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Seven Ways Washington Can Spur Private Sector Growth
The U.S. economy is sputtering, and it's no secret why: The government is standing in the way of private sector growth.
Second-quarter gross domestic product (GDP) growth was revised down to 1.0%. That means the economy grew at an average rate of 0.7% in the first half. That's pathetic.
Keynesians will say that without government intervention, we wouldn't even have seen that meager advance. But in reality, the government's intrusion into the private sector has stunted growth.
And truly, when you look at the harassment it is suffering, and at the output it is producing, the private sector actually has been remarkably resilient. If only the government would keep out of the way, growth might get onto a decent track during the rest of the year, and at some point people might get their jobs back.
As I discussed last week, there is a precedent for this statement.
When you look at output of the private sector during the 1930s, its most vigorous recovery was in 1939-40. And it was caused not by any good government policies but simply by the end of bad ones. The Republicans won a huge victory in the 1938 mid-term elections, which did not allow them to make policy but was enough to block the endlessly inventive and expensive experiments of the New Deal.
That success could be repeated now.
The private sector is still growing, albeit not very quickly. It expanded 1.9% in the first quarter and 1.4% in the second. In both quarters, government shrank slightly, mostly at the state and local level, making GDP growth even more sluggish than gross private product (GPP) growth.
More importantly, if you consider the handicaps under which the private sector is operating, it becomes clear that the private sector is capable of even more.
Specifically, there are seven things the government could do to jumpstart the U.S. economy by simply getting out of the way of the private sector:
Five High-Yield Stocks That Are a Safer Bet Than Treasuries
If you're trying to maximize return and minimize risk, you can't beat a high-yield stock that is a better credit risk than U.S. Treasuries.
It sounds crazy but it's true. The rate of insuring against the default of the debt of 70 large U.S. companies is lower than that to insure the debt of the U.S. government.
Meanwhile, the record-low yields on U.S. Treasuries – the 10-year note dropped below 2% recently and isn't much higher now – have put them below the yields of several major U.S. companies.
It cost about 50 basis points (bp) to insure U.S. Treasury bonds against default for five years; that translates to a cost of $50,000 annually to insure $10 million of bonds. But the cost to insure the debt of dozens of U.S. companies is less than 50 bp; for some it's as low as 30 bp.
And the United States is far from the riskiest government debt; Germany's credit default swaps were recently trading in the low 80s; Japan's and China's around 110 bp; and France's in the 150 bp range.
"There is no reason why governments should be considered better credit risks than top-quality companies," said Money Morning Global Investing Strategist Martin Hutchinson. "The Proctor & Gamble Co. (NYSE:PG) and The Coca-Cola Co. (NYSE:KO) make tangible products that people want to buy – and they do so at tightly controlled costs. So it's clear that companies like these can repay modest levels of debt under almost any circumstances.
"The same is not true for a government," Hutchinson continued. "Especially one that makes no money itself, produces few goods and services of value, and obtains money only by squeezing its unfortunate taxpayers."
Meanwhile, some companies have hit upon a magic combination of being a better credit risk than Treasuries while offering high-yield dividends and the potential for capital returns.
Here are five such companies:
Western Oil Majors Will Get the First Crack at Libyan Oil Production
Countries that supported the overthrow of dictator Moammar Gadhafi's regime are likely to get first crack at post-war Libyan oil production, while those that sat on the sidelines are at risk of losing out.
"We don't have a problem with Western countries like the Italians, French and U.K. companies. But we may have some political issues with Russia, China andBrazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.
Talk like that has many Western oil companies licking their chops. Meanwhile, officials from China and Russia are foundering for ways to deal with the emerging Libyan government, the National Transitional Council (NTC).
Although Libyan oil production before the uprising comprised just 2% of global output, it is prized because it is of the light sweet crude variety – it contains less sulfur than most other oil and is thus cheaper to refine.
The deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang, tried to stay positive when asked about Mayouf's statement last week.
"We hope that after a return to stability in Libya, Libya will continue to protect the interests and rights of Chinese investors and we hope to continue investment and economic cooperation with Libya," Wen told a news conference.
But other Chinese observers were indignant.
"I can say in four words: They would not dare; they would not dare change any contracts," Yin Gang, an expert on the Arab world at the Chinese Academy of Social Sciences in Beijing, told Reuters.
Although China was getting only about 3% of its oil from Libya, the Asian giant's rapidly growing economy has given it a ravenous appetite for energy – including oil.
China abstained from the United Nations vote that authorized force to protect civilians during the uprising, and along with Russia and Brazil opposed sanctions against the Gadhafi regime.
Central Bankers' Next Panic Move
It may seem like panic in the stock markets just started this month, but the truth is governments and central bankers have been in "panic mode" since March.
We just didn't see it in the markets until a few weeks ago.
But if you look back, you can tell central bankers were panicking because they kept intervening to manipulate their stock or currency markets.
Here's a quick play-by-play of those panic attacks and the real messages behind them:
- March 17 – Central bankers in the United States, the United Kingdom, Canada and the Eurozone all join forces with Japan to orchestrate a "coordinated intervention" to drag down the Japanese yen's value.
Translation: "Emergency! We have to do something about that "strong yen" or else Japan's economy is doomed."
- Aug. 3 – The Swiss National Bank unexpectedly cut interest rates to "as close to zero as possible." Swiss bankers said they would increase the supply of francs to money markets to curb their "massively overvalued" currency.
Translation: "This "strong franc' is killing us. Before long, no one will be able to afford our chocolates and fancy watches. We've got to do something. Let's try shooting this "final bullet' in our gun and see if that works." (And, unfortunately for Switzerland, it didn't.)
- Aug. 4 – The Bank of Japan (BOJ) intervenes once again to push down the strong yen's value by selling yen and buying dollars.
Translation: "Ok, now we're desperate. We've got to see this yen turn around or we're toast!"
- Aug. 8 – The European Central Bank (ECB) buys Italian and Spanish bonds.
Translation: "We need to throw Italy and Spain a bone, even though we don't have enough firepower to bail out Italy like we bailed out Greece. But we'll put on our best poker face and try."
- Aug. 9: – The U.S. Federal Reserve announced it would keep interest rates low through mid-2013.
Translation: "Um, well we have to do something — let's announce we're keeping rates low. We were going to do that anyway."
- Aug. 26: – At the annual Jackson Hole central bankers' retreat, Bernanke announced no new measures, saying: "Although important problems certainly exist, the growth fundamentals of the U.S. do not appear to have been permanently altered by the shocks of the past four years." He also promised to make the Fed meeting longer next month to address other concerns.
Translation: "Well, we've tried everything else, let's say everything is fine to calm the markets down! Then we can always dive into QE 3 next month or the month after if things get really bad!"
Nothing Has Worked
Did any of these emergency moves actually work? Did central bankers manage to stop volatility in the markets?
In fact, they made it worse. Investors have finally sensed panic from the guys in charge. That's why so many stock and currency traders keep hitting the sell button and dumping all their holdings.
Why Gold Will Replace U.S. Treasuries as the World's Last Risk-Free Investment
It wasn't long ago that U.S. Treasuries were considered a "risk-free" investment. But the financial crisis, hulking budget deficits, political gridlock, and the Standard & Poor's debt downgrade have changed that perception – forever .
Now there's only one safe -haven investment: gold.
Since surging to a record high $1,917.90 an ounce earlier this month, the price of gold has slipped on profit taking. But don't let that minor correction fool you into thinking gold's bull run is over. The yellow metal's best days are still ahead.
How do I know? Because, unlike U.S. debt, gold can't be downgraded. It has inherent value that's more reliable than the word of even the most powerful country on earth.
Gold was used as currency for centuries. In fact, it's still being used for transactions in places such as China, India, and much of the Middle East – regions that are eager to diversify away from the beleaguered U.S. dollar.
But now gold's also usurping the role U.S. Treasuries have played for the better part of a century – that of the ultimate investment safe haven.
Just take a look.
The World's Real Risk-Free Investment
From July 21, 2009 to mid-July of this year, the correlation between Treasuries (as represented by the iShares 20-Year Treasury Bond ETF (NYSE: TLT)) and gold (as represented by the SPDR Gold Trust ETF (NYSE: GLD)) was 0.5 – meaning that only half the movement of one coincided with the other.
However, in the period ranging from July 21, 2011 to Aug. 16, 2011, the correlation jumped by 78% to 0.89. That means gold and 20-year Treasuries are moving in near- perfect lock step.
The Dollar Is DONE: Four Ways To Profit As the U.S. Dollar Dies
As a young British banker in the inflation-ridden 1970s, I got used to carrying large amounts of German deutsche marks, Swiss francs and Japanese yen in my wallet – to have some security against the lousy performance of the British pound sterling.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the debt-ceiling debacle in Washington, the U.S. credit-rating downgrade by Standard & Poor's, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
How to Protect Yourself From the Collapse of Treasury Bonds
By now, you've probably taken note of the growing bubble in Treasury bonds.
The yield on the 10-year Treasury bond fell below 2% for the first time in 50 years in the wake of the U.S. credit rating downgrade.
That's irrational, and more importantly, dangerous.
A Treasury bond bubble is a unique creature. In fact, it's never been seen before, so determining its fate requires some careful thought.
But what's absolutely certain is that U.S. Treasuries are not a safe haven investment – far from it.
Treasury bonds carry five very dangerous risks – including negative yields, higher inflation, panic selling, an outright collapse, and default.
So let's take a closer look at those risks before determining the best way to profit.
First, real yields on Treasuries, after accounting for inflation, are now negative. Not only are nominal Treasury yields below the current inflation rate, but 10-year Treasury Inflation Protected Securities (TIPS) have traded on a yield of less than zero.
That is very unusual and economically distorting. Long-term bond yields in the zero-inflation 19th century never fell below 2.2%, which is to be expected. The guy who provides the money should get paid for doing so. However, any reversion to historical patterns would cause a major bond bear market. Ten-year Treasury yields would rise to the 5% to 6% range – even if inflation gets no faster – giving investors a 27% mark-to-market loss.
Of course, inflation will accelerate.
The consumer price index (CPI) inflation is up 3.6% from last year. And it's likely to rise much further as a result of the Federal Reserve's loose monetary policies.
If inflation were to rise to 10%, which is perfectly plausible, bond yields would have to rise to 12% to 13%, giving investors a 59% mark-to-market loss as well as eroding the value of their principal.
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Alliance Bernstein Holding LP's (NYSE: AB) 9.4% Dividend Yield is Too Juicy to Pass Up
In a market denoted by volatility, stocks with a high dividend payout typically come at a premium, but in the case of AllianceBernstein Holding LP (NYSE: AB) we have a bargain.
This is a company that has broad global exposure, no debt to service, and a 9.4% dividend yield.
Better still, AB stock has been beaten down of late, which means we have the opportunity to snap up this gem at a bargain-basement price.
For patient investors looking for cash flow, it doesn't get any better than this. So it's time to buy AllianceBernstein Holding LP (NYSE: AB) (**).
Why AllianceBernstein Holding LP (NYSE: AB) Is a Buy
AllianceBernstein isn't a household name but it's one of the largest asset managers in the world. The $1.5 billion company is the end result of Alliance Capital Management acquiring Sanford C. Bernstein in 2000.
The company has offices in New York, London, Frankfurt, Tokyo, Hong Kong, Sydney and Chicago, giving the company a truly global reach.
Another great thing about AllianceBernstein is that it pays 100% of its earnings per share to investors. That's why the stock currently sports a yield of 9.4%.
Jackson Hole Speech: Fed Can't Fix Economy Without Washington's Help
The U.S. Federal Reserve has exhausted nearly all of its resources in trying to help the U.S. economy, Chairman Ben S. Bernanke said in a speech Friday at Jackson Hole, WY.
Now it's up to the federal government to do its part by fixing U.S. fiscal policy.
"Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," Bernanke said in his address to the annual conference in sponsored by the Kansas City Fed.
Some analysts thought Bernanke would hint at a third round of quantitative easing, but instead he handed off responsibility for reviving the economy to Congress and the White House.
The absence of any policy changes at first disappointed Wall Street – the Dow Jones Industrial Average fell 220 points immediately following the speech – but the negative sentiment didn't last. The Dow closed up 134.72 points, or 1.21%, while the Standard & Poor's 500 Index rose 17.53 points, or 1.51%.
"The Federal Reserve Chairman may have left the door open for more easing measures, but he has given the markets nothing concrete this morning," John Kilduff, a partner at Again Capital LLC, told Reuters. "It appears the Fed has stepped back, leaving us to await efforts from the White House and Congress, if any, to bolster theeconomy. This is a bearish development."
The only tidbit of fresh information Bernanke offered in his Jackson Hole speech was the extension of the Federal Open Market Committee's (FOMC) September meeting from one day to two (Sept. 20-21), "to allow a fuller discussion" of the "merits and costs" of the Fed's policy options.