LIVING OFF DIVIDENDS & PASSIVE INCOME

Gold broke another record today, closing just over $1,700/oz. The Dow Jones Industrial Average dropped 634 points (5.5%) and not surprisingly, US Treasuries jumped.

This was the expected response to S&P’s cut in US credit rating.

The irony is the jump in US Treasury prices caused a decline in the interest rates.This is because bond prices and interest rates are inversely correlated.

Usually, when your credit rating is cut, the interest rate at which you can borrow goes up.  But, in the case of the US government, it has gone down.

The current yield on a 10-year Treasury is 2.31%.  Last month it was 3.02%. Similarly, the yield on a 30-year Treasury bond is 3.65%, down from 4.28% last month.

Maybe S&P should take down the US’s credit rating another notch, and cause interest expenses to fall even further!

Okay, I’m being facetious.  Read more... (241 words, 8 images, estimated 58 secs reading time)

Today the US debt broke the $13 trillion level. Considering that the US GDP or the US economy is $14.2 trillion (according to the World Bank), that makes our debt level just over 91% of the GDP. Greece’s debt-to-GDP ratio is currently at 115%  (or 133% depending on who you ask – I don’t think even the Greeks know for sure!) and look at the trouble it’s facing!

Professor Morici, of the University of Maryland, is critical of excessive government spending. He claims that whenever the debt-to-GDP ratio exceeds 150%, you run the risk of hyperinflation or “the Chinese buying up Wall Street”, a reference to China being the largest foreign lender to the US government. Either way, he claims that we will run the risk of losing our financial standing.  Read more... (301 words, 8 images, estimated 1:12 mins reading time)

If you believe the government or the popular press, the economy is out of recession and everything is business as usual again. Last month there was an increase in jobs by 162,000, home sales jumped 8.2%, the Dow is now almost at 11,000 and interest rates are inching upwards  in recognition of the economic recovery. It’s all peaches and cream isn’t it!

Unfortunately, I don’t believe the government or the popular press. I like to look at the facts and draw my own conclusions. First of all, the 162,000 new jobs includes 48,000 temporary census jobs. What happens when these jobs go away? And compared to the millions of jobs lost, 162,000 jobs doesn’t feel like anything to celebrate in the first place.  Read more... (625 words, 8 images, estimated 2:30 mins reading time)

A lot of people don’t even know that Greece’s debt is a problem that is threatening to bring down the European Union. And of those that have heard about, few realize its significance and potential impact on the US. John Mauldin has done a fine job explaining that in his most recent newsletter. It’s written as a letter to his kids explaining how the current economic situation affects them.

Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)  Read more... (1010 words, 9 images, estimated 4:02 mins reading time)

The Wall Street Journal had an article advising homeowners who were upside down on their mortgage to just throw in the towel and walk away from their mortgage. Here’s the abridged version:

Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s finances first.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.  Read more... (608 words, 8 images, estimated 2:26 mins reading time)

Here’s an excellent video about an empty city in China that has been built using government funds. Ploughing billions of dollars in infrastructure and construction works theorectically improves the GDP but benefits no one (unless you count the companies that were awarded the contracts), and actually punishes tax-payers. But of course, the people reaping the rewards are not those being punished so there is no incentive to change the way things are.

The government bailout of poorly run companies (via direct investment and subsidizing of their products) also distorts the GDP. GDP numbers in the US without the Trillion dollar bailout would not look so rosy.

Despite all the talk of the economy being out of recession, 39 million people in are on food stamps. [source: USA Today] Thats 12.65% of the US population! And 6 million of that number have no other source of income. In what was once the world’s most prosperous nation, 2% of people would starve if the government didn’t send them food stamps.  Read more... (198 words, 8 images, estimated 48 secs reading time)