Wednesday, April 2, 2008

The Coming Economic Tsunami

This is the one analysis I hope I am wrong.

I am part of the investor class. I have 32% of my portfolio invested in equities. The last time I was invested this low in equities was right before the dot-com crash. In the near future, money market funds will be yielding a scant 1%-2%, but I have decided to take a cautious approach in preserving capital rather than trying to risk principle because I foresee treacherous waters ahead. There are several reasons why I have decided to reduce my exposure in equities. I enumerate these below.

  1. The uncertainty in the elections – If the economy continues to deteriorate, the Democrats could take the white house and gain even more control of both the house and the senate. This is the Democrat's election to lose, and so far, they are doing their best to try and lose it. But, this will probably be the highest turnout ever in an election season, and that does not bode well for Republicans. Moreover, even with the schism among the ranks of the Democrats, Democrats still have the fire in the belly to win back the white house. That fire does not exist among much of the Republican base. Should Republicans lose the White House, I predict Obama, not Hillary will win. This is troublesome to say the least. Obama is further left than Hillary if that is possible. Read my post here Obama Revealed. Obama has promised to raise taxes on virtually everyone. Capital gains, dividends, wages for anyone earning more than 75,000 dollars a year are all fair game. His socialized health care is just the tip of the iceberg with Obama. An Obama presidency will mirror that of another inept president, Jimmy Carter. A perusal of Barack Obama's book Dreams From My Father shows how clueless Barack is on the economy. In this current election cycle, Obama wants to increase our taxes at a time our economy is teetering on the brink.


  2. The energy crisis and the so-called alternative energies – At the beginning of the Bush presidency, a gallon of gas was under $2.00 a gallon, it is now approaching $4.00 with no end in sight. Can you see gasoline going to 10.00 dollars a gallon? I can. We are held hostage by OPEC and the other oil producing nations, and our government is complicit in our dependence on foreign oil. We refuse to drill in Anwar because of lobbyists like the Sierra club and other environmental groups. The Bakken formation in Western North Dakota may hold up to 400 billion to 500 billion barrels of oil. The arctic refuge, a pin-prick of a waste land, is estimated to have 16 billion barrels of oil. Imagine how many jobs drilling for this oil would create, and imagine how all this would help us become energy independent. Our politicians would rather sit on their hands while they think of new ways to screw the American public.


    The entire world laughs at us because we refuse to drill for our own oil. In the same vein, global warming alarmists led by its high priest Al Gore fly around in private jets screaming we are all going to die. At the same time, they refuse to build any nuclear plants, the cleanest form of nuclear power. Instead we continue to build coal plants the chief contributor of CO2, and the single biggest air polluter in the U.S... There are 600 coal plants in the U.S. and more are continuously being constructed. France is more than 85% run on nuclear power. The two biggest myths of nuclear power are that it is dangerous and it produces copious amounts of nuclear waste we do not know what to do with. Click here for more about the myths on nuclear power.


    Natural gas is currently the most viable source of alternative energy we have, and the infrastructure is already in place, but because of our reticence in building nuclear plants, we use this natural gas to heat our homes, etc. If nuclear power were to become the new source of energy, natural gas could be diverted into alternative fuel for vehicles. It is viable, inexpensive, and clean.

    If I haven't convinced you yet that this country is run by morons or if you are still under the illusion the environmental movement is a good thing, consider the energy and security act of 2007. You should have noticed the effects of this act by now if you do any type of grocery shopping. Have you noticed the price of eggs? meat? grain? The stated purpose of this act is to to move the United States toward greater energy independence and security, to increase the production of clean renewable fuels, to protect consumers, to increase the efficiency of products, buildings, and vehicles, to promote research on and deploy greenhouse gas capture and storage options, and to improve the energy performance of the Federal Government, and for other purposes. This bill was passed by both the house and senate and signed by president Bush and could have been easily something done by our enemies to further impede our economic growth. It mandates the use of biofuels including corn ethanol. Large subsidies of course are given to producers of ethanol. Imagine the corn lobbyists involved here. This has raised the price of grain, beef, poultry, eggs or any other dairy products. Anything that uses corn oil or by-products of corn will increase in price. Ethanol from corn is a hoax.

    Corn ethanol contains water, which can cause damage to one's automobile. Ethanol is 30% less efficient than gasoline. Ethanol subsidies are about $1.05 to $1.38 a gallon. There is a 54 cent a gallon tariff on the much more efficient ethanol made from sugar cane produced by Brazil. How is that for protectionism?

    The ethanol hoax is the biggest corruption scandal by both the politicians and the ethanol lobbyists in decades. Guess what is coming next? Global warming cap and trade schemes, and any other form of global warming scheme that will increase the cost of living on the promise of removing C02 from the atmosphere, a so-called pollutant responsible for the soon to come demise of the human race. It seems that Al Gore might be capable of causing more economic damage to the world's economy than he could have done as president.

    Maybe we as humans should walk around with a muzzle around our face since we breathe out C02. We could all look like trained pit-bulls.

    According to the pro-corn-ethanol US Dept. of Agriculture, 2006 ethanol production was enough for 1.5% oil independence, and by 2017, we will max out at 3.7%.
    This energy bill did not even mention nuclear power. Below is an estimated cost of one gallon of corn ethanol.

Cost For A Gallon Of Corn Ethanol


Corn Ethanol Futures Market quote for January 2007 Delivery


Add cost of transporting, storing and blending corn ethanol


Added cost of making gasoline that can be blended with corn ethanol


Add cost of subsidies paid to blender


Total Direct Costs per Gallon



Added cost from waste


Added cost from damage to infrastructure and user's engine


Total Indirect Costs per Gallon



Added cost of lost energy


Added cost of food (American family of four)


Total Social Costs



Total Cost of Corn Ethanol @ 85% Blend

$6.89 source: Ronald R Cook, the cultural economist

Since you need 30% more ethanol than gas, the cost of ethanol would approach nearly ten dollars.

The subprime crisis – I do not believe we have seen the end of the subprime debacle. In fact we may only be half way through the process. We have seen how the impact of this subprime debacle has started to trickle into other areas of the economy. Democrat pundits have tried to put the blame on Bush, but that is a bit stretching it. The blame should be directed towards greedy buyers who could not afford the payments, (buyers hoped the increase in equity in real estate would bail them out) and greedy lenders who would lend money to any "Dead Man Walking." We were headed on a collision course. Banks would lend money, securitize these loans and off load them to the nearest buyer. One of my strategies in buying stocks is to buy good stocks when everyone is fleeing from them. This is how value funds work. I bought several bank stocks after the initial subprime shock to the markets. I think I was premature. They are all under water and may be for some time. Live and learn. Bear Sterns may only be the tip of the iceberg.

Whitney Tilson, head of Tilson Funds says this:
We've been very bearish on housing for a number of years, but after all of the recent terrible news, we had thought that we might be in the 6th or 7th inning of this unfolding debacle and perhaps it might be time to start buying some of the stocks that have been obliterated, in anticipation of a bottom and then recovery. But then we were introduced recently to the CEO of Amherst Securities Group L.P., Sean Dobson, who has collected extensive data on every mortgage that was securitized in the United States this decade. He was kind enough to share some of his data with us, which shows that we are still in the early innings of the bursting of the housing bubble. Believe it or not, as bad as things have been to date, we have only seen the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is about the hit the United States. We believe it will get so bad that large-scale federal government intervention is likely

Of course, why stop there? Car delinquencies will be the next frontier. Beyond that there may be additional companies besides Bear Sterns waiting on the sidelines with distressed debt ready to go into forclosure. The Economist warns of a pending Armageddon with the rise of corporate bankruptcies.

The devaluation of the dollar – We currently face a conundrum. How do we continue to say we are a world power when our dollar is the laughing stock of the world? Our dollar continues to devalue on a daily basis. I have heard pundits say that a devalued dollar is good for the economy because it makes our exports cheaper. If devaluing our dollar were a good thing, then Argentina would be a rich country. The Swiss franc is currently 1 to 1. In the 1970s, it was 4 to 1. The Canadian dollar is now below the U.S. dollar, first time in history. The U.S. dollar is weakening our credibility abroad, and it will ultimately end in our downfall.

The reason for this devaluation is twofold. The current administration is spending us into oblivion. In the first six years of Bush's administration, not a single bill was vetoed. There has never been a president in history that has spent so freely especially during wartime. The Iraq war is only 3%-4% of current GDP. This is small relative to the overall budget and past wars. The Medicare prescription drug plan was a huge expenditure that we could ill-afford. But, it became law anyway. Secondly, the government sees no problem in printing money we cannot back. Lowering interest rates is the equivalent of printing money. Lowering the interest rate is achieved by increasing the money supply, (i.e.: printing money) and selling it cheaply to financial institutions. This is no different than the third world printing money it cannot back. Raising and decreasing rates can be a way to manage the economy, control inflation, etc. but there comes a point of diminishing returns. Our dollar becomes worth less, and countries look elsewhere to invest, and hyperinflation (just like in third world countries) ensues. Where are we headed?

Conclusion – The economy cannot take much more. When Bush first became president, he saved the country from going into recession by lowering taxes. But Bush continued to spend. In addition, his prosecution of the Iraq war remained suspect. Bush is responsible for the loss of both houses of congress, and if Republicans lose the election, he will be responsible for that too. Half of the US population seems to be an electorate bordering on the delusional. This half of the electorate looks to two radical leftists to lead this country out of our economic woes and out of Iraq. The populist policies of both Obama and Hillary are "cut and run" from Iraq, cut defense, raise taxes, and socialize health care all of which will doom this economy and weaken our security even further. John McCain has climbed onto the global warming band wagon too, but at least he will cut taxes. If there is one person who we can believe will control spending, John McCain is the man.

McCain also recognizes we are still at war with Islamic terrorism while Obama wants to play kumbaya.

We are currently in a state of economic paralysis. Osama Bin Laden doesn't need to take down our economy when our politicians, Democrats and Republicans alike seem to be doing a great job by themselves.

We need a president with probity who believes in a free market system, low taxes and the willingness to enact policies that encourage businesses to thrive. We need a president who will stand for building nuclear power plants and drilling for oil instead of any run-of-the-mill politician who succumbs to the environmental and biofuel lobbies.

I hope I am wrong with my analysis, but I see we are led by inept politicians who seem bent on destroying this economy by plunging us into a black hole of green nonsense with unparalleled recklessness. I hope this nation survives, but one has to wonder.


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