Category Archives: Economy

How To Save The US Economy

Posted on by Nirav
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Will the $700 Billion bailout save the US economy? I don’t think so, mainly because I’m not really sure where the money is going – I don’t think even congress understands how it’s supposed to work.

Keith Fitzgerald, investment director of Money Morning, wrote an interesting hypothetical letter to Ben Bernanke about what steps he ought to take to save the US economy.

Dear Dr. Bernanke,

I’m sorry to hear that you don’t know what to do about the credit crisis. That must be terrifying to you. I can tell you, it is certainly that frightening to the hundreds of millions of Americans who have seen their homes plunge in value and who now are watching their investment portfolios get vaporized.

Ben, you’re fighting the wrong battle and you have been since Day One, when you took over from your predecessor, Alan Greenspan.

You’ve been printing money on the assumption that this action will stimulate demand. That’s great in theory, but it’s clearly not working.

Here’s why.

Every dollar you print devalues every other dollar in circulation. What’s more, each new dollar you print also stokes inflation, which is why Americans are feeling pinched right now.

Forget the housing crisis or the consumer confidence statistics that you and elected leaders seem to be so focused on: These are the byproducts of the monetary problems I’m referring to – and aren’t the root cause.

The credit crisis began because there was too much money available. Not having enough money has never been an issue.

What is at issue – and what’s causing such pain in global markets at the moment – is that banks and other financial institutions will no longer lend to each other.

Americans – and, indeed, consumers worldwide – are caught in the middle. That’s why they’re unhappy. Of course consumer confidence is at all time lows, housing is melting down and wages are stagnating. But, again, those are byproducts, and not causal factors.

Here’s a five-step plan that I believe will help sort this out. It’s simple, but it’s decisive, and that’s what’s needed right now.

Step 1: Stop printing so much money. Take steps to restrict the monetary supply, including limiting how much “fantasy” currency the credit card companies can create. This is money that’s not backed by anything except the companies that created it. I’m sure you see the irony here, since it’s the companies that created the collateralized debt, the special-investment vehicles (SIVs) and other derivatives that caused the trillion-dollar problem roiling the markets right now.

Step 2: Create incentives for institutions to lend to each other, a strategy that includes raising interest rates. You could argue, as will many who read this, that this will stifle demand. I’ll concede that this might happen in the short run. But in the long term, this will provide a natural hedge that will selectively weed out those companies that shouldn’t have been in the game in the first place.

Think of it as a form of “financial Darwinism” and, by all means, talk to Paul Volcker to get his perspective. Many people thought he would kill the economy in the early 1980s when he raised interest rates to the sky to kill inflation, but that didn’t happen. In fact, you could argue that he set the stage for one of the greatest bull markets in history.

Step 3: Stop socializing debt. The public treasury is not a proxy for handouts, so stop treating it as such. We do not need the current credit crisis fiasco turned into social debt that will burden our country and every American for countless generations in the future.

The latest surveys reveal that up to 80% of Americans think the financial institutions that got us into this mess should be allowed to fail. So why are you pandering to the politicians who insist on bailing them out? Nobody will bail me out if I fail to make my debt payments anymore than they will assume your personal debts, either.

The fruit picker in Southern California making $17,500 a year who reportedly “qualified” for a $700,000 adjustable-rate mortgage (ARM) should receive a “stupidity premium” on his next tax return and the mortgage representatives who handled and processed the paperwork should be prosecuted in criminal court for predatory lending – if not for “credit-rating homicide.”

Step 4: Let the free-markets work freely. Contrary to the “Chicago school of economics” free-market strategies that you and your entourage profess to employ, the markets really do want you to take active steps to fix this mess.

Providing more money to stimulate demand presumes that the financial institutions handling it will be healthy enough to do so [or wise enough to deploy it properly – an assumption I find hard to agree with, at this point]. Since I can argue that these financial firms are neither healthy nor wise enough to do so, it’s probably a mistake for you to assume that the new money will rescue weak institutions that shouldn’t be in business in the first place.

If a person is addicted to drugs, and then runs out of the cash they need to finance their habit, they go into withdrawal. You don’t solve that problem by giving them more cash, or more drugs. You do an intervention and send the poor person to rehab.

Similarly, with an economy that has abused credit the way the United States has, you don’t address withdrawal [the U.S. credit crisis] by firing up the financial printing presses – which is tantamount to a federally sanctioned credit-line extension. Again, it’s time for an intervention that stops consumers from abusing credit.

Step 5: Tell the American people the truth. The Federal Reserve Act of 1913 requires the Fed to promote stable prices. You’ve got a once-in-a-generation opportunity to do so … and to make a difference.

Let those idiots on Capitol Hill know that their actions are interfering with your ability to do your job. Point out to them what “Everyday Joes” already know, and what you know – that “the emperor has no clothes.”

This is not a political issue for either party and you need to make that clear when you draw your line in the sand.

This is a generational crisis. Every single one of us is responsible for the path ahead – but precious few folks besides you are in a position where they can truly make a difference.

President John F. Kennedy once said that “the hottest places in Hell are reserved for those who in a period of moral crisis maintain their neutrality.”

In other words, sir, don’t damn yourself.

In closing, people do not write books about Captains of Industry who don’t know how to take charge any more than they will write about Fed chairmen who have no clue about how to fix things.

But history does look back favorably on decisive leaders who act with conviction. You have the chance to play that role right now – regardless of who’s in the White House. And I urge you to grab that chance.

Best regards,

Keith Fitz-Gerald

Note that this letter was originally published back in March, 2008!

 

The Trillion Dollar Bailout

Posted on by Nirav
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In the last post I speculated that the bailouts would end up costing the taxpayers upto $1 Trillion. It looks like that has become reality. Here’s an email I recieved from Asif Suria, of SINLetter:

In an unprecedented move, the current administration unveiled a simple three page plan on Saturday that will provide the treasury with $700 billion to buy toxic assets off the balance sheets of financial institutions. Combining this bailout plan with the $85 billion loan to AIG and the $200 billion to rescue Fannie and Freddie, we the taxpayers are eventually likely to incur a bill of $1,000,000,000,000. In case you did not have the time to count all those zeros and calculate what you might be liable for, that is $1 trillion and works out to a little over $3,250 for every man, woman and child living in the United States.

We have come a long way in this crisis that has devoured most of the independent mortgage lenders and left just 3 out of the 6 investment banks that started this year. Almost every weekend there is news of yet another small bank going under and real estate shows no signs of turning around. Nearly 47% of all homes sold in the state  of California last month were foreclosures and the median home price in the San Francisco bay area fell from $655,000 in August 2007 to $447,000 last month.

Following in the footsteps of our neighbors across the pond, the SEC temporarily banned short selling in the stocks of 799 financial institutions in an orchestrated effort to shore up markets. While I felt that the SEC’s move to ban naked short selling was a good move, I think a ban on short selling of any kind makes no sense. Essentially we can only buy stocks to go long or sell our existing positions but cannot hedge our portfolios by selling stocks that may be overvalued?

[Cartoon of Wall Street Bailout]

Short selling is an activity that even noted British economist John Maynard Keynes indulged in as far back as 1919 and is not the evil activity it is being painted out to be in the media. Try telling fund managed Ken Heebner who graced the cover of Fortune magazine just a few months ago that he has to change the structure of his 130/30 fund (130% of assets are invested in long positions and 30% are invested in short positions) because he can no longer sell short even if he identifies overvalued or mismanaged companies in the financial sector.

In its press release regarding the short selling ban the SEC admits, “Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets.”. Clearly this action is targeted towards institutions that were aggressively short selling financial stocks and unless extended, it should end on Oct 2, 2008. Thankfully naked put options and the ultrashort ETFs, our instruments of choice to hedge the SINLetter model portfolio, were not included in the ban.

We are already beginning to see the dollar weaken against other currencies and the best way to play this (besides shorting the dollar) could be to take long positions in other currencies through ETFs like Currency Shares Australian Dollar Trust  (FXA), Currency Shares British Pound Sterling Trust  (FXB), Currency Shares Canadian Dollar Trust  (FXC) or Currency Shares Swiss Franc Trust (FXF). If picking a specific currency is too daunting a task (it is for me), then the “carry trade” ETF PowerShares DB G10 Currency Harvest Fund (DBV) could provide a useful alternative. The simple premise of this ETF is that higher yielding currencies tend to outperform lower yielding ones and hence this ETF goes long the highest yielding currencies while simultaneously shorting the lowest yielding currencies. You can learn more about the carry trade and DBV from this BusinessWeek article titled Trade Currencies Like A Hedge Fund.

Bond prices have also dropped in anticipation of the U.S government issuing more debt to finance this bailout. Most homeowners tend to either move or refinance their homes within a 10 year period. Hence 30 year mortgages are closely correlated to the 10 year Treasury note and have already jumped last week in response to this bailout plan. Not only are financial institutions being given a “get out of jail free” card but responsible first time home buyers who waited out the real estate bubble are going to pay the price immediately through increased financing costs.

So Who’s Really Bailing Out The Financial Industry?

Posted on by Nirav
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I started writing this post on Sunday but never got a chance to finish it. (On the other hand my first 3 days of the UCLA MBA program have been AWESOME!) I  know there’s been a lot of commotion in the stock market over the past few days and the Government just announced a bail-out of insurance company AIG. (But between spending 12 hours at school and reading 40 pages of papers a night, its been impossible to keep up). So anyway, here’s my delayed posting – its still relevant.

Last week the government announced a bailout of Fannie Mae and Freddie Mac. The US taxpayer now owns 79.9% of the outstanding shares. Before you go around congratulating them on their outstanding stock picking skills, just remember that the government is now explicitly backing the mortgages held by the two institutions.

While certain government officials have said that the bailout will end up costing the taxpayer as much as $300 Billion, the actual figures could be as high as $1 Trillion. When you consider that several major banks, the FDIC (Federal Deposit Insurance Corporation) and the PBGC (Pension Benefit Guaranty Corporation) will all need to be bailed out at some point, the official cost to the US tax payer will probably be well over a $1 Trillion.

Where is the government going to get this kind of money? Our national debt is already running at $9.68 Trillion and we have future debt obligation of another $45 Trillion.

Will the government raise taxes or just print more money to cover this shortfall?

Raising taxes is never a popular thing to do and most politicians try to avoid it if they can. The easiest thing to do is just print more money! However, this has the effect of devaluing the existing dollars in circulation. This typically leads to more inflation. Someone even said that inflation was like taxation without representation!

Basically, the average US tax payer is on the hook for all these bailouts. It will come at the cost of higher taxation, or higher inflation. Both will lead to a somewhat lower standard of living than we’ve been used to for the past two generations!

Despite the severe correction in gold and silver prices, this instability in the currency should cause their prices to jump.Even gold and silver stocks, which have been massively punished, should do well in the long term and are currently great buys right now.

Manipulation In the Financial Markets

Posted on by Nirav
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In July and August, the USD has actually become stronger against most other currencies, on apparently no news. Gold had also dropped as low as $790/oz from a high of $1030/oz this year, even though there is a shortage of physical gold in the US and the US mint had stopped selling gold coins like the American Gold Eagles. I was wondering if there was some manipulation going on in these markets.

Hedge fund manager John Lee thinks that gold prices are being manipulated in an effort to keep up the dollar afloat.

According to an article on Forbes, the central banks of the US, Europe and Japan planned in mid-March to prop up the US Dollar if it continued to slide.

Officials from the U.S. Treasury Department, Japan’s Finance Ministry and the European Central Bank reportedly drew up a currency contingency plan over the weekend of March 15-16.

The officials did not specify an exchange rate for initiating the dollar rescue plan, but in the event of a free-fall they agreed to aggressively buy the greenback and sell yen and euros.

Japan was to supply yen necessary for the underlying currency swaps. The plan also called for using a previously established swap mechanism between the United States and Europe.

Analysts said even though a rescue never took place, the fact that global monetary officials had agreed on action would be important in the future if the dollar were to tumble again or other exchange rates move very sharply.

Hmmm…who are these analysts and why should we trust what they say?

The Government and Wall Street has been less than forthright in the past. The CEO’s of Fannie Mae and Freddie Mac said a few months ago that they’re in no danger, but Buffett just declared game over for those two.

I’m getting tired of the bankers and government interfering in the natural course of things. They’re bailing out some market participants to the detriment of the taxpayer. People aren’t facing any adverse effects for taking on insane amounts of risks. If it pans out, they give themselves a bonus. If not the US taxpayer bails them out! Effectively, they’re socializing losses while privatizing profits.

Fannie Mae’s CEO claims that they make housing affordable for millions of Americans. However, if they went bankrupt, there would not be money available for huge home loans and home prices would fall. THAT would make home prices more affordable. Yes, it would be difficult for people to get a mortgage to buy a home, but it would encourage regular saving and it would take longer for people to buy their first home. But in the long run, housing would be a lot cheaper with lower payments towards mortgage interest and thus lower effective home costs.

The fact that the two CEOs of Fannie Mae and Freddie Mac took home $32 million last year while saddling the US Taxpayers with $500 Billion in losses means they can’t be trusted. If this isn’t outright theft, then at least it’s either gross misrepresentation, negligence or stupidity and they ought to refund their salaries, if not do serious jail time.

And talking about government manipulation, the Pakistani Government just introduced price controls on the most popular Karachi Stock Exchange Index. They got tired of watching the stock market drift lower every day, so until the officials decide otherwise, the KSE-100 cannot go below yesterday’s two-year low of 9,144!

Cartoon Capitalism

Posted on by Nirav
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I’m often extremely pessimistic on the state of the US economy. In public settings my doom and gloom predictions seem to depress people so I tend to restrict my rants solely to my blog. So it makes me happy when I read an article that agrees with my thoughts on the state of affairs.

CARTOON CAPITALISM
by Bill Bonner

America’s largest mortgage finance companies, Fannie and Freddie, have so much water in their lungs it will take at least $25 billion of the public’s money to save them. Possibly $300 billion. Were it up to us, we’d leave them on the beach.

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins – gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

In America itself, how this came to be is the subject of little concern. But despite the lack of interest, it is the subject of the next 500 words or so.

At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not – destroy Fannie and Freddie’s collateral. Kunstler’s critique of American suburban vernacular architecture is that its products are not real houses at all – but “cartoon houses.” They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too – nailed to the wall, making them completely useless. They may have “picture” windows…looking out on nothing…or no windows at all. And they wouldn’t exist at all were it not for cheap credit and cheap gasoline.

Of course, the same may be said of America’s – and Britain’s – entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

For proof, we return to Fannie and Freddie. Here were two companies that appeared to be helping Americans own houses. But since they were created, homeowners’ equity – that portion of the house actually owned and paid for by the homeowner – fell from 70% to below 50%. Currently, Americans’ total equity is lower than their mortgage debt. As a whole, the nation’s homeowners are “upside down,” in other words. Nearly 9 million Americans have zero or negative equity already – and house prices are still falling.

How comes this to be? The answer is simple: lenders lent more than the houses were worth to people who couldn’t pay it back anyway. This Looney Tune approach to finance radiated to all points of the economy. People pretended that they earned more – spending more and more money to buy more and more goods and services – but wages did not really increase. Then, they bought houses – believing the roofs over their heads were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans – for most of the new buyers, home ownership was merely a dangerous conceit. Now that the roofs have caved in, it is a staggering burden.

The “consumer economy” was always a mockery. No serious economist ever suggested that you could get richer by consuming wealth. But that didn’t make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference? In a cartoon economy – no one. Besides, spending made people feel as though they were getting richer.

Then, whenever the consumer threatened to come to his senses, the feds rushed to “stimulate” him – by giving him more of what he least needed, more credit. More spending kept the cartoon economy running – allowing the consumer, the businessman and the speculator to add to his burden of debt. In 1971, when the United States went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. And now, the poor consumer’s knees buckle; he will be forced to work the rest of his life just to keep up with his debt burden, let alone pay it off.

Even the rentiers were bamboozled by their own claptrap. Stocks rose from ’82 to 2000…fell heavily to 2002 and bounced back. For the last 10 years, shareholders have gotten little for their effort. In July of ’98, the FTSE hit a high of 5,458. This month, it has reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year – during a period in which the companies lost almost $5.2 billion – not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn’t wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism – run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis . I strongly recommend his latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

Since I mentioned that Fannie Mae and Freddie Mac were going to go bankrupt, their stocks have plummeted 50%. I think its time to start shorting other financial sectors like consumer credit card companies.

Fannie Mae & Freddie Mac Collapse

Posted on by Nirav
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About 5 weeks ago I suggested that both Fannie Mae and Freddie Mac were going bankrupt and their shares were going to hit single digits in 12 months. Well it looks like the market believed that too and their shares were punished. Instead of having to wait a year, the stocks dropped like bricks within the month!

According to Nouriel Roubini, renowned Professor of Economics & International Business at NYU’s Stern Business school, this is the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.

The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

Wow, those are strong words! Practically every stock in the financial sector has jumped today, probably due of extreme oversold conditions and not because of any underlying change in the fundamental scenario.

Sadly, my beloved Oil & Gas stocks are down. It may be a sector rotation out of energy stocks and into the financials. But so long as my Canadian Income Trusts continue to provide me with dividends and passive income, I’ll continue to hold them.

But I might enter new short positions in the financials if the stocks rally significantly above these levels. Fed Chairman, Ben Bernanke announced today that FNM & FRE were “in no danger of failing”. I don’t know if I believe him – sounds just like a few months ago when the government telling us there’s no recession. Meanwhile everything (except housing) is getting more expensive and unemployment is rising. And as Jim Rogers says that “the only people Bernanke cares about are his buddies on Wall Street”!

There's Still No Recession!

What Is Jim Rogers Buying Now?

Posted on by Nirav
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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

LIU: All right. Jim, first, talk to us about the story of the week that we’ve seen so far, Lehman Brothers, you know, you’ve been very critical so far about what’s been going on on Wall Street, the accounting, all of that. Do you believe, I mean this is relevant – do you believe that Lehman Brothers is in fact in so good shape that they’ve got no liquidity problems or what’s your view on this right now?
ROGERS: Well, okay, I am still all – short all of the investment banks on Wall Street through the ETF. I know they are all in trouble. I know most of them have phony accounting. And you know, in bear markets, they all go down to eight. So, I just presume they are all going to go to eight before it’s over, before the bear market is over.
LIU: Do you believe that we could another Bear Stearns as we did in March?
ROGERS: Oh, why not, sure. There are certainly – and I’m also short Citibank and I’m also short Fannie Mae. So, you know, some of these companies have – have horrendous balance sheets and if the bear market has a ways to go, which in my view, it does, then you are going to see some really, really low prices. But, Betty, there’s nothing unusual about this, just go back and look at any previous bear market. Financial stocks sell at unbelievably low prices during bear markets. This was not going to be any – well, this one may be a little different because it’s just going to be worse for the financial companies during this bear market, because the excesses during the past five or ten years have been so horrendous in the financial communities.

LIU: All right. And Jim, you know, I want to turn back to, of course, the Fed and the banks and all of that. You were talking before about some of the stocks that you’re short on. Are you short on Lehman Brothers?
ROGERS: I’m short the ETF, Betty, the investment bank ETF, which means I’m short all of them. I am not short any specific investment banks. First of all, I have too many friends at all of those places, I don’t want to short any of them specifically. So, I am just short at the ETF, which means I am short all of them, I mean some would do well, some will do probably too badly, but the ETF in my view is going to go down a lot more.
LIU: Well, does what happened with Lehman Brothers over the past week, does it perhaps stoke your interest in shorting Lehman along with Citigroup? And Fannie, I believe is the one you talked about as well.
ROGERS: I’m already short Fannie Mae and Citibank, and have been for sometime. I’m just going to kind of stay with the ETF. It’s easier for somebody like me, who’s too lazy to spend a lot of time on any specific one, except for Citibank and Fannie Mae.

Monetary Policy

LIU: All right, Jim. So, tell us, you have also been very critical of the Fed and Ben Bernanke. I want to ask you first one thing. How do think the Fed has handled so far what’s been going on on Wall Street? You think that they helped situations or actually made things worse?
ROGERS: They made things worse, Betty. They printed huge amounts of money, which has caused great inflation which could cause the dollar to go down, and the Federal Reserve has taken on something like $400 billion of bad assets on to its balance sheet. Now, you and I as American taxpayers are going to have to pay off that debt some day. What’s Bernanke going to do? Get in his helicopter, and fly around, collecting bad debt? Is he going to start repossessing cars, repossessing houses that go bad? I mean, this is insane Betty, the Federal Reserve has $800 billion on its balance sheet. They have already committed $400 billion to bad debt. What then they are going to do next? Where are they going to get the money the next time things start going wrong?

Investment Strategy

LIU: Okay. Okay, well, given that scenario, Jim, as an investor, where are you going to put your money right now?
ROGERS: I own commodities, I have been buying agriculture, I bought airlines today. I bought a lot of airlines around the world today, both stocks and bonds. Swiss franc, Japanese yen, renminbi, these are the few things I have been buying recently.

Airlines

LIU: You bought airlines? A lot of people are very bearish on the airlines, talking about the fuel cost. Why are you buying airlines?
ROGERS: Well, Betty, you just got through the same why, everybody is very bearish. No, I don’t buy things just because people are bearish, but I fly a lot, and the planes are full. You cannot buy a new – if you order a new plane today, you couldn’t get it for several years. This Boeing and Airbus have problems. You read every day that the airlines are cutting back their capacity. Fares are going up. I mean, Betty, everybody knows about the fuel cost. Is there any airline left that doesn’t know we have fuel problems? They are adjusting for all of it.
LIU: Well, that’s true. But there’s also talk about bankruptcies in the airline industry. And you think some could go bankrupt?
ROGERS: How much more bullish in the news do you want? Twenty-four airlines have gone bankrupt this year. That’s great news. You know, five out of the seven largest American airlines went bankrupt during this decade. So, fine. Bankruptcies are signs of bottoms, not signs of tops.

Commodities

LIU: Right. You know, staying with oil and commodities, we’ve seen a pullback in some commodities in recent months. But which commodities do you like right now, Jim, and which don’t you like?
ROGERS: Well, I mean, yes, a lot of commodities have come down pretty hard. If people are talking about a bubble, I’d like to know what they’re talking about. I mean, many commodities, nickel, zinc, lead are down 50 percent. Silver is down 80 percent from its all-time high. Sugar is down 80 percent from its all-time high. What kind of bubble is that? Cotton is down 40 percent from its all-time high. Coffee is down 60 percent from its all-time high. I have been buying agriculture recently, I’m holding off a little bit right now because it looks like Congress is determined to do something to drive down commodity prices. If they do, it’ll be a fantastic buying opportunity and I’ll buy more.
LIU: Jim, you – .
ROGERS: But what I bought most recently is more agriculture.
LIU: More agriculture? In China, did you buy?
ROGERS: I bought agriculture stocks in China. It’s not legal for – I mean, it’s almost impossible for foreigners to buy commodities – commodities and sales in China.
LIU: Right. Okay, also, you’ve said before that we’re half- way through the commodity bull run. You still think that, or I mean how long can this bull run last for?
ROGERS: Well, Betty, there are number of acres devoted to wheat farming. It’s been declining for 30 years. The inventory of food is at the lowest level in 50 or 60 years. We are burning a lot of our agricultural products in fuel tanks now, as fuel. That’s useless, that’s hopeless. Talk about a bubble, that’s a bubble. It’s crazy that we’re spending so much money burning our agricultural products as fuel. But you can go on a long time, nobody has discovered any major oil fields for over 40 years. Betty, all the oil fields in the world are in decline. I mean, there’s been one lead mine opened in the world in 25 years. The last lead smelter built in America was built in 1969. Unless somebody starts bringing on a lot more capacity soon, that bull market has got a ways to go.

Oil

LIU:All right. Jim, also talk to us about oil. You know, you’ve been very bullish on oil. We’ve had a lot of people talk about, you and I had a debate about whether or not there’s speculation in oil markets right now. You say no, others say yes, like Soros, he says it’s going to bubble. What do you know that others don’t about the oil market?
ROGERS: Look, look, Betty, there are always speculators in every market. Look at the New York Stock Exchange right now. You think there aren’t any speculators down there on the floor of the stock exchange? There are always speculators. That’s what business is all about. I submit to you that most of the people and – I don’t know about most of the people, I shouldn’t say that, but we know that the IEA, the definitive authority on oil has said that the world has an oil problem. The Saudis have told Bush that we have an oil problem. Betty, if there is lot of oil, please, would somebody tell us where it is, so we can all invest in it? The world has a serious oil problem. Now, Betty, that does not mean that oil cannot go down 50 percent. During this bull market since 1999, oil has gone down twice by 50 percent, going down by 50 percent in 2001 and again, in 2000 whatever it was, ‘05 or ‘06. So sure, you can have big reaction in any bull market. But that’s not the end of the bull market. There is no supply of oil unless you – somebody can tell us where the oil is, the bull market in oil has years to go despite new corrections which may or may not come.
LIU: Well, but you know, and I know you always hate having me ask you about – about limits or caps and all of that. But, given the supply/demand situation that you’re talking about, how high can oil go?
ROGERS: Betty, I know you – how you’re paid to ask questions like that, but I don’t know the answer. I’m not smart enough. I know that unless somebody discovers a lot of oil, the price of oil can go to $150, $200. You pick the number.

U.S. Dollar

LIU: All right, Jim. And I’ve got to turn to the dollar very quickly. What do you make of the comments by Bernanke earlier this week, noting the dollar slide, you have been very, very critical of Bernanke on this.
ROGERS: It is astonishing. Now, this is a man that under oath in Congress said, “If the price of the dollar goes down, it doesn’t affect ordinary – it doesn’t affect most Americans.” So, I almost fell out of my chair when I saw him say that. We know the man doesn’t know about markets, we know he doesn’t know about the currencies. Now, we know he doesn’t even understand civil economics, simple economics. So, I was astonished to see him, what, two or three days –
LIU: Right.
ROGERS: – suddenly said, “Well, if the dollar goes down, it affects us all.” It’s called inflation. So, somebody’s been teaching him economics. It’s about time, he should go back and take Economics 101.

How The Federal Reserve Helped The Rich Become Super Rich!

Posted on by Nirav
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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.

10 hedge fund managers pulled in 500 million dollars last year with a lucky few pulling nearly 1 Billion dollars!

It also explains the discrepancy in risk-adjusted returns for these finance wizards. They made obscene amounts of money without taking on any risk. Their financial wizardry is what caused the financial crisis with the subprime loans. Of course, they weren’t left holding the bag! It was the shareholder and maybe at the end of the day it might even result in the US tax payers having to bail large investment banks like Bear Stearns.

Check out this video by the BBC starring Robert Preston – its very enlightening.