A Rookie President

We can lose some very big games with this rookie. National Review

The Ghost of Soviet Past

Where are we going? Is this what we really want?

A spectre is haunting America—the specter of unbridled Big Government command-style economics. The ghost of Soviet past is paying America a little visit. And its chilling effects are getting worse by the day.

Liberty and Tyranny

The Modern Liberal believes in the supremacy of the state, thereby rejecting the principles of the Declaration and the order of the civil society, in whole or part.
For the Modern Liberal, the individual's imperfection and personal pursuits impede the objective of a utopian state. In this, Modern Liberalism promotes what French historian Alexis de Tocqueville described as a soft tyranny, which becomes increasingly more oppressive, potentially leading to a hard tyranny (some form of totalitarianism).
As the word 'liberal' is, in its classical meaning, the opposite of authoritarian, it is more accurate, therefore, to characterize the Modern Liberal as a Statist. ... The Statist ... knows that despite his successful usurpations, enough citizens are still skeptical and even distrustful of politicians and government that he cannot force his will all at once. Thus he marches in incremental steps, adjusting his pace as circumstances dictate.
Today his pace is more rapid, for resistance has slowed. ... The Conservative does not despise government. He despises tyranny. This is precisely why the Conservative reveres the Constitution and insists on adherence to it. An 'effective' government that operates outside its constitutional limitations is a dangerous government. ... The Conservative is alarmed by the ascent of a soft tyranny.... He knows that liberty once lost is rarely recovered. He knows of the decline and eventual failure of past republics. And he knows that the best prescription for addressing society's real and perceived ailments is not to further empower an already enormous federal government beyond its constitutional limits, but to return to the founding principles. A free people living in a civil society, working in self-interested cooperation, and a government operating within the limits of its authority promote more prosperity, opportunity, and happiness for more people than any alternative. Conservatism is the antidote to tyranny precisely because its principles are the founding principles." --author and radio talk-show host Mark Levin in his book "Liberty and Tyranny"

A New Order Rises: President Fires GM Agency Head

The GM and Chrysler took the bait, I mean the bail out. They are now told what to do. These companies have been taken over. GM and Chrysler are no longer independent companies, these are now de facto agencies of the federal government.

Ford has rejected the bail out funds. Guess what, that company is gaining market share.

Who wants to buy a car made by the government?

Team Obama fired GM CEO Rick Wagoner Sunday afternoon - A ‘Truly Breathtaking’ Departure

The peculiar link between the markets and a 1957 novel

I understand sales of Atlas Shrugged are moving up quickly. Up to No. 17 on Amazon.

This link to the Toronto Star - March 8, 2009 reports the spikes in sales of 'Atlas Shrugged' , which coincides with specific developments in the economy.

Foreign Relations - Syria

Syrian Reactions to Initial Contacts with Obama Administration: The U.S. has Capitulated to Syria and Iran; The Resistance, has Changed the World - not Omaba

The wrong-minded auto rescue

Why is Washington determined to continue to bail out Detroit, despite the objections of the public (61% opposed it, according to a CNN poll in February)?

The public is correct. Money diverted to a dying industry is taken away from areas with better prospects.

Why build cars that no one wants?

Fortune - March 30, 2009

Inside the world's biggest hedge fund

Bridewater Founder Ray Dalio had a great year last year. His fund, Pure Alpha generated a return of 14% when 70% of hedge funds lost money last year and the average fund fell 18%.

Where does Dalio think then economy is going? He call it a D-process, which is when an economy has an unsustainable high debt burden and monetary policy ceases to be effective (interest rates being close to zero) and as a result the central banks has no way to stimulate the economy. To compensate, the value of debt must be written down (depression) or the central bank must print money (inflation).

The level of debt as % of GDP in the US has skyrocketed past the previous highs last seen in the early 1930s.

Dalio's view is that stocks will get materially cheaper and that we will have to go through an important debt restructuring program; lots of assets will be going on sale and there will be a shortage of buyers.

Hedge funds will not be immune. Hedge funds are 75% correlated to the S&P.

Fortune Magazine - March 30, 2009

Stocks Drop Most in 3 Weeks as U.S. Warns on Banks, Carmakers

It continues.... World Markets fall again

March 30 (Bloomberg) -- U.S stocks slumped the most in three weeks as the Obama administration warned that some banks will need more government aid and that General Motors Corp. and Chrysler LLC have one last chance to restructure. The Standard & Poor’s 500 Index fell 3.5 percent to 787.53 and the Dow Jones Industrial Average tumbled 254.16 points, or 3.3 percent, to 7,522.02.

UK PM...The devalued Prime Minister of a devalued Government

I caught this clip last week by Daniel Hannam, MEP. It was good. Thousands have seen it. The same will be said of the Omaba.

I'm back again...

Had a few days out of town. Traveled over to the Isle of Skye. It was good.

UK government bond auction fails

The UK Treasury has failed to sell all its government bonds in an auction for the first time since 2002. It's because the government has to borrow so much, that any such flop is unnerving.

What Big Government you have!

Inflation or Deflation? That is the Question.

I think we all recognize that we are in a time of change. The leader of the US has promised change. We are all beginning to wonder what this change will actually be. Some are now having second thoughts for voting for change. We are where we are now. And the question is where are things going.

I do think we are in for change...we have seen it start. What I am assessing is what will this change be. Will it be more of the same? I think we can easily concluded that the answer is no. We are in a major state of change...more financially, economically and politically. This change could have serious and significant affect upon us all.

I have been thinking about this for some time, concerned with the situation. The question that we all need to ask ourselves and assess is whether the change will be (1) inflationary or deflationary or (2) hyper inflation or Great Depression 2.

I reject the first option of inflationary/deflation case. We are not in a situation that we will have either moderate inflation or deflation/recession.

The current environment indicates major forces in play; with economic events that have not been seen for 50-80 years.

So what will it be? HyperInflation or the Great Depression 2? Or will all of the action by the governments be successfull and return us to the norm?

Enough for now. Post your comments...what do you think? And what do you think should be done, and what are you doing ?

Social Behaviour

Animals that were formerly self-sufficient are modifying their behavior to take advantage of what they expect to be a new set of societal norms in the next four to eight years. This black bear has ceased hunting and, instead, has begun to merely sit outside a U.S. Fish & Wildlife Service office, waiting to be fed and to have his winter den dug by government employees. In honor of what is believed to be the cause of this behavior, area residents are calling him "Bearack Obama."

Next Bubble to Pop - US Bonds? NYT

Treasuries bear risk, in particular, the risk that flows from crowd psychology. Last month, in his annual letter to shareholders Warren Buffett wrote: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

How China sees the world - The Economist

IT IS an ill wind that blows no one any good. For many in China even the buffeting by the gale that has hit the global economy has a bracing message. The rise of China over the past three decades has been astonishing. But it has lacked the one feature it needed fully to satisfy the ultranationalist fringe: an accompanying decline of the West. Now capitalism is in a funk in its heartlands. Europe and Japan, embroiled in the deepest post-war recession, are barely worth consideration as rivals. America, the superpower, has passed its peak. Although in public China’s leaders eschew triumphalism, there is a sense in Beijing that the reassertion of the Middle Kingdom’s global ascendancy is at hand.

What Changed?

Economic Policy Conundrum

The world's economy is facing years of ill-begotten economic policies. The worst economic downturn in 80 years is the result of these policies. Healthy economic growth is savings based and thus is sustainable. However, the economic growth that has occurred was not based on savings and production, but was credit and policy induced. It was and is artificial and thus unsustainable.

The policies that were implemented included:

• Monetary policies - these kept interest rates low (artificially) for years
• Tax policies - favour debt financing over equity
• Regulatory policy - that allowed financial institutions to mismanage their operations eg excessive leverage
• Social policy - which pushed home ownership regardless of affordability
  

All of this combined created credit induced artificial demand. More and more debt was created.

The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.

Economic demand has to be savings driven to be sustainable.

What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.

What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.

I think the people want change, and are willing to go with lower growth based on real economic principles and values.

However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.

Quant Easing: Central Banks Unleash the 'Nuclear' Option

Printing Money....Is this really the solution to the financial and economic problems?

Well, the Central Banks and Government think that is the only solution left. That is somewhat of a concern, isn't it? I do not think the people really think that is a good answer. No one wants hyper inflation; that is just a crazy environment that no one enjoys. It is a wealth destoyer.

I think we and the governments need to be honest. There are no quick fixes. We have over spent; and the debt that has been created needs to be reduced to a more reasonable level. The solution of more spending and more debt does not solve the problem.

The solution of QE or printing money, is not a real solution. It is a fraud; and it it is accepted then, the economy will suffer more.

More on QE -
Desperate times call for desperate measures. As the global “credit crunch” has grown increasingly severe, central bankers are examining the Great Depression of the 1930s for possible parallels that are relevant to today’s situation. Most worrisome, is the synchronized meltdown of the global stock markets, which had wiped-out $32-trillion of wealth, on top of another $10-trillion in losses in real estate.

As an atheist, I truly believe Africa needs God

Matthrew Parris, an atheist, reported in The Times that, missionaries, not aid money, are the solution to Africa's biggest problem - the crushing passivity of the people's mindset. Why would an atheist see the need for God?

Madoff Employee Breaks Silence

An employee of Bernard Madoff’s legitmate brokerage operations, which were described by the fraudster in his plea agreement as being “successful and profitable,” has told The Daily Beast that they were in fact money-losers that acted as a front for his Ponzi scheme.

The Roar of the Crowd

Marx was wrong: The opiate of the masses isn't religion, but spectator sports.

UK Sipps - Something to consider for all - Tax savings now

UK Sipps is similar to Canadian RRSPs and US 401s. For US citizens, residing in the UK, since they have to file and pay taxes in both countries, they should seriously consider UK Sipps. It is not only good savings from UK point of view, but as well US.

In London, the party's over and the hangover is setting in

Since the rug was pulled out from under the financial world, Britain's capital has taken one of the farthest and hardest falls of all- Saturday's Globe and Mail

Jim Rogers was Right

March 9, 2009 Bloomberg reported that Jim Rogers said that in order to keep its borrowing costs down, the U.S. Fed will likely start buying Treasuries... driving prices up and yields down. On March 18, 2009 the US Fed announced its would just do that. Jim Rogers says that this action "setting things up for a gigantic fall down the line."“Governments are printing money everywhere, borrowing stupendous amounts. Throughout history that has led to problems in the bond markets, and it will this time too.

Wall Street or Washington - Who is to Blame?

Debate of the week was who is to blame for the economic mess. Wall Street or Washington?

Good debate....and results of this debate ended up that it is Washington.

However, I am not sure the right question was asked, it was limited. And if it is Washington, then really is not the people who voted for Washington?

Washington is created, by the people, for the people. If people believe policitians' promises of something for nothing, then is not the real fault the people. There is no free lunch, there is no cost free promises. The more promises, the more it costs, and not only directly, but indirectly as well as the government processes, policies and spending disorts the economy, until economy starts to collaspe and fail. That is what we are seeing now in the US. This is not new stuff, we have seen through out history the results of government led and directed economies. They always end up the same....in failure and collaspe.

There needs to be a fundamental change with all of us and our expectations. The economy only grows based on production and savings. Debt led growth and expansion will not provide substainable economic growth. It just can't. The compounding affect of interest assures that it can not.

Financial Crisis Debate March 2009

Rolling Stones on the Economy, Wall Street and Washington

Rolling Stone magazine has an article on the economy, Wall Street and Washington. Think that maybe the people are beginning to understand that nothing has really changed, that the government is continuing with its mismanagement of the economy and markets, but now doing more of it, bigger and faster.

It is amusingly wild-eyed stuff from on AIG, the Fed, etc. it is enthusiastically written, even if somewhat hyperbolic in its claims. For example, just because the writer hasn't seen the hodge-podge -- Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, etc. -- of Fed credit programs on billboards doesn't make them "secretive".

Anyway, it's worth a read:

It's over — we're officially, royally f__k_d. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit.....

Lessons for the west from Asian capitalism

From the FT
We should not be surprised to discover that the greatest global believers in capitalism will be in Asia. But it will be an Asian mix of capitalism, not the western formula, that will become the dominant form of global capitalism, where the “invisible hand” of free markets will be balanced by the “visible hand” of good governance.

There will be no ideological trumpeting of the virtues of Asian capitalism. After their experiences of the past 100 years, Asians are wary of ideology. They prefer the simple, commonsense approach of learning from experience and they will heed the advice of Adam Smith, who said that prudence is “of all virtues that which is most useful to the individual”. It may also be helpful to nations.

The US Fed Announcement March 18, 2009

On March 18, 2009, the US Fed announces its further program of devaluation of the US dollar. It plans to "purchase" a Trillion dollars of debt ($1,000,000,000,000).

Since last Fall, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

This announcement by the Fed is pretty scary. In it self, it does not look very good (link to the announcement). However, what are they seeing that makes them take this very unusal heavy action? And that is the scary part.

In reaction, the markets jumped up but then fell back, realizing that something is not right. Gold, naturally moved up on this announcement.

Another Quote...

by Robert Heinlein:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

Quote of the Week

"All of this reads as if yanked from an Ayn Rand novel. The government, in a desperate attempt to avoid political pain caused by its own foolish economic mistakes and lax oversight, has poured billions into bankrupt companies. Then when those companies pass out bonuses they claim are necessary to retain qualified workers, the political firestorm leads government officials to propose tax rates that would make even British socialists of a half century ago blush. We are slipping into debates that have nothing to do with a free economy and everything to do with the government calibrating how to balance the favors it hands out with the inevitable moral outrage those favors engender." --Wall Street Journal columnist John Fund

Canadian Stocks Drop, Halting Eight-Day Rally; Suncor Declines

March 20 (Bloomberg) -- Canadian stocks fell the first time in nine days as energy producers tumbled with crude-oil prices and insurance companies slid on concern that equity investment losses will eat up capital.

Wall Street's Top Five Big Lies

From MSN Money....Wall Street top Five lies:

1: The market will take care of everything
2: The 'experts' will help you
3: Buy and hold
4: Overpaid CEOs are worth the money
5: Buy a flat-screen TV, save the economy

Treasurys Are 'Disaster Waiting to Happen': Dr. Doom

The Federal Reserve has no option but to start buying Treasurys as the government's needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, reported to CNBC.
"I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster," Faber said.

Loonie leaps to three-month high on Fed boost

Canadian $ should be doing better than the US $....US is printing more of it to "solve" their financial and economic problems. Really now, will that work....is it that easy of a problem to solve? I think we all know where this will go and its results. See comments made by Jim Rogers. Get ready!

Canada's dollar jumped to the highest in three weeks after the Federal Reserve said it will purchase US$300-billion of longer-term Treasuries, sparking concern the central bank is debasing the world's reserve currency.

investment pros lack knowledge to properly manage portfolio risk

The investment industry is largely winging it. "Investment managers often use ad hoc decision making rather than quantitative portfolio construction processes." One respondent said "Many firms -- even those that claim to have consistent allocation techniques -- implement them arbitrarily or chaotically."

Japanese Women Hunt for Husbands as Refuge From Deepening Slump

“Financial concerns are a major reason for the increase in marriage-hunting,”

Fed Ignites Markets with...

Quantitative easing (printing money). Interest rates fall, Bonds are up, Stock Markets up and of course with printing of money, Gold and Gold Stocks rocket up. Gold stocks up ~10% on the day.

Is it surprise? Think not....it was just a matter of time. We know the new US administration and direction that it is heading and what it means. So....there are no real surprises coming.

China must be real happy.


US Fed to Buy $300 Billion of Longer-Term Treasuries

Jim Rogers says...we're in trouble

In an interview with Bloomberg TV, aired Tuesday, Rogers says the US risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, and urges Washing to let AIG - which notched up the biggest Q4 loss in corporate history - go bankrupt:

“The US is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and author of books including Investment Biker and Adventure Capitalist. “That’s bad economics”.

In other cheery remarks, there were lots of dire warnings but not many solutions in Rogers’ predictions that the US is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under.

His most useful point is possibly that we should all be buying farms and agricultural producers.

And in a characteristically counter-intuitive tack, Rogers warns that oil prices (now floundering around $47 a barrel after last year’s highs of more than $147), may rise to record levels due to waning reserves and a lack of major field discoveries: “Reserves of oil are going down all over the world…The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”

Finally, the spectre of inflation also disturbs Rogers - although he owns gold and silver, he adds, calls to return to the gold standard are “not going to solve our problems”:

“People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure…We’re going to have serious, serious inflation down the road… I wish I knew when.”

Thanks, Jim.

And here are Rogers’ other main points, courtesy of FirstAdopter:
- This is a bear market rally that can last days, weeks, even months
- He is worried about government debt market. In a few months, they have quintupled government debt
- Massive short squeeze on the U.S. dollar from forced liquidation. It’s an artificial rally
- He owns the yen and the dollar, not sure where to put the money. Maybe real assets
- The only asset class that has fundamentals improving are raw materials and commodities
- He owns some gold, but thinks there is more money to be made in agriculture and silver. IMF is trying to sell their gold, which may hurt it for a while
- Central bank is trying to keep interest rates down, but eventually it will backfire and rate will go through the roof
- If you write-off everything in sight, sure you can show a profit [talking about C, BAC, and JPM saying they are profitable in January and February 2009]
- He is short JPMorgan and covered his Citigroup. He thinks they have gigantic derivatives and off balance sheet exposure, also large credit card division which will be bad
- No position in insurance companies
- Best economic sector in the world next 10-20 years is agriculture and farming. Low inventories and tons of shortages

More Pain for REITs

Good article from Bloomberg summarizing the upcoming pain. Some salient quotes:
“REITs are cheap but they’re going to continue to be cheap,” said Marc Halle, managing director of Prudential Real Estate Investors in Parsippany, New Jersey, whose firm manages about $32.5 billion in real estate assets. “We’re going to see increased corporate bankruptcies and continued unemployment for the next few months.”

More than a dozen retailers, including Circuit City Stores Inc. and Linens ‘n Things Inc., filed for bankruptcy protection in 2008. Store closures have hit shopping center landlords including Developers Diversified Realty Corp., whose stock fell 95 percent during the past year to $1.89.

The dividend yield on the retail REIT index is almost 15 percent, more than five times the 2.88 percent yield of the 10- year Treasury note, a traditional benchmark of value. During the past decade, REIT yields averaged less than 2 percentage points above Treasury yields.

Retail REITs are worse off because they borrowed more heavily than apartment and health care landlords, said Dean Frankel, a senior portfolio manager at Urdang Securities who helps manage about $1 billion of real estate securities.

Refinancing Risk

The real estate market has been in limbo while investors await government measures to deal with the collapse of the banking industry and boost an economy in its second year of recession.

Refinancing risk is driving REIT prices, said Prudential’s Halle.

“No one cares about value,” he said. “It’s about survival and making your balance sheet as strong as you can.”

What’s the difference between Iceland and Ireland? “One letter and six months,

Push for financial literacy spreads to schools

I agree.....we need to teach financial literacy; and just not budeting, spending, saving, and investing but economics. I think we have long way to go.....but it is starting!

Roy Kobert set aside his work as a bankruptcy attorney one Friday morning to teach these and other personal-finance lessons at Boone High School. He starts by showing the 11 students of this senior-level business class a Saturday Night Live sketch in which Chris Parnell touts a book called, "Don't Buy Stuff You Can't Afford."

Roubini: "Reflections on the latest sucker’s rally"

So, in conclusion and caveat emptor for investors: Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally ... don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.

As Oil and Gas Prices Plunge, Drilling Frenzy Ends - NYT

Plunging oil and gas prices results in less drilling.

Inside the Bear Stearns boiler room - Fortune Reports

The secret history of Bear Stearns' collapse; Bestselling author William Cohan uncovers the inner workings of the misadventure that brought down Bear Stearns and foreshadowed the financial crisis to come.

Bank of England warns tensions in banking system at fever pitch

Tensions in the financial system are approaching the fever pitch they reached before the collapse of Lehman Brothers last October, the Bank of England has warned.

Will China Continue Financing the Great USA? If so for how long?

Obama's Fear-mongering - Obama's Rule No. 1

"Rule 1: Never allow a crisis to go to waste," reports White House Chief of Staff Rahm Emanuel to WSJ. Over the weekend, Secretary of State Hillary Rodham Clinton told an audience at the European Parliament, 'Never waste a good crisis.' Then President Obama explained in his Saturday radio and Internet address that there is 'great opportunity in the midst of' the 'great crisis' befalling America. Numerous commentators, have pointed to this never-waste-a-crisis mantra as ideological evidence that Obama's budget priorities are a great bait-and-switch. He says he wants to fix the financial crisis, but he's focusing on selling his long-standing liberal agenda even though his proposals have absolutely nothing to do with addressing the housing and toxic-debt problems. Indeed, some -- particularly on Wall Street -- would argue that his policies are making the crisis worse. But those policies aren't the real scandal, the real scandal is that this administration thinks crises are opportunities for governmental power-grabs." --National Review editor Jonah Goldberg

More needed?

Earlier this week, WSJ report that said the ink is barely dry on the $787 billion economic stimulus package enacted by Congress, and talk is already beginning by the Capital Hill ruling party that there is needed! (And just how does pork and debt spending add economic growth, stronger economy? If little is good then lots more must be better! Hey, has anyone take basic economics out there?)

In another WSJ article it was mentioned that while AIG received a taxpayer bailout of more than $170 billion dollars it did not forget its executives and their $165 million in bonuses for doing such a great job. The US taxpayers must feel all warm and fuzzy about being able to help out the friends of Treasury Secretary Geithner, Omaba, B Frank and Nancy Pelosi.

Keep it up guys! You're doing a great job!

South Sea Bubble Survivor Says Dismantle RBS Along With Lloyds

March 13 (Bloomberg) -- Henry Hoare made a 1.6 million- pound ($2.2 million) profit from the South Sea Bubble, a speculative bust that bankrupted thousands of English families in the 1720s.

Cards Raise ‘Canary in Coal Mine’ Alert in Canada

“If there’s another shoe to drop, credit cards are going to be it,” said John Kinsey, who manages about C$1 billion including bank stocks at Caldwell Securities Ltd. in Toronto. “It’s probably going to be the Achilles heel this year for the banks.”

Depression Dynamic Ensues as Markets Revisit 1930s

Bloomberg - March 9, 2009 As in the Great Depression, world trade is collapsing, wealth is evaporating and the banking system is broken. “We are tracking 1929-1930,” says Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley.

Credit Cards - Next Credit Crunch

Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.

Iceland’s de facto bankruptcy - Vanity Fair

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash

UK House Prices could fall 55%; UK is Bankrupted

House prices may fall by a further 55 percent and there is a "very real probability" that Britain will be bankrupted, a leading investment bank has warned in a private note to clients.

Panics and Booms, a lesson from 1897

Panics and Booms, a lesson from 1897
March 11, 2009 – 4:24 pm

by Rolfe Winkler, CFA

Thanks to Patrick for an absolute gem. Earlier this week, he linked to a fantastic newspaper article written in 1902. That article actually reprinted a paper written five years previously, entitled “Panics and Booms” by L.M. Holt. When Holt wrote the paper, the economy was at the tail end of a depression. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Fast-forward five years, a new boom was in full swing, and the newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take. The Bank Panic of 1907 arrived a bit ahead of schedule.

It’s a great read, particularly now when most observers remain conflicted about what kind of economic funk we’re in. Mr. Holt described quite clearly the economic conditions we face today, a depression created by over-indebtedness. And he offers a prescription for how to dig ourselves out: pay back debt. It’s a prescription I endorse wholeheartedly.

The paper is so good, for posterity’s sake, I have reproduced it here in full. Another reason: Irving Fisher generally gets credit for having created the “debt deflation theory of depressions,” but Holt beat him to it by 36 years. Enjoy!

“Panics and Booms”

L.M. Holt

Ever since the establishment of the human race on this planet there has been a gradual increase of population and a more rapid consumption of wealth.

Wealth is the result of labor, and without labor there can be no wealth.

Men live and pass away, but as they cannot take their wealth with them a large percentage accumulates for the benefit of their successors. Hence the wealth of the world today, per capita, is much greater than ever before, and it is continually on the increase.

The transfer of wealth, or property, from one person to another creates business. Under favorable conditions, transfers are numerous and business is brisk. Under unfavorable conditions transfers are few and business is dull.

During periods of business activity there is work for all, and this of itself makes greater business activity. During periods of business depression there is not work for all, and this of itself makes business dull and unprofitable.

The existence of either one of these conditions leads necessarily to the other. It is an impossibility for either prosperous times or depressed times to continue permanently.

This is where it starts to get good…

During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.

This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade….The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.

Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.

This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.

When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.

A fantastically simple description of leverage, that is, investing with borrowed money as a way to amplify potential gains at the risk of greater losses. How quaint that Holt seems impressed by “ten times” leverage. He would blush at the leverage ratios permissible today.

A quick tutorial on leverage for the unfamiliar. The more money borrowed to buy an asset, the higher the buyer’s return on equity when times are flush. If you buy a $100,000 house with only $5,000 down and the price increases to $125,000, the return on your equity investment is 400%. ($25,000 increase in price / $5,000 initial investment = 400% return). A cash basis investor who pays the full price of the house up front has a much more meager return, 25%. ($125k / $100k = 25% return). The flip side is that when prices fall, the leveraged investor sees his equity wiped out quickly. The guy who paid cash has lots of cushion.

All people in a given section of country use their credit at the same time because they are all governed by the same local conditions. Hence, there is a fictitious stimulation of prices which must come to an end. This end brings a financial depression which must necessarily follow a period of business activity.

A “fictitious stimulation of prices.” We have our own word for that: “bubble.”

When the people arrive at a point where their credit limit is reached there is necessarily a decrease in the demand for goods and property, and soon the supply becomes greater than the demand and prices begin to decline. This stops speculation. Thousands of people engaged in manufacturing or producing articles of general use are thus thrown out of employment, and this causes a still further decrease in the demand for goods and hence a further decline in prices. Those who have purchased on credit find themselves subjected to heavy losses because they are compelled to sustain the depreciation on goods they do not own—that is, goods bought on credit. Because of this decrease in valuations all are compelled to economize in order to adjust their expenses to the new order of things, they being compelled to pay off the accumulated indebtedness with the decreased income. This economy of the masses still further decreases the demand for goods and property and this still further increases the supply over the demand, and decreases the prices, throwing more people out of employment and increasing the depressed condition of business.

Fisher, eat your heart out!

The business man feels the change in conditions as well as the laborer. Doing business largely on borrowed capital he loses all the capital employed in the business, not alone on the money furnished by himself. The value of the business shrinks, but the debt remains the same or increases. Bankruptcy stares the business world in the face. The weaker go under while the stronger pull through, and sometimes make fortunes at a little later date out of the misfortunes of others.

Here is a condition of hard times. A large percentage of laboring people of the world are thrown out of employment. Every time a man stops work—stops producing—his purchasing ability is impaired, the demand for goods becomes less and prices are lowered.

During the period of depression—the debt-paying period—the people at large are forced to economize. The earning capacity of all classes has been decreased. A large percentage of people are thrown out of steady employment and wages are reduced for those who do secure labor. Some earn enough to pay expenses of living economically, while others do not and are compelled to live in part on the limited accumulation of former more prosperous years.

Holt notes that depression coincides with the period during which debt gets paid back. Economic expansion coincides with the expansion of debt, with the period during which debts are rolled over rather than paid back. [I made this point in my post on The Great American Ponzi.] The bigger the debt hole we dig for ourselves—via bailouts, stimulus, etc.,—the longer our payback period. More debt, in other words, will only exacerbate the depression.

Many business men continue in business: some are able to meet running expenses, while others prefer to lose a little each month, awaiting a return of better times rather than to lose more heavily by retiring entirely from business. Many cannot stand the pressure and quite business, forced to lose the accumulation for years.

During the years of depression, values of all kinds of property shrink. In the case of incumbered property this shrinkage falls entirely on the margin and not on the debt. Sometimes it wipes out the margin and a portion of the debt also. Sometimes the margin is so nearly wiped out that the alleged owner of the property transfers his interest in the property to the one who holds the claim against it, and another debt is paid. Sometimes the holder of the debt declines to thus take the property and releases the owner.

More on leverage. Assets “incumbered” with debt leave their owners very vulnerable. What Holt refers to as “margin” we refer to as equity. Equity, “during the years of depression,” may be substantially “wiped out.”

A person who does business on a partial credit basis, on borrowed capital, makes larger profits during periods of prosperity when the prices are advancing than he who is on a cash basis, but he sustains larger losses during periods of depression when prices are dropping.

If a man could change quickly from a credit system to a cash basis as soon as the period of prosperity closes he would be all right, but he is in debt, and the debt must be paid, and hence it is not usually practical to make the change. If it were he would not be in debt.

Gradually the surplus debts of the country are paid and the people breathe easier again. People live within their incomes and temporarily learn economical habits. Men smoke fewer and cheaper cigars and ladies purchase fewer ribbons and occasionally fix over a bonnet and dress instead of getting new ones.

A time is finally reached when people begin to get out of debt and they begin to live a little better, buy more of the necessities of life and some of the luxuries. As the number of people in such improved condition increases, trade begins to pick up, larger orders are sent to the factories, more wheels are set in motion, more operatives are employed and more people are placed in position to buy more goods, which in turn starts more mills and gives employment to still more men.

Note how the pre-existing condition for healthy economic growth is first getting out of debt.

Deficit spending won’t stimulate anything. It will just sow the seeds of an even deeper depression. The sooner we get out of debt, the better off we’ll be.

Thus the business of the country is forced into an active condition, and thus business activity increases in geometrical progression until wages reach their maximum point, factories are running to their utmost capacity, prices of all kinds of goods and all kinds of property advance, and people begin to purchase again more than they have the money to pay for—some because they want profits on increasing valuations and others simply because of extravagant ideas of living.

Money is plenty, credits are good, and the masses are good pay because all kinds of property are convertible into legal tender. Improvements, public and private, are pushed to their utmost extent, fancy prices are paid for real estate because it can be sold readily again at still more fancy prices. Individuals of limited capital hold thousands and hundreds of thousands of dollars worth of property on which only a small payment has been made. An advance of five per cent on the price of the property is an advance of 50 or 100 per cent or more on the cash investment. Another transfer is made and another soul is made happy. In short a speculative boom has struck the country again gradually but surely. This speculative boom is not the result of any movement on the part of the people or any portion of them to create a boom, but it is the result of natural laws of business and is just as certain to materialize as a good crop is sure to be the result of favorable climatic conditions.

It is not, perhaps, in order here to discuss the millionaire question or inquire into the trust combinations which threaten to disturb so seriously the business interests of the country. It is, however, safe to say that those who think during a period of business activity that such activity will always continue are just as much mistaken as are those who believe during a period of business depression that such business depression will never come to an end.

Good times will follow bad times and bad times will follow good times just as surely as darkness follows day and day follows darkness. Those periods always have followed each other and they always will.

The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom. There is not question as to the soundness of this conclusion. There is no question that these changes will come. The only question is—when?

At the close of a speculative boom the change comes like a thief in the night. In fact a thief in the night would be a welcome visitor to many instead of the change which puts in an appearance, but the change from a financial depression to better times comes gradually—so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not.

Glance for a moment over the financial history of the century just closing, and see what has been the condition of the country. During 1837 the country was in the midst of a financial panic. Again during the year 1857—twenty years later—there was another panic. In 1837 a financial crisis struck the eastern states and the great banking house of Jay Cook & Co. was found among the financial wrecks scattered throughout that section of the country. In 1875 that same panic reached the Pacific Coast, closing the doors of the Bank of California of San Francisco, together with many other banking institutions, including the then popular banking house of Temple and Workman in our own Los Angeles—a bank that failed for over a million dollars and never paid a cent on the dollar to the many unfortunate depositors.

In 1893 the next panic struck the United States after having wrecked so many banking institutions in South America, Australia, and other parts of the world.

During the year 1886, when the late speculative boom was getting under good headway in Southern California, Hon. D.C. Reed, now mayor of the City of San Diego, gave a banquet at the Horton House in that city, to which he invited business men from all points in Southern California. In response to the sentiment, “The Prosperity of Southern California,” the writer, among others, briefly reviewed many of the principles herein laid down and following the line of thought that waves of prosperity and depression follow each other with more or less regularity, predicted that somewhere between the years of 1892 and 1895 this country would again enter upon a period of business depression that would be very severe on the business activity of the country. The local speculative boom of 1886-7 broke long before this predicted period, but the universal panic which swept over the civilized world did not appear until the time predicted—1893. It appears to require, under present business conditions, from eighteen to twenty years for the country to pass through a complete cycle from one business depression to another.

After the panic of 1875 it took the people of Southern California five years to get ready for business again in 1880. A similar period after the panic of 1893 ought to place this country again in line for business activity. The panic of 1893 was more widespread in its operations that that of 1875; but locally, it was not so severe, as comparatively little money was lost by depositors by falling banks in Southern California four years ago, whereas in 1875 the loss was heavy.

Again so far as Southern California is concerned the past five years has dealt very kindly with our people. Southern California increased its population from 200,000 in 1890 to over 300,000 in 1896. Los Angeles city has increased in population from 50,000 in 1890 to 103,000 in 1897, more than doubled.

In actual wealth, Southern California has kept pace with the increase of population, although on account of the business depression of the country and the decrease in valuation all over the world, this increase in wealth is not so apparent. With the extraordinary increase in population and wealth in Los Angeles city during the past seven years, nothing short of a financial depression all over the country could have prevented that city from experiencing a speculative boom of great magnitude.

If Southern California in general and Los Angeles city in particular can make such a showing during a period of financial depression, what will be the result when the clouds roll by and prosperous times are enjoyed again throughout the country at large?

It is a difficult matter to make the people believe that our country is now entering upon another period of prosperity. Each one has a remedy for hard times. And each one sticks firmly to the proposition that better times cannot come again until his remedy has been applied. These remedies are mostly of a political nature. One man believes that a high protective tariff is all that is necessary to restore prosperity to the country, and another thinks the free coinage of silver and gold on a basis of 16 to 1 without making any suggestion to any other nation about the matter would bring good times. There is no question but the legislation on both these questions or either of them would affect the main proposition. Wise legislation will always assist in bringing prosperity, and unwise legislation will always retard the coming of better times, but no legislation, no matter what it be, can prevent the incoming tide any more than the little child on the sandy beach with its little shovel can, by piling up a ridge of sand, stay the incoming surf.

“The statement that, except for the temporary depression in prices the volume of business transacted is now larger than it was in 1892—the year of the greatest prosperity—has been questions by some. But a comparison of prices this week in the leading branches of manufacture, not only confirms that view, but shows a remarkable similarity to the course of prices in the early months of 1879, when the most wonderful advance in production and prices ever known in this or any other country was close at hand. The key of the situation is the excessive production of some goods in advance of an expected increase in demand. So, in 1879, consumption gradually gained, month by month, until suddenly it was found that the demand was greater than the possible supply. All know how prices then advanced and the most marvelous progress in the history of any country resulted within two years. Reports from all parts of the country now show that retail distribution of products is unusually large and increasing.”

This is a remarkably clear statement of the facts of the case, and is evidence from unquestionable authority that the position taken herein is correct.

Local conditions in Southern California will affect the issue here, and they appear in our favor. The building of the breakwater at San Pedro by the government will insure another transcontinental railroad from the east to Los Angeles via Utah. Then a 1 cent a pound tariff on citrus fruits, the building or more beet-sugar factories and the improvement of the vast water power of the mountain streams, and the setting of that power to work building up and enriching the country—all these and more will help along the good work.

Capitalists are now active, laying the foundations solidly for future operations in this, God’s corner of the universe; and while we would not advise people to stand still and see the salvation of the Lord, still it is pretty certain that those who stand will see it, although they will not be benefited thereby so much as they would be if they didn’t stand still.

The coming boom is not here today and it will not be here tomorrow, but he who has no faith that a period of very busy business activity, accompanied by a speculative boom is close at hand, would do well to place himself under the fostering care of a good, reliable guardian.

"Time Is Running Out Faster than Expected"

TIA Daily • March 13, 2009

COMMENTARY

The Obama backlash that I discussed in yesterday's edition of TIA Daily is now emerging as the big news story of the week.

In The Hill, a newspaper for Capitol insiders, congressional Democrats are quoted worrying that Barack Obama's "honeymoon" is fading and that "there is a growing sense that time is running out faster than expected." The reason? The stock market crash and the worsening of the economy, which has accelerated since Obama took office.

"We've got to see an uptick by August or the Democratic majority is in jeopardy," said Rep. Bart Stupak (D-Mich.), whose state had an 11.6 percent unemployment rate in January.

Stupak doesn't fault Obama for pursuing healthcare reform, because high medical costs are intertwined with the economic difficulties, he said.

But Obama must move quickly, he added, saying, "By summer there is no more honeymoon. Period."

And it is not just the economy. Chas Freeman, the sympathizer of tyrants picked by the Obama administration to be in charge of writing National Intelligence Estimates, did more damage on his way out than on his way in. After resigning, he issued a tirade blaming opposition to his appointment on a secret cabal of Jews. Here is the reaction from the Washington Post:

It wasn't until Mr. Freeman withdrew from consideration for the job, however, that it became clear just how bad a selection Director of National Intelligence Dennis C. Blair had made. Mr. Freeman issued a two-page screed on Tuesday in which he described himself as the victim of a shadowy and sinister "Lobby" whose "tactics plumb the depths of dishonor and indecency" and which is "intent on enforcing adherence to the policies of a foreign government." Yes, Mr. Freeman was referring to Americans who support Israel—and his statement was a grotesque libel….

Crackpot tirades such as his have always had an eager audience here and around the world. The real question is why an administration that says it aims to depoliticize US intelligence estimates would have chosen such a man to oversee them.

And Obama's staffing problems persist. His appointee as a coordinator for "urban policy" has been caught taking advantage of the unpaid services of an architect who also happened to be the beneficiary of large government projects controlled by his client.

Such scandals are not entirely a distraction. They serve to remind everyone of the corruption and abuse of power endemic in a government bloated by looted dollars. But it is the enormous expansion of government proposed by Obama, the administration's dishonesty regarding the fiscal consequences, and the resulting crash in the financial markets that is really feeding the growing discontent with Obama.

Megan McArdle, an economics blogger for The Atlantic, is the latest defector. Writing about Obama's budget projections, she says:

Of course they're too optimistic. In fact, the word "optimistic" is too optimistic. A better choice might have been "insane."…

Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse. Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury. Meanwhile, the administration is clearly prioritize[ing] a stimulus package that will not work without fixing the banks over, um, fixing the banking system….

The budget numbers are just one more blow to the credibility he worked hard to establish during the election…. These numbers...well, I can't really fully describe them on a family blog. But he has now raced past Bush in the Delusional Budget Math Olympics.

The more famous recent Obama defector is CNBC's Jim Cramer. An intolerably snide article in TIME describes how CNBC—the home of Cramer and "tea party" hero Rick Santelli—has become the voice of the investor class, which is ready to rebel against Obama's wealth-destroying policies. The TIME article sniffs that "there's still a small, demographically appealing niche for talking heads fulminating against the 'demonization' of business and being in favor of laissez-faire government." But the niche is not so small. CNBC's ratings have sharply increased during the financial crisis, and the investor class it appeals to is the broad American middle class.

So will all of this stop Obama's agenda? Is there reason to speculate that worry about a backlash will cause him to drop socialized medicine or cap-and-trade energy rationing from his agenda, so that he can focus more effort on stabilizing the financial system?

I doubt it. The Hill is already reporting that Obama has been buoyed by a small stock rally and feels confident going forward with his agenda.

Moreover, the Wall Street Journal's Daniel Henninger argues that an improvement in the markets its not Obama's goal. Instead, he cites a crucial passage from Obama's own budget documents which reveals that the administration's main goal is to reduce income inequality—by means of tearing down the wealth of the nation's top producers.

Turn immediately to page 11. There sits a chart called Figure 9. This is the Rosetta Stone to the presidential mind of Barack Obama. Memorize Figure 9, and you will never be confused. Not happy, perhaps, but not confused….

Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

As described in Mr. Obama's budget, these two economists have shown that by the end of 2004, the top 1% of taxpayers "took home" more than 22% of total national income…. [T]heir "Top 1%" chart has become a totemic obsession in progressive policy circles.

Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum:

"While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."…

The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to "pay for" the fact of their wealth—no matter how many of them worked honestly and honorably to produce it. No Democratic president in 60 years has been this explicit….

The economy as most people understand it was a second-order concern of the stimulus strategy. The primary goal is a massive re-flowing of "wealth" from the top toward the bottom, to stop the moral failure they see in the budget's "Top One Percent of Earners" chart.

So there you have it. The Obama administration's goal is not to revive the economy, but to attack its "commanding heights"—and level them down to the ground.

One of the main signs of Obama's indifference to the economy, as many have pointed out, is his failure to make sure that the Treasury is fully staffed, even as that agency is supposed to be taking the lead on a massive rescue of the nation's banks. And the Associated Press is reporting yet another withdrawal of a top-level Treasury nominee. This is part of the reason why there is still no plan for what to do about failing banks, a full two months into Obama's presidency.

Of course, the Republicans have problems of their own, which they are always skilled at manufacturing. Afraid of having the "race card" used against them for the next four years, the party selected black Republican Michael Steele to be the public face of the party—only to discover that he is prone to cave in and tell the left-leaning press whatever it wants to hear, whether that means defaming Rush Limbaugh or flip-flopping on abortion.

If you need an inspirational antidote to all of the current news about politics and the stock market, I would direct you to composer M. Zachary Johnson's moving tribute to Schuyler Chapin, a former director of New York City's Metropolitan Opera who passed away early this week. Readers of TIA know Mr. Johnson for his writings on music, and hopefully also for his own compositions. (If not, I highly recommend that you buy his CD.) But he was also a personal secretary for Mr. Chapin in the final years of his life, and he offers a wonderful description of what the experience meant to him.

When the world recently lost Beverly Sills, Luciano Pavarotti and Brooke Astor (three of Mr. Chapin's many illustrious friends), I felt much the same as I do now: that their deaths represented a loss of the living links to the sensibilities of a prior era, to the values and culture of the pre-counterculture, pre-modernist world….

I feel similarly about Schuyler Chapin.

I grew up in post-counterculture, post-60s America, and have never liked the nature or results of the counterculture upheavals or the ideas behind them. Rather, I have for a long time admired the art, manners, and many of the basic values of pre-WWII culture. The 19th century had nevertheless been distant for me; the era was something I learned about from books and film, not something I had had firsthand contact with.

Schuyler Chapin was for me a direct link and immediate manifestation of that world. I cannot tell you how important this was for me personally, particularly given the kind of music I write. Knowing Schuyler was a concretization and affirmation for me of a part of myself.

For a description of an inspiring life and its beneficent impact on the world, read the whole thing. It's a reminder that we could all use right about now.—RWT

Berkshire Hathaway losses its AAA credit

SINGAPORE — — Warren Buffett's Berkshire Hathaway was stripped of its AAA credit rating by Fitch, barely hours after S&P cut General Electric Co.'s top-tier rating, as the global financial crisis pummels America's corporate titans.

Citing concerns about Berkshire's equity and derivatives investments, as well as Mr. Buffett's tight grip on the company, ratings agency Fitch cut the insurance and investment company's issuer default rating by one notch to AA+.

The downgrade is another setback to Mr. Buffett, 78, coming a day after the billionaire lost his position as the world's richest man to Microsoft Inc. founder Bill Gates, according to Forbes' annual list. Mr. Buffett's net worth plunged to $37-billion (U.S.) from $62-billion last year, the list said.

"Fitch views the company's potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the AAA level," the ratings agency said in its statement on Berkshire.

Those exposures include Berkshire's equity investments, as well as its holdings of derivative contracts tied to equity and credit markets, Fitch said.

Fitch is the first major credit agency to cut Berkshire's AAA rating.
Known as the Sage of Omaha for his long history of successful investments, Mr. Buffett was caught out by the global financial crisis.

Berkshire's net worth tumbled $10.9-billion in the final quarter of 2008 and profits fell 96 per cent, due mostly to losses on derivatives contracts tied to the stock market. Berkshire had $4.65-billion of net investment and derivative losses in 2008.

Mr. Buffett has defended his use of the derivatives, which helped drive Berkshire's annual profit to a six-year low.
Investors should distinguish Berkshire's derivatives from others that dramatically increased financial leverage, made banks "almost impossible for investors to understand," and threatened the collapse of companies such as investment bank Bear Stearns Cos. and mortgage financiers Fannie Mae and Freddie Mac, Mr. Buffett said in his annual letter to Berkshire shareholders.

Fitch also noted Berkshire remains too closely linked to Mr. Buffett to merit a AAA rating.
"Fitch views this risk as unrelated to Mr. Buffet's age, but rather Fitch's belief that BRK's record of outstanding long-term investment results and the company's ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett," it said, referring to Berkshire.

Berkshire generates about half its results from insurance, including auto insurer Geico Corp., but operates more than 70 businesses that offer such things as carpeting, ice cream, paint, real estate services and underwear.

Fitch lowered Berkshire's senior unsecured ratings by two notches to AA. However, it affirmed its AAA insurer financial strength ratings on the company's insurance and reinsurance subsidiaries. The AAA ratings of the insurance subsidiaries "continue to reflect their strong capitalization and competitive positions, and underlying underwriting results," Fitch said.

The outlook for all of Berkshire's entities is negative.
Fitch said the current ratings on Berkshire assume that the company will continue to aggressively deploy its cash and capital as companies look for investors with strong balance sheets.

Berkshire invested $3-billion last year in GE, buying preferred shares with the option of acquiring another $3-billion in common stock at $22.25 per share.

Berkshire has also agreed to make a 3 billion Swiss franc investment in Swiss Re and has bought $5-billion worth of preferred shares of Goldman Sachs.

Berkshire Class A shares closed on Thursday at $87,500 on the New York Stock Exchange. They have fallen 34 per cent over the past year, while the Standard & Poor's 500 has dropped 43 per cent.

The Backlash Begins

We did want change. Bush, his Administration and ...and Congress (let us not forget them at all e.g. Barney and Nancy) messed things up. We knew that. However, the solution to this is not Obama, and it was not that other guy McCain, either.

However, now we got Obama....we have a bigger mess happening.

I have to say...this is real change for America and the world!
******************************

TIA Daily • March 12, 2009

1. The Obama Backlash Begins

It's still early, but this past week has seen the beginning of a backlash against Barack Obama—a backlash in the media, among the Washington establishment, and among an important segment of the public.

A revealing early skirmish was the appointment of Chas Freeman—an "Israel Lobby" conspiracy theorist, Saudi mouthpiece, and apologist of China's tyrants—to be in charge of writing America's National Intelligence Estimates.

Freeman withdrew his nomination on Tuesday when it became clear that he would face opposition even from congressional Democrats. The whole imbroglio is described below, including Freeman's departing tirade about the perfidious influence of the Jews.

I suspect that this incident will be marked as the beginning of a sharp disillusionment with Obama among many "moderates" and among a swath of the center-left that is generally pro-Israel and remembers the old-fashioned "liberal" stance of being opposed to dictatorship and political oppression—people like Marty Peretz at The New Republic.

It will get worse, as these people begin to realize that Freeman was not some aberration, not just a "failure of vetting," which implies that the administration would not have chosen him if they had only been more aware of his views. Rather, it will become clear that Obama's policies and appointments are motivated by a far-left ideology that is hostile to American interests and allies and sympathetic to dictatorship.

And remember that the public is not really paying much attention yet to Obama's foreign policy. When they start to pay attention—when some new disaster forces them to pay attention—they will begin to take the measure of the new president and how he is conducting himself in office, and I suspect they will not like what they see.

Meanwhile, in another promising foreign-policy development, it looks like Senator Leahy's "Truth Commission"—an attempt to harass and intimidate the intelligence agents who helped prevent terrorist attacks on the US for the past seven years—has fizzled.

"The Intel Czar Stumbles," Michael Isikoff and Mark Hosenball, Newsweek, March 10

Chas Freeman, the Obama administration's choice to serve in a key US intelligence post, abruptly withdrew Tuesday after House Speaker Nancy Pelosi and numerous other congressional leaders complained to the White House that he was too closely tied to Saudi and Chinese government interests.
The resignation of Freeman represents another serious "vetting" embarrassment for the White House and a personal blow to Dennis Blair, President Obama's national intelligence director. After choosing Freeman to head the National Intelligence Council, Blair had publicly defended his choice and insisted as recently as this week that he had no intention of withdrawing the selection. On Monday, Freeman himself was telling people on Capitol Hill that the more criticism was heaped on him, the more intent he was on fighting to stay at the intelligence council….

A spokeswoman for Blair said that neither Freeman nor the intelligence czar would have any comment beyond the brief written statement Blair issued Tuesday regarding Freeman's withdrawal. But in a rambling and angry e-mail obtained Tuesday night by Foreign Policy, Freeman lashed out at his accusers and seemed to blame all his troubles on unnamed members of the "Israel Lobby."

"I have concluded that the barrage of libelous distortions of my record would not cease upon my entry into office," Freeman wrote, explaining his decision to withdraw. "I do not believe the National Intelligence Council could function effectively while its chair was under constant attack by unscrupulous people with a passionate attachment to the views of a political faction in a foreign country.... The tactics of the Israel Lobby plumb the depths of dishonor and indecency and include character assassination, selective misquotation, the willful distortion of the record, the fabrication of falsehoods, and an utter disregard for the truth. The aim of this Lobby is control of the policy process through the exercise of a veto over the appointment of people who dispute the wisdom of its views, the substitution of political correctness for analysis, and the exclusion of any and all options for decision by Americans and our government other than those that it favors."…

Pelosi in particular was upset about public comments that seemed to belittle the Chinese human-rights movement—a cause she has championed for years. In 2005, for instance, Freeman was quoted as writing in a public e-mail about the Tiananmen Square massacre: "[T]he truly unforgivable mistake of the Chinese authorities was the failure to intervene on a timely basis to nip the demonstrations in the bud … In this optic, the Politburo's response to the mob scene at 'Tian'anmen' stands as a monument to overly cautious behavior on the part of the leadership, not as an example of rash action.

"I do not believe it is acceptable for any country to allow the heart of its national capital to be occupied by dissidents intent on disrupting the normal functions of government, however appealing to foreigners their propaganda may be," he added. "Such folk, whether they represent a veterans' 'Bonus Army' or a 'student uprising' on behalf of 'the goddess of democracy' should expect to be displaced with despatch [sic] from the ground they occupy."

2. How to Lose Friends and Alienate People

Some of the building backlash against the administration is directly self-inflicted.

The White House's press flacks and polemicists may have thought that they were very clever to target Rush Limbaugh; while he is popular with the conservative "base," he is apparently not well liked by moderates. But having indulged in this kind of argument ad hominem—attacking the message by attacking the messenger—they can't stop with Limbaugh.

Thus, they have decided to target any critic of the administration. The latest target: CNBC financial commentator Jim Cramer. I can't recall, by the way, previous presidents having their press secretaries single out specific media figures by name and making them the targets of personal put-downs, as Obama's people have done with Rush Limbaugh, Rick Santelli, and now Cramer.

But what makes this a completely self-inflicted injury is that Cramer is a Democrat who supported Obama during the election. Yet he is still an investor who wants his audience to prosper and grow rich—and he has instead watched their portfolios crash by another third due to Obama's bumbling.

But most of all, what emerges from Cramer's response to the White House criticisms is his sudden realization, based on statements by the president and his press secretary, that the administration doesn't give a damn about investors, they they are indifferent to the horrific losses in the stock market. This is how Obama will create many new enemies. (See also item #6 below.)

Cramer admits that he started out, in his teenage years, as a Trotskyite. Maybe this experience will help move him a little further toward the right and towards advocacy of the free market. In much the same way that the neoconservatives were famously converted from the left by the experience of being mugged, how many people like Cramer might be converted by the experience of seeing the stock market get mugged.

"My Response to the White House," Jim Cramer, TheStreet.com, March 5

The lines are drawn pretty clearly: If you can help people make money to be able to retire, enjoy life, pay for college, pay down debt, etc., you are a "good guy," so to speak. If you take the other side of the trade, you are, well, let's say, a less favored fellow. And if you gun for the gigantic investor class that is out there that includes 90 million people in one form or another, whether it be 401(k)s or individual stocks or pension plans, then you are on my enemies list….
"I'm not entirely sure what he's pointing to to make some of the statements," [White House Press Secretary Robert] Gibbs said about my point that President Obama's budget may be one of the great wealth destroyers of all time. "And you can go back and look at any number of statements he's made in the past about the economy and wonder where some of the backup for those are, too."

Look at the incredible decline in the stock market, in all indices, since the inauguration of the president, with the drop accelerating when the budget plan came to light because of the massive fear and indecision the document sowed: raising taxes on the eve of what could be a second Great Depression, destroying the profits in healthcare companies (one of the few areas still robust in the economy), tinkering with the mortgage deduction at a time when US house price depreciation is behind much of the world's morass and certainly the devastation affecting our banks, and pushing an aggressive cap and trade program that could raise the price of energy for millions of people….

Gibbs went on to say, "If you turn on a certain program, it's geared to a very small audience. No offense to my good friends or friend at CNBC, but the president has to look out for the broader economy and the broader population."

How much I wish it were true right now that stocks played less of a role in peoples' lives. But stocks, along with housing, are our principal forms of wealth in this country. Only the people who have lifetime tenure, insured solid pensions and rent homes but own no stocks personally are unaffected…. If we only want to help those who have no wealth to destroy, we are not helping the majority of Americans; we are not helping the broader population.

Obama has undeniably made things worse by creating an atmosphere of fear and panic rather than an atmosphere of calm and hope….

I believe his agenda is crushing nest eggs around the nation in loud ways, like the decline in the averages, and in soft but dangerous ways, like in the annuities that can't be paid and the insurance benefits that will be challenging to deliver on.

So I will fight the fight against that agenda. I will stand up for what I believe and for what I have always believed: Every person has a right to be rich in this country and I want to help them get there. And when they get there, if times are good, we can have them give back or pay higher taxes. Until they get there, I don't want them shackled or scared or paralyzed. That's what I see now.

If that makes me an enemy of the White House, then call me a general of an army that Obama may not even know exists -- tens of millions of people who live in fear of having no money saved when they need it and who get poorer by the day.


3. Not the Barack Obama They Knew

During last year's general election and during his presidential transition, Obama seemed to move sharply toward the political center, indicating his support for conventional policies and naming some cabinet appointees who had a reputation for being "centrists." It is now obvious that this was a feint intended to disarm Obama's critics and make them slow to respond when he unveiled his actual agenda, which is an attempt to move America much farther to the left.

But it hasn't taken long for a lot of people to realize that they have been fooled. This is beginning to happen, not just among the general public, but even among the media and political establishment in Washington and New York.

In Newsweek, Howard Fineman writes that "the establishment is beginning to mumble that the president may not have what it takes." Fineman's own comments are a mushy, toadying mess, but he offers a helpful list of the growing criticisms of Obama.

Below, Jennifer Rubin gives an overview of how a collection of media commentators who consider themselves to be "moderates" have come to realize that Obama is pursing a leftist agenda and are now complaining that they were deceived.

"'I'm Maureen Dowd, and I've Been Had'," Jennifer Rubin, Pajamas Media, March 4

They may need a support group before the month is out. They could gather in New York or Washington where many victims reside. The meetings would start: "I'm Maureen [or David]. I'm a duped Barack voter. And I'm mad."
The ranks indeed are filling with the disaffected and the disappointed—Chris Buckley, Maureen Dowd, David Brooks, David Gergen…. And then there is the very angry Marty Peretz. Their complaints are varied but expressed with equal amounts of remorse and bitterness. They all have been done wrong by Barack.

Chris Buckley is in mourning over the loss of fiscal sobriety and the sense he has enabled a spend-aholic….

Maureen Dowd has multiple complaints. She's miffed that the post-racial president's attorney general is playing the race card and she too has had it on the spending and business-as-usual fronts:… "'You know, there are times where you can afford to redecorate your house and there are times where you need to focus on rebuilding its foundation,'" he said recently about the 'hard choices' we must make. Yet he did not ask Congress to sacrifice and make hard choices; he let it do a lot of frivolous redecorating in its budget….

"Team Obama sounds hollow, chanting that 'the status quo is not acceptable,' even while conceding that the president is accepting the status quo by signing a budget festooned with pork."

Then there's David Brooks…. Looking for a moderate, he wound up with a crazed leftist….

Meanwhile, Marty Peretz, who attested to candidate Obama's pro-Israel and tough foreign policy bona fides during the campaign, now is incensed the president has put into a high level national security post Chas Freeman, the Israel-bashing toady of the Saudis who assigned responsibility "both ways" for 9/11 and bemoaned the Chinese didn't crack down on the Tiananmen Square protesters quick enough….

They and the rest of the country are figuring out the bitter truth: Obama bears little resemblance to the moderate and soothing figure who tied up John McCain in knots.

4. "A Great Pretender"

Here's another segment of the media that Obama is beginning to lose. He's losing Israel backers (see item #1), the financial press (item #2), and "moderates" (item #3). He's also losing the serious, "technocratic" types. This is the professorial type who tries to stay neutral on "ideological" issues and instead focuses on demanding honesty about the actual economic numbers behind any given political proposal.

The quintessential example of this type is economics columnist Robert Samuelson. In the article below, Samuelson assails the ruinous dishonesty of Obama's budget and concludes that Obama is just another manipulative politician who "constantly says he's doing things that he isn't, and…relies on his powerful rhetoric to obscure the difference."

"Presidential Double-Talk," Robert J. Samuelson, Newsweek, March 7

To those who believe that Barack Obama is a different kind of politician—more honest, more courageous, more upfront—please don't examine his administration's recent budget….
Barack Obama is a great pretender. He constantly says he's doing things that he isn't, and he relies on his powerful rhetoric to obscure the difference. He has made "responsibility" a personal theme, and the budget's cover line is "A New Era of Responsibility." He claims that the budget begins "making the tough choices necessary to restore fiscal discipline." It doesn't….

As a society, we should be willing to pay in taxes what it costs government to provide desired services. If benefits don't seem equal to burdens, then the spending isn't worth having (granting exceptions for deficits in wartime and economic slumps).

If Obama were "responsible," he would be leading a candid conversation about government's size and role. Who deserves support and why?...

It would also be "responsible" for Obama to acknowledge the big gamble in his budget. Defense—a.k.a. national security—has long been government's first job. In Obama's budget, defense spending drops from 20 percent of the total in 2008 to 14 percent in 2016, the smallest share since the 1930s. The decline, reflecting large savings from an Iraq troop drawdown, presumes a much safer world. If the world doesn't cooperate, Obama's deficits would grow….

Confidence (too little) and uncertainty (too much) are at the core of this crisis. All of Obama's double-talk threatens to reduce the first and raise the second. Investors and traders have surely noticed the discrepancies between Obama's words and actions.

5. All of the People All of the Time

So when will Obama begin to lose the support of the American people? The poll results reported below offer the first indication. They show that Obama is still widely popular, but that his policies, including the massive expansion of government, are not popular. Moreover, they show growing negative reactions to Obama among voters on the right and the center.

Most important, however, is the fact that the polls register growing opposition to Obama among voters who follow the news closely, particularly the financial news. These are precisely the people who have the most influence on the opinions of those who don't follow the news closely. For more on these people, and why they're turning against Obama, see item #6 below.

It's a bad position to be in, when your continued political success depends on the public not paying any attention to what you're doing.

"The Cracks In Obama's Popularity," Amy Walter, National Journal, March 10

[A]s many have noted in recent days, the latest polling shows that [Obama is] more popular than his party or his proposals….
The 31 percent of voters who say they are paying attention to the various economic plans in Washington "very closely" are the most pessimistic about Obama's economic programs, as well as Obama personally. For example, a bigger percentage of these voters who oppose Obama's $75 billion plan to help prevent foreclosures are in the "very closely" category than those who are paying attention "somewhat closely." Just 27 percent of those who give Obama a positive job approval rating are in this "very closely" category, while 42 percent of those who say they disapprove of the way he's handling his job are in this group. In other words, there's evidence that those who are the closest followers of the details are those who are more disapproving of the job Obama's doing.

It's important to note that this group of voters is wealthier, better educated and slightly more Republican. Yet, remember, Obama did very well with these voters in 2008. He split with John McCain at 49 percent among those making $100,000 or more, and carried both college educated and post-graduate voters.

Finally, voters are less supportive of more government involvement in the economy than they were just a month ago. In January, 55 percent of voters were supportive; today it's at 49 percent. Meanwhile, the number of people who say they think it's a bad idea rose 8 points from 37 percent to 45 percent.

So, how long does Obama's glow survive? No one knows for sure, though many peg the summer as make-or-break. Until then, the reality is that the more scrutiny these programs get—and the more closely the details are followed—the harder it will be for him to keep those ratings up.

6. "Obama Doesn't Get It"

The polls indicate that opposition to President Obama and his agenda is not yet a broad, popular movement. But I have already noticed a sharp shift among an important and very influential subset: the entrepreneurs, individual investors, independent professionals, and small business owners. These people are the backbone of the upper middle class, and Obama has set out to turn them into an exploited class who are to be drained dry to pay for his expansion of government.

These people see what is coming, and their panic is radiating outward, resulting in the actual, literal hoarding of gold, in response to fears of inflation and financial collapse, as well as a growing interest in the primitive, pre-money-economy expedient of barter, which helps productive people minimize their taxable cash income.

And it can also be seen in the fact that "Saturday Night Live" is now beginning to make fun of Treasury Secretary Timothy Geithner, presenting him as a gullible, empty-headed naïf going onto national television to offer $400 billion to the first person who can come up with a solution to the financial crisis.

But laughter will not be the dominant reaction to Obama's failures; the dominant reaction will be rage. Obama is taking a public accustomed to nearly three decades of prosperity, and he is about to put them through a ringer of hardship and privation. They are going to become very, very angry.

The article below is a preview, presenting the Obama economy from the perspective of real small business owner. What it makes completely clear is the fact that Obama is ignorant of and indifferent to the whole world of business and investing—which means he is out of touch with the concerns and economic requirements of most of the American middle class.

This is the sort of thing that can add a little steam to a tea party.

"When It Comes to Real-Life Experience with Stocks, Obama Doesn't Get It," Jim Prevor, The Weekly Standard, March 6

On Tuesday, March 3, 2009, President Obama made comments about the stock market…. As he spoke, I realized that three things have changed, perhaps profoundly and forever, regarding the way many people will perceive the President….
When President Obama dismissed a decline of the Dow from 9,625 on Election Day to 6,763 on March 2 as something akin to a tracking poll, the vast middle class suddenly saw how alienated their concerns were from Obama's concerns….

I realized that in the White House, Obama doesn't deal with what I do: Scared secretaries with tears in their eyes coming in to ask for advice when they see 401-K statements down by 25 percent since Election Day.

Obama seems unconcerned with a divorced woman approaching retirement age looking at her 401-K statement and realizing that her plans to retire and spend time with her church and her grandkids are gone.

I wonder how the president would answer his salesman who, after never asking for a dime in his whole life, asks for a loan, because he had promised his children that he would pay his grandkids' college tuition and he hasn't the foggiest idea how he is going to do that now….

Obama doesn't understand the implications of the stock market dive for real people....

Every stock market investor quickly learns that the math of markets is forbidding. After all, if stock prices go down by 50 percent, they have to rally by 100 percent to get one back to even.

Yet this doesn't begin to explain the problem…. If a family needs $25,000 to pay tuition and it sells stocks to raise the money, that money is not available to benefit from any future upswing in market values. So even if Obama orchestrates a miraculous rebound, countless millions of people will have been permanently hurt….

We learn that the president knows nothing about markets or business….

The notion that the president and his party are alienated from this mainstream of productive America for whom the stock market is not like a tracking poll but is real life is the kind of realization that shapes political identities.