What the 2008 bailouts really cost

I had some extra time today so I decided to take a look at what has happened this year. I wanted to go back and take a look at the various buyouts and bailouts that the Government has backed, and the promises made so far. And the numbers are horrendous.

The main focus so far is on the $1.5 trillion that has been authorized and/or spent thus far. $700 billion for the bailout of mortgages and the credit crunch, and now another $800 billion for mortgages and consumer loans. But those numbers are not the full amount of cost this year.

The year started with the bailout of Bear Stearns. It cost $29 billion to allow JPMorgan to buy that failed brokerage house. And we were promised that would fix everything. Then there was the $150 billion stimulus package that was promised to fix the sagging economy, which failed. Then came Fannie Mae and Freddie Mac, which Representative Barney Frank publicly pronounced as healthy and secure, that cost $120 billion each (not including the $600 billion that is now part of the $800 billion bailout package). And the numbers are still not done.

AIG cost $120 billion by itself. That though was said to be included in the $700 billion authorized by Congress. That means of the 1/2 of the funds given to Treasury Secretary Paulson only $230 billion was available for everything else needed. Not counting the tens of billions given to banks, or the money spent to buy bad loans at unknown valuations.

Of course there was also Citigroup. This cost $20 billion plus $306 billion for guarantees of their bad loans, for a total of $326 billion. Now that is a problem because if the funds came out of the same pool as AIG, we are in a bigger negative than the spending is already creating. A double negative of sorts. And yes I know that guarantees are not the same as cash, but a guarantee must be backed by something besides words. Which means cash from somewhere.

But let us not forget the $25 billion given to the auto industry. And that has nothing to do with the additional $25 billion that is being asked for now, just roughly 5 weeks later. Which is separate money. And that precedent is going to lead to the requests of the airline, credit card, home building/construction and other industries. If the Government is handing out money to businesses, it would be folly not to get in the line.

So the total is $1.94 trillion dollars. Which does not include Citigroup or the additional amounts from the auto industry. Including that figure we get $2.27 trillion in money that never existed and must be repaid. To be exact that means that every American, each of the 300 million citizens, owes $7,567 to the Government.

It is expected that some of these loans and stock purchases will eventually break-even or turn a profit. The expectation is that will happen in 10 - 15 years. Though it is absolutely unclear how the public will be repaid, though the Government will collect all the money. Thus it is possible that the Government will receive money from the public and hold repayments from loans - effectively being paid twice. And it is very likely that any repayment will be funneled into Government agencies instead of the public, as was attempted by Democrats with the first version of the mortgage bailout bill.

But even if 40% of the loans were to make a 50% profit, the bulk of the debt incurred will still be greater. And that does not cover the direct cash infusions made without a loan or repayment provision - which is about 70% of all the funds so far as I can gather.

And the fun does not end there. Remember that President-elect Obama, pushed by House Speaker Nancy Pelosi, has promised a now $700 billion second stimulus plan. The exact details of this plan are unclear, but some amount will be given to the public and some will be used to fund public works. Or so the loose plans state so far. That would mean that in 1 year the cost is $2.97 trillion.

And President-elect Obama still is pushing to add over $800 billion in new spending for new and/or expanded programs. That makes it $3.77 trillion. Or in terms of cost to you and I - $12,567. That's for every man, woman, and child alive right now - working or not.

Put in different terms, this money could have completely funded the entire NASA budget (roughly $419 billion unadjusted for inflation) since inception nearly 10 times over. We could have funded 1,000 moon landings ($36 billion unadjusted) including all the research and development.

Let me make it more personal. That amount is more than the entire net worth of Oprah Winfrey, Bob Johnson, Tiger Woods, Michael Jordan, Tom Cruise, Bill Gates, George Soros, and Warren Buffett combined and multiplied by 10. It's enough money that every single American citizen, of any age, could go to the average college for 2 years. It's enough money to give every American alive today a 10% down-payment on a $120,000 house.

And there is no guarantee, in fact there is reason to highly doubt, that it will get better.

Was Barbara West's Senator Biden interview fair?

In response to my post on Barbara West’s interview with Senator Biden I have heard many people excuse the response of Senator Joe Biden, and defend Senator Obama’s flexible tax plans. Even more have chosen to attack or dispute the questions of Barbara West.

First is a fact that this election seems to have avoided, at least in the sense of the major media. There are few questions that can be asked of candidates that are unfair. Any question that is based in whole in the words and meanings of a candidates statements is always fair and deserving of an answer.

In addition it is the responsibility of the major media to ask the candidates tough questions that some or all citizens have. When the media in question is more local those questions should be more locally motivated, but otherwise the questions should be asked. This has rarely happened with Senator Obama, even as far back as the Democratic Primaries.

The statement in question is Senator Obama definitely stating and standing by his desire to “share the wealth” of Americans, and doing so via Government mandate. This is beyond taxation and a statement of redistribution of wealth forced upon Americans. This is in no part an ideal of Democracy. The closest style of Government that reflects such attitudes is the socialism that Karl Marx discussed and wrote of – communism being a far more extreme form of that same government style.

Taxes are not meant as a means to check the power of Americans. In fact it is impossible to do so as a billionaire is still drastically wealthier than the middle class or less Americans. Yet they have only one vote and are equally as restricted in their campaign contributions. Taxes are a means by which the Government is able to enact policies it believes are in the best interest of the nation as a whole.

Barbara West did not ask the same question twice because the first is speaking on a Gallup poll and the effect of the Obama tax plan. The second question on the tax plan is asking to clarify the distinction of the tax plan versus socialism – which really does not exist as redistribution of wealth is a core point of socialism. That is the reason I believe that Senator Biden refused to answer the question, besides the fact that he was visibly upset at being asked tough questions which is rare for the Obama campaign.

And it should be noted that virtually every independent study of news coverage of the election has shown that Senator Obama has been treated with an unfair bias. He has been asked fewer tough questions and has had less complete investigation of his policies and past political votes.

Were the major media fair there would be questions on how Obama could claim he is a moderate when he has been consistently ranked by his voting as far back as the Illinois Senate as extremely liberal, as an example. The media has avoided coverage of several gaffes by Senator Biden that refute or question Obama policies. The media has failed to ask for clarification of several controversial or unclear policies and statements of the Obama campaign. Even right now you can go to Yahoo and see a poll result for the Presidential election that is unmatched by several of the most reputable polling companies including Rassmusen.

But the question at hand is the comment of “sharing the wealth”. There is no question of what Senator Obama has meant. He has repeated and defended his belief. Such a belief is liberal at the least and socialist in definition. It is effectively a cap on the productivity of all Americans.

A friend of mine explained this to her son who asked what it meant as follows:

“Say you were to do a job, like rake leaves, and be paid $20 for it. The guy across the street did nothing but watched you. Before you get paid the Government would take $15 dollars out of your $20 and give $5 to the guy across the street that watched you, and another person like him down the block, and another. But you get to keep the $5 for all your hard work.”

Her son felt this seemed unfair since they did nothing. I agree that giving people money that they did not earn and cannot justify, based on the will of the Government, is unfair. And in my experience, having lived in Moscow and Tsblisi while the USSR still existed, it does reflect aspects of the socialist style of Government.

I did not open my business to share the wealth I generate. When I chose to make a donation that is my choice, and any donation will go to something I support. I do not trust the Government to spend my money, and neither does Warren Buffett, John Kerry or other famous Democrats.

If Warren Buffett were so confident of the Government he would have left his money to the Government as opposed to a foundation run by Bill Gates. If John Kerry and other extremely wealthy Democrats were so in favor of sharing wealth with Government allocating the funds they would have donated millions (Kerry is worth in excess of $300,000,000) without any change of lifestyle. And I won’t even go into the donations of Senator Biden, which I outpaced.

But again I detract. Barbara West was justified in asking the questions she did. Senator Biden had an obligation to the citizens in Florida and the nation to answer the question. Senator Biden failed his obligation, not Barbara West. And the Obama campaign compounded that failure when they then had a tantrum and canceled the access of that media organization (including its Philadelphia affiliate) to the candidates. Because not being presented to Americans just prior to an election benefits whom on Election Day?

Presidential candidates work on bailout and political images

It’s amazing how in the last 24 hours the Obama political machine has spun around and launched polispeak that turns almost a 180 from yesterday. All of this revolving around the bailout that is being worked on today.

Yesterday, Warren Buffett compare the current financial crisis to a Pearl Harbor event in America. He strongly felt this was a serious threat to the well-being of America. President Bush called for television time at 9pm to put pressure on Congress to get the bailout done, by speaking to the public about the status. And then come the Presidential candidates.

At 8am yesterday, Obama suggested a bi-partisan announcement to support specific controls in the bailout plan. At 10am Warren Buffett made his comments, at 11am the President made plans to speak with the public. At about 2:30pm McCain made a press statement



The Obama campaign immediately releases an email that clarifies their position at 8am. At 4:40pm Obama has a press statement that states



And since that time the polispeak wheels have been spinning. Democrats have been stating that the Senators are not needed. That the bailout will be resolved without them. That they have no need to do the jobs they were elected to office to do. Or at least they should be working on both situations.

Now maybe it’s me, but if this bailout could cause a depression equal to the Great Depression as many of the best financial minds believe don’t you want the next President and your Congressional representatives to be doing their jobs? Do you believe that this is their first priority?

President Bush believes it is. And thus he asked both candidates to come to the White House, along with both Parties Congressional leaders, to ensure a deal can be made as quickly as possible. Because as Warren Buffet said yesterday in various interviews, this is not something he would want to see take weeks to resolve. It’s too important and dangerous. So bi-partisan agreement is required.

But it seems the Obama campaign is ok with dividing its attention. And supporters are trying to make this seem like McCain is not doing his job and acting on America’s benefits first. They are questioning why Gov. Palin is not continuing the campaign in place of McCain. The answer to that seems obvious, she is not running for President. And since Senator Biden also needs to do his job, it is more bi-partisan to allow both campaign to stop while both work on this.

Yes, a President multi-tasks each day. Yes you must deal with many events at once. But priorities are important. And approving political ads or practicing for debate questions while you speak with say Chris Dodd on the phone about what compromise or terms of repayment are ok for the bailout presents itself as the wrong kind of order to me.

But I asked an average guy about this today. He is a cable repairman, doesn’t follow politics much, and I have no idea of his politics. He heard of the bailout, but had no idea how that could affect him and America. He heard about what McCain and Obama were planning to do. In his words

“They both sound like politicians to me. It’s all just political showing off.”

I asked him about the bailout, and he mentioned he wasn’t sure what it meant to him. I clarified the point, giving him the comments of Warren Buffett (who he had heard of) and detailing what a Depression would mean – 4 out of 5 people he knows would be without jobs, and possibly homes, within 2 months. That is the worst case scenario.

I asked him again, based on that severity, and the fact that all 3 Senators involved in the Presidential race still have jobs in Congress, how he felt. He still could see the political nature of both their actions. He further said

“But that [Obama] doesn’t seem right, if it’s that important.”

How important could it be? Well in a press conference on the 23rd it was stated that several Democrats would not vote on the bill if McCain did not (5:05)





If this bill must be bi-partisan, and it must be resolved as quickly as possible, and it should hold safeguards that ensure that the crisis is ended and we won’t need to spend another trillion dollars in a month, then both Presidential candidates need to work on this and not their campaigns. I think so.

And I really think that Obama should have thought so too, and not need the President to call him to bring him back to D.C. to do the job he was elected to the Senate to do.

If this is not the single most declarative statement of which candidate will act for America first, which has their political gain first then I don’t know what is. No amount of polispeak can hide bi-partisan action, and a politician doing the job they were elected to do. But if you disagree, I would love to hear that argument.

Mortgage crisis bailout - Buffett in, but should we join him?

Warren Buffett has made a significant symbolic action in our economy. He has invested $5 billion into Goldman Sachs, the bank. Not the investment bank but the commercial bank that it has now become. The difference may sound small but it’s huge.

In doing this he has signaled his long-term belief that the American economy will weather this storm. Which few doubted. But this one act is hardly enough to resolve all the issues between now and his normal 5 – 7 year investment window.

Now I realize confidence needed to enter the markets. And the doubt of the bailout plan did not help anything. This is a great stabilizing factor. But the bailout plan is not a smart bet, and will not benefit the nation near-term.

The reality is that the Government wants to give Ben Bernanke $700 billion dollars to accept the bad debt of the financial markets. This is the same individual that failed to identify or resolve the problems in the financial markets that I saw back in January at least. And he is planning to accept every problem every size bank can shovel into this deal.

Have no doubt that every bank is working out how they can get their debt passed onto the taxpayers. These are individuals that were smart enough to create the derivatives that regulators are not smart enough to see as a problem for over 5 years. And suddenly we think that more regulation will prevent bad decisions and prevent being unable to understand what is happening in the markets.

The Government should not be in the business of owning banks. The Government is not smart enough, efficient enough, nor reactive enough. The Government is not able to take on debt at a realistic valuation since it does not understand the value, and thus every dollar spent on the bailout will be a waste. And the Government has never been able to intervene in the financial markets to the benefit the nation or investors.

I would bet that Warren Buffett was asked by the Government to step into the market. He is too strong a figurehead to be ignored, and thus symbolically stabilizes the markets. And the fact that Goldman had to become a less powerful commercial bank, and thus seek out deposits to shore up its bad books and loan reserves, to get the investment by Buffett is telling indeed.

The fact is that nothing will prevent the markets from going lower in the short-term. They need to. And if there is to be any real confidence we need to see other investors step up and make similar styled investments. I want to see the Blackstone Group, and Apollo Investments to make similar steps. Bill Gates too. But that is not happening yet.

The Government has been given time, to sort out what it will do. My advice would be to let the markets sort out the problem created in the markets and bad decisions. Because all a bailout does is tell the markets that the Government will step in every time they make an overly greedy decision. And if you think I am wrong, go back and look at what the auto industry is asking Congress right now.

But perhaps one of the worst things a bailout will signal is opening the floodgates on mortgages. If we bailout bad bets by financials, why not bailout the home owners that made bad decisions? And if we can help those home owners, how the hell can we not say that people like myself that made a smart decision on their loans deserve help too. Why should my taxes go to help pay a mortgage that is not my own? Especially since all those home owners had to do is read their documents and do the math.

The Government is not responsible for correcting the bad decisions those it governs makes. But in making the bailout a fact that is exactly what it is doing. And that is more than a small step towards a socialist government and away from a Democracy.

In the Star Wars movies there is a scene where it is said that

“This is how Democracy dies. With thunderous applause.”

But I believe that that is not the only way we can lose it. It can die with a funnel of money draining from the people. Not as dramatic or poetic, but perhaps far more effective and deceptive.

Senator Obama: looks great, less filling on economy and foreign policy

Senator Obama is quite a man. I mean that seriously. It takes quite a man to step up to the plate for a position that most my age or above never expected to happen. He is facing down the most difficult hurdle an African American has ever come against in this nation’s politics and looks to be competitive.

Though with that said I have to say that I wouldn’t vote for him. Historical importance and all, he is not ready for the position – but he is damn close.

My problems with Senator Obama are purely on his political experience and policies. In terms of his presentation, the fact that he is breaking barriers and making history are all things I deeply respect about the man. I find him charismatic, and a capable public speaker. His ability at polispeak is unmatched by neither Senator McCain, nor any of the past Democratic primary candidates he beat.

But that is not enough to be President.

I’ll give you an example. Senator Obama visited Iraq for less than 2 days, after 2 ½ years since his last visit of less than 48 hours. That is not fact finding, nor is it being open minded to changes that he opposed. That is building voter interest on the backs of the soldiers in Iraq. The same can be said of his time in Afghanistan.

Senator Obama has not changed his position. He never was going to. Thus the trip, with enough media coverage to rival the President, was just a new take on the shake-hands-kiss-babies politicing. He got into the race saying he would remove all the troops in Iraq in his first term, then shifted to a 16-month policy that will still leave some unknown number of troops in Iraq, and after his trip he still maintains that policy.

But as I have said to many people and in this blog, how do you expect to win a fight if you tell your opponent that you will stop before it’s over? If this were boxing, Queensbury rules all the way, but this is war. When America left Saigon did anyone view that as a win? Besides the North Vietnamese. Can anyone give me a reason to believe that Al Quida and any other insurgents won’t just bide their time for 16 months to end, if Obama is elected President, and then rally to make Iraq a bigger mess than it is?

If people want to praise Senator Obama for his unyielding position on Iraq, which essentially calls for retreat and means that every orphan and anyone who lost a loved one in Iraq will be gunning for Americans within 5 years of our departure, even if it is not popular then how can they not praise Senator McCain for his unyielding and at times unpopular stance to win the war? Mark my words, not winning in Iraq means that more American lives will be lost, and in our nation not overseas.

But there is also the issue of domestic economic instability. The housing markets are tanking, as are many financials that facilitated this drop. Senator Obama is looking to speak with advisors (though not 300 as he uses for foreign policy which is impractical) that include Treasury Secretary Robert Rubin, former Federal Reserve Chairman Paul Volcker and billionaire investor Warren Buffett.

Obama said in his meeting with advisers he expects to ``get their read on where the economy is going,'' and fashion some ``additional steps'' to address the short-term economic and financial and housing issues.

Robert Rubin helped to advise Senator Hillary Clinton. While many have chosen to forget, I recall that her campaign ended in debt of some $20 million. That’s after she loaned herself in excess of $6 million for her campaign. Somehow I think Rubin’s advice was ignored and/or faulty, you can pick which.

Warren Buffett is the greatest investor ever. He has made billions via investing. Yet he does not give one extra dime to the government than he has to. He has never donated any money to the I.R.S., but he has been very vocal to say that taxes should be raised. He is so sure that the government should have more of his own money that he is donating the bulk of his billions to a charity, run by Bill Gates – another man that made billions via business and investing. This tells me that he does not believe that the government can efficiently use his vast fortune to the benefit of Americans, whether Democrats or Republicans are in charge.

Paul Volcker, the predecessor to Alan Greenspan – the man who tried to get the Clinton Administration to do something about the internet bubble, is best known for ending stagflation and creating a recession that killed farming. To recap for those younger than myself Volcker reduced the inflation rates at the end of President Jimmy Carter’s term (13% in 1979) to reasonable levels during the President Regan Administration (3% in 1983). He also helped increase unemployment levels to those near equal to the Great Depression, bankrupted farmers, and generated the most protests that any Federal Reserve Chairman has ever received.

Senator Obama’s choices make a few things clear. It seems that his intention is to raise taxes (not just on the rich as he has already voted to raise your taxes this year), spend your money on policies that will feed the hungry as opposed to help them be able to feed themselves, and drive up prices for energy and oil.

The last 2 come from the fact that Senator has voted the most extreme liberal of the entire Democratic Party. He is not bi-partisan according to his record. Thus the Democratic Party opposes any domestic drilling for oil, preferring to use corn ethanol. That means that we will continue to drive up the price of oil – funding some of the enemies of America with more money than ever before – slowing the economy as businesses contract to offset the higher energy cost, and the cost of food will go higher since the price of corn is increasing. That’s inflation as I understand it. That’s hurting the average American. Higher taxes, higher energy costs and higher food costs – that is what I understand he is being advised to do.

There are other questions about Senator Obama that I have, but these are some of the more prominent right now. This is what the news media wants America to focus on. And just these reasons are enough for me, even though I have several others.

But is that what you want? Is this what you expect from a President after the polispeak is gone and action is required?

$31,850 is the new definition of rich

How rich do you feel if you are making $31,850 or more?

If you are like most families and individuals in America, I imagine that you don’t. In fact I would say most would feel relatively poor. Not because of a lack of luxury items or failing in a competition with the Jones’ but because of a scarcity of essentials and a knowledge that loss of everything is possible.

Americans in the middle class don’t feel rich because they are the ones losing their homes to the mortgage crisis. They are the ones incapable of affording better colleges (or sometimes any college) for their children. They are the families most often without healthcare coverage and unable to afford medical costs.

And they are the ones that are going to feel even worse if Democrats, and the Presidential candidates Senator Clinton and Senator Obama, get their way. I don’t say this because of some ideal, or dedication to the Republican Party. I say this because that is exactly what they are voting for.

“Senators voted 52-47 to reject a move to extend tax cuts for middle- and higher-income taxpayers, investors and people inheriting businesses and big estates.”

and

“Obama and Clinton both promise to reverse Bush's tax cuts for wealthier taxpayers, but the Democratic budget they'll be voting for would allow income tax rates to go up on individuals making as little as $31,850 and couples earning $63,700 or more.”

So, if you make $31,850 or more you may not feel like Bill Gates and Warren Buffett but you are going to get taxed like them.

This is not a surprise because for all the statements by Democrats that running scared from Iraq will turn the economy around, and their implication that universal healthcare is the same thing as free health care the facts are that more money will come out of our pockets to pay for it all. Your pocket, whether or not any of the things you will be paying for will provide a single benefit for you or those you know.

This is what a Democratic President will provide. Some may believe that this is a small price to pay. Some may believe that all businesses should pay more in taxes. And some may believe that terrorists and those hostile to the existence of America will give up their fights just because we turn our backs.

But I believe that increasing the taxes that the middle-class and businesses pay will not improve the economy. I believe that giving money TO problems rather than spending money to FIX the problems is foolish. I believe that turning your back on a bar fight will get your head cracked open from a chair smashed upon it. I believe that nothing is free, and some things are too expensive to be worthwhile.

The Democratic candidates have marched across America saying they will only tax the rich. They have said that they will only affect big business. They have said that they will make America safer. All are great things. But the facts of their actions indicate they are lying if not confused.

“Under both Democratic plans, tax rates would increase by 3 percentage points for each of the 25 percent, 28 percent and 33 percent brackets. At present, the 25 percent bracket begins at $31,850 for individuals and $63,700 for married couples. The 35 percent bracket on incomes over $349,700 would jump to 39.6 percent.”

So here is the big question for the up-coming election. If you aren’t rich at $31,850 and the Democrats are going to increase your taxes, what other plan proposed by them is equally skewed to your disadvantage?

Will gold hit $1125 and lift gold stocks in 2008?

Over the past 9 days the potential for a Democratic nominee to be identified in the U.S. Presidential race became clearer, crude oil has topped $100 a barrel, China has begun to recover from winter ice storms and started the Lunar Year of the Rat. Each of these items has helped to place upward pressure on the spot price of the precious yellow metal commodity gold. Thus today we are at a point where record profits are being reported by some gold mining stocks, and gold spot prices have breach historic levels.

And I’m not surprised.

I have mentioned,

“As these facts are absorbed by the markets, increased volatility and further upward pressure on gold should continue. It’s likely that the Philadelphia Gold and Silver Index and Amex Gold Bugs Index will reflect this pressure. Several Canadian gold miners are also likely to have a short-term boost as they will have increased sales due to lack of competition.

Perhaps most important will be the timing of all these events. If they are moderately spread out and occur individually I expect that they will not be able to retard the move in gold. Combined or occurring close together the effect will be magnified.”

When I made this statement gold spot prices were above $920, now on February 21st they have reached $948. That’s roughly a 3% increase in 9 days, and a continuation of the trend established at the beginning of this year. And it’s not limited to just gold commodity prices.

Barrick Gold Corp reported a 28 percent gain in fourth-quarter profit, or 61 cents a share, beating the estimate of 14 analysts. Barrick was able to attain this while production in 2007 fell 6.7 percent to 8.06 million ounces.

Given that fact, what would an investor or analyst think when you consider that supply is in the throes of shrinking due to power outages and other factors in South Africa. One example is DRDGold, which dropped production 13% in the 4th quarter, and yet is up 4.4% today.

But the growth is not limited to just these companies.

The TSX material stocks gold sub-sector is up 1.4 percent. That includes the aforementioned Barrick and Goldcorp. Other companies around the world on the rise include Exxaro, AngloGold Ashanti, and many others.

The facts are that China and India need gold. Even in a global slowdown their demand has increased pressure on supply. Recession and inflation fears and a lagging stock market in the United States have not diminished though they are not leading world headlines this moment. Oil prices are foreseeable going to continue higher and place more pressure on world economies, especially if OPEC cuts production rates as expected. And the prospect of a Democratic President in America is generally seen as a negative for the stock market, further spurring a move to gold to hedge investments. I have said,

“All stock markets, all financial markets, move on emotion first. That’s given. And few things are more emotional that 1.25 basis point moves by the Fed in a week. But fundamental facts of the markets always come to fore and correct the emotion. To me, $1000 gold, and higher gold stocks across the world, is as fundamentally sound today as when I discussed it earlier this month and in December of 2007.”

I’m no analyst, nor am I making an advisement. But I do believe that the factors are in place, and the results are like dominoes falling. Unless investor sentiment changes, which actions by Warren Buffett and the IMF have not been able to counter to date, I see nothing to stop this trend.

Now I will go one step better. If supply remains constrained, as we can see is likely, and the U.S. economy has the mild recession now being stated by the Federal Reserve. If oil production is cut, in combination with the recent U.S. refinery accident that has placed pressure on capacity, and Senator Barack Obama becomes the Democratic nominee for the President of the United States. If all those actions occur, which seem 80% probable to me at this time, then I believe that gold spot prices in excess of $1125 are possible by the end of this year. Commensurate with this move should be gains among the gold mining stocks across the world.

Warren Buffett and International Monetary Fund pressure Gold prices

Gold prices took a bit of a hit with news hitting the markets early on Tuesday’s trading day. Lifting the general markets is the news that Warren Buffett has offered to provide reinsurance coverage for municipal bonds. While this does nothing for non-municipal securities, nor the mortgage backed loans that have caused severe losses across the financial markets, the move by Buffett has added to the confidence levels of investors. Early gains on the Dow Jones Index have hit 224 for the day.

Added to this is news that the International Monetary Fund (IMF) is planning to sell gold into the market. Approved over the weekend, the news was announced Tuesday and has driven down the April gold futures prices slightly. Gold continues to maintain above $920, but the ultimate effect of the sale has yet to really factor into the market.

Considering that South Africa, responsible for the 2nd largest amount of gold in the world, has reduced supply numbers due to power outages in that country the timing of the IMF sale seems to be an attempt to balance demand and keep prices lower.

"However, the fact that dips are still drawing very strong buying interest, and with the rest of the precious complex pushing higher, it seem likely gold will follow,” said James Moore, an analyst at TheBullionDesk.com.

The real thought to keep in mind is that if the offer by Warren Buffett instills enough confidence in the U.S. markets that investors feel a recession will be short-lived, profits in gold will likely be taken and depress the price. The IMF sale will have a real affect on gold spot prices, but will likely only have a short-term effect considering the lack of supply from South African mines.

Another factor that I believe has not hit the market yet are the 1st quarter results of the financials and banks still plagued by sub-prime mortgage loans. While Project Lifeline is being announced at 11:30 and will include home owners that are not in the sub-prime category, it does not affect losses that have already occurred. I continue to expect that all major losses will not be fully accounted for until the end of the 2nd quarter, thus still a pressure on the markets and positive for gold investors and stocks.

As these facts are absorbed by the markets, increased volatility and further upward pressure on gold should continue. It’s likely that the Philadelphia Gold and Silver Index and Amex Gold Bugs Index will reflect this pressure. Several Canadian gold miners are also likely to have a short-term boost as they will have increased sales due to lack of competition.

Perhaps most important will be the timing of all these events. If they are moderately spread out and occur individually I expect that they will not be able to retard the move in gold. Combined or occurring close together the effect will be magnified.

Gold soars in early 2008, but will it stay lofty?

It’s amazing what can happen in 30 days. In virtually a single month there have been dramatic changes in the world, and in the world markets. Not least of these events has been the change in price of gold. What follows next will be interesting.

Back on December 6th 2007, I stated that oil hitting and exceeding $100 a barrel was imminent. I mentioned that geo-political instability was in the air. I was looking forward to a Fed rate cute, and further trouble in the housing markets. And I mentioned the threat of recession. All of these things I felt were cause for the gold futures hitting $855.

Since that time we have seen oil soar and attain the century mark. Former Prime Minister Bhutto was viciously assassinated in Pakistan, either by Al Quida or the military/government there. The Fed did cut rates and the housing market has slowed down. At the same time, reinsurers for high-risk mortgages have been hit and another round of write-offs seems imminent. Many are starting to talk recession, and gold spot prices have hit in excess of $850 with many calling for a run to $1000.

Sometimes you just hit the bull’s-eye.

So considering all that, and the fact that today is just the 4th day of 2008 what can we expect? How far will those that are rising go? What is holding back gold stocks that have not rallied as gold spot prices have?

Perhaps just time. Even as I write this the Dow Jones is falling some 200 points. The next round of write-offs due to the mortgage crisis has yet to be announced, but I expect that several major banks will exceed expectations by 75% or more. I also expect more banks to announce their own mortgage based problems.

A massive 100-mile and hour winter storm is starting to hit the Northwest coast, potentially dropping as much as 10 feet of snow. As that storm and others travel the nation, heating oil prices are sure to rise, and inflation is probably going to follow suit.

The dollar is getting hit repeatedly, and expectations of good sales numbers from the 4th quarter are unlikely. Expect no help from there.

And Middle East politics is anyone’s guess. Iran may or may not have nuke; Pakistan is still rioting and ready to riot. And we are still fighting Al Quida in Afghanistan, plus the war in Iraq.

Instability has always been good for gold and gold stocks. Demand has always been a solid factor. Right now demand from China and India is surging. Literally everything is in place.

But gold stocks are not gold spot prices. Events across the world and at home don’t cause instantaneous reactions normally. There is always a trickle factor. But it would seem that gold stocks are worthy of a lot of attention. Yet timing is vital. Geo-politics can stabilize quickly. Oil can drop as fast as it has risen. This could be the last of the big winter storms.

I would take a viewpoint similar to Warren Buffett when he recently spoke about China’s stock market. Caution is the key. Timing is everything and being sure often is worth more than rushing in.

Still analyst like John Ing of Maison Placements Canada Inc. are confident,

“It's unquestionably going to be a golden year.”

And 4 well known stocks have already hit 52 week highs. Streettrack Gold Trust, Barrick Gold Corp., Agnico Eagle Mines Ltd., and Goldcorp Inc. all surged.

Maybe JPMorgan analyst Josh Bridges will be right when he stated,

“We feel that we could be beginning to see another period of gold prices outperforming their dollar relationship.”

Just remember that the last time, some 30ish years ago, when gold last broke out it then entered a 20 year bear. And 30 days can make a huge difference.

Predictions of China's growth by the Christmas tree

I have often found that some of the best information comes from the least expected places. For example I recently was at a Christmas party for a top NYC law firm. One of the people I met was a trader who specializes in Southeast Asia.

This trader believes that Japan, China, and Australia will all be exceptional areas of growth throughout the next 5 years. China is his personal favorite. I paraphrase…

“China has the sheer manpower that will help it outperform. In many ways it is similar to Japan of the 1950’s.”

It is hard to argue that point. Especially since the $5 billion 9.9% stake in Morgan Stanley was made December 19th. This positioning and the $29 billion Chinese buyers spent buying outside companies signal a long-term plan by China to integrate with the world markets in a more direct manner.

There is no question that the manpower resources available to Chinese corporations are a unique resource few nations can match. Add the previously stated investments and time, and you get growth and stocks that can surge longer and stronger than even in the last Chinese bull market.

But there are serious negatives. The Chinese stock market is hardly as transparent as many might wish. The latest bull has very recently reversed into a solid bear market. That transition occurring in an amazingly rapid month. And of course the communist nature of the Chinese Government adds political issues; some of which are known, some unknown, and 1 thing is assured – volatility.

There is no lack of investors that agree with the abovementioned trader I met. In fact I agree with reservations. While I am perhaps more cautious than Warren Buffett, China is a market that demands attention. The only question is the one most vital to all investors.

When is the right time to get in and out?

A point of caution for Iowa Democrats

As has been shown constantly since it happened, the most important part of the Iowa Debate has now hit YouTube. It’s very important for more reasons than just the joke that Senator Obama wittily made. Take a look at the video clip, and watch for the details. I’ll explain my points right after.



Now at the beginning we get the question. This is very important because of what it does not state. The fact is that many long-time supporters of the Clinton’s have abandoned them and joined Senator Obama. I have to wonder why these people, who personally know the Clinton’s, would end a decades long relationship. What do they know that would cause them to switch? And en masse at that.

The next thing we hear is the laugh. Or cackle if you prefer. [The 23rd second of the video] This is not a joyful laugh, but one that directly implies superiority and advantage. It’s clear that Senator Clinton felt this was an embarrassment to Senator Obama. That it proved his lack of experience and ability, in her mind. Her laughter was at him and not with him, it was mean-spirited and for once an honest reaction from a normally very well scripted and calculating politician. [I’ll address the experience issue in a moment]

Senator Obama responded in defense and with class. [The 28th second] Rather than snapping at Senator Clinton’s implied slap in the face, he retaliated with jest. He emphasized his growing support and the fact so many of her initial supporters have joined him. He mentioned and declared that like all great leaders, he too would seek advice from those around him and make the best decision.

If you notice the reaction from Senator Clinton, which is brief, is opposite everyone else. EVERYONE else laughed. Senator Clinton caught herself in the middle of a scowl. [The 32nd second of the video clip] She showed part of another real reaction. She is angry about her attempt to embarrass was used against her, well. That a moment she thought would stand for her benefit turned into a moment of her obvious weakness.

I am not saying that Senator Obama should be the choice of anyone. I am not endorsing any candidate, Republican or Democrat, at this moment. But I am highlighting facts that are going unspoken in this race of the primaries.

Oh, and as for experience. In the mid-80’s Senator Obama worked as a community organizer in Chicago. In the 1990’s Senator Obama ran a voter registration drive. From 93-96 he represented communities and voter rights as a lawyer and lectured on constitutional law from 1993 until 2004 when he was elected to the Senate. Oh, don’t let me forget to mention that Senator Barack Obama served in the Illinois State Senate from 1996 until 2004 when he was elected to the Senate.

Now that might not be executive political experience, but it is experience. It is serving the public. It is a commitment that spans roughly 20 years.

As for Senator Clinton. She campaigned for a year in 1973. She researched impeachment procedures in 1974. She taught something at Fayetteville School of Law, for 3 years until she got a job working on patent infringement. When President Bill Clinton was elected Governor she got to work on getting federal funds to expand medical facilities. After President Clinton lost re-election she joined Arkansas Educational Standards Committee and did eventually change school policies.

When President Clinton was elected First Lady Clinton took on healthcare, a familiar area for her. She failed miserably.

Essentially Senator Hillary Clinton has consistently had minor experience serving the public. She has done very well making money in dubious actions. But her roles helping the public have consistently come from her connection to President Clinton. That includes being elected in New York, where she is not from and has no connection to.

Senator Clinton has not lead a life of public service. President Bill Clinton has, Hillary has not. Consistently Senator Clinton has had the claim that she was around public service, and dabbled with it a bit, while being the wife of someone who did serve the public.

If sleeping with public figures qualifies as public service, executive experience, then expect Monica Lewinsky to win a Senate seat shortly. But if actually serving the public is the criteria, Senator Clinton is lacking all the candidates.

Oh, a last thought. From 1978 until roughly 1992 Senator Clinton made at least $100,000 a year. She was on multiple corporate boards. When was it that she, or Warren Buffett, or John Edwards and so on, wrote a check from their excess funds to the government just because. Not paying taxes but just paying more than their share, which she claims the rich, which she qualifies as for over 2 decades, don’t do.

Suffice to say, be cautious at the Iowa Caucus. 41 seconds in the past might have a lot to say about what 4 years in the future could be like.

Impending US rate cut moves China and Asian markets

It’s amazing the interconnectivity of the global stock markets and the thoughts that are held in various countries. This is especially true of China, and it’s stock market.

As noted earlier on this blog, China has ended a long Bull market and entered a Bear recently. The 20% drop has elicited calls of caution from noted investor Warren Buffett, and debate amonst brokerage house. Yet the outlook for 2008 is not quite that dreary.

With the chance that U.S. markets will be receiving another rate cut by the Federal Reseve, Hong Kong rallied and took much of the Asia markets with it. Even the Chinese banks, which are expected to raise the reserve ratio to a high of 17%, gained with expectation

“Hong Kong Monetary Authority generally follows interest rate adjustments by the Fed because of the local dollar's peg to the U.S. dollar. Local and Chinese banks gained on expectations that a rate cut would fuel their mortgage businesses.”

In addition there is the thought that China will be a big part of growth in South Korea. Shipbuilding and steel are the favorite sectors for some analysts like Cho Yong-jun of Shinyoung Securities. Others feel that China is one of the critical keys to the emerging markets, like Yoon Ji-ho of Hanwha Securities.

“China is the growth engine of the global stock market. The rise would continue unless China and other emerging markets slow down.”

Yet this news all comes as an expected tightening of the monetary policy is being implemented. Which is seen as a positive in that

“Yuan appreciation has actually been helping the stock market by attracting inflows of foreign funds and encouraging Chinese investors to keep their money in domestic markets.”

So given all this, what conclusions can we draw?

It’s likely that any rate cuts in the United States will rally all the Asian markets and while the Chinese monetary policy will probably increase the Yuan to the Dollar, growth is foreseen in the emerging markets. How this growth interacts with the continuing questions in the U.S. economy and the increased demand in Asia is unknown. Mr. Buffett has made his statements, which must be respected. At the same time Asian brokerages are indicating they have no fear.

I would suggest, though this is no recommendation, that any potential investors remember that bears hibernate, as do the market trend that is named after them. Often the worst of a bear market is not seen in the first bite. But in any non-bull market there is always an area of productivity. And at some point even the worst performers are worth buying for the long-term.

From a soaring Bull to a biting Bear in 30 days

Sometimes markets act swiftly. In America we have seen that since Monday, with the Dow Jones hitting correction territory and just 2 days later now resting up at 13,289. That’s a huge point swing, but when you consider China, it’s not that big a move.

Those that like distressed stocks, and have a feel for international markets may want to take a look. Of course the words of the reputable Warren Buffett should be heeded when he stated investors should be “cautious”. Why is the Chinese stock market in distress and Mr. Buffet advising caution? Because China is going through its own market bubble right now.

While you may not have heard this in the news, China had prices increase 4x in the past year. Beyond impressive growth without question. But the bubble is bursting now with massive recalls and particularly high valuations.

“Shares in the index trade at an average 44 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 17 times profit.”

Because of these pressures China has now officially gone into a bear market having dropped 21% in a single month. And some feel this is not the bottom.

“Yan Ji, an investment manager in Shanghai for HSBC Jintrust Fund Management Co., which oversees the equivalent of about $517 million. ``What we have seen now is only the start.”

So the question is, is this the feeding ground for international bears feasting on shorts as the pressure mounts, or is it an opportunity for savvy bulls picking and choosing their targets? As with any market in turmoil, there is no easy answer.

China is seeking to slow the 11% growth of that nation; Chinese brokerages are being encouraged to invest overseas to the tune of $34 billion. The last bear market lasted 4 years and caused the Chinese market to drop 50%, before rising 5x in its wake.

And some are optimistic, like

“It's far too early to talk about a prolonged bear market as domestic demand is still strong,'' said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai.”

Well overall one thing can truly be said, without risk there is no reward. But to know whether you are leaping without looking is important as well. There is no question that there is money to be made with China stocks. Just make sure you know where you have placed your footing.

**This can be seen at China Stocks Blog where I am a contributing author.**

Democratic response to State of Union - 1.24.2007

Having just heard the President’s State of the Union speech, and the Democratic Response I feel compelled to respond. I will address the Democratic Response as it has me enraged. With all due respect to Senator Webb I feel that the response was an insult to my intelligence.

That is a strong accusation, I realize. I will back it up as well as I can.

In the first point, Senator Webb states that the economy is being viewed unfairly. He stated that the view of the economy should be seeing from the point of view of ‘Main Street.’ The senator went on to discuss the vast discrepancy in CEO pay vs. the average worker.

I have a problem with these comments. The fact is that unemployment is at a low. Profits for corporations are up. That is important as the money corporations make benefits shareholders, and helps with corporate taxes, and allows for higher research and development funding for future innovation. It is a fact that for the average corporation to make more money more of its product, or the same products at higher prices must be bought. The consumer must have the funds to buy those goods, at either the higher price or more goods. That to me is a direct example of the health of ‘main street’ health.

The fact that CEO pay is up is a good sign. Higher pay equates, or should, to better performance of a company. You can’t pay a massive salary if the money isn’t there. And the extreme of 400x more than the employees (I believe the statement was employee and not average employee which means the comparison could be versus the lowest paid person in the company) is the reason why people own businesses. Don’t we want to be our own bosses to be able to make more money? If you have built up a company, or improved an existing one, don’t you deserve to reap the reward? And if it is too much the company will suffer, the pay will be lowered or you will be replaced. Basic law of business as far as I know. On the other side of this thought is the fact that I, as the owner of my own business, do NOT want the government telling me what is the most I can make in my business. That is the essence of what the CEO pay comparison means. Government regulation of what I deserve to make for running my business. The laws may start off with the intention of affecting the top 1% of CEO’s but they will inevitably affect ALL CEO’s.

The question of corporate profits was further questioned later, as Senator Webb mentioned how the pay has increased since his time in college. Since we are aware of Senator Webb being in Viet Nam, I assume that his college years were in the late 70’s. Considering that, is his comparison adjusted for the rate of inflation? Does it consider how much a dollar bought roughly 3 decades ago as compared to today?

And when Senator Webb mentions how President Roosevelt worked on breaking corporate profits, did the senator consider the philanthropy that CEO’s did then? Did the senator consider the extremes in CEO pay vs. employees? And is that comparison better or worse than 30 years ago, or today?

What about the philanthropy that the top CEO makes because they have such an alleged extreme in pay? The Gates Foundation would not exist id CEO pay was capped. Mr. Warren Buffett may not be able to give away his fortune if he did not make as much, or his incentive (pay and profit) were limited or removed.

Continued in part 2