July 23, 2012

Time for us to make enlightened policies

Posted in Armageddon, Bankruptcy, debt, Economic Growth, Economy, Europe, Finance, Foreign, recession, Spain, Uncategorized, Unemployment tagged , , , , , , , , , , , , , , at 8:10 PM by Robert Barone

On July 6, the country received another disappointing jobs report. For the month, the establishment survey indicated jobs grew by 80,000; for the quarter, such growth averaged 75,000, about one-third of the 26,000 monthly average for the first quarter. Clearly, the worldwide slowdown in Europe, China, India, Brazil, etc. is having an impact here.
 
Deleveraging and slow growth
 
Let’s be clear. We are in the midst of a worldwide debt deleveraging (i.e., consumers are paying down debt instead of consuming). So, absent another round of sweeping innovation anytime soon (e.g. the Internet), in the natural course of things, economic growth is going to be painfully hard to come by. As a result, it is doubly important that economic policies promote the growth that is available.
 
Policies are key
 
Clearly, monetary policy has led with pedal-to-the-metal and unconventional therapies. On the fiscal side, the Keynesian remedies (huge deficits) have been applied. Together, however, such policies haven’t worked well enough to establish a solid economic foundation, as the recent data prove. For those who study economic history, it is clear that deficit spending alone doesn’t work if government is simply stepping into the role of debtor in place of households, as total debt owed has continued to rise.The scary part is the interest cost of the rapidly accumulating debt when interest rates rise. For those who don’t believe me, just look at Greece, Portugal, Ireland, Spain, Cyprus and Italy in today’s world. Rising interest rates (near 7 percent for the 10-year government issue) make it impossible for states to survive without bankruptcy, a bailout or financial ruin.

 
Policy failures
 
In times like today, when deleveraging is slowing economic activity, government should adopt policies that promote the private sector, because it is the private sector, not government, that is the engine of economic growth. Unfortunately, the following federal policies currently are negatively impacting the private sector:

• Taxes:
Uncertainty surrounding tax policy causes the private sector to take less risk, which lowers investment and job creation. For the last several years, Congress has signaled that significant tax increases are just ahead (currently referred to as the “fiscal cliff” due to occur on Jan. 1, 2013), only to push them back at the last minute for another short period. Nevertheless, the uncertainty persists, and economic hesitancy pervades.
 
• Corporate cash: America’s multinational corporations are flush with cash, and while the politicians chide them for not putting it to work at home, it is their very policies that are to blame. Sixty percent of that corporate stash is held offshore, and it won’t come home because, if it does, 35 percent of it will disappear in taxation. Policies that encourage the return of that cash and its investment at home would spur job creation and economic growth.

• Corporate tax rate:
Having one of the highest corporate tax rates in the world discourages investment at home and makes investment elsewhere more fruitful. Corporate taxes are paid by consumers via higher prices.

• Energy policy: 
Cheap energy is the No. 1 requirement for robust economic growth. Current policies appear to be designed to raise energy prices to spur the development of government selected industries. The result is great waste (e.g. Solyndra) and significantly reduced economic growth.

• Taxmageddon:
The U.S. has a joke for a tax code. Talk about a Rube Goldberg! High, and threatened increased taxes on capital and investment just discourage economic growth. The tax code needs to be thrown out in favor of a broad-based, simple, and fair system.

• The financial system:
Scandal after scandal show how pervasive lawlessness is among the world’s “too big to fail” institutions. So far, no U.S. banker has gone to jail, nor trial, nor has anyone been indicted. Regulatory policy encourages moral hazard (excessive risk taking backed by implicit taxpayer bailouts) and discourages lending to the private sector. All of this reduces economic growth.
 
 

Investing in a deleveraging world 

 
For investors, the markets will continue to show volatility, with market up-drafts occurring when there is a perception of a policy change. For example, the recent hope generated by the late June “European Summit” caused a large rally in the equity markets, as will the hoped for move by the Fed toward more stimulus when and if it occurs. Down-drafts occur when poor economic data cross the tape.
 
Implications for Nevada
 
The policy prescription doesn’t end at the federal level. It is also relevant at the state and even local levels. Nevada has been challenged to attract new businesses now that gaming is widespread.The tax system in Nevada could be such a strength, especially when compared to what is going on in California. CNBC ranks Nevada 18 in “Business Friendliness,” but 30 in “Cost of Business.” Two things are critical: 1) The Legislature must stop threatening new business taxation every two years when it meets. The uncertainty this breeds prevents businesses from relocating here.

2) Policymakers must identify those businesses that would benefit from such a philosophy. There might be several categories that would so benefit, but one immediately comes to mind (maybe because I have worked in it all my life) — financial and intangible asset firms. This category includes managers of investments, hedge funds, trusts, patents and trademarks, insurance companies and services, banking and subsidiary finance companies. While these firms are usually small, their salary levels generally are high. A University of Nevada, Reno study indicates that salaries in these firms average $88,000, twice the state’s average.

Jon Ralston, a political columnist and host of a daily political commentary show seen locally, recently criticized the Apple move, saying that they will grow “astronomical profits” but that the state won’t benefit much because the number of jobs is small. But its move, along with those of Microsoft (which now employs several hundred), Intuit (also a large employer), Oracle and others, appears to recognize that Nevada, indeed, has something to offer now. If the state attracts enough of these companies, there will be plenty of tax revenue generated. The state should play to its current strengths and make sure its policies protect and nurture those strengths.

 
 
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value
Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521.
Ph: (775) 284-7778.
 
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July 9, 2012

Economic issues, good and bad

Posted in Banking, Big Banks, debt, Economic Growth, Economy, Europe, Federal Reserve, Finance, government, greece, Housing Market, International Swaps and Derivatives, investment advisor, investment banking, investments, Italy, recession, sovereign debt, Spain, taxes, Unemployment tagged , , , , , , , , , , , , , , , , , , , , , , , , , at 3:17 PM by Robert Barone

This is a mid-year overview of the economic and policy issues in the U.S. and worldwide, both positive and negative. I have divided the issues into economic and policy issues. With enough political will, policy issues can be addressed in the short run, while economic issues are longer-term in nature and are clearly influenced by policy.

Positives

• Cheap energy (economics and policy): There is growing recognition that cheap energy is key to economic growth; the next boom will be based on cheap energy.
 
• Manufacturing (economics): After years of decline, American manufacturing is in a renaissance, led by the auto industry.

• Corporate health (economics): Large corporations are extremely healthy with large cash hoards and many have low cost and low levels of debt.

• Politics (policy): Americans are tired of special interests’ ability to pay for political favors.

 
Negatives
 
• Recession in Europe (economics): This has implications for world growth because Europe’s troubled banks are the engines of international lending; Europe’s economy rivals that of the U.S. in size.

• European Monetary Union (policy): A Greek exit from the euro is still probable after recent election and is likely to spread contagion to Portugal, Spain and even Italy. There is also danger here to America’s financial system.

• Brazil, Russia, India, China or the BRIC, Growth Rate (economics): China appears to be in danger of a hard landing, as is Brazil. India is already there. This has serious implications for commodity producers like Canada and Australia.

• Fiscal cliff and policy uncertainties (policy): A significant shock will occur to the U.S. economy if tax policy (Bush tax cut expiration and reinstatement of the 2 percent payroll tax) isn’t changed by Jan. 1, 2013.

• Entitlements (policy): Mediterranean Europe is being crushed under the burden of entitlements; the U.S. is not far behind. This is the most serious of the fiscal issues but the hardest for the political system to deal with.

• Housing (economic & policy): In the U.S., housing appears to have found a bottom, but because of falling prices and underwater homeowners, a significant recovery is still years away. Housing is a huge issue in Europe, especially Spain, and it will emerge as an issue in Australia and Canada if China has a hard landing.

• Energy costs (economics & policy): The current high cost of energy is killing worldwide growth (see “Positives” above).

• U.S. taxmageddon (policy): The U.S. tax system discourages savings and investment (needed for growth), encourages debt and favors specific groups.

• Too Big To Fail (TBTF) (policy): The U.S. financial system is dominated by TBTF institutions that use implicit government backing to take unwarranted risk; TBTF has now been institutionalized by the Dodd-Frank legislation; small institutions that lend to small businesses are overregulated and are disappearing.

• Debt overhang (economics): The federal government, some states and localities and many consumers have too much debt; the de-leveraging that must occur stunts economic growth.

• Inflation (economics & policy): Real inflation is much higher than officially reported. If a true inflation index were used, it is likely that the data would show that the recession still hasn’t ended.

It is clear from the points above and from the latest data reports that worldwide, most major economies are slowing. It is unusual to have them all slowing at the same time and thus, the odds of a worldwide recession are quite high.

In the context of such an event or events, the U.S. will likely fare better than most. But that doesn’t mean good times, just better than its peers. There is also greater potential of destabilizing events (oil and Iran, contagion from Europe, Middle East unrest), which may have negative economic impacts worldwide. Thus, in the short-term it appears that the U.S. economy will continue its lackluster performance with a significant probability of an official recession and vulnerable to shock type events. (Both the fixed income and the equity markets seem to be signaling this.)

 
 
The extension of Operation Twist by the Federal Reserve on June 20 (the Fed will swap $267 billion of short-term Treasury notes for long-term ones through Dec. 31 which holds long-term rates down) was expected, and continues the low interest rate policy that has been in place for the past four years. That means interest rates will continue to remain low for several more years no matter who is elected in November. Robust economic growth will only return when policies regarding the issues outlined in the table are addressed.

Looking back at my blogs over the years, I have always been early in identifying trends. The positive trends are compelling despite the fact that the country must deal with huge short-term issues that will, no doubt, cause economic dislocation.

The only question is when the positives will become dominant economic forces, and that is clearly dependent on when enabling policies are adopted. 1) In the political arena, there is a growing restlessness by America’s taxpayers over Too Big To Fail and political practices where money and lobbyists influence policy and law (e.g., the Taxmageddon code). 2) The large cap corporate sector is healthier now than at any time in modern history. Resources for economic growth and expansion are readily available. Only a catalyst is needed. 3) America is on the “comeback” trail in manufacturing. Over the last decade, Asia’s wages have caught up.

Cultural differences and expensive shipping costs are making it more profitable and more manageable to manufacture at home. 4) Finally, and most important of all, unlike the last 40 years, because of new technology, the U.S. has now identified an abundance of cheaply retrievable energy resources within its own borders. As a result, just a few policy changes could unleash a new era of robust economic growth in the U.S. Let’s hope those changes occur sooner rather than later!

 
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value
Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.

May 8, 2012

Chained-CPI is not an accurate deflation gauge

Posted in Ben Bernanke, Economy, Federal Reserve, Finance, government, Housing Market, IRS, medicare/medicaid, social security tagged , , , , , , , , , at 5:09 PM by Robert Barone

Circulating around the Beltway is a concept called Chained-Consumer Price Index (Chained-CPI). It is being billed as a new and “more accurate” way to measure the rate of inflation.In an April 25th article, the editors of Bloomberg View stated that the Chained-CPI “is a more accurate gauge of U.S. inflation that would yield immediate savings … The fix to this has already been endorsed by lawmakers in both parties, the Obama administration, many economists, and a series of bipartisan deficit-reduction panels.”According to Bloomberg View, the Chained-CPI is “a more exact measure that accounts for the substitutions consumers make when a product’s price goes up.” Remember this substitution concept, for, as you will see, it is the problem not the solution.
 
Currently, the most popular measure of inflation is the Consumer Price Index. The Bureau of Labor Statistics (BLS) produces several CPI measures monthly, but the one that makes the headlines is called CPI-U. In theory, CPI-U represents the buying patterns of all urban consumers.

This CPI measure is the “benchmark” that determines cost-of-living adjustments (COLAs) for a wide range of government programs, including Social Security, Medicare and government pensions. It is also widely used by the IRS in the tax code, in union contracts and in most long-term rental agreements.

The reality is that, like much of what comes out of Washington, the “Chained-CPI” concept is neither new nor more accurate. This chain-weighted concept is just another step in a series of steps that began in 1980 aimed at changing the CPI concept from one that measures the cost of maintaining “a constant standard of living” to measuring, really, not much at all, as I will explain later. The real purpose of altering the methodology is twofold: 1. To reduce the reported increase in inflation for political reasons; and 2. To lower future federal budget costs of Social Security, Medicare and government pensions by lowering the COLA adjustments without having to haveCongress vote for those or the administration sign it into law. Just note, however, what class bears the biggest burden of this – seniors and retirees.

The CPI rate of inflation reported for the year 2011 was approximately 3 percent. That was higher than what appears to be “tolerable” for America’s political class. But, we have a fairly recent concept called “core” CPI, which is the CPI-U excluding food and energy.

Both Fed chief Bernanke and Treasury Secretary Geithner believe that this is a better measure of “underlying” inflation. Apparently, they don’t believe that Americans are much impacted by the cost of petroleum products or food. I promise, however, that when the “core” CPI is higher than the CPI itself, “core” will be ignored!

If the methodology for computing the CPI-U were the same formula that was used in 1980, then the 3 percent rate of inflation reported for 2011 would have been closer to 11 percent, according to John Williams of Shadowstats.com, who follows this indicator in detail.  In 1980, the CPI measured a “standard of living,” with the price index telling us how many dollars more it would take to buy the exact same basket of items we bought in a prior period, say, last year. Below is a simple example using two goods: T-bone steaks and hamburger.

 

Weight (W)

Price (P)

W x P

T-Bone

50%

$10.00

$5.00

Hamburger

50%

$3.00

$1.50

   Index

 

 

$6.50

The table shows that the consumer has chosen, at current prices, to spend 50 percent of his/her budget on each item. The weighted index is $6.50. Now, assume that the price of T-bone steak rises to $12 while hamburger rises to $3.25. The table below shows that the weighted index would be $7.625.

 

Weight (W)

Price (P)

W x P

T-Bone

50%

$12.00

$6.000

Hamburger

50%

$3.25

$1.625

   Index

 

 

$7.625

That is, it now takes $7.625 to purchase what $6.50 used to purchase. What that says is that to maintain the “standard of living” that $6.50 used to buy now takes $7.625. So, prices have risen (i.e. inflation) by 17.3 percent [(7.625-6.5)/6.5].

We all know that when prices change, and especially if incomes are not rising as fast as prices, consumers substitute lower cost goods that usually are of lower quality. When that happens, the “standard of living” is clearly falling. The following is an example of how the Chained-CPI would significantly lower the reported inflation rate.

The table shows the same two goods, but because incomes have not risen, consumers have cut back T-bone steak to 40 percent of their budget and increased hamburger to 60 percent. As shown in the following table, the weighted index is $6.75 and the resulting reported rate of inflation is 3.8 percent [(6.75-6.50)/6.50)] rather than the 17.3 percent rate associated with maintaining a defined “standard of living” (i.e. 50 percent T-bone and 50 percent hamburger).

 

Weight (W)

Price (P)

W x P

T-Bone

40%

$12.00

$4.80

Hamburger

60%

$3.25

$1.95

   Index

 

 

$6.75

U.S. consumers already know that their living standard is being eroded, and that the reported rate of inflation understates reality. This has been the explanation of why. And, clearly, the “Chained-CPI” is not a “more accurate” gauge of inflation.

If you think about it, the two weighted average costs using different weights are not really comparable at all. What would you say if consumers had to substitute canned dog food for hamburger? Would you think the measure of inflation meant anything? The 3.8 percent is a math result, the product of numbers in a formula. But the numbers being used in the calculation measure different things and are not comparable. The result is that the Chained-CPI doesn’t really measure anything.

Nevertheless, the coming use of the Chained-CPI will allow reporting of much lower rates of inflation than is the reality, reducing Social Security, Medicare and government pension COLAs, all without any action on the part of Congress or the administration.

It also will distort to the upside the reporting of other economic activity where nominal” (i.e. current dollar) indicators, such as GDP, are translated into “real” terms by deflating them with an artificially low measure of inflation.

As I’ve said in many past blogs, much of the recession is being carried on the backs of those living on fixed incomes, savers, those living off of accumulated assets and retirees. Not only do they now get near 0 percent on their savings, but now they will be further cheated out of part of the COLA adjustments that would keep them at their current living standard via their Social Security, Medicare and, if a government retiree, pension. Isn’t it wonderful how government works?

March 26, 2012

Robert Barone: Is U.S. housing healing?

Posted in Banking, Big Banks, debt, Economic Growth, Economy, Finance, Foreclosure, government, Housing Market, investment advisor, investment banking, investments, Nevada, recession, Uncategorized tagged , , , , , , , , , , , , , , , , , , , at 5:15 PM by Robert Barone

Last Tuesday, a headline in the business media read: “U.S. housing heals as starts near three-year high.”
I scratched my head. The last three years have been the worst in recorded U.S. housing history. The accompanying chart tells the story. It is a real stretch to believe that this data indicates “healing.” Worse, everybody knows that the extremely mild winter has pulled demand forward; this is especially true for housing starts, as contractors don’t pour foundations in freezing weather, but use mild periods in the winter to get a head start for spring sales.
The data shown in this chart is “seasonally adjusted,” a statistical process that attempts to normalize fluctuations in data caused by such things as weather or holiday shopping. The seasonal adjustment process assumes January and February have typical winter weather. So, if the mild winter caused contractors to pour more foundations than they would have in a normal winter, then the seasonal adjustment process overstates what would be a normalized level of housing starts.
There is a similar story for sales of existing homes — the data was released last Wednesday. Because of the weather and other significant issues, I suspect that new starts and sales (where the “seasonal factors” normalize to the downside) will disappoint in the months ahead. Here’s why:
There are 3 important price categories: less than $300,000; $300,000 to $800,000; $800,000 and above.
There are three important buying groups: first-timers; move-ups; retirees. Generally, the first-timers purchase the under $300,000 homes, while the move-ups purchase in the other two categories. Retirees, usually sell from the upper two categories and “downsize.”
Government stimulus programs and record low interest rates have made homes the most affordable in decades (current index = 206; 100 means that a median income family can afford a median income home). First-time buyers can get a low down payment low interest rate loan (what happens if interest rates rise?), but those in the move-up category must rely on traditional bank-type financing, which requires a big down payment.
The home price downdraft since 2007 has taken many of the move-up buyers out of the market. CoreLogic data shows that 50 percent of current U.S. homeowners (the move-ups and the retirees) have less than 20 percent equity in their homes. That means that a significant percentage of move-ups cannot sell their existing home, pay a realtor’s commission (usually 6 percent), and have a 20 percent down payment for the move-up property.
History shows a healthy housing sector is critical to U.S. economic growth, and that when the move-ups are not healthy the sector does poorly.
Retirees are finding their homes are not worth what they thought. Their tendency is to stay put and wait for a better market. In fact, the media hype around “healing” is probably keeping them in their homes, as they now believe that a better market is just ahead! This is called “shadow” inventory, which means that the number of homes officially for sale understates the real supply.
With this view, we would expect the low-priced homes to be doing well but the upper two price brackets to be doing poorly. February data from Dataquick for the Southern California housing market confirms this view. First-time buyer price point sales (under $300,000) are up 9.5 percent from a year earlier, while the other two price point sales are both down (the $300,000 to $800,000 down by .8 percent, and the $800,000 and above down by 12.6 percent).
Nothing in this data, from the seasonal adjustment bias to the health of two of the three buying groups, tells me U.S. housing is healing.

March 15, 2012

Markets Hooked On Liquidity Drug From Central Bank Pushers

Posted in Banking, Ben Bernanke, CDS, Economy, Europe, Federal Reserve, Finance, Foreign, government, investment banking, investments, ISDA, QE3, recession, sovereign debt, Uncategorized tagged , , , , , , , , , , , , , , , , , , , , , , , at 10:04 PM by Robert Barone

From early last October to the end of last month, the S&P 500 rose 25%; amazing for an economy that is struggling to stay out of recession.  Then again, the equity markets are hooked on the liquidity drug.

When Federal Reserve Chairman Ben Bernanke, in his recent semi-annual testimony before Congress, did not hint that QE3 was just around the corner, the market sold off.  When the European Central Bank broke its traditional role as lender of last resort and morphed into a gift giver to its member banks (to the tune of more than a trillion dollars), much like our Fed, the equity markets soared.

Money printing can’t go on forever, can it?

In every historical context, whenever the equity markets have a run up not based on economic fundamentals, eventually, they return to what those fundamentals dictate.  And here are some of the underlying economics:

  • There is no doubt that American manufacturing is undergoing a renaissance.  Labor costs in Asia are on a steep rise while wages here have been stagnant for several years.  Shipping costs, quality control and culture are other factors.  But, manufacturing represents less than 12% of GDP.  It, alone, cannot drive significant economic growth.
  • Gasoline prices are up more than $.60/gallon year to date with talk of $4.50 gas by summer. That cost/gallon is already here in some markets. Every penny increase drains $1.5 billion annually from other consumer discretionary spending.  That’s about $90 billion so far for 2012.  And what happens to gas prices if the Middle East flares up again?
  • While the first quarter is far from over, early data suggest a much softer than expected GDP.  Retail sales have been soft except for automobiles (pent-up demand or just a rush to buy fuel efficient vehicles ?).  Consumers (70% of GDP) have shown no real income growth for many quarters, and incomes are tumbling in Europe.  Inventories appear to be on the high side given the level of demand.  So additional production won’t be forthcoming.
  • Despite a reinstitution of 100% depreciation for capital equipment, much of that demand was pulled into 2011, as the business community was uncertain as to whether or not the tax break was going to be reinstated in 2012.    The state and local government sector is still in contraction, and, given the slowdown evident in the rest of the world, exports aren’t likely to add to GDP.  Of course, the market may like the softer side of GDP, as it likely ensures another dose of the liquidity drug from the money czar, Bernanke, the king of money printing.
  • Europe is sicker than the markets have priced in.  The hoopla around the Greek bailout is just another can kicking.  Because the Greek populace hasn’t accepted the idea that they have lived beyond their means for the past decade, austerity won’t be successful.  Politicians who promise to end the austerity are likely to be elected.  Eventually, Greece will need to have their own currency which can fluctuate in value vis a vis other currencies with commensurate interest rate levels.
  • It is rare that all of Europe is in recession at the same time.  The current market expectation is that Europe’s recession will be mild.  But, don’t forget, Germany’s biggest export clients are other European countries.  In fact, as a general rule, all of Europe’s economies export heavily to each other.  Being in recession together is going to have a large impact on those exports.  In addition, if the Euro remains at its current lofty level (above $1.30), it will be more difficult to export to non-EU countries.
  • The determination by the ISDA (International Swaps and Derivatives Association) that Greece officially defaulted on its debt when it invoked its recent legislatively passed “Collective Action Clause” to force investors to take losses is actually good news for the other so-called troubled European sovereigns (Portugal, Spain, Italy, Ireland) because it assures private sector investors that if they buy the so-called troubled foreign sovereign bonds, hedge them with Credit Default Swaps (CDS) and a Greek style default occurs, they will be paid at or near par value.  If the CDS payout had not been triggered, the private sector investors would view the purchase of such sovereign debt as having significantly more risk, and that would result in a much higher interest cost of that sovereign debt to the issuing countries.  In addition, it would throw the whole CDS concept into confusion, potentially impacting even the higher quality sovereigns like, Germany, the U.K., Canada, Australia, and even the U.S.
  • This is not to say that the world is now safe from financial contagion, as, in the context of world markets, Greece’s default is an expected and well prepared for event. The real worry should be if Spain (debt > $1 trillion) and/or Italy (debt> $2 trillion) default.  In addition, the CDS market is not transparent, and no one knows where the CDS obligations lie.  While a Portuguese and/or Irish default would have about the same individual impact as that of Greece (economies slightly smaller and not as indebted), we should worry that a rolling set of smaller defaults would eventually cause a major CDS insurer to fail due to the cumulative impact of the several defaults.  After all, it is likely that the CDS insurers who dabbled in Greek CDS, are also involved in CDS insurance of the other high debt European countries.  And, if a significant CDS insurer defaults (e.g., an institution similar in size and stature to AIG in 2009), we could, indeed, have contagion.
  • But even ignoring Greece for the short term, the ECB’s LTRO 1 and 2 appear to make Europe’s banks even more vulnerable.  Unlike the Fed, which purchased questionable assets from bank balance sheets and put them on its own, the ECB has not followed suit.  In fact, it stepped in and, by force majeure, inserted itself as senior to other bondholders holding the exact same Greek bonds, thus avoiding any losses in its own portfolio.  That makes losses for the private sector even greater.  Worse, it sours potential investors in European sovereign debt, seeing that they cannot easily quantify their risks as they can’t know how much of the same sovereign debt they own may be owned by the ECB.  This partially reverses the positive impact that the triggering of the CDS default will have on the European sovereign debt market.
  • Finally, the LTROs may make European banks even more insolvent than they are now, as they have been encouraged to take the cheap ECB funding and purchase European sovereigns for the interest spread (by Basle II and III rules, the debt of the European sovereigns is “riskless” and requires no capital backing on a bank’s balance sheet)!  Further sovereign debt crises, e.g., Portugal, Spain, or Italy, will eat away at already scarce European bank capital.  Contagion could very well result.

Looking at the GDP of Europe relative to China, if one includes all of the European Union countries and those closely related, Europe’s economy is about twice the size of China.  If China’s GDP growth went from 9% to 3%, the equity markets would certainly have a huge sell off.  But, it is likely that Europe’s GDP will fall from about 1.5% in 2011 to -1.5% in 2012, maybe even more than that.  Do the math!  This is equivalent to a Chinese hard landing.  As the European recession unfolds, the equity markets are likely to wake up.

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Speaking of China, a slowdown is clearly developing.  They actually ran a trade deficit for the first two months of 2012 signaling a real slowdown in exports.  Retail sales have been softer than expected and the real estate bubble there appears to be in the process of popping as property sales and prices are plunging.  No wonder the government recently lowered its official growth forecast from 8% to 7.5%.  This is not to say that China, itself, is entering a recession, but a slower growth rate there (2nd largest economy) in combination with growth issues in the US (largest economy), Japan (3rd largest), and a significant recession in Europe bodes ill for worldwide growth and will eventually play out in the equity markets.

The profit implications for multinational corporations of the severe recession in Europe, and a slowdown in China and elsewhere are significant.  Analysts have continued to forecast rapid earnings growth and high profit margins even in the face of rising energy and food costs and stagnant U.S. and falling European incomes.  Using such rosy profit forecasts makes the market look undervalued.  However, a 15% – 20% profit decline is normal for a recessionary world.  If you plug that in, the equity markets look overvalued today.

Wasn’t it somewhere around this time last year that the equity markets were also priced for perfection?  Didn’t we hear that the economy had achieved “escape” velocity and that the recovery was about to accelerate?  And, didn’t the market sink when the economy fizzled and needed the QE2 liquidity drug injection?  In fact, the S&P 500 ended 2011 at exactly the point where it began, with a lot of volatility in between.  So far, 2012 appears to be following 2011′s path.

Robert Barone and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment Advisor.

Statistics and other information have been compiled from various sources. Universal Value  Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United   States. A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.

Robert Barone (Ph.D., Economics, GeorgetownUniversity) is a Principal of Universal Value Advisors (UVA),Reno,NV, an SEC Registered Investment Advisor.  Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee. 

Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy.  A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at:9222 Prototype Dr.,Reno,NV 89521.  Ph: (775) 284-7778.

 

February 22, 2012

Dr. Robert Barone Interview with Face the State on KTVN News Ch2

Posted in Banking, Big Banks, Business Friendly, Economy, Education, Finance, Foreclosure, Gaming, government, Housing Market, investment advisor, Las Vegas, Nevada, taxes, Unemployment tagged , , , , , , , , , , , , , , , , , , , , , , , , , , at 4:15 PM by Robert Barone

If you missed the televised interview with Robert Barone on February 16th, 2012 with Face the State on Ch.2 News, you can watch the video by clicking the link below.

Dr. Robert Barone Interview with Face the State on KTVN Ch. 2 News

December 13, 2011

How MF Global Almost Got Away With Everything

Posted in Banking, Big Banks, Europe, Finance, Foreign, investment advisor, investment banking, investments, sovereign debt, Stocks, Uncategorized tagged , , , , , , , , , , , , , , , , , , , at 4:39 PM by Robert Barone

The MF Global (MFGLQ.PK) story is just another chapter in the continuing saga of the legal fleecing of America by a financial system joined at the hip in an “Unholy Washington-Wall Street Alliance.”

The rules of the game are such that the managements of large Wall Street entities are allowed to gamble with assets entrusted to them by an unsuspecting public. If the bets are successful, the spoils flow entirely to the management and the firm, with nothing going to the clients whose assets are at risk. On the other hand, if the bets fail, the clients take the entire loss! Unfair? Of course.

But, as you will see if you keep reading, MF Global’s client assets will not be “found,” and, worse, unless the NY attorney general becomes incredibly creative, no one is likely to go to jail because no laws appear to have been broken. MF Global is just another piece of evidence that the current financial system is addicted to and permits excessive leverage and is deeply flawed.

Until this is recognized and fixed, the financial system will continue to be besieged with crises spawned by Wall Street greed. There are likely other, yet to be discovered, atrocities lurking in the shadows.

Asymmetrical Borrowing Rules

It appears that MF Global, as well as every other major US investment banking firm, has taken “advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name,” Christopher Elias notes in a recent Thomson Reuters article.

Simply put, MF Global borrowed money, and, using that borrowed money, purchased the debt of the European periphery (Italy, Ireland, Greece, Spain, and Portugal) at very attractive yields. The borrowings and the debt purchased had the same maturity date, so the proceeds of the debt maturities were to pay back the borrowings. MF collected the difference between the low rate it paid on the borrowings and the high rate it received on the debt.

The euro debt it purchased was guaranteed by the European Financial Stability Facility (EFSF). To get the low rate, MF had to pledge collateral. So, it pledged the euro debt, and as additional collateral, it borrowed and pledged its clients’ assets, which assets it held as custodian. Looks like a no-brainer! So thought Jon Corzine and Co.

Margin in the US

In the US, a client with an account at a broker-dealer can place his assets in a “margin” account. The client is then allowed to borrow against those margined assets. There are rules for this called “margin requirements.” Generally, speaking, the value of the assets assigned to “margin” must be greater than the amount borrowed by a factor set by the Federal Reserve under Regulation T.

If the market value of the assets assigned to “margin” falls in value to the point where the margin requirement ratio is violated, a “margin call” is generated. The client either has to assign or pledge more assets to “margin,” or reduce the borrowing via a cash deposit. If the client fails to do either of those in the time allotted by regulation, usually three business days, the assets that were pledged to “margin” are liquidated (sold out) and the proceeds are used to offset the borrowings until the required margin ratio is satisfied.

Of relevance, clients who assign their equities to “margin” (the only other alternative is called “cash”) so that they can borrow against them also automatically grant their broker-dealer the right to “lend” their assets to another investor who wants to “short-sell” that particular asset because a short-seller must first “borrow” existing stock in order to “sell” it. The broker-dealer makes money by lending out equities in margin accounts to short-sellers. The everyday American investor is unaware of this, and earns nothing.

Leverage

So, how did MF Global lose client assets? In the US, broker-dealers can use margined assets as a funding mechanism, i.e., by borrowing those assets themselves and using them as collateral to borrow. But in the UK, those same borrowed assets can be pledged several times over (called rehypothecation), resulting in very significant leverage. That is, the client assets stand behind several borrowings rather than just one.

Buried somewhere deep in the legalese of the account forms (you know the pages and pages of legal gobbledegook that nobody reads because one has to be an attorney to understand it), the clients gave MF Global the right to transfer those client assets to its UK subsidiary and to “borrow, pledge, repledge, hypothecate, and rehypothecate” those assets.

According to the Thomson Reuters article cited above, such language is common in most large US broker-dealer agreements. That language allows the large broker-dealers to circumvent US law and take advantage of UK law where rehypothecation (leverage) is allowed.

The Impact of Margin Calls

For MF Global, the unanticipated “tail” event occurred. (“Tail” events are only supposed to occur very infrequently. However, in an unstable financial system, they occur often.) When the value of the European periphery debt declined this past fall (even that guaranteed by the EFSF), margin calls occurred. MF Global would have been okay if it hadn’t used so much leverage.

The leverage magnified the margin calls to such an extent that all of the client assets weren’t enough to meet the margin calls. All of the collateral, including the euro debt (at bargain basement prices) and the client assets were sold to offset the borrowings. The clients’ assets are gone. They are not going to be “found.”

Conclusion

No laws appear to have been broken. No one is likely to go to jail. But, as you can see, the financial system is deeply flawed and is rigged in favor of Wall Street and against the ordinary investor. The causes of the financial crisis that appeared in the US in 2009 have not been resolved, only papered over (with money printing). In order to have a “fair” and healthy financial system, the excessive use of leverage, such that success leads to untold wealth for the managers and failure is directly borne by unsuspecting clients or taxpayers, must be changed.  Until this occurs, we will continue to experience such debacles. And the volatility caused by them will continue to keep the financial system unstable and limit economic growth.

Robert Barone  and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment  Advisor. Statistics and other information have been compiled from various sources. Universal   Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.  Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.   A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.

December 7, 2011

Severe Europe-Wide Recession Likely for 2012

Posted in Banking, Europe, Finance, Foreign, government, investment advisor, investment banking, investments, sovereign debt, Stocks, taxes tagged , , , , , , , , , , , , , , , , at 8:25 PM by Robert Barone

NEW YORK (TheStreet) — Given the speed at which markets move, and given the volatility that accompanies the hopes and fears that occur when the key European leaders meet to try to make progress on the European debt crisis, it is somewhat risky to try to describe what will happen to the European Monetary Union (EMU) in 2012. Something that I write today, in early December, could be obsolete as early as next week. So, I will approach this with what I consider to ultimately be the most likely scenario, why it is most likely, and where the remaining dangers lie.

There are two opposing forces in Europe regarding the approach that should be taken to resolve the crisis:

  • Those that want the European Central Bank (ECB) to act just like the U.S. Fed and rapidly expand its balance sheet, either to support a strengthened European Financial Stability Facility (EFSF), or directly. The ECB has no mandate in its charter to do this;
  • Those that want the causes of the crisis, overspending and out of control deficits via entitlement and social welfare spending, to be addressed. While these folks appear to be the minority among the political class, their strength lies in the fact that the politicians representing the economically strongest EMU member, Germany, hold this view.

As an aside, some have wondered why the euro has kept its value high vis-à-vis the U.S. dollar. It is precisely because the ECB hasn’t significantly expanded its balance sheet while the U.S. Fed has. In fact, the big worldwide market rally on Nov. 30 due to the “coordinated” central bank policy of insuring liquidity for Europe’s banks, was a “dollar” policy, i.e., dollars, not euros were made available. So far, the ECB appears to have remained faithful to its mandate as the guardian against inflation, and nothing else.

Most Likely Scenario

The U.S. Fed tripled the size of its balance sheet with some apparent success at keeping its financial system from collapsing and, until now, those actions appear to have had no apparent large unintended consequences. There has been some moderate inflation officially reported (and disputed by some), and some believe that the Fed’s balance sheet expansion has been behind the rapid rise in commodity and food prices. But given the apparent success in staving off financial collapse with such policies, the most likely scenario is the first one outlined above, i.e., the use of the ECB or some structure around it (including the EFSF and the International Monetary Fund (IMF)) to directly purchase or partially guarantee the sovereign bonds of the peripheral countries.

>>Saving Euro a Tall Order, Even for Germany

The “bazooka” theory appears to apply here. As long as the market knows that the ECB has a bazooka (the power and authority to print euros), and is willing to use it, it won’t have to. As U.S. Treasury Secretary, Hank Paulson found out in 2009 that the “bazooka” theory doesn’t always work. Time and again, the capital markets have demonstrated that they are much more powerful than any central bank or sovereign treasury.

Verifiable Austerity

The most likely scenario, then, is an emerging consensus in Europe as follows: Through a series of bilateral agreements to avoid having to get 17 separate countries to approve changes to the treaties that govern the EMU, a painstakingly long process, the offending peripheral countries (Italy, Portugal, Spain, and perhaps, Ireland) may agree to some level of verifiable austerity with benchmarks and external audits. In return, Germany and its political allies will permit the ECB to expand its balance sheet either by directly purchasing the sovereign debt of the peripheral countries, or by making credit available to the EFSF or whatever structure emerges.

Once again, as an aside, under this scenario, you can expect the value of the euro to fall relative to other currencies. Of course, if the U.S. Fed embarks on QE3, the euro’s relative value to the dollar may well hold.

Recidivism?

Of course, once the crisis atmosphere passes and things settle down, under this most likely scenario, the peripheral countries may not feel the pressure to continue with their promised austerity. Don’t forget, politics plays a large role and austerity often leads to political defeat for those politicians who negotiated it. Already we have seen political changes in Greece, Italy and Spain as a result of this crisis.

Perhaps these countries will follow Greece’s lead and hire Goldman Sachs to help them issue off the books debt so that they have the appearance of complying with their austerity promises. That could very well buy several years, as it did for Greece. (Ireland appears to be an exception. After their bailout, they appear to have abided by their austerity promises and have made great progress in addressing their fiscal and economic issues. Then, again, none of Ireland’s shores touch the Mediterranean Sea.)

Issues Remain

So, as we enter 2012, the stage is set for some calming over Europe’s sovereign debt and the solvency of Europe’s banks. Mind you, it may be a rocky road over the near term to get there including setbacks and lots of uncertainty and market volatility. The biggest issues will likely revolve around the magnitude of the guarantees and the capacity of the guaranteeing entities. Nevertheless, the most likely scenario is coming into clearer focus.

Unfortunately, this scenario, or any other one that emerges, means recession in Europe, most likely severe recession. This has implications for markets worldwide, as Europe’s economy matches or exceeds the size of the U.S., depending on which countries you include. Once again, the recession, coupled with the austerity measures, may change the political backdrop such that the populations of some of the peripheral countries may well want to exit the EMU.

While 2012 may bring calmer conditions, even if the most likely scenario is executed, the future of the euro and the EMU is still not assured. It rests on the effectiveness of the fiscal controls. If EMU members retain sovereignty over their fiscal policies, then there has to be some mechanism to expel fiscal offenders from the EMU in an orderly manner. Without this, we may well see a replay of this crisis within the decade. Let’s hope there is enough political courage to include such measures.

Robert Barone  and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment  Advisor. Statistics and other information have been compiled from various sources. Universal   Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.  Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.   A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.

 

November 30, 2011

Why Central Banks’ Action Could Make Matters Worse

Posted in Banking, Big Banks, Bonds, Capital, community banks, crises, derivatives, Europe, Finance, Foreign, government, investment advisor, investment banking, investments, sovereign debt, Stocks, taxes tagged , , , , , , , , , , , , , , , at 9:47 PM by Robert Barone

NEW YORK (TheStreet) — Over the past 18 months, we have witnessed the emergence of what has become known as the “European Debt Crisis.” Capital markets have become increasingly concerned over the sovereign debt of the European peripheral countries and the solvency of the financial institutions that hold much of that debt. You can tell from the 10-year borrowing rates shown in the table below exactly where the concerns reside.

Solvency issues manifest themselves in liquidity issues. Looking at the table, you can see that investors are hesitant to lend to the lower tier without significant compensation for the credit risk they know they are taking. The solvency issue also plays havoc with the ability of the banks to access the short-term capital markets for their everyday liquidity needs. And, in some cases, especially among the banks in the lower tier countries in the table, those liquidity strains are huge.

If you were a Greek citizen, for example, wouldn’t you go to your bank and withdraw all of the euros you could and put them in your mattress? That is, in order to protect yourself from the prospect of waking up one morning to find that your account was no longer denominated in euro, but in “new drachma” converted on a 1:1 basis, and the free market value of that “new drachma” was such that it took 4 to purchase 1 euro? So, the silent run currently occurring on Greek banks is not surprising.

>>The Real Reason Behind the Central Bank Scramble

A similar phenomenon is beginning to happen to the continent’s banks. This is showing itself in the form of an unwillingness of financial institutions to lend to each other and a severe tightening of the private sector money markets.

So, the coordinated move of the central banks announced today is a reaction to the near shut down of the money markets and it makes liquidity available to the continent’s banks. But, this is not the end of the story because this move only addresses the symptoms (the resulting liquidity issues), not the cause (the solvency issues). As we know in America, the Savings and Loan Industry in the 80s was able to access the money markets in $100,000 increments due to FDIC insurance. As a result, the solvency issues weren’t addressed early when they were relatively small. But, eventually, they had to be dealt with.

Thus, the move by the central banks, by printing money and making it readily available to the banks, only postpones the inevitability of having to solve the solvency issues. It buys time. The tradeoff is twofold:

1) it increases inflationary pressures;

2) it allows the solvency problem to continue to fester, and perhaps, become even worse.

The sovereign nations have two choices: inflation or austerity. They would choose the former except for Germany’s resistance. That story is still being played out. For the banks, significant recapitalizations must occur. We are likely to see a lot more drama played out on this issue, especially if one of the larger institutions has a misstep or is attacked by the marketplace as we saw in the U.S. in 2009.

Robert Barone  and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment  Advisor. Statistics and other information have been compiled from various sources. Universal   Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.  Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.   A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.

 

November 23, 2011

Super Committee Could Hurt Dollar’s Reserve Currency Status

Posted in Banking, Big Banks, Bonds, Capital, community banks, crises, derivatives, Finance, Forward thinking, government, investment advisor, investment banking, investments, local banks, municipal bonds, San Francisco, Stocks, taxes tagged , , , , , , , , , , , , , , , , , , , at 4:30 PM by Robert Barone

NEW YORK (TheStreet) — The decisions of the Super Committee are likely to have more far-reaching implications than are currently envisioned, as the deliberations have been cast only in political terms by the media. There are, however, significant long-term economic implications.
As we have seen over the past couple of weeks in Europe, contagion can spread like wildfire. The bond yield spreads to U.S. Treasuries or German Bunds on all European peripheral country debt, and even on the debt of AAA rated (at this writing) France, have widened significantly and are displaying huge volatility depending on the day’s headlines.
>>Debt Super Committee Could Spoil the Holidays
Luckily for the U.S., the dollar is still the world’s reserve currency and, in a world of fiat currencies, shows up as the least risky because of its worldwide liquidity and its unabashed penchant to use its money printing press in a financial crisis. So, despite the imbalances clearly present in the U.S. today (see U.S. Debt Crisis: What’s the End Game? ), there still exists a “flight to the lowest perceived risk” (formerly known as “flight to quality”), when crisis and uncertainty rear their ugly heads.

Benefits of Reserve Currency Status

The rapid spread of the contagion in Europe should be a wake-up call to U.S. policy makers, especially the Super Committee. Any stumble or failure to propose something significant in the form of deficit reduction could further jeopardize the dollar’s reserve currency status and bring the day of reckoning perilously closer. The Nov. 14 edition of Barron’s (Enter the Yuan) set forth five benefits of reserve currency status:
  • Investor willingness to hold your currency and paper;
  • The ability to print money to purchase foreign assets — without paying any interest;
  • Easy issuance of debt and worldwide acceptance;
  • Deeper financial markets ultimately benefiting your financial institutions;
  • Conducting trade in your currency which avoids exchange rate risk and benefits your exporters.
Think of what could happen to the U.S. without reserve currency status. Like what has already happened in the European periphery countries, interest rates would rise. This will occur even if the U.S. shares reserve currency status, which is the most likely initial scenario. I (see Wow-II! That’s A Lot of Interest!) and other prominent economists have estimated the cost of debt in the U.S. if rates rise. Some possible scenarios are truly frightening in that the cost of the debt relative to the federal budget and GDP could put the U.S.’s debt burden on par with or higher than that of Greece, Italy and the other countries involved in Europe’s debt crisis. 
For sure, as I opined in the above referenced blog on Dec. 1, 2010, “[g]iven the structural nature of the deficit and the difficulty of slowing or reversing defense costs or the costs of ‘social’ categories, even small upward changes in interest rates … will exacerbate the deficit and economic growth issues.” Thus, preserving reserve currency status, just for the lower interest rates that accompany it, is critical.

Recession Implications, QEs and the Financial System

While recent data suggest that a U.S. recession is not imminent, some leading edge economists and even the San Francisco Fed believe that the inevitable recession in Europe in 2012, a slowing growth rate in Asia and China, and fiscal austerity at the state and local levels could tip the U.S. into recession. The San Francisco Fed says this probability is above 50%. A renewed recession will certainly cause the Fed to embark upon additional QEs, and the Administration and Congress will react by increasing the deficit (after all, it is an election year!). This will further erode the world’s confidence in the dollar as the world’s reserve currency.
The U.S. financial system was not “fixed” by TARP or Dodd-Frank. MF Global has shown that some of these institutions still have insanely high levels of leverage and are more than willing to make “all in” bets. An implosion in European financial institutions may negatively impact both the mid-sized and the Too Big to Fail institutions and cause further credit tightening. Under such circumstances, I can envision another TARP-like response from the Treasury and Fed with more money printing and secret lending further eroding the dollar’s status as the world’s reserve currency.
One has to wonder why China hasn’t come to Europe’s aid given that China exports as much or more to Europe as it does to the U.S. The answer could be that China has a long-term plan to vault the Renminbi (RMB or Yuan) toward reserve currency status. The benefits are numerous as outlined above. Already McDonalds, Caterpillar, Unilever, UBS, Volkswagen and the World Bank have issued bonds denominated in RMB in the Hong Kong market. It is no secret that China wants its emerging market trading partners to settle merchandise trades in RMB and wants a financial center on par with New York and London on its mainland. So, a flailing Euro and QEs in the U.S. advance the RMB as a potential reserve currency.
The importance of the Super Committee recommendations for the dollar’s status in the world and the special privileges, liquidity, and low borrowing rates that accompany that status cannot be overemphasized. Failure to make significant progress will only hasten the day when there won’t be a “King Dollar.” The end result will be higher borrowing rates, lower economic growth, a continuation of depressed economic conditions, and a further lowering of the U.S.’s standard of living.
TheStreet
Robert Barone  and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment  Advisor. Statistics and other information have been compiled from various sources. Universal   Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.  Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.   A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.

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