They reward the behavior that causes the problem: bailing out banks that made bad decisions, tilting the competitive field in favor of those banks, making it more difficult for those smaller banks that made good business decisions to compete.

As a capitalist, I have the strong belief that you can’t mess with markets.  As the article stated, Mr. Fisher argued for the end of the too big to fail banks and that was the right solution.  Markets have a way of imposing discipline and consequences on bad business decisions. The government should, for the most part, stay out of the way and let the market do what it does.

For those of you that disagree, for those of you that say that government intervention saved the economy and the banking system, I say stay tuned. If this situation was an opera, I believe the fat lady that sings at the end of the show hasn’t yet reached the opera house.

The crux of this problem is debt. Bankers made the debt problem worse by inventing new ways to sell debt through leveraging, essentially adding debt to a debt laden system. That debt hasn’t gone away; it’s merely transferred from the balance sheet of the private sector to the public sector. I believe the consequences still lie ahead.

Illinois Funding Costs Rise

A Bloomberg article reported that the State of Illinois is raising money via a bond offering and it seems that the State’s borrowing costs are rising.  This from the article[vi] (emphasis added):

Illinois plans to sell $1.8 billion of general-obligation debt tomorrow as its relative borrowing costs may increase by almost a quarter.

The tax-exempt deal for the state, rated lowest by Moody’s Investors Service, includes a 10-year segment that underwriter Jefferies & Co. plans to offer to investors at 1.85 percentage points above benchmark AAA securities, according to a person familiar with the sale.

Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent.

The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.

Investors should get more yield than 1.85 percentage points given those fiscal challenges, John Mousseau, a portfolio manager at Vineland, New Jersey-based Cumberland Advisors, which has $1.2 billion of municipal debt. It doesn’t own Illinois general-obligation bonds.

“The state’s debt should be trading even cheaper,” Mousseau wrote in a report released today. “At some point it is a buy. Not yet.”

Like many European countries that have seen borrowing costs rise as investors recognize the increased credit risk associated with said country’s debt, Illinois is now facing the same problem.

Interestingly, prior to the offering, Illinois acknowledged that it is a financial train wreck, making the bond offering at yields that are 22.5% higher than about 1 ½ months ago.  That’s a significant increase in a short time frame.

Interestingly, the same thing recently occurred in Italy and Spain with yields not quite doubling in the same approximate time frame.  Given these significant yield increases and given that many governments at the national level worldwide and the state level domestically are now borrowing money at significantly higher rates, I believe that we are headed down the proverbial slippery slope and will soon have to face the consequences of debt with honest solutions, rather than adding debt to debt.

What might those solutions be?

I believe that it will be near impossible to avoid an economic hard landing and I’m advising clients to prepare themselves accordingly. However, policymakers must come to grips with the simple math involved here: all around the world, governments have over-committed, over-promised and over-bailed out. The only solution is to bring spending back in line with tax receipts; that will be a painful process.  If policymakers collectively choose to continue to add debt to the system, the bond market will, at some not too distant future point, impose austerity via rapidly rising interest rates.

Either outcome will be painful.

Gross: Look For Another US Credit Rating Downgrade

A Financial Post article quoted Bill Gross, manager of one of the world’s largest bond funds, predicting another US credit rating downgrade if the US Government and those in charge don’t aggressively attack the deficit.  Of course, making that prediction is a bit like saying tomorrow morning we will have darkness followed by light. This from the article[vii] (emphasis added):

Bill Gross, founder and co-chief investment officer of bond giant PIMCO, told CNBC on Tuesday that the U.S. could be headed toward a credit rating downgrade if it does not tackle its deficit.

Gross cited a U.S. structural deficit figure between 6 and 8% greater than any other country besides Japan and the United Kingdom, and added “until we address that structural deficit then yes, we’re headed to AA territory.”

The U.S. is currently rated AA plus by Standard & Poor’s and AAA by Moody’s and Fitch.

While Gross currently gives the U.S. a personal credit rating of AA plus, he warned that one needs to be “very conscious” of the “fiscal cliff” near the end of the year.

What is the “fiscal cliff” to which Gross is referring?

Because the “super committee” failed to come to an agreement as to how to get the deficit under control, at the end of this year there are mandated tax increases and spending cuts that will take place. Both spending cuts and tax increases can be drags on the economy.

And that’s the rub. In order to get the deficit under control, there has to be spending cuts that include cuts in entitlements.  But since government spending is one of the components in Gross Domestic Product, a cut in government spending can lead to a reduction in GDP and a recession.

On the other hand, addressing the deficit to preserve the credit rating of the Unites States requires tough choices now or forced choices later when the credit rating declines and borrowing costs spike. Given that Congress and the other super committee both failed at making tough choices, the only logical conclusion is that the majority in Washington won’t address the issue, leaving it to the bond market to sort out. That will mean a credit rating cut and that’s why Gross’ prediction is a safe one.

Core Economic Beliefs Driving Investment Philosophy

Economic Cycles
In 1925, a Russian economist by the name of Nikolai Kondratieff published a book titled “The Major Economic Cycles”. In it Mr. Kondratieff stated his view that capitalist economies move in boom and bust cycles with each full cycle repeating itself every 60 to 80 years. Some present day economists building on Kondratieff’s work have defined these “Kondratieff Waves” as 4 sub cycles, naming the sub cycles after the 4 seasons of the year; spring, summer, autumn and winter. We believe, after a study of economic history, that Mr. Kondratieff’s cycle theory is accurate.

The Spring Cycle
During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle. Interest rates begin to rise from historically low levels and credit gradually expands. At the beginning of the spring cycle overall debt levels are low. (In our view, this most recently represents the time frame of 1949-1966)

The Summer Cycle
During summer, an economy sees an increase in the money supply which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer. Stocks are under pressure and decline through the period reaching a low at the end of the summer cycle. (In our view, this most recently represents the time frame of 1967-1982)

The Autumn Cycle
During autumn, money is plentiful and gold prices fall reaching a gold bear market low by the end of the autumn season. During autumn there is a massive stock bull market and much speculation. Financial fraud is prevalent and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all time high due to high stock prices, high real estate prices and plentiful jobs. (In our view, this most recently represents the time frame of 1983 – 2000)

The Winter Cycle
During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. Unprecedented levels of bankruptcy at the personal, corporate and government levels. There is a credit crunch and interest rates rise. There is an international monetary crisis. There are pension funding problems and the price of gold and gold related equities rise. (In our view, we have been in the winter cycle since 2001)

Investing Overview and Premise
In 1999, economist and financial commentator, Harry Browne, wrote a book titled “Fail Safe Investing”. In his book, Browne presented his idea as to what an ideal portfolio should look like given that economic conditions cycle and as these cycles occur, certain asset classes can be adversely affected while other asset classes might benefit.

In his book, Browne concluded that the best kept secret in the investing world is that almost nothing turns out as expected. We agree. While each season of the economic cycle may be easy to see from an historical perspective, it may be difficult to determine with precision the beginning of one cycle ‘season’ and the end of the prior cycle ‘season’.

Browne designed a very simple portfolio strategy designed to protect and grow assets in each of the four economic cycles:

• 25% invested in Cash. In a tight money environment, cash can be a profitable asset to own. In periods of deflation, cash can gain in purchasing power as prices fall.
• 25% invested in Growth Stocks. In prosperous times, growth stocks can perform nicely while stocks may not perform as well in periods of inflation, deflation and tight money.
• 25% invested in Gold. In an inflationary environment, gold can protect purchasing power.
• 25% invested in Government Bonds. In a deflationary environment, as interest rates fall, bonds can perform nicely. In more prosperous times, bonds can also perform well.

Our Approach
While we agree with Browne’s approach given our belief that evidence suggests that economies cycle, we have modified Browne’s approach due to our belief in the use of exit strategies and our interpretation of current world macro-economic conditions. We believe that our modification of Browne’s original strategy will produce enhanced results. For thoughts on incorporating this strategy into your portfolio or your 401(k) plan, request an Exit Strategy Analysis below.

Exist Strategy Analysis™ Evaluation

If you would like to receive a complimentary Exit Strategy Analysis™ on each of the holdings in your portfolio, visit www.ExitStrategyAnalysis.com and complete the form there. An Exit Strategy Analysis™ is a second opinion on the holdings in your portfolio; however, unlike many second opinions, you will learn at what price you may wish to exit your holding in order to potentially protect profits or limit losses

Additionally, at your option, your Exit Strategy Analysis™ could include the following:

• How to potentially maximize your retirement income
• How to potentially diversify currencies
• A complimentary copy of the book Economic Consequences: Can You Survive, Even Prosper from the Results of 100 Years of Bad Money Decisions?
  

After obtaining some preliminary information from you, you will receive your completed Exit Strategy Analysis™.

Request your complimentary Exit Strategy Analysis™ now by visiting www.ExitStrategyAnalysis.com!

Current View, Positions and Rationale

The company has begun to publish an investment overview “Market and Economic Outlook”. To receive a copy of the most recent issue, visit www.InvestingApproach.com to request it.

Advisory services offered through USA Wealth Management. Any information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed. This entry may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be considered a guarantee. No investment strategy can guarantee a profit. Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professionals should be obtained in order to understand the risks, costs, and benefits associated with a particular investment.

• You Can’t Argue with the Math
• Medicare Costs
• Too Large to Bailout
• Some Deleveraging Desirable?
• “Everything Looks Like a Nail”

Report: Social Security Trust Fund Runs Dry by 2033

You probably saw the news report last week that reported the Social Security trust fund will run out of money sooner than was previously forecast.  That’s not even the worst news (I’ll get to that after this article excerpt).  This from “The Financial Post”(emphasis added) [i]:

Interview of the Week
This week I interviewed Karl Denninger, a prolific economic commentator and blogger.  Karl has a terrific understanding of the economic issues facing the world today and has a talent for explaining how these issues may affect you.  Learn what Karl says about the derivatives bubble by listening to the entire interview at www.everythingfinancialradio.com

The Social Security program will exhaust its trust fund in 2035 and have to start reducing benefits to senior citizens unless Congress intervenes, its trustees said.

That is three years sooner than projected in 2011 for the retirement benefits program, which serves 44 million people, the trustees said in an annual report Monday. Social Security’s disability program, which aids 11 million Americans, will run through its trust fund in 2016, two years earlier than predicted. The report attributed the fiscal stress in part to the weak economy.

The combined Social Security trust funds would be depleted in 2033, three years earlier than projected. The giant retirement programs are straining the government’s finances, and what to do about them is a central issue in the election-year debate between Democrats and Republicans as President Barack Obama seeks a second term.

“Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible,” the report urged. “Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.”

The main fund that supports the Medicare health-care program for the elderly will run dry in 2024, the report said.

House Republicans propose replacing Medicare with government subsidies to help seniors buy private insurance. Democrats and the Obama administration rejected that plan and want to find ways to shore up the program. Neither side has offered a plan for Social Security, which at a 2011 cost of $736 billion is the U.S. government’s largest single program

Anyone want to wager that there will be no viable plan proposed to attempt to bring these programs back to solvency before the election?

While I have personally spoken with many politicians who genuinely want to try to fix the problem and have openly discussed the almost impossible task, the majority of those in charge are thinking only as far as the next election, including the President.  With that mindset, there is simply no way that the insolvency issues surrounding Social Security and Medicare get dealt with.

Why?

The reality is just too ugly.  And, it’s uglier than this article reports.

The Social Security trust fund isn’t really a trust fund; it’s nothing more than an Enron style accounting fraud.  Let me explain by using a part of an article from Forbes from last year when the debt ceiling battle was raging[ii] (emphasis, as usual, added):

Social Security has a trust fund, and that trust fund is supposed to have $2.6 trillion in it, according to the Social Security trustees. If there are real assets in the trust fund, then Social Security can mail the checks, regardless of what Congress does about the debt limit.

President Obama’s budget director, Jack Lew, explained all this last February in USA Today:

“Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries. … Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”

Notice that Lew said nothing about raising the debt ceiling, which was already looming, and it shouldn’t matter anyway because Social Security is “entirely self-financing” and off budget. What could be clearer?

Unconvinced, syndicated columnist Charles Krauthammer wrote a subsequent column questioning Lew’s assertions. “This [Lew’s] claim is a breathtaking fraud. The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction. … In other words, the Social Security trust fund contains—nothing.”

Social Security status-quo defenders have assured us for the past 25 years that Social Security is fully funded—for the next 25 years, or 2036. So if there are real assets in the Social Security Trust Fund—$2.6 trillion allegedly—then how could failure to reach a debt-ceiling agreement possibly threaten seniors’ Social Security checks?

The answer is that the federal government has borrowed all of that trust fund money and spent it, exactly as Krauthammer asserted. And the only way the trust fund can get some cash to pay Social Security benefits is if the federal government draws it from general revenues or borrows the money—which, of course, it can’t do because of the debt ceiling.

Social Security is a hand to mouth program, financed by tax receipts.  The politicians that were entrusted to manage the trust fund over the years proved themselves to collectively be untrustworthy.

This problem is far worse than this article describes and the day of reckoning for Social Security is, in my view, far closer than many folks believe.  You can’t argue with the real math once you zero out the fraudulent trust fund.

Medicare Could Cost Each US Household $328,404

Medicare, the Federal Health Insurance Program for those age 65 and over, is in serious financial trouble.  With a deficit of over $38 trillion according to the program’s trustees report, it’s a fiscal problem that can’t be solved; there is simply not enough money to do so.  The math is discussed in this article[iii] (emphasis added):

Medicare faces an unfunded liability of $38.6 trillion, according to the Medicare Trustees report released Monday.

The unfunded liability is the amount that has been promised in benefits to people now alive that will not be funded by the tax revenue the system is expected to take in to pay for those benefits. (The Medicare Trustees calculate the unfunded liability for a period of 75 years into the future.)

The $38.6 trillion in unfunded benefits Medicare is expected to pay over the next 75 years equals $328,404.43 for each of the 117,538,000 households the Census Bureau said there were in the United States in 2010.

“From the 75-year budget perspective, the present value of the additional resources that would be necessary to meet projected expenditures, at current-law levels for the three programs combined, is $38.6 trillion,” reads the report.

“To put this very large figure in perspective, it would represent 4.3 percent of the present value of projected GDP over the same period ($907 trillion),” states the Trustees report.

The extra money needed to fund the unfunded liabilities would have to come from something other than payroll taxes, benefit taxes, and premium payments scheduled under current law.

The report also says that there is “a significant likelihood” that the “projected HI and SMI expenditures are substantially understated as a result of potentially impracticable elements of current law.”

Let me make a couple of assumptions.

Assumption One:  Expenditures are understated.  The trustees report practically admits as much.

Assumption Two:  GDP growth is overstated.  From my experience, anytime a government or government agency makes a projection regarding finances, expenditures are understated and revenue growth is overstated.

Now a couple of points.

Notice that the article states that under current law the underfunded liabilities need to be funded from something other than payroll taxes, benefit taxes and premium payments.  From my perspective, that leaves only one option – benefit cuts.

Given the way that the politicians have collectively mismanaged both the Social Security program and the Medicare program, do we want them managing healthcare for the general populace?

I think not; but, it’s probably too late.

Spain and Italy Are Following Greece

Borrowing money when it’s less likely that you can pay the money back gets expensive.  If anyone will loan you money, the lender will demand a higher interest rate to compensate for the additional investment risk.  Greece found that out when the yield on 1 year Greek Government debt recently reached over 1,000%.

Once borrowing costs begin to increase, it’s a slippery slope.  Over the past year I have been repeatedly writing about the financial solvency of countries in Europe initially Greece and Portugal but more recently Spain and Italy.  Another news story was published last week on the topic by “RTE News”, the public broadcasting company of Ireland.  This from the article[iv] (emphasis added):

Spain’s borrowing rate nearly doubled in a short-term debt auction as investors fretted over the euro zone’s determination to deal with its debts.

And Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.

The Spanish treasury said it raised €1.933 billion but the timing could hardly have been worse, with financial markets slumping on concern that Europeans are wavering in their commitment to austerity.

The sale of three-month and six-month bills came a day after Spain’s central bank declared the country had plunged back into recession in the first quarter of 2012.

Markets were shaken after a first round of French presidential elections on Sunday put Socialist Francois Hollande, who wants the euro zone to focus on growth rather than austerity, ahead of incumbent Nicolas Sarkozy. The two contenders face off in a final vote May 6.

Further undermining stability, the Netherlands’ government collapsed yesterday after failing to reach agreement over austerity measures, placing its AAA credit rating at risk. But Spain still managed to lure strong interest in the auction with overall demand outstripping supply by more than four-to-one.

The money raised was towards the top of its targeted range of €1-2 billion. But it had to pay a steep price. The borrowing rate leapt to 0.634% from 0.381% for three-month bills and to 1.58% from 0.836% for six month bills, when compared with the last similar auction on March 27.

Spain has promised to cut its public deficit – the annual shortfall of income compared to spending – to 5.3% of gross domestic product in 2012 and just 3% of GDP in 2013. Last year it had allowed the deficit to hit 8.5% of GDP – 2.5 percentage points over target.

Desperate to meet its targets, the government approved €27 billion in fiscal tightening in its 2012 budget, in addition to an earlier round of tax increases and spending cuts amounting to €15.2 billion.

But analysts say those targets will be harder to reach as tax income declines and welfare costs rise because Spain is back in recession just two years after emerging from the last downturn. Spanish GDP fell by an estimated 0.4% in the first quarter of 2012 after a 0.3% decline in the last three months of 2011, the Bank of Spain said yesterday.

Spain, whose unemployment rate at the end of 2011 was already the highest in the industrialised world at 22.85%, suffered a further 4% year-on-year drop in employment in the first quarter of 2012, the Bank of Spain said.

In addition to raising the cost of Spain’s debt financing, worries about Spain’s finances have sharply depressed the stock market. Madrid’s IBEX-35 index of leading shares has dropped by nearly 19% since the beginning of the year, slipping below 7,000 points for the first time in more than three years.

Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.

Rome issued bonds worth a total of €3.44 billion today. The offer included €2.5 billion in bonds due in 2014 which were sold to give buyers a yield, or rate of return of 3.35%, up from 2.35% at a similar sale in March.

The government also sold €501m of inflation-indexed bonds due to mature in 2017 at 3.88%, up from 2.04%, and €441.5m in bonds due in 2019 at 4.32%, up from 3.06%.

One month ago, Spain was borrowing money for 3 or 6 months for slightly more than half of current costs.  Italian bond yields increased similarly.

This is how the Greek and Portuguese situations began as well.  Trouble for Europe is that Spain and Italy are simply too large to bailout.

Remember about one year ago when European leaders were stating that the goal was to contain the crisis and they were confident that the crisis could be maintained?

At the time I commented that I never believed anything until it had been officially denied and the crisis was simply too large to contain.

That is now becoming evident.

IMF Warns of Coming European Credit Crunch

The International Monetary Fund is warning of another potential credit crunch by the end of 2013.  The IMF recently concluded that the Eurozone debt crisis could reach a point that European banks would be forced to sell off assets worth almost $4 trillion; according to the IMF, this would be the catalyst that would trigger the next credit crunch.  The gloomy scenario was described in a recent article published in “The Telegraph”[v] (emphasis added)

An escalation of the eurozone debt crisis could force European banks to sell assets worth up to $3.8 trillion (£2.4 trillion) by the end of 2013 and trigger a fresh credit crunch, the International Monetary Fund has warned.

The IMF’s spring Global Financial Stability Report said that should markets lose faith in the effectiveness of eurozone policies, rising funding costs and increased stresses within the banking system could force banks to rapidly reduce their balance sheets to raise capital buffers.

Under the scenario, the supply of eurozone credit would fall by 4.4pc and growth in the region would be cut by 1.4pc.

The sell-off among 58 of the biggest banks in the European Union included in the IMF’s analysis would be equivalent to 10pc of total assets, and the balance sheet adjustment would also involve a significant reduction in bank lending, it said.

The UK banks involved in the study were state-backed Royal Bank of Scotland and Lloyds Banking Group, as well as HSBC and Barclays.

A second global credit crunch would make it more difficult still for UK households and businesses to borrow from banks.

“Such a large-scale deleveraging would have consequences well beyond the euro area. The fire sale of bank assets could have a significant impact on asset prices and market liquidity,” the IMF said.

José Viñals, director of Monetary and Capital Markets at the IMF, said that while policy actions in the eurozone had eased the sense of crisis, risks remained.

“Policy actions have brought gains but current efforts are not enough to bring lasting stability. It is too soon to say we have exited the crisis. Pressures on European banks remain.”

He said that while some deleveraging was desirable where it increased banks’ capital positions and reduced the reliance on wholesale funding, the pace and nature must be correct.

The IMF said that banks would prioritise the disposal of non-core and foreign assets before moving onto home markets and lending reduction the higher the stress.

To achieve lasting global financial stability, the IMF said swift fiscal integration was needed in the eurozone, close regulation of banks, continued loose monetary policy, and a gradual withdrawal of fiscal support where possible.

Let’s look closely at what the IMF is saying here.

First, the IMF states that some deleveraging is desirable.  That is an extreme understatement.  Global debt accumulation doesn’t begin to reverse until the financial system reaches its capacity for debt which transforms the autumn season during which illusionary growth is experienced (fueled by debt) into the winter season where economic contraction and deleveraging occurs.   For the IMF to state that some deleveraging, or debt elimination, is desirable when the fundamental economic problem is excess debt is like saying fewer flames are desirable when your house is on fire.  Of course deleveraging is desirable.

Second, the IMF states that continued loose monetary policy would be important to global long term financial stability.  Loose money policy is simply reducing bank reserve requirements and engaging in additional rounds of money printing, or quantitative easing.  As new fiat currency is printed, inflation occurs, supposedly inflation that is controlled, kept on a leash by the wise money stewards at the central bank.  Trouble with all this is that the way the central bankers measure inflation is a bit different than the actual inflation rate due to manipulation in how the inflation rate is calculated.  The IMF is suggesting that some inflation would be good, presumably to allow debtors to pay their debts with a currency that is worth less than it was at the time the debt was incurred.

While that policy may be beneficial for debtors, it’s bad news for savers and investors, the folks that we should be looking to reward rather than punish.

If you haven’t already done so, make sure that your nest egg is invested to profit from these potential moves from the world’s central bankers.

Some Advice from the Author of ‘Bulls Eye Investing’

I read John Mauldin’s “Thoughts from the Frontline” newsletter last week as I usually do, but this week, it included a piece that I wanted to share with you.  It’s a little excerpt filled with what I believe is some investing wisdom for the economic winter season in which we find ourselves.  Here it is[vi] (emphasis added):

Every hunter knows you don’t shoot where the duck is; you shoot where the duck is going to be. You’ve got to lead the duck. Bull’s Eye Investing simply attempts to apply the same principle to the markets. In this book, I hope to give you an idea of the broad trends that I believe are at work now and will persist for the remainder of this decade. Then I’ll help you target your investments to take advantage of those trends.

Through the Looking Glass

“You’re sure to get somewhere if you only walk long enough…”

—The Cheshire Cat (Lewis Carrol)

When I was invited to do this Little Book of Bull’s Eye Investing, I wondered whether the original Bull’s Eye Investing (written nine years ago and dense in data and research and not little at all) could be shortened and still deliver what put the book on the best-seller lists, made it a choice for the New York Times best summer reading list, and earned it the top spot on Forbes publisher Rich Karlgaard’s roll call of the decade’s most important books on investing. It’s since been published in several foreign languages and is still in print.

Thinking about doing the Little Book made me go back and carefully read the original, and I was pleased to find how much of it is still useful today. Much of the research that it reports is timeless and still will be valuable a generation from now. Many of the predictions, whether by luck or skill, were spot on. We are still on the path I mapped out but are much further along it. The task for the Little Book is to collect the parts that have held up well and then bring things up to date, to introduce new readers to the concept of Bull’s Eye Investing.

As I write this introduction (the final element), I’ve just come from Hong Kong, where the original Bull’s Eye Investing still has something of a serious following. Publishers are eager to do a Chinese-language version for distribution in Hong Kong and the mainland. The principles of the long-term ebb and flow of markets really do work wherever human beings are involved in investing, which is to say, everywhere.

Successful investing for the remainder of this decade will mean doing things differently from what people did so profitably in the 1980s and 1990s and from what Wall Street is still telling people to do. We started the last bull market, in 1980, with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.

The environment now is just the opposite. Stock market valuations are still relatively high (though well down from the stratosphere where they were flying at the beginning of the decade), and interest rates will eventually have to go up. In addition, gold is volatile, as is the dollar against other currencies, and the twin deficits of trade and government debt stare us in the face.

Everything Is Not Relative

So which way is the stock market going? And how about bonds? Gold? Real estate? Where should you invest?

Wall Street and the mutual fund industry say, “The market is going up, you should buy stocks, and now is the time to do it. You can’t time the markets, so you should buy and hold for the long term. Don’t worry about the short-term drops. And my best advice is to buy my fund.”

Wall Street is like the carpenter who only has a hammer: everything looks like a nail. Those brokers are in the business of selling stocks because that is how they make their real money. Whether they are sold one by one or packaged in mutual funds or as IPOs or in wrap accounts or in variable annuities or in derivatives, what the brokers want to sell you is some type of equity (stock), and preferably today. They have rigged the rules against investors who would prefer more and safer choices, so that most investors are unaware of the options.

Their advice for you to buy what they’re selling has been their same advice every year for a century. And it has been wrong about half the time. There are long periods when stock markets go up, but there also are long periods when markets go down or sideways. And by “long,” I mean longer than almost anyone is prepared to wait.

These cycles are termed secular bull and bear markets. (Secular as used in this sense is from the Latin saeculum, which means a long period of time.) Each cycle has its own good investment opportunities. When I wrote the introduction to Bulls Eye Investing in 2003, I said we were in a secular bear. Now, nine years later, we are in what I think is the latter part of that same trend.

The problem with Wall Street is that most of what it sells does poorly in secular bear markets, so most traditional portfolios have suffered since 2000. But they still tell you that things will get better, so buy and keep buying. “Just look at this chart prepared by our independent economists that proves the market will go back up. Just have patience, and please give us more of your money.”

In secular bull markets, an investor should search for assets that offer relative returns—stocks and funds that will perform better than the market averages. If you beat the market, you’re doing well. Even though there will be losing years, the strategy of staying invested in quality stocks during a secular bull market will be a long-term winner.

In a secular bear market, however, that strategy is a prescription for disaster. If the market goes down 20 percent, and you just go down 15 percent, you’d be doing relatively well, and Wall Street would call you a winner. Your broker would expect a pat on the back. But you are still down 15 percent.

In markets like those we face today, the essence of Bull’s Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured by how much you make above Treasury bills.

Some will say, as they say each year, that the bear market is over and that the book you are reading is about ancient history. But experience says otherwise. A secular bear market can see drops much bigger than we have already been through, and it can last as long as 20 years. The shortest has been 8 years. None has ended with valuations as high as they were at the bottom in 2009. And that touches on one of the novel ideas in this book: bull and bear cycles should be seen in terms of valuations, not price.

Investors who continue to listen to the music from Wall Street will be sorely disappointed, in my opinion, as the facts I will present show that this bear market has years to go. For buy-and-hold investors planning to retire within a decade and live on their stocks, the results could be particularly devastating.

While I have yet to read the revised version of Mauldin’s book, I agree with his assessment.  In an economic winter season, I believe that your investing goal should be absolute returns.

Core Economic Beliefs Driving Investment Philosophy

Economic Cycles
In 1925, a Russian economist by the name of Nikolai Kondratieff published a book titled “The Major Economic Cycles”. In it Mr. Kondratieff stated his view that capitalist economies move in boom and bust cycles with each full cycle repeating itself every 60 to 80 years. Some present day economists building on Kondratieff’s work have defined these “Kondratieff Waves” as 4 sub cycles, naming the sub cycles after the 4 seasons of the year; spring, summer, autumn and winter. We believe, after a study of economic history, that Mr. Kondratieff’s cycle theory is accurate.

The Spring Cycle
During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle. Interest rates begin to rise from historically low levels and credit gradually expands. At the beginning of the spring cycle overall debt levels are low. (In our view, this most recently represents the time frame of 1949-1966)

The Summer Cycle
During summer, an economy sees an increase in the money supply which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer. Stocks are under pressure and decline through the period reaching a low at the end of the summer cycle. (In our view, this most recently represents the time frame of 1967-1982)

The Autumn Cycle
During autumn, money is plentiful and gold prices fall reaching a gold bear market low by the end of the autumn season. During autumn there is a massive stock bull market and much speculation. Financial fraud is prevalent and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all time high due to high stock prices, high real estate prices and plentiful jobs. (In our view, this most recently represents the time frame of 1983 – 2000)

The Winter Cycle
During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. Unprecedented levels of bankruptcy at the personal, corporate and government levels. There is a credit crunch and interest rates rise. There is an international monetary crisis. There are pension funding problems and the price of gold and gold related equities rise. (In our view, we have been in the winter cycle since 2001)

Investing Overview and Premise
In 1999, economist and financial commentator, Harry Browne, wrote a book titled “Fail Safe Investing”. In his book, Browne presented his idea as to what an ideal portfolio should look like given that economic conditions cycle and as these cycles occur, certain asset classes can be adversely affected while other asset classes might benefit.

In his book, Browne concluded that the best kept secret in the investing world is that almost nothing turns out as expected. We agree. While each season of the economic cycle may be easy to see from an historical perspective, it may be difficult to determine with precision the beginning of one cycle ‘season’ and the end of the prior cycle ‘season’.

Browne designed a very simple portfolio strategy designed to protect and grow assets in each of the four economic cycles:

• 25% invested in Cash. In a tight money environment, cash can be a profitable asset to own. In periods of deflation, cash can gain in purchasing power as prices fall.
• 25% invested in Growth Stocks. In prosperous times, growth stocks can perform nicely while stocks may not perform as well in periods of inflation, deflation and tight money.
• 25% invested in Gold. In an inflationary environment, gold can protect purchasing power.
• 25% invested in Government Bonds. In a deflationary environment, as interest rates fall, bonds can perform nicely. In more prosperous times, bonds can also perform well.

Our Approach
While we agree with Browne’s approach given our belief that evidence suggests that economies cycle, we have modified Browne’s approach due to our belief in the use of exit strategies and our interpretation of current world macro-economic conditions. We believe that our modification of Browne’s original strategy will produce enhanced results. For thoughts on incorporating this strategy into your portfolio or your 401(k) plan, request an Exit Strategy Analysis below.

Exist Strategy Analysis™ Evaluation

If you would like to receive a complimentary Exit Strategy Analysis™ on each of the holdings in your portfolio, visit www.ExitStrategyAnalysis.com and complete the form there. An Exit Strategy Analysis™ is a second opinion on the holdings in your portfolio; however, unlike many second opinions, you will learn at what price you may wish to exit your holding in order to potentially protect profits or limit losses

Additionally, at your option, your Exit Strategy Analysis™ could include the following:

• How to potentially maximize your retirement income
• How to potentially diversify currencies
• A complimentary copy of the book Economic Consequences: Can You Survive, Even Prosper from the Results of 100 Years of Bad Money Decisions?
  

After obtaining some preliminary information from you, you will receive your completed Exit Strategy Analysis™.

Request your complimentary Exit Strategy Analysis™ now by visiting www.ExitStrategyAnalysis.com!

Current View, Positions and Rationale

The company has begun to publish an investment overview “Market and Economic Outlook”. To receive a copy of the most recent issue, visit www.InvestingApproach.com to request it.

Advisory services offered through USA Wealth Management. Any information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed. This entry may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be considered a guarantee. No investment strategy can guarantee a profit. Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professionals should be obtained in order to understand the risks, costs, and benefits associated with a particular investment.

• “A Non-Dollar Reserve Currency?”
• Euro “Experiment” done?
• Worldwide Currency Devaluation
• More Pension Problems?
• Elmo Speaks

Economist: Global Economic System is Doomed to Fail as It Exists Today

A recent article in “Business Insider” ran a story outlining the conclusion that economist Joe Stiglitz has reached regarding the global financial system.  It’s not pretty.   Here is a bit from the article[i] (emphasis added):

Interview of the Week
This week I interviewed Laurence Kotlikoff, a Presidential candidate of the Americans Elect Party.  Mr. Kotlikoff discusses his thoughts on inflation, where the US is heading and why he is running for President. You can hear the interview at www.everythingfinancialradio.com

At the Institute for New Economic Thinking conference in Berlin, economist Joe Stiglitz delivered a presentation titled Is Mercantilism Doomed to Fail? China, Germany, and Japan and the Exhaustion of Debtor Countries.

The basic idea is: A few powerhouses like China, Germany, and Japan, plus some commodity based economies, have thrived in a system where they do all the exporting, and a few countries like the US run massive trade deficits.

But that system is coming to an end, as countries realize that their trade deficits are unsustainable, and seek to become trade surplus countries at the same time. Of course, not everyone can run surpluses, so this becomes a game of hot potato, with everyone pushing the deficit to someone else, via currency devaluation and other aggressive trade moves.

In this presentation, Stiglitz explains why the system is heading towards collapse.

Stiglitz hints a globalist solution, with a non-dollar reserve currency, and more coordination of monetary policy to avoid currency wars and competitive devaluations.

Mr. Siglitz is correct in my opinion.  When it comes to trade, some countries are net importers and some are net exporters.  Mathematically, trade is a zero sum game where globally net imports equal net exports.

In an economic winter season like the one in which we currently find ourselves, countries that have been net importers look to fix their economic woes by increasing exports. A country attempts to increase exports by devaluing its currency to make it exported goods more attractive to consumers in other countries. As one country moves to devalue its currency, others, looking to play the same game, follow suit and soon, massive worldwide currency devaluation is underway. This can lead to trade wars which only make economic problems worse.

IMF: Euro Break Up Possible

In spite of earlier statements to the contrary, the International Monetary Fund is now stating that a Euro breakup is possible, a conclusion that would be reached by any reasonable person who examined the facts.  This from the article[i] (emphasis added):

The International Monetary Fund (IMF) has for the first time accepted the prospect of the euro breaking up.

In its flagship economic survey of the world economy, the IMF acknowledged there were fundamental “flaws” in the design of the single currency and said that one prospective “tail risk” is a “disorderly default and exit by a euro area member”.

It is the first time the IMF has openly contemplated such an outcome.

Its previous forecasts disregarded such a scenario, and its managing director, Christine Lagarde, said earlier this month that it had no agenda to see the euro collapse.

The announcement comes amid growing consternation about the plight of Spain, which has suffered an exodus of bank deposits and is struggling to raise money at reasonable rates.

Many now believe that Spain could follow Greece, Portugal and Ireland in having an emergency bailout.

The IMF said it was impossible to quantify the impact of a country defaulting or exiting the currency union.

But in its World Economic Outlook, it added: “If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.

Only last month, IMF Chief Christine Lagarde said the euro would not collapse

“Under these circumstances, a break-up of the euro area could not be ruled out. The financial and real spillovers to other regions, especially emerging Europe, would likely be very large.

“This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.”

However, the IMF’s working assumption is that “policymakers succeed in containing the sovereign crisis through continued crisis management and further advancing measures toward its resolution”

If the inevitable is coming, you might as well acknowledge it.

The fact is that the worldwide debt levels are too large to deal with no matter the strategy.

In my view this is simply the IMF director acknowledging the inevitable – there is too much debt to pay and an unwillingness politically to hold the Euro together.  As many pundits have observed, the Euro was an ill-advised experiment as far as currency was concerned.

While the treaty that governs the finances of the countries that are using the Euro dictates certain levels of compliance as far as deficits are concerned, it is fundamentally an economic arrangement which cannot survive without a parallel political arrangement.

Bottom line is this – the stronger European economies are about ready to throw the weaker ones under the bus economically speaking since there is no political connection to prevent it.

Ms. Legarde is simply acknowledging the inevitable.

Gold Still Viewed As An Alternate Currency?

I have long contended that gold will eventually be viewed as an alternate currency to the fiat currencies now being used around the world as a means of commerce.  I believe that the first evidence of this has already emerged, with gold prices decoupling from the prices of other precious metals.  Now, an article in “The Telegraph” may confirm that this is indeeed the case.  Seems that exports of non-monetary gold from Italy to Switzerland are increasing rapidly.  This is an excerpt from the article[ii] (emphasis added):

Exports to Switzerland from Italy soared by 35.6pc in February compared with the year before, “mostly due to sales of non-monetary gold”, according to Italy’s official statistics office, Istat.

The figures showed that the solid gold bars are now Italy’s fastest growing export.

Italy exported a total of 120 tonnes of gold to Switzerland last year – a 65pc jump from the amount exported in 2010. Around half of the total was exported in the final quarter of 2011, when fears over Italy’s financial stability were at their height.

The rise in February is the latest step in a trend that continued into the new year. Istat said in January that sales of gold rose 34.6pc compared with the same month the year before.

The statistics will not be welcomed by Mario Monti or the financial markets. The technocrat prime minister has announced a raft of reforms designed to raise more revenues from the rich, especially Italy’s tax evaders. The reforms are seen as vital to reaching Mr Monti’s deficit targets and bolstering the waning confidence in Italy among investors.

Investors in Switzerland and around the world are beginning to recognize that the current worldwide currency devaluation that is occurring will be bullish for gold, not because the chunk of metal is worth more, but because fiat currencies are losing buying power.

If you have not yet done so, visit www.everythingfinancialradio.com and listen to the interview that I conducted with Dr. Chris Martenson who presents a very compelling case that concludes the price of gold is being manipulated.

That shouldn’t come as any surprise given that the central planners charged with the task of maintaining confidence in the currency will likely do whatever they can to keep the price of gold in check in order to retain confidence in fiat currencies.  But, in the words of the late economist Herbert Stein, who is often quoted in these pages, if something cannot continue forever, it will stop.

I believe that is the case with currency devaluation and gold prices.

More Evidence of Pension Funding Problems

The State of Illiniois’ teacher pension program is an extreme example of the pension underfunding problems facing many of the nation’s pension systems, but it’s not an isolated example of the problem.  According to an article recently published on Bloomberg, the Illinois teacher’s pension had investment returns of over 20% last year and still only made up a small part of its pension funding deficit.  This is an excerpt from the article[iii] (emphasis added):

Rod Blagojevich is in prison. But the worst things the former governor did to Illinois (BEESIL) weren’t even illegal.

This month, the Teachers’ Retirement System of the State of Illinois made a dire announcement to its members. TRS, which covers most public-school teachers in Illinois outside Chicago and has more than 360,000 members, said the following:

“If the General Assembly does not continue to provide all of the funding called for in state law, calculations done by TRS actuaries show that the System could become insolvent as soon as 2030. Preventing insolvency may include significant changes for TRS — new revenues must be generated and if they are not benefits may have to be reduced.”

The teachers’ fund is one of the country’s worst-financed statewide pension systems, reporting that it is only 47 percent funded. And that’s if you buy the system’s rosy accounting assumptions, including that it will achieve 8.5 percent annual returns on its assets. This level is tied for the most aggressive investment assumption among state pension funds in the country, and the fund has had to get creative in an effort to meet it. Pensions & Investments magazine says it has the fourth-riskiest pension investment portfolio in the U.S., with less than 17 percent of its investments in fixed income and cash.

Perhaps the teachers’ fund will be fabulously lucky, and rich investment returns will cover pension costs so taxpayers won’t have to. But the odds of that are vanishing. Indeed, the system’s funding status is so poor that it achieved a 23.6 percent return on investments in 2011 and still managed to shave only $2 billion off its $46 billion unfunded liability. And it’s not as though the fund can make such gangbuster returns consistently — in 2009, it returned negative 22.7 percent.

Closing the TRS funding gap — and the gap at the State Retirement Systems of Illinois, which is only 36 percent funded– will depend on taxpayers’ willingness to start paying far more than they ever did for pensions. And as the TRS statement makes clear, that is far from a sure bet, meaning that pensioners may see their benefits cut.

Public pensions are a problem all over the country, but they are a special problem in Illinois, mostly because the state has failed, for decades, to make proper contributions into its pension funds. Illinois, more than most states, has used its pension funds as a vehicle for off-balance-sheet borrowing, financing high spending without high taxes by making unfinanced pension promises.

No individual is more personally responsible for allowing this to happen than Rod Blagojevich, who became governor in 2003 and who was impeached in 2009. Illinois is not unique because it has struggled to manage its budget in the recession; many states have similarly failed to act responsibly in the last four years. It is much more notable as a place that let its fiscal problems spiral out of control while the economy was strong, leaving an unusually daunting mess for lawmakers to clean up in the recession.

The pension underfunding problem is a national problem, but the Illinois Teacher’s Pension Plan is only one example of the pension funding problem that exists all across the country.

Problem is that many of these pension plans are hoping to get better returns on investment in order to meet their future funding obligations and, in my view that is unlikely to occur given the economic winter season in which we find ourselves.

It will take just one more bad investment year to create a “funding hole” that the Illinois teacher’s pension plan mentioned in this article to be in a position from which the plan could not possibly recover given that the break even curve would be working against the plan.

If you’re not familiar with the break even curve, let me give you an example.  If plan assets in a pension decline by 20% this year, a 25% gain next year is required to get back to break even status.  A 50% decline requires a 100% subsequent increase to break even,

Given the economic winter season in which we find ourselves, it’s unlikely that pensions get back to break even status.

Elmo Explains the National Debt

This blog entry speaks for itself.[iv] Enjoy.

Elmo Tries to Explain The National Debt (Again)

Muppets have received a lot of bad press since Greg Smith realized that he is not, in fact, a one-percenter. Fortunately Elmo’s back to reclaim his rightful place in the financial world: Making the seemingly incomprehensible comprehensible while politely pointing out what should be obvious to everyone not in diapers. That’s not so easy when the economic views espoused by everyone from central bankers to TV talking heads can only be accurately described as infantile.

It’s hard to get the right answer when you’re counting the wrong stuff, and maybe that’s why Wall Street’s minions never discuss income per capita. It’s a meaningful measure of economic strength that ordinary Americans can relate to. Well, that and it exposes “pro-growth” policies for what they actually are: An excuse to loot the country in broad daylight by focusing on GDP, where government money, no matter how horribly misspent, shows up in the “win” column. Strip away that illusion and it becomes crystal clear that their path to prosperity is our highway to hell.

In case you haven’t noticed, incomes (not GDP) pay mortgages and support small businesses. Increasing the National Debt by a can you say “parabolic?” 54% in the last 42 months hasn’t budged income per capita in nominal terms. If you adjusted for inflation, you’d find that Americans are actually about 12% poorer today than they were in 2006. We’re not “growing” our way out of this, we’re just going deeper and deeper into hock, courtesy of a government with about as much fiscal discipline as crack addicts with a stolen credit card. Here’s the thing: It’s your credit card, so maybe you should understand how much they’re spending:

Just to be clear, we’re talking about $400 per citizen per month in new charges alone, month after month after month. Here’s what me and Elmo can’t figure out: Why would attempting to break this spiral be labeled Class Warfare? Of course you don’t have to believe us, there’s far more distinguished schools of thought out there:

Fun facts:

• From 1947 to 1974 US income per capita grew more than National debt per capita 25 times.
• In the last 30 years, National debt per capita has grown more than income per capita 24 times.
• The last time income per capita grew more than national debt per capita was 2001.
• Ben Bernanke arrived at the Federal Reserve in 2002.

I’m going to ask Elmo to leave before this gets ugly…

Core Economic Beliefs Driving Investment Philosophy

Economic Cycles
In 1925, a Russian economist by the name of Nikolai Kondratieff published a book titled “The Major Economic Cycles”. In it Mr. Kondratieff stated his view that capitalist economies move in boom and bust cycles with each full cycle repeating itself every 60 to 80 years. Some present day economists building on Kondratieff’s work have defined these “Kondratieff Waves” as 4 sub cycles, naming the sub cycles after the 4 seasons of the year; spring, summer, autumn and winter. We believe, after a study of economic history, that Mr. Kondratieff’s cycle theory is accurate.

The Spring Cycle
During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle. Interest rates begin to rise from historically low levels and credit gradually expands. At the beginning of the spring cycle overall debt levels are low. (In our view, this most recently represents the time frame of 1949-1966)

The Summer Cycle
During summer, an economy sees an increase in the money supply which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer. Stocks are under pressure and decline through the period reaching a low at the end of the summer cycle. (In our view, this most recently represents the time frame of 1967-1982)

The Autumn Cycle
During autumn, money is plentiful and gold prices fall reaching a gold bear market low by the end of the autumn season. During autumn there is a massive stock bull market and much speculation. Financial fraud is prevalent and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all time high due to high stock prices, high real estate prices and plentiful jobs. (In our view, this most recently represents the time frame of 1983 – 2000)

The Winter Cycle
During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. Unprecedented levels of bankruptcy at the personal, corporate and government levels. There is a credit crunch and interest rates rise. There is an international monetary crisis. There are pension funding problems and the price of gold and gold related equities rise. (In our view, we have been in the winter cycle since 2001)

Investing Overview and Premise
In 1999, economist and financial commentator, Harry Browne, wrote a book titled “Fail Safe Investing”. In his book, Browne presented his idea as to what an ideal portfolio should look like given that economic conditions cycle and as these cycles occur, certain asset classes can be adversely affected while other asset classes might benefit.

In his book, Browne concluded that the best kept secret in the investing world is that almost nothing turns out as expected. We agree. While each season of the economic cycle may be easy to see from an historical perspective, it may be difficult to determine with precision the beginning of one cycle ‘season’ and the end of the prior cycle ‘season’.

Browne designed a very simple portfolio strategy designed to protect and grow assets in each of the four economic cycles:

• 25% invested in Cash. In a tight money environment, cash can be a profitable asset to own. In periods of deflation, cash can gain in purchasing power as prices fall.
• 25% invested in Growth Stocks. In prosperous times, growth stocks can perform nicely while stocks may not perform as well in periods of inflation, deflation and tight money.
• 25% invested in Gold. In an inflationary environment, gold can protect purchasing power.
• 25% invested in Government Bonds. In a deflationary environment, as interest rates fall, bonds can perform nicely. In more prosperous times, bonds can also perform well.

Our Approach
While we agree with Browne’s approach given our belief that evidence suggests that economies cycle, we have modified Browne’s approach due to our belief in the use of exit strategies and our interpretation of current world macro-economic conditions. We believe that our modification of Browne’s original strategy will produce enhanced results. For thoughts on incorporating this strategy into your portfolio or your 401(k) plan, request an Exit Strategy Analysis below.

Exist Strategy Analysis™ Evaluation

If you would like to receive a complimentary Exit Strategy Analysis™ on each of the holdings in your portfolio, visit www.ExitStrategyAnalysis.com and complete the form there. An Exit Strategy Analysis™ is a second opinion on the holdings in your portfolio; however, unlike many second opinions, you will learn at what price you may wish to exit your holding in order to potentially protect profits or limit losses

Additionally, at your option, your Exit Strategy Analysis™ could include the following:

• How to potentially maximize your retirement income
• How to potentially diversify currencies
• A complimentary copy of the book Economic Consequences: Can You Survive, Even Prosper from the Results of 100 Years of Bad Money Decisions?
  

After obtaining some preliminary information from you, you will receive your completed Exit Strategy Analysis™.

Request your complimentary Exit Strategy Analysis™ now by visiting www.ExitStrategyAnalysis.com!

Current View, Positions and Rationale

The company has begun to publish an investment overview “Market and Economic Outlook”. To receive a copy of the most recent issue, visit www.InvestingApproach.com to request it.

Advisory services offered through USA Wealth Management. Any information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed. This entry may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be considered a guarantee. No investment strategy can guarantee a profit. Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professionals should be obtained in order to understand the risks, costs, and benefits associated with a particular investment.