December 2011 - Money Morning - Only the News You Can Profit From
Put An End to Congressional "Perks"
With a median net worth of $891,506, Congress members are nine-times wealthier than the average American household – and some Congressional leaders are exceedingly richer.
In fact, a recent analysis of financial disclosure forms showed Congress members' collective net worth was more than $2 billion in 2010 – a 25% leap from 2008.
If members of Congress are that rich, then why are average Americans footing the bill for so many of their luxurious perks?
Just look at what a member of Congress gets in addition to base pay of $174,100 a year:
- Three-day workweeks.
- A 401(k)-like plan that "matches" up to 5% of its input.
- The chance to choose from 10 different first-rate health plans and access to an on-site doctor.
- A full pension.
- Retirement benefits.
- Gym memberships.
- Car service.
- Free parking at two regional airports.
- Free flights to almost anywhere in the world.
- And a per diem travel allowance of $3,000 per trip.
And yet members of Congress still find time (and the audacity) to complain about political gridlock and federal spending.
Well, if we want to reduce "capital waste" we might as well start by scaling back Congressional perks. And if we want a governing body that's more solutions-oriented, then maybe we should increase urgency by making members of Congress live like the rest of us.
Five Economic Blunders of 2011 and Five Fixes for 2012
Government's ability to fix the economy's problems may be limited, but it at least should try not to make matters worse.
Unfortunately – but not surprisingly – many of the things that happened in Washington this year did the U.S. economy more harm than good.
More than two years after the official end to the recession, the U.S. economy is still suffering through sluggish growth and an 8.6% unemployment rate.
"They've been wrong from the beginning, and they're still wrong," said Money Morning Chief Investment Strategist Keith Fitz-Gerald of U.S. government policymakers. "It makes you wonder if any of these people passed Economics 101."
That said, here are five of the government's worst economic blunders of 2011:
- The Debt Ceiling Crisis: While Congress did step back from the brink of plunging the nation into default, the fear and uncertainty resulting from the battle over raising the debt ceiling unnerved stock markets and was the main reason Standard & Poor's cut the U.S. credit rating from AAA to AA+ for the first time ever. The worst part of it was that the whole battle was unnecessary. Congress votes often to raise the nation's debt ceiling, a necessity to keep borrowing the 40% of the federal budget not covered by receipts.
- The Bungled Federal Budget: In mid-January, the federal government will have operated without an official budget for 1,000 days. The lack of a real budget makes it harder for government agencies to plan, as funding depends on a series of "continuing resolutions" by Congress. Failure to pass one of these stopgap measures would result in a government shutdown, which both Republicans and Democrats have used as a threat to try to force the other party's hand. Even worse, lawmakers argued about, but ultimately took no action on, reducing the crippling $15 trillion national debt or the huge annual deficits that keep driving it higher. Both are anchors on the U.S. economy.
- The U.S. Federal Reserve's Loose Money Policies: Led by Fed Chairman Ben Bernanke, the central bank has used every policy tool at its disposal to flood the U.S. economy with money in a futile effort to spur growth. Not only has it held interest rates near zero for more than two years, but it has conducted two "quantitative easing" bond-buying programs (not to mention mortgage-backed securities). Those policies have failed to implement either of the Fed's dual mandates to hold down the unemployment rate and control inflation.
- U.S. President Barack Obama's Jobs Bill: Despite a lot of dramatic rhetoric, President Obama's American Jobs Act was more of a re-election ploy than a serious attempt to deal with the high U.S. unemployment rate. The president knew Republicans would object to many of its provisions, as well as its hefty $447 billion price tag, but also knew those same provisions would appeal to his political base. Even if it had passed intact, economists said it would at best lower unemployment only by a single percentage point.
- The Payroll Tax Cut: While the House Republicans were foolish to fight the Senate and President Obama on the deal that was made to extend the payroll tax cut for two months, they were right about one thing: Any extension should have been for the full calendar year. Instead of resolving the issue, Congress merely postponed the fight over further extending the 2% cut in the Social Security tax deduction until February. Apart from that, who thought putting money into Americans' pockets by lowering payments into the already-threatened Social Security Trust fund was a good idea? Talk about mortgaging the future.
That leaves plenty of room for improvement, doesn't it? Now let's look at five things the government could do that could actually help the U.S. economy:
The Script for 2012 – And Your Part In It
Welcome to 2012, the third act of a tragic play. As an investor, you have a part in it.
So, if you haven't been paying attention to character development or lost sight of the plot, you're going to be frozen onstage when it's your turn to act.
Here's your script and some direction.
The set-up went like this: The audience walked into the world theater in September 2008. They took their seats and read the card left on their velvet chairs. It was short. It said:
Act I opens with the backdrop of mounting tension as insanely leveraged homeowners, consumers and banks scramble to make sense of declining home prices. The curtain lifted and the show began. The first act was dramatic, but ended in March 2009.
Act II began immediately without an intermission. Asset prices began to climb from their depths thanks to massive global stimulus.
But, Act II also revealed the tragic nature of this play. In spite of "green shoots" and rising commodity and stock prices promising a return to normalcy, the truth is that the world changed before the credit crisis and the Great Recession. There's a "new normal."
Globalization has increased labor pools, lowering costs and causing massive shifts in manufacturing realities, while productivity gains orphaned an army of white collar, middle-management sergeants, mostly in the developed world.
Seismic shifts in emerging markets were met with inflows of capital, while in developed countries, especially Europe and the United States, outflows of capital were offset by politicians borrowing more from future generations to promise retirees they would be able to retire.
Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year
Despite a pullback from its all-time high of $1,923 an ounce a few months ago, gold is still trading in the $1,700 range. In fact, the glittering metal has gained 22% in the past 12 months.
What's more, I believe gold prices will eclipse $2,200 an ounce in the next year, and shoot beyond even $5,000 an ounce after that.
With the economy still in turmoil – and the U.S. dollar sinking even lower in 2012 (Take a look right here to learn how far the dollar will sink in our new report) – gold prices will continue to rise.
So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.
Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.
Let me explain.
Natural Gas Q&A: Lies, Damn Lies, and Statistics
It has been a while since I responded to your many emails.
So, as we await the latest developments in the European debt mess, today seems like a good time to answer a few. This time around, I am addressing some of your questions and comments that deal with natural gas.
By the way, my staff and I read all of the input and feedback you send our way, and we're very grateful for it. Please email me at firstname.lastname@example.org. (I can't offer any personalized investment advice, but I can address your questions and comments in future broadcasts.)
Let's get started…
Q: I've just read recently several articles stating that the EIA has revised downward its estimate of our natural gas shale reserve potential by deciding to accept, unconditionally, the most recent U.S. Geological Survey stating that the Marcellus, Eagle Ford, Barnett, and other shale formations hold only 20% of the heretofore accepted reserves. This is an 80% reduction! This changes everything if true.
That's the question – is this bogus, or is there factual evidence to conclusively support this new estimate? ~ Howard B.
A: Howard, this reminds me of a famous statement from the 19th-century British Prime Minister Benjamin Disraeli (though the comment is also variously ascribed to Mark Twain, Alfred Marshall, and many others): "There are three ways to hoodwink the masses – lies, damn lies, and statistics."
The Energy Information Administration (EIA) – a unit of the U.S. Department of Energy – continues to wrestle with the distinction between reserves and extractable reserves.
The first is the volume of gas indicated by field tests and analysis. The second is gas available for extraction at current methods. I would also stipulate as "extractable" reserves only the volume that market conditions allow.
When you equate the two, we are still in the same ballpark.
Current estimates put no more than 20% of known reserves as "extractable." As technologies improve, that figure could improve, too.
For now, the EIA estimate falls in line with most others.
So to answer your question, nothing much has changed here, aside from some government bureaucrats wanting their figures to be more accurate.
Q: Kent, your work appears to be expanding into areas of advisement that could affect the future profitability and wellbeing of nations and their business relationships with existing partners. A delicate balancing act if there ever was one! If such arrangements are not handled carefully, could sanctions and/or military skirmishes be the outcome? Are we facing the possibilities of "gas wars"? ~ Fred P.
A Brave New (Broken) World
I've said it before, and I'll say it again.
The markets are broken.
It's not that they're not functioning on a daily basis, pricing risk and assets and performing their price discovery duties. They are doing that – or at least trying to.
Those are the little, daily things that markets do, and there are things there that are broken. (I'll get to those things another time.) Think of those little things as the "hows" or the "mechanics" of buying and selling.
Think of the big things as the "whys" or the "psychology of investing."
Those are the things that are broken.
Until they are fixed, or "things" change, drastically, we are in for some really wild swings in the months, quarters, and years ahead.
I'm going to point out all of these big things to you, over time. But right now, I'm going to point to just two.
1) No More Buy-and-Hold Believers
First, there are two types of players in markets, investors and traders.
It used to be that investors dwarfed traders – by a huge margin.
Investors were the meat and potatoes and the vegetables, and traders were the gravy that made sure investors' plates were liquid enough so that they didn't choke when swallowing their meals.
But that's all changed.
There aren't that many truly long-term investors any more. It's too dangerous to be an investor in the traditional sense. That's why most investors, at least those that call themselves investors, are really all traders now.
I don't mean traders in the high frequency sense, or even in the day trading sense. I mean they are traders because they invest for the future but can't see beyond a few quarters, if that, so they have to get out of positions.
These traditional investors almost always have stop-loss orders down, or at least have stop-loss levels in mind as part of their investment "plans." A lot of them now use profit targets, too.
That hardly ever happened traditionally. Investors invested. They were buy-and-hold believers in a brighter future where, over time, assets appreciated, and they stuck with them.
Not any more.
Investment Forecast: Why 2012 Will Be the Year of the "Micro Boom"
Forget about "buy-and-hold" investing.
Going the total blue-chip route won't help, either.
Even that grand old investment standby – indexing – figures to be a loser in the 12 months to come.
As an investor looking to maximize your profits in the New Year, you need only understand one thing – that 2012 will be the year of the "Micro Boom."
Never heard the term before?
That's okay … Micro-Boom investing is a different kind of investing strategy for what's shaping up to be a very different kind of market.
But make no mistake: These little-known profit machines will separate the winners from the losers in the New Year.
Let me explain …
Micro Booms are small pockets of intense growth … that can lead to stunning profits.
Don't confuse Micro-Boom investing with sector investing – they're not the same at all. Micro Booms are much more focused, much more intense – and far more profitable.
Take, for instance, the "Bakken Boom."
It's unfolding in North Dakota, and is being compared to a "modern-day gold rush." But it's not gold the profit-seekers are pursuing … it's oil from the Bakken Shale oil deposits located there.
Big Oil is investing $2 billion each month in pursuit of Bakken business. And the urgency is so intense that some towns in that region have seen their unemployment rate go all the way to zero.
And the Bakken Boom is just one of a half-dozen of these tectonic growth plays – some of which offer investors the chance to make five times their money … or even more.
But it's not enough just to identify these Micro Booms – to maximize profits an investor must be able to identify the biggest beneficiaries of all this growth, since those will also be the greatest profit opportunities.
- Thinking about high-frequency stock trading and transactions taxes on trades
U.S. Economy 2012 Forecast: Where to Find the Biggest Gainers and Avoid the Biggest Losers in This Year's Rocky Markets
Anyone who hoped the U.S. economy would get back on track in 2011 was sorely disappointed.
The European sovereign debt crisis and the abysmal failure of policymakers to take effective action undermined any chance we had at a strong recovery.
And what's even worse is that we're in for more of the same in 2012. Indeed, the U.S. economy in 2012 will be even more sluggish than originally thought – and for the same reasons 2011 was a disappointment.
The Organization for Economic Cooperation and Development (OECD) estimates U.S. growth will slow to 2% next year, down from a 3.1% estimate in May. It forecasts growth will pickup to 2.5% in 2013.
Of course, these forecasts are contingent upon Congress finding a way to stimulate the economy and tighten fiscal policy – not an easy balance to achieve. Without such action, U.S. economic growth next year could be as slim as 0.3%, and only hit 1.3% in 2013.
Occupy Wall Street, Consider This My Gift to You…
Out of far left field, I see something coming that I never expected.
It's more like the coming together of pieces of a puzzle that have eluded us for too long.
By the way, Occupy Wall Street, if you're listening, and I hope you are, and you're still floundering (which I know you are) without a cause that anybody can really wrap their heads around, drop your drums, chants, and wanderings, and make the coming together of this puzzle what you're protesting.
And make what could result what you are demanding.
Because, really, this could be the mother lode.
The U.S. Securities and Exchange Commission (SEC) is accusing six former executives of Fannie Mae and Freddie Mac of playing down the risk to investors of their firms' aggressive fast-forward into subprime mortgages… which caused them to implode spectacularly.
Two separate civil suits, filed last Friday, allege that the executives "knowingly misled investors" who owned shares in the companies and were thus deprived of critical information against which meaningful investment decisions are generally made.
The two wards, currently under U.S. conservatorship (life support attended by a wet-nurse), were themselves spared being sued, on account of their signing civil non-prosecution agreements and promising to cooperate and not dispute allegations (and also not have to admit nor deny wrongdoing). Yet the SEC is seeking financial penalties, disgorgement, and an order barring guilty parties from serving as officers or directors of any public companies in the future against the implicated executives.
The SEC faces an uphill battle based on one word – "subprime."
The problem is, subprime has never been legally defined.
You know what it means, I know what it means, everybody knows what it means, without knowing its exact definition. But if there's no definition of subprime, defense lawyers will counter that it's not possible to sue based on a standard that has never been defined.
How about we compare mortgages to cars and subprime to clunkers. If you're on my used car lot and I offer you two cars at the same price and don't tell you one is a clunker, is that fair? You wouldn't need me to define "clunker." If I said one was a clunker, you would simply choose the other car; after all, it's the same price.
There is a difference, there's a big difference.
Over on the Fannie and Freddie lots between 2006 and 2007, they were loading up on clunkers and not telling anyone what they were stocking. In fact, they were saying things like, "basically (we) have no subprime exposure" in the single-family realm.
One of the reasons they were loading up on subprime was because Wall Street banks were eating their lunch by buying up subprime loans, packaging them, and selling them to investors hand over fist, and Fannie and Freddie wanted in on that very lucrative business. It's not that they hadn't dabbled in subprime before; they had. But as they saw stresses in the marketplace on the better mortgages in their portfolios, they still loaded up on far weaker credits; also known in the business as SUBPRIME.
So what's next?