Archives for February 2012

February 2012 - Page 6 of 11 - Money Morning - Only the News You Can Profit From

President Obama’s 2013 Budget: Five Things You Should Know

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U.S. President Barack Obama's 2013 budget proposal will give Republicans and Democrats plenty to fight about.

The $3.8 trillion budget proposal, submitted to Congress, essentially follows the blueprint President Obama outlined in his State of the Union address.

That means fewer spending cuts and more taxes than Republicans will like.

So if you thought last summer's wrangling over the raising of the debt ceiling was nasty, watch the rhetorical Armageddon when those battles get re-fought in an election year.

President Obama's 2013 budget sets much of the agenda for the stormy election season ahead. These points will help you make sense of the chaos.

What You Should Know About President Obama's 2013 Budget

  1. Congress Sets the Budget: The fact is Congress, not the president, ultimately controls the federal purse strings. While much hoopla will accompany President Obama's 2013 budget, presidential budget proposals often serve more as a political billboard than a framework for how money is collected and spent by the government.

    2. So President Obama's budget will provide talking points for his 2012 re-election campaign and targets for the Republicans who seek to defeat him.

    "Every budget proposal is partly a serious policy document and partly a political statement,"Stan Collender, a former staffer for both the House and Senate Budget Committees, told msnbc.com.

  1. No Budget, No Problem: Not only can Congress reject the president's budget,

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Why I’m Taking Gold Double-Eagles on My Next Trip to Utah

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Federal Reserve Chairman Ben Bernanke may think he has everything under control, but the truth is the monetary ground is literally shifting beneath our feet.

That's why his loose monetary policy has some U.S. states looking to get into the gold coin business.

As I'll explain later, it's why my Gold Double-Eagles are becoming even more valuable.

Because while the U.S. Constitution bans states from printing their own paper money, it does allow states to make "gold and silver Coin a Tender in Payment of Debts."

Now no fewer than 13 states are seeking approval from their state legislatures, either to issue their own currency or to explore it as an option as the Fed's printing presses spin out of control.

So why is there this big rush by states to move into gold as an alternative currency?

It's simple really.

The Trouble with Fiat Money

Fiat money, created by central banks, possesses no intrinsic value. Paper money only works as long as governments don't create too much of it.

For pieces of paper to have value, we all have to believe there won't be too many of them and that the authority creating them has the preservation of their value as its top priority.

When that confidence vanishes, the fiat currency returns to being just paper – as it did famously in Weimar Germany in 1923. Or even more catastrophically in post-war Hungary, where the last stable symbol of value, the 1931 gold pengo, became worth 1.5 octillion 1946 paper pengos.

Of course, central banks do occasionally compete for foreign depositors by offering paper currencies with more stability.

In fact, before 2000, the U.S. dollar benefited from these flows that came from all over the world, including Europe.

Now, apart from the eccentrics who swear by the Japanese yen or the Chinese yuan, flight capital is largely confined to the Swiss Franc.

Since Switzerland is a small economy, the Swiss National Bank has drawn a hard line. It refuses to allow the franc to rise above 1.20 against the euro, so even that refuge has been made less attractive.

The Attractiveness of Gold

As you would expect, the private sector and some governments have begun to look further afield, and are beginning to focus on gold in particular.

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The Real Reason Mark Zuckerberg is Paying $2 Billion in Taxes on the Facebook IPO

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As the much-ballyhooed Facebook IPO looms closer, there's a mountain being made out of a molehill.

Turns out 27-year-old founder and CEO Mark Zuckerberg may have a $2 billion tax bill that, according to a variety of sources, he intends to pay in full.

He seems like a regular guy…or is he?

To say I'm skeptical of his intentions would be an insult to actual skeptics. I think the "Zuck" is a great guy, but a regular guy? No way.

He didn't build from scratch a business that has 845 million customers by being stupid.

Zuckerberg goes to great lengths to project an aw-shucks kind of image. But in reality, this move is about as down-to-earth as Kim Kardashian's wedding. And it's every bit as sophisticated a play as I would have expected out of Larry Ellison or the late Steve Jobs.

Zuckerberg (and presumably his advisors) knows that the stakes couldn't be higher than they are at the moment, which is why he wants to pay this tax bill and reinforce the illusion that Facebook is part of Middle America – instead of being built upon its back.

He knows that successfully doing so will help him monetize your information when Facebook goes public.

I say this because it's important to remember the only reason Facebook is worth anything is because users – people like you – have voluntarily, with no compensation whatsoever, assembled the greatest single collection of marketing data in recorded history. That's right. Your data is going to make him rich.

So where are all the privacy advocates now?

I'd love to see what Facebook's proposed valuation would be if 845 million people suddenly decided they really don't want to share their most intimate moments with friends or decide they don't really want to "like" anything.

And why hasn't the Occupy Wall Street crowd or the Tax the Rich bunch latched onto this?

Because evidently none of them can spell h-y-p-o-c-r-i-s-y. And many are probably too busy using Facebook to "meme" about their activities to pay attention anyway.

But that's really beside the point.

A Zuckerberg Tax? …Give me a Break

There should be a huge amount of backlash, but there isn't. Well, unless you count any number of proposals like the "Zuckerberg Tax" advanced last Tuesday in a New York Times OpEd piece by tax lawyer David Miller.

Miller advocates allowing the government to claw back money from the ultra-wealthy. He believes that individuals earning more than $2.2 million in income or having more than $5.7 million in securities should have their stocks marked to market and taxed even if they haven't sold their investments.

That's asinine.

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How This Indian Wedding Tradition Drives Global Gold Demand

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An Indian wedding tradition dating back thousands of years is more than a simple cultural practice – it has become one of the biggest drivers of global gold demand.

In a Feb. 12 CBS News' "60 Minutes" report, correspondent Bryon Pitts took a look at how the Indian wedding tradition of draping the bride in gold jewels has propelled India to be the biggest source of global gold demand. India is now No. 1 in gold consumption of jewelry as well as physical bars and coins.

India accounts for about 32% of the global gold market with half of the gold Indians buy spent on jewelry for the 10 million weddings held there each year.

As a result, gold prices typically rise ahead of wedding season as families prepare.

"The demand for gold out of India is fundamental for the health of the industry," Ajay Mitra of the World Gold Council told Pitts. "If India sneezes, the gold industry will catch a cold."

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Is Gold Money?... Don't Ask Ben Bernanke, Examine the Federal Reserve

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If you really care about your financial future, here's something you need to know.

It's about a story that received almost zero coverage from the mainstream press. I can't say that I am surprised.

It involves gold.

Thanks to requests by Bloomberg News under the Freedom of Information Act, the Federal Reserve has revealed unprecedented details concerning the personal holdings of its regional bank presidents.

What they found is nothing short of stunning …

Ben Bernanke on Gold

But let me back up a little.

There's an exchange between Fed Chairman Ben Bernanke and Congressmen Ron Paul you need to hear first.

During a monetary policy report delivered to Congress last summer, Congressman Ron Paul asked Bernanke if he thought gold is money.

After a clearly uncomfortable pause Ben said, "No. It's a precious metal." [By the way, if you haven't seen Ron Paul questioning Bernanke about gold, click here. It's already had over half a million views.]

Paul went on to ask Bernanke why it is then that central banks hold so much gold. Bernanke answered that it was simply a tradition.

Well, congrats Ben, you did get that one right, just for the wrong reasons. (Deep down, you surely know the true reasons).

The fact is gold has been a monetary tradition for millennia.

Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:

  1. It must be durable.
  2. It must be portable.
  3. It must be divisible.
  4. It must be consistent.
  5. It must have intrinsic value.

So it's no accident that the most common basis for money – in all of human history – has been gold.

You might want to reread that: the most common basis for money – in all of human history – has been gold. It's no accident.

After all, only gold meets all five of those requirements for sound money.

It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.

What makes today's central bankers and their system of printing fiat currencies and setting interest rates so special? It is hubris and nothing more.

Fiat currencies are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.

Here's why.

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The World's Two Best Sin Stocks: Diageo (NYSE: DEO) and Philip Morris International (NYSE: PM)

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The common misconception is that so-called "sin stocks" only perform well when the economy tanks.

But the truth is that purveyors of alcohol and tobacco take their lumps during a recession just like everybody else.

That was certainly true of the world's largest spirits company Diageo PLC (NYSE: DEO), which traded as low as $42 a share in 2008. Of course, the stock has more than doubled since then, closing Friday at $93.38.

Shares of cigarette-maker Philip Morris International Inc. (NYSE: PM) have nearly doubled in the past two years, as well.

Still, you don't have to worry if you missed either of those rallies because there's still plenty of room for these two sin stocks to run.

Indeed, more and more consumers are returning to their vices as the global economy improves.

For instance, liquor sales, which stagnated in 2009, rose 4% last year, while sales of top shelf spirits increased 5.3% — a near return to pre-2008 levels.

What's more is that these gains came at the expense of the beer market, which typically has the upper hand in tough economic times.

"People who are doing well are going out and spending on spirits as an affordable luxury," John McDonnell, chief operating officer for The Patron Spirits Co. and chairman-elect of the Spirits Council, told Bloomberg. "Also, spirits companies never stopped spending through the downturn."

The same goes for tobacco products, which have been gathering steam in emerging markets even while they fall out of fashion in developed countries like the United States.

So let's take a closer look.

Diageo is Uplifting Spirits

Diageo – the company behind Baileys, Captain Morgan, Guinness, Smirnoff, and Johnnie Walker – is the most obvious beneficiary of increased liquor sales.

These are powerful brands that helped Diageo actually increase its cash flow during the recession. And now that consumers worldwide are in a slightly more festive mood, sales are set to take off.

Diageo, which produces about 28% of the spirits sold in the United States, reported a 5% increase in liquor sales in the U.S. and Canada in the second half of 2011.

More importantly, the company continued to expand its business in emerging markets.

While volumes were flat in North America and Europe, Diageo generated 14% volume growth in Latin America, 7% in Africa, and 5% in the Asia-Pacific region.

And that's just the beginning for a company that has made developing markets the focus of its growth strategy.

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The ECB's Long Term Refinancing Operation (LTRO) is Bullish for Stocks

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If you listen to the talking heads, there is no end in sight to the Euro crisis.

Even with the European Central Bank's (ECB) recent Long Term Refinancing Operation (LTRO), Greece is still making all the headlines.

As of late last week, a possible new deal has been made in Greece. However, the finance ministers that are responsible for the deal are not sure it will be enough to release the second bailout of Greece.

The ECB has been demanding that debt it bought at a discount be honored at full par value. It is now reported that the ECB will sell these debts at cost, and allow the debt to be retired.

This is a huge first step in the process of getting Greek debt levels low enough to be sustainable.

Yet, we are still well into the second year of this crisis and the market is growing tired of endless European emergency meetings.

It reminds me of the period around January 2009.

The reality is Europe needs to go through a hard, brutal adjustment period, where the weak states that cannot handle being in the European Union (EU) leave.

While a New Greek deal has been announced, few people believe it will be the last deal, or the best deal. That is, if it is even ratified in the end.

"It's up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

The rolling bailout process appears to be set up to happen this spring, as the ECB pumps fresh liquidity into its banks for unlimited dollar amounts. The drain on the balance sheets of Euro banks appears to be ending.

The ironic angle few people are tracking is that U.S. banks have been helping to drive Europe's big banks into this crisis.

Setting the Stage for the Second LTRO

Let me explain.

U.S. banks have loaned money to European banks via our money market accounts for periods between seven and 270 days on average.

So when you left cash in your money market account, a significant portion of that cash was actually being invested in unsecured loans to European banks in a search for higher yield.

These funds were typically rolled over at the current market rates, allowing Euro banks access to shorter-term liquidity. However, that began to change in July 2011 when U.S. banks started shortening the terms of the funds or flat out began to repatriate them.

This shift by American banks caused European banks to lose access to what they were using for near-term liquidity. European banks were using short-term loans to make longer-term loans to their clients.

The process of paying back their short-term funding, while still holding onto longer term loans has stretched their balance sheets even more.

This reversal of funding caused an expansion of the leverage at the banks, as they have loans outstanding but have to pay back the source of them.

As result of this liquidity crunch, the ECB rolled out a program to allow banks to recapitalize themselves.

It's called the LTRO (Long-Term Refinancing Operation).

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Latest Greek Debt Crisis Deal Solves Nothing

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Although a pending deal will allow Greece to get its next batch of bailout money, the Greek debt crisis is as much of a time bomb now as it ever was.

Private bondholders tentatively agreed yesterday (Thursday) to take a 70% "haircut," or a reduction in the value of the Greek debt they hold, in exchange for more Greek austerity measures.

If the Greek parliament approves the measures, which include lowering the minimum wage by 22%, cutting 150,000 public sector jobs and further reductions in pensions, Greece will get the $130 billion in bailout money it must have to avoid default on March 20.

Trouble is, none of that solves the real problem, which is Greece's shrinking ability to pay back future debt.

"Greece will be able to make the payment and immediate default will be avoided," Jurgen Odenius, chief economist for Prudential Fixed Income, told USA Today. "But the situation still won't be sustainable."

Previous austerity measures designed to lower budget deficits have hammered the Greek economy. Unemployment is 20.9%. The country's gross domestic product (GDP) has declined for five straight years and has been negative for the past three. Last year the Greek economy contracted 5.7%. Economists expect Greek GDP to shrink another 5% or so this year.

As the Greek economy gets smaller, balancing the budget gets harder. Greece almost certainly will need to keep borrowing money for years to come.

And because Greece's credit is shot, it will have a tough time selling bonds at rates low enough to avoid sinking deeper into the debt hole.

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Congress Insider Trading: Rep. Spencer Bachus, You're Up

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As Washington works on finalizing a Congress insider trading ban, Rep. Spencer Bachus, R-AL, could be the first member to be penalized for profiting from power.

The Office of Congressional Ethics is investigating Bachus, the chairman of the House Financial Services Committee, for possibly violating insider trading laws, The Washington Post reported Thursday.

Activity disclosed on Bachus' annual financial disclosure forms triggered the investigation, which started late last year.

This is the first insider trading case involving a member of Congress. It was announced days after the House approved the Stop Trading on Congressional Knowledge (STOCK) Act, which basically says that members of Congress must obey insider trading laws.

The House voted 417-2 to approve the bill; the Senate approved it last week in a 96-3 vote. It took more than two months to get the bill through both houses. The House amended the Senate bill, meaning the process still has to go through another step: a conference to produce a common version.

Bachus issued a statement Thursday.

"The Office of Congressional Ethics has requested information and I welcome this opportunity to present the facts and set the record straight," Bachus said in a statement released by his spokesman, Tim Johnson.

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