By Alexander Smoltczyk and Bernhard Zand FROM THE MAGAZINE DER SPIEGEL (English Edition)
Israel and the Arab states near the Persian Gulf recognize a common threat: the regime in Tehran. A regional diplomat has not even ruled out support by the Arab states for a military strike to end Iran's nuclear ambitions.
"The Jews and Arabs have been fighting for one hundred years. The Arabs and the Persians have been going at (it) for a thousand,"
Almost all Arab neighbors have a hostile relationship with the Islamic Republic. Saudi Arabia suspects Iran of stirring up the Shiite minority in its eastern provinces. The Arab emirates accuse Iran of occupying three islands in the Persian Gulf. Egypt has not had regular diplomatic relations with Iran since a street in Tehran was named after the murderer of former Egyptian President Anwar el-Sadat.
Jordanian King Abdullah II warns against the establishment of a "Shiite crescent" between Iran and Lebanon. And Kuwait, fearing the Iranians, installed the Patriot air defense missile system in the spring.
Closely Aligned
Arab governments are concerned about a strong Iran, its nuclear program and the inflammatory speeches of Iranian President Mahmoud Ahmadinejad. They share these concerns with another government in the Middle East -- Israel's.
Never have the strategic interests of the Jewish and Arab states been so closely aligned as they are today. While European and American security experts consistently characterize a military strike against Iran as "a last option," notable Arabs have long shared the views of Israel's ultra-nationalist foreign minister, Avigdor Lieberman. If no one else takes it upon himself to bomb Iran, Saudi cleric Mohsen al-Awaji told SPIEGEL, Israel will have to do it. "Israel's agenda has its limits," he said, noting that it is mainly concerned with securing its national existence. "But Iran's agenda is global."
But Arab countries are pursuing a delicate seesaw policy. The UAE cannot afford to openly offend Iran, which explains why Ambassador Otaiba was promptly ordered to return home on Wednesday.
This caution only conceals the deep divide between the Arabs and the Persians. Despite their public expressions of outrage over Israeli behavior, such as the blockade of the Gaza Strip, Arab countries in the region continue to pursue their pragmatic course. On June 12, The Times in London wrote that Saudi Arabia had recently "conducted tests to stand down its air defenses to enable Israeli jets to make a bombing raid on Iran's nuclear facilities" -- in the event of an attack on the nuclear power plant in Bushehr. In March, Western intelligence agencies reported that there were signs of secret negotiations between Jerusalem and Riyadh to discuss the possibility.
"We are aligned (with the United States) on every policy issue there is in the Middle East," Ambassador Otaiba said in Aspen.
Friday, July 16, 2010
"Inflating War: Central banking and militarism are intimately linked".
The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
Fed's volte face sends the dollar tumbling,economy in decline, QE II to start soon?
The very respected Ambrose Evans-Pritchard writes in the Telegraph fom London:
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
Thursday, July 15, 2010
Thomas Jefferson said it all
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them. - Thomas Jefferson
Is the wipeout in offshore drillers over?
Time to buy offshore drillers?
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
"Wall of debt" could hurt the fragile economic recovery
U.S. and European governments are expected to sell about $4 trillion in bonds this year, creating a "wall of debt" that could course through the global financial
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
Signs of things getting better?
From Zacks Update July 2010
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Wednesday, July 14, 2010
Interest rate dilemma
"At 4.6 percent, 30-yr mortgage rates are already at historic lows, yet housing demand cratered as soon as the government's homebuyer tax credit expired in April. If you think lowering long-term rates and reducing the spread between short and long rates will stimulate the economy,think again. The steep yield curve is the most powerful thing the economy has going for it right now."
Caroline Baum
Caroline Baum
Monday, July 12, 2010
Chinese credit rating agency rates the 50 biggest economies
Dagong Global Credit Rating released sovereign-debt ratings for 50 countries that account for 90% of the world's economy, in a move to break the credit rating monopoly of Moody's Investors Service, Standard & Poor's and Fitch Ratings. The Chinese firm gave the U.S. an AA rating, lower than the top AAA rating it assigned to Norway, Denmark, Luxembourg, Switzerland, Singapore, Australia and New Zealand. Xinhuanet.com
U.S. debt could "destroy the country from within," officials say
Erskine Bowles, a member of U.S.
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
Saturday, July 10, 2010
Actions should be shaped by beliefs and values
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Friday, July 9, 2010
Geithner indicates good news on taxes for capital gains and dividends
Treasury Secretary Timothy Geithner said the White House wants to keep the top tax rate on dividends and capital gains at a proposed 20%.
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
Optimizing Social Security: It's More Complicated Than You Think
Christine Benz of Morningstar suggests (for full article click on heading - a must read)deferring the collection of Social Security benefits as long as you can...at least until 70 years of age if practical.
Rally in Stocks Starts Now
Ninety-eight percent of the time, when we've been in this situation, stocks end up higher three months later.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
Kitco just came out with a new investment product for rhodium. Why rhodium? What's the appeal for investors?
John nadler of KITCO explains in an interview linked above ( click on the heading)
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
So what is the "right" price for gold?
John Nadler of KITCO( click on title for full article) opines:
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
How Government idiocy steals future prosperity for all: The Underfunded Pension scandal
The fix for all underfunded pension liabilities (Scial Security included) is to use a realistic assumption for return on investment. Thomas DeMarco, CFA, FCM Market Strategist in a Market Note today discusses this in some detail.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
Gold and silver push to fresh highs
09-Jul-10
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
Thursday, July 8, 2010
• Behind the gold takedown… central banks
Mystery solved. We think.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
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