Andersons - Tax & Investment Services

Specifically, under the government’s HAMP program, you can qualify for a spanking new mortgage with a debt-to-income ratio of 60%. Which is to say, you can qualify for the mortgage even if making your mortgage payments would require you to spend 60% of your pre-tax income. Insanity.

Real Estate. As Miller makes clear in our interview, it’s still way too early to invest in residential or commercial real estate. The list of problems are too long to recount here, but Andy sees things beginning to unravel in residential as early as July, and worsening as the year progresses. For now, keep your powder dry. 

(Ed. Note: You can give The Casey Report, which will be published tomorrow, a risk-free trial. Why not? Here’s the link.)

Energy. As much as I personally love energy and see it as a central holding to be added to over time in the full expectation of stunning gains a year or so down the road, the BP catastrophe in the Gulf has set off a chain reaction of uncertainty throughout the sector. And it’s increasingly looking as though, due to the depth of the well, it may be months before it can be capped. Our Energy Research team led by Marin Katusa, is sifting through the risks – and opportunities – created by the disaster, but for the time being extra caution is called for. No sure thing here, at least not in the short term.

Bonds. With interest rates near 50-year lows and governments around the world spewing out hundreds of billions of dollars in new financings, suggestions of buying bonds are more appropriate as punch lines delivered from the stages of comedy clubs. That said, there may be some additional upside to be squeezed out of U.S. bonds as investors continue to flee the euro and, maybe soon, the yen… but comparing the risks against the slim potential for further rewards makes chasing the returns in bonds anything but a sure thing.

Commodities (other than gold). With the Chinese miracle looking more fragile by the day, and the strong possibility that we’re headed for another big leg down in the global economy, one has to be very cautious on the everyday commodities. While the supply/demand profiles of some commodities are better than others, a sinking ship will pull them all down, at least temporarily. Provided you are not standing in the line of fire, this is not a bad thing – because lower prices will create new opportunities to get positioned before the resulting shortage in new supplies, and a pick-up in inflation, send prices soaring again. For the next six months, however, garden variety commodities are anything but a sure thing.

Foreign Currencies. Again, a big area with lots of choices. With just a couple of exceptions discussed in this month’s Casey Report, most of the fiat currencies are like dry tinder lying too close to the roaring fire of out-of-control sovereign debasement. In addition, you also have the always-there possibility that a government will do something really, really stupid that blindsides its own currency. The most recent example was provided by Australia’s decision to slap its domestic mining industry with a special 40% tax on mining company profits, effectively wounding one of its critical export industries just as China looks to stumble. Hope that works out for them. In any event, with all the uncertainties just now, no fiat currency rises anywhere near the level of a “sure thing.”

Which brings me to the only sure thing…

Gold. As I have previously commented on in these pages, to the point of stuttering repetition, the overarching problem the world now faces is debt, debt, and more debt. Including, most importantly for this discussion, historic levels of government debt – coupled with an ongoing attitude of “If you spend it, they will come” – “they” being the easily misled voters.

All you really need to know is that in sum, the world’s top ten sovereign debtors currently owe upwards of US$135 trillion.

At this delicate point in time, the sovereign deadbeats are beginning to be strung up separately, but the odds grow daily that they’ll hang together in the not-too-distant future. Read the following excerpt from today’s Bloomberg and see if it strikes the same chords with you that it did with me…

June 2 (Bloomberg) -- Iran’s central bank began the first phase of the 45 billion-euro ($55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.

The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31.

Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55 percent of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said.

Iran’s shift out of euros has been prompted by the single currency’s decline, said Jaam-e-Jam, which is owned by the state broadcaster. Other central banks, including those of the Persian Gulf states, also are selling their euro reserves, it said.

Experts in Iran’s central bank have suggested the country buy gold because they forecast the precious metal’s price will increase, the newspaper said.

What’s striking a chord with me on reading that is as follows…

a) A year ago, could anyone have imagined that we’d see a wholesale dumping by central banks of the only real competitor to the dollar’s reserve status?

b)  It’s interesting that Iran is considering shifting back toward the currency of its sworn enemy, especially after numerous earlier statements it would increasingly eschew the use of the dollar in its commerce. One has to wonder how long Iran will remain willing to feather its nest with dollars?

c) Finally, the comment at the end about gold catches the eye. Especially in that it is increasingly being looked upon for the role it can, and likely will, once again play as a foundation of central bank reserves.

Of course, the sovereign nations could decide to resolve their massive debt problems through default – and some most certainly will. But at this point, that these nations will reduce their current, let alone future, obligations to manageable levels without crushing their respective economies – never a politically palatable choice – is literally impossible.

Thus, while there will be much grandstanding about making tough choices and hard budget cuts, when push comes to shove, you can bet that the choices made will be those most likely to return the politicos to office, and the cuts nothing more than window dressing, quickly offset by spending increases.

In a world awash in funny money, gold is the only sure thing.

Well Said

Don Grove, our man in Washington, dropped the following into my email box just before the weekend…

I see Lisa Murkowski successfully blocked raising the oil spill liability cap from $75M to $10B. Although BP still has to pay cleanup costs and is still liable under state law, it strikes me that the government's involvement has again hampered the ability of the free market to handle risks, penalties, and rewards in the manner most beneficial to all. 

The idea that Congress can now determine that $10B is the appropriate cap is as ludicrous as that it could determine that $75M was the appropriate cap after Exxon Valdez, or that the Fed can determine what interest rates should be. The object should be simply to let the system require risk takers to make those they damage whole, not to add penalties or limit damages. If for no other reason than no one in government is smart enough to figure out what penalties or limits should be, so let's just skip them. 

Speaking of government jiggering, just below is a link to an article on Business Insider about a commission set up by the Federal Trade Commission to “rethink” journalism and the news media, while almost entirely ignoring the blogosphere. One of the proposals made by the commission was to slap a 5% tax on all consumer electronics, in order to raise $4 billion to be used to provide public funding to the struggling mainstream media. It’s all just another scam designed to keep the entrenched mob at the top of the nation’s power structure, entrenched. Here’s the story.

And now, for something entirely different, Bud Conrad puts aside his charts in order to take a ramble through the recent headlines.

The World Is Getting More Interesting by the Moment

By Bud Conrad

By now you’ve seen the news:

·  Flotilla of aid ships bound for Gaza is intercepted by Israel and 10 or more killed

·  Netanyahu and Obama call off planned meeting

·  The president stops offshore drilling after BP fails at latest attempt to stop the oil leakage

·  Economists recommend Greece default (restructure)

There are many good sources for the news. Here is a Turkish point of view on Gaza.

The New York Times reports quite differently on the events:

I turn to finding the connections:

Turkey has brought to the world's stage what most Arab nations feel, that Israel has imposed harsh and unfair strictures on the lives of the people of Gaza. The UN has condemned the Israeli reaction, but that is not expected to have any real effect on Israel.

The question is what effect the events will have in the Middle East and on the close ties between Israel and the United States. Israel would not exist without the direct support of the United States. From an Arab perspective, the policies of Israel and the United States appear joined at the hip.

Turkish street protests against the deaths of the humanitarian aid supporters are typical of the reaction against Israel. The distance between the United States and Israel is in the news, with Obama and Netanyahu canceling their meeting this week. The reaction of the U.S. is being watched by the Arab states, and so far the administration is only cautiously stating that it is studying the situation. A stronger position is required.

A key question going forward is, what Turkey will do? There has been talk of another attempted flotilla. It would certainly fail. Turkey is a member of NATO and in theory could invoke Clause 5 and call on the rest of Europe to support it in its confrontation of Israel. Europe would not follow, but cracks in NATO could develop. The United States has nuclear arms based in Turkey. Turkey could turn more towards Russia for its alignment.

Israel acts in seemingly irrational ways out of fear for its survival in a sea of mistrustful and antagonistic neighbors. It has been argued that Israel's influence is behind bringing sanctions against Iran for its intention to move toward nuclear options. Israel's duplicitous complaint that neighboring Iran might attain nuclear weapons, when it has its own undeclared and unmonitored arsenal, makes its aggressive stance harder to justify. The latest flotilla incident will lead to Israel losing support from Russia and China for any further sanctions against Iran, leaving U.S. policy in flux and Israel more vulnerable.

One result of the close relationship between the U.S. and Israel, exacerbated by the latest incident, has been to drive Middle Eastern countries to look beyond the U.S. as purchasers of their oil, with China in the news recently in that regard. Recognizing its own needs for energy, China has already built strong economic relations with Iran. As it must, because while China used to be self-sufficient in oil, its population and economic growth has now made it the world's second largest importer.

There are other powerful and needy nations ready to make their own claim on specific resources, given the opportunity and the provocation. So expansions of turmoil in the Middle East could easily grow to become a more global conflagration. The tinder for a bonfire is set, and it would not take much to light it. Brzezinski has asserted that both a wider diversity of allegiances and a widespread dispersal of information have made people more engaged in the political confrontations in the Middle East. We see this in Al Jazeera broadcasting from the deck of the Turkish ship that was heading to Gaza. Emotions boil more fervently from small confrontations.

The United States has attacked two countries of the Middle East in recent years, creating more ill will than offset by any gain in stable sources of oil. The conflicting reasons given by the United States government for these invasions and follow-on occupations really don’t much hold water.

It is my belief that accessing oil was a big factor driving us to war, as oil is essential for the operation of society and the growth of wealth. Iraq and Iran sit on top of 100 billion barrels of oil. Afghanistan has no oil, but it could be part of a larger strategy for the U.S. to tap the rich oil resources of the Caspian. There is little debate that U.S. support for Israel also contributed to the rationale for our military engagement in the region.

Regardless, relying on military action to align the pieces of this chessboard has had disastrous consequences. Things are not going well in Afghanistan. German President Horst Koehler – whose job is largely ceremonial – had to resign after making public comments that Germany's military was operating in Afghanistan primarily to protect the country's corporate and mercantile interests. Koehler’s remarks drew heavy criticism from other German politicians, but he probably just said out loud what most Germans think anyway.

I think we will fail in Afghanistan, not unlike our failure in Vietnam. Much of the population doesn’t want us there, and a sizable percentage are willing to pick up arms to get the foreign invaders out. Each new military offensive creates even more antagonists, honor bound to seek revenge for their dead friends and relatives.

Meanwhile, precarious sovereign debts are now weighing on the future of the euro. Despite pronouncements of a $1 trillion package to support the weaker nations of the eurozone, the market confidence has not been restored. Greek debt cannot be ignored, because of the size of the at-risk investments by German and French banking interests. The reaction in Germany to the idea that the country should bail out the weak southern nations of the eurozone has already cost Angela Merkel her majority in parliament. 

Recent recommendations by Hugh Hendry, Nouriel Roubini, and the Center for Economic and Business Research for Greece to restructure (default on) its debt can be seen as advance notice that the huge bailouts being promised won’t work. Once the bailouts are spent, the debt is still too big to be paid down. The result is that the euro hit a new low for the period the day after Memorial Day.

BP is more than a Gulf polluter

It's not the brown gobs of goo lapping at Louisiana's shores that we should be worried about. It's the potential shortage of oil for the energy-gobbling United States. Obama just announced the shutting down of Gulf oil drilling, meaning less domestic oil for the United States. And that means more world scarcity of oil. Instead of lessening our dependence on imports, the United States will become more vulnerable from these failed technological attempts to drill farther out in the ocean, and to drill deeper than has ever been done before.

It’s worth a quick review of the history of BP, a company that has recently tried to promote itself as being “Beyond Petroleum.”

At the turn of the last century, the Anglo-Persian Oil Company developed the first commercially significant find in what now is Iran. When Mohammed Mossadeq tried to nationalize Iranian oil, the United States CIA managed a coup and installed the more U.S.-friendly Shah. A year later, in 1954, the follow-on company named itself British Petroleum.

Most Americans remember the hostage crisis at the American Embassy in 1979 as contributing to Jimmy Carter losing his second term, but they only barely understand the long-term roots of antagonism between the Western world and Iran. In more recent years, BP acquired Standard Oil of Ohio, merged with Amoco, and acquired Arco.

Its record for environmental and operational deeds is the worst of the major oil companies: it was fined $87 million for safety violations that resulted in deaths at an explosion in a Texas oil refinery in 2005. Among others, BP also paid a fine of $303 million when its energy traders manipulated the price of propane. (More here.) This is the company that we are relying on to clean up its own mess in the Gulf.

It is past time to take away their rights to operate their own game. Personally, I think they should be put out of business. On Memorial Day, Colin Powell recommended the U.S. military take over the project of managing the cleanup. The problem is that the military doesn't know how to do it either. But perhaps they could manage the conflicting parties, bring in other, more competent companies, and look to the best interests of the country, rather than the self-interest of BP.

So it's all about oil. The Gulf of Mexico mess came from sloppy management and arrogance of a company whose history is rooted in international intrigue but that came up against the laws of geology. The failure in trying to extend the envelope of how and where we can search for oil decreases our future sources. It’s clear that the scarcity of oil will come to the fore in military conflicts as the world divides up resources. As I have long said, the price of oil is going higher.

Turning to our administration and Congress, one can only watch in dismay as they act the part of politicians rather than statesmen working together toward real-world solutions. My prediction is for more of the same: hastily assembled, politically motivated patches to the country’s many problems until the train ultimately leaves the tracks. And before that point, yet more bailouts and wars.  

For those who think the stories I have touched on here are nothing more than examples of an unending list of bad but generally inconsequential news items, I reach back to an event in history that seemed small at the time: the assassination of Archduke Ferdinand in the city of Sarajevo.

This small event was the spark that exploded to become World War I. And World War I, with the devastating destruction and reparations imposed on Germany, created the basis upon which Hitler built his nationalistic campaign that led to the worst conflict ever of World War II. The events were all inextricably linked.

In those days, winning territories by military conquest was the primary goal. Today, the primary goal is to secure the energy needed to expand our wealth by multiplying human productivity. But with a disaster of the latest technology in shambles in the Gulf, and the continuing mistrust of governments and our financial systems, I see a mixing brew of broken promises and angry people blaming each other, while not recognizing that we are beginning to hit up against the limits of our planetary resources.

The future could bring $100.00 oil and more war, or it could bring new approaches. In a time of potential nuclear annihilation, it would be a lot nicer to know that we had longer-term viewpoints than I see articulated in our current political discourse.