LIVING OFF DIVIDENDS & PASSIVE INCOME

A couple of days ago, legendary investor, commodity bull and one-time partner of George Soros, Jim Rogers, was interviewed by Betty Liu of Bloomberg’s Singapore office. It seems that Jim Rogers is also of the opinion that Fannie Mae is going to lose a lot of money along with other investment banks.

He’s still bullish on commodities like oil and food grain and he’s bearish on the US Dollar. Surprizingly, he’s also bullish on Arline stocks.

Here’s an excerpt of the relevant portions of the interview:

Financial Sector

According to this short video from the Wall Street Journal, the mortgage crisis is no longer limited to sub-prime loans. Its spreading to other loans and even construction loans.

I wonder if the analyst believes that Fannie Mae and Freddie Mac are going to fail?

Popularity: 3% [?]

Here’s an incredibly interesting video about how the Federal Reserve Chairman Alan Greenspan directly helped the rich become Super Rich by keeping interest rates artificially low. The low interest rates and easy liquidity caused a spike in asset prices (ever wondered what causes inflation?).

I’ve long maintained that globally, assets are no longer a function of value but a function of liquidity. The video explains how leverage has helped home borrowers become incredibly wealthy. I didn’t become super wealthy, but I did profit by using the same idea. Unfortunately, instead of growing a million into a billion, I started out with Zero and made proportionally less. (although technically, I made an infinite return of return!).

In England there are currently 30,000 people earning over half a million pounds a year, and over 50 Billionaires. All of them work in finance related industries like hedge funds and private equity firms.

Here’s a hilarious skit about the subprime mess. Even if you don’t follow the financial acronyms like SIV and RMBS, you’ll really enjoy this one. They’ve really simplified the causes and the results.

Popularity: 8% [?]

While Jim Rogers has never had a good opinion of Fed Chairman Ben Bernanake, he seems particularly upset with his latest actions. He thinks that he had no right to bail-out Bear Stearns (BSC) to the tune of $230 Billion of the US taxpayers money. He claims that if BSC had filed bankrupcy,the billions of dollars of bonuses paid out in January would have to be returned. So effectively Bernanke facilitated a bail-out so that his pals on Wall Street could continue to drive their Maseratis! Sounds a bit too conspiracy-theory to me, but in principle I agree with him. It’s not fair that the Wall Street guys take huge risks to make huge amounts of money, but when they mis-calculate, instead of being punished by the market (in terms of bankruptcy and financial ruin) the Fed just bails them out.

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

I’m finally back in the US! Last week, I heard Dr. Marc Faber, of GloomBoomDoom
fame, on CNBC India. While gold is currently at a whopping $973/Oz, on that day gold had briefly touched $950/Oz for the first time ever.

Dr. Faber said two things that were very interesting:

1. Gold is a bargain at $950/Oz

2. Fed Chairman, Ben Bernanke doesn’t understand how the economy works

Seems like he agrees with Jim Rogers!

I’ve been advising everyone to invest in gold since it was $500/Oz. Of all the people I know, maybe 3 or 4 actually followed my advice and bought some gold. Most people thought I was stupid and vehemently disagreed with me. Most of their arguments consisted of the following points:

1. Gold has been a terrible investment for most of history and in fact had declined from its peak in the early 80’s for 17 years.

I always like it when he rips into Ben Bernanke! Mr Rogers says that job of Federal Reserve is NOT to bail out a few financial institutions and the stock market, but to maintain a strong currency and job market. He says the Bernanke’s lowering of the interest rates is debasing the currency which will lead to higher inflation.

He also explains why we’re going to see the worst recession in a long time and also mentions some of his current investments.

Its a great informational video. Definitely check it out!

Popularity: 8% [?]

Based on my own experiences of being allowed to borrow 40 times my annual income to purchase investment property, I knew the real estate party was going to end badly for many borrowers, banks and eventually tax-payers. I had tried  shorting Countrywide, which was the largest lender of mortgages, last year when the stock was trading at around $36. Unfortunately, I was a little early and closing my position at $39 incurring a substantial loss. If I had held on to my position, with Countrywide currently trading in $6-$7 range, I would’ve have been handsomely rewarded.

Hopefully, I’ll have the fortitude to hold onto my positions next time. Right now I think the Commercial real estate is the next bubble to burst.

Since 2005, I’ve been saying that San Diego home prices are way overpriced and are due for a 40-45% correction. The homes are so far out-of-whack thats it’s 30-50% cheaper to rent than it is to buy. Of course, the National Association of Realtors (the cheerleaders of the real estate world) will always tell you its always a good time to buy, but anyone who can use a calculator might think otherwise.

Already in most parts of San Diego, home prices are down 20-30%, unsold inventory has sky-rocketed, and real estate is no longer the main topic of cocktail parties.

Someone recently asked me if I though it was a good time to buy in San Diego. Houses in a Cardiff/Solan Beach/Encinitas/Pt. Loma that were $800-900k during the peak were now in the $600-700K range. When would we see the bottom?

As I stated in my last post, the government is bankrupting our economy. I asked Chuck Butler of Everbank.com “why is the government trying to weaken the dollar and if there was any advantage to having a weak dollar?”

He was gracious enough to answer my question:

It’s a political thing… If the Gov’t can show that they are doing what they can for Manufacturing, that equals votes. The main thing though is the dollar is used to attract foreign investment. I’ll explain.

The Gov’t is running a huge deficit, and as long as they are running a huge deficit, they are in need of foreign investment to finance that deficit. The amount of financing needed each day is over $2 Billion.

In the past week or so, the Federal Reserve has lowered the interest rates 1.25%. Today they’ve announced that they’re going to lend out $60 Billion to cash-strapped banks to prevent a credit crunch and to maintain liquidity in the economy.

By lending out money below the real rate of inflation, the bank is essentially handing out free money. Basically, Ben Bernanke is giving away a truckload of money to anyone who asks for it!

My guess is he’s going to keep lowering the interest rates for the remainder of 2008 until we’re at a 1% Federal Funds rate.

Since the US consumer can no longer refinance his house to fulfill his appetitive for consumption, Bernanke’s hoping that low interest rate consumer loans will continue to fuel consumption. After all, we’re a consumption based economy (as opposed to other countries, who actually make goods). Evidence of this is provided by the Economic Stimulus package worth $150 Billion. Since our economy is $15 Trillion, I guess $150 Billion will make 1-2 months look good, long enough for President Bush to claim that the economy has turned around as he gracefully exits office.

I read a lot of financial news and newsletters on a regular basis. One of the paid newsletters I subscribe to is Capital & Crises by Chris Mayer which discusses safe, non-speculative stock market investments. Today I got an email quoting Mr. Mayer which was pretty interesting. It was about the return of manufacturing jobs to the US.

“The weak U.S. dollar makes U.S. assets look cheap to foreign buyers,” comments our managing editor Chris Mayer. “And they are buying.”

In 2007, foreign purchases of U.S. assets topped $400 billion. That was a 93% increase over the year before. The top foreign purchasers were Canadian, British and German, with their loonies, pounds and euros. But the Middle East and Asia — most especially China — are quickly catching up.

Today’s post is an excerpt from a letter by Martin Hutchinson. He’s done a great job of explaining why interest are so low and why inflation will probably run 10% pretty soon.

Back in the early 1990s, the Fed and its chairman - Alan Greenspan - had a problem. And it was a big one. The central bank tried to maintain a low rate of money supply growth, as Fed predecessor Paul Volcker had pioneered, but this was causing problems. Even though inflation appeared under control, economic growth remained stuck in low gear - even long after the nadir of the 1990 recession. President George H.W. Bush was seriously annoyed, as he had right to be: After all, that slow economic growth probably cost him the 1992 election.

According to a newsletter I subscribe to, it looks like we’re now in recession territory.

We are finally seeing a dose of reality in the jobs numbers. The BLS employment report shows that December jobs were horrid. The overall economy will soon follow.

Key Numbers

* 49,000 construction jobs were lost in December

* 31,000 manufacturing jobs were lost in December

* 24,000 retail trade jobs were lost

* Everything totaled up, private nonfarm jobs contracted by 13,000 jobs in December

* The BLS birth/death model added jobs once again. The total now shows 1,305,000 jobs added to the economy since February. That model remains somewhere in outer space

* The unemployment rate hit 5%, but the real number is far worse if one digs a little deeper

* Table A-12 paints a story that is much closer to the truth

Jim Rogers thinks the US has lost its title as the world’s economic engine. He thinks the subprime mess will last for years, Bernanke doesn’t know anything about the economy and should resign, the US dollar is on a permanent decline and China will become the world’s foremost economic power.

Everyone is recognizing the weakness of the US economy and Federal Reserves lack of interest in a strong dollar. Realizing that the dollar is going to continue its free fall,  everyone from super-models to rappers are dissing the dollar. Even OPEC wants oil priced in a non-US dollar based currency, which it called “a worthless piece of paper”.

Don’t say I didn’t warn you! Its still not too late to buy gold and replace your dollar-based assets with foreign currencies.

Here’s an interesting article from England’s Standard newspaper:

Six more hard years tipped for subprime fallout

Legendary investor, Jim Rogers thinks Fed Chairman, Ben Bernanke is a complete moron who “doesn’t understand how the economy works”. He’s selling all his possessions in the US, exchanging all his dollars for the Chinese remnimbi and moving to Asia. If you think he’s overreacting and the dollar can’t stay down, consider that its dropped against almost all major currencies this year. The dollar has seen some strength this week. Use this temporary bounce in the dollar to take a position in gold or other currencies.

“Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity”.
– Nicolas Copernicus, 1525

“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge - even to ourselves - that we’ve been so credulous.”
– Carl Sagan