Friday, January 22, 2010

Bernanke Confirmation to Another Term at Fed in Trouble?

The good news is that there is growing reluctance to reappointing Ben Bernanke to another term at the head of the Federal Reserve. Today alone two new Democratic senators, Boxer and Feingold, announced they are voting NO on Bernanke's confirmation.

The bad news is that even though the trend is clearly against Bernanke at this point I still expect him to be confirmed. But then again I hope I'm wrong. Who would have thought Senator Scott Brown of Massachusetts would be sitting in Ted Kennedy's seat?

I'm sure Ben Bernanke is a nice man. He probably likes flowers and trees and would read books to the blind if politely asked. But his tenure at the Fed has been a disaster of monumental proportions. Bernanke has missed so many national and international economic trends and problems he should have seen coming he makes the now discredited Alan Greenspan look like Nostradamus in comparison.

The country needs a new direction at the Fed and a change in leadership. The market has lost confidence in Bernanke and even his allies in Congress and in the White House see that a Fed chairman under siege for making dozens of really bad decisions over years and years honestly isn't the best choice when the economy is still teetering on the brink of depression.

Even Bernanke realized this himself when he asked the GAO to investigate the Fed's role in the AIG bailout. The notion of a Fed chairman trying to hide behind the skirts of the GAO to cover up a $40 billion mistake a first year MBA student would not make is sad.

I don't think Bernanke has done anything illegal.

I don't think Ben Bernanke is a bad guy.

It's just at this time in our economic history when we are suffering through 17% unemployment, millions of foreclosures, and worldwide and withering economic competition from a dozen nations bent on seizing U.S. markets we need a stronger chief at the Fed. His recipe of cheap money, inflation, devaluation, increased regulation on the one hand while ignoring financial problems on the other, is a recipe for national suicide.

I hope the U.S. Senate rejects his reappointment and sends Helicopter Ben back to a classroom in Princeton, New Jersey where he belongs.

I'll even buy him a bag of chalk for his blackboard as a welcome home gift.

Robert J. Abalos, Esq.

Wednesday, January 20, 2010

Teach Your Kids About Money Because The Schools Don't

I learned a great many things in high school, and to this day I applaud the teachers at my suburban public school that really gave me a culturally aware education. I think it was because most of them were young and went to college in the 1960s. Let's face it, you learned lots of liberalism at NYU or Columbia in those days---and that often was not a bad thing.

In high school I learned all about how the Iroquois Indians made baskets out of willow bark before the time Columbus was born, and the secrets of ancient Japanese calligraphy and how to write the numbers one to ten in a 1,000 year old language, and how native Aborigines go on walkabout to earn their manhood, and all sorts of wonderful facts and details about an infinite number of subjects from art to science to history and more.

VERY interesting stuff, but not exactly practical when you graduate from high school and need a job and money to pay a college tuition bill or pay rent, or buy clothes and food for that matter.

American public schools teach the arcane and the trivia of human endeavor brilliantly. You learn a great deal for sure. A gold medal performance, and I'm being totally sincere.

Unfortunately you don't get a grasp on what you really need to do once you toss your graduation hat in the air and senior year is over. THEN WHAT?

You see, you don't learn about personal finance in high school because no one teaches it to you. Parents don't sit down their kids and teach them the difference between a stock and bond, much like they don't spend much time teaching the birds and the bees. The schools don't teach personal finance. Trust me when I say that kids chugging beer down behind the local 7-11 don't talk about FICA scores. You can sure learn a great deal about sex under the Broadwalk at Coney Island but no one really learns about mortgages and trust deeds there.

To me this is common sense. You want people to be good citizens, to work hard, save and invest their money, and become economically successful and self-sufficient. Society certainly wants this. All individuals except the most wacko want this. And so does the government even if it is just to create a new generation of taxpayers with jobs and off the dole.

So why not teach subjects like this in school in some sort of public civics or economics class?

  • How to write a resume
  • How to balance a checkbook
  • How to buy stocks
  • The magic of compounding interest and how the average 17 year old kid could be a millionaire by the age of 40 (their parent's age?) if they would just start saving now
  • How to lease an apartment and how to buy a house
  • Budgeting and saving for cool things like cars, motorcycles, trips to Amsterdam with girls
  • What is credit and how to get a good credit rating
  • All about credit cards and how to handle them. (Check out how bad the current system is doing here by reading this)
  • What is insurance, why you need it, and how to get it as cheap as possible
Perhaps you get the idea. Basic personal finance stuff. But super important because most high school kids don't manage a family budget, or pay bills, or make IRA and 401(k) contributions, but adults five minutes out of high school actually often do.

I know I did. Isn't that really what happens when kids go off to college? Or get a job after graduation? Or join the Service? Even kids that sleep on the sofa in their mother's house have a personal finance budget.

I wish my high school would have taught me about these things IN ADDITION TO all that great stuff about the Thirty Years' War and the Holy Roman Empire, what is the mass of an hydrogen electron and how to measure it, or who composed the 1812 Overture and why.

Yes, sometimes the practical is boring. YAWN. ZZZZ. Especially to 16-year old minds surging with hormones. Nuts and bolts and numbers and dry text instead of lots of pretty pictures of the African plains or Mount Everest. Pie graphs and bar charts instead of cuddly panda bears or cute newborn penguins.

But practical gets you work when you have bills to pay, and let's you go to college when your parents did not, and buy a home instead of forever renting, and build an emergency fund that gets you though the rough times, and let's you get a nice car that runs instead of a junker with no brakes that stalls at every light.

The practical can be made fun to teach and learn. And who doesn't want to learn how to make money?

Sometimes you just gotta be practical and when your 17-years old and on your own for the first time, yes, practical sounds good.

A word to the wise. If you are an investor, or a homeowner, or a small business owner, speak to your kids about money. I bet if you could go back in time you would handle a great many of your financial decisions differently. Do you kick yourself for all the money you wasted on dumb things (or people) that are long gone?

Well, save your kids from learning too many hard lessons about money. If you don't, who will?

Robert J. Abalos, Esq.

Tuesday, January 19, 2010

Jim Rogers on James Chanos and the Chinese Real Estate Bubble

Here is a response from Jim Rogers directly taking on famous short seller James Chanos on the subject of the Chinese real estate and stock market bubbles---and if they exist at all. I have reprinted this article from China Daily below.

I wrote about this dispute on China last Friday in this blog and find the debate between these two investment giants I deeply respect utterly fascinating. It is like watching the Super Bowl in a way, two proven sophisticated investors looking at the very same facts and arriving at two completely divergent and mutually exclusive conclusions.

This debate is so interesting to me that I have decided to go to China and check all this out for myself. But I don't need to hop on a plane to conclude that Rogers is absolutely right on the prospects for world inflation. I've been saying the very same thing here in this blog for months.

Robert J. Abalos, Esq.

Rogers trains guns on Chanos for China remarks
By Andrew Moody (China Daily)
American investment guru Jim Rogers has debunked contrarian investor James S Chanos suggestions that China's investment bubble may lead to a Dubai-style implosion.

Rogers said the Chinese economy is not in any imminent threat of collapse, and investors and companies are wise to stay involved with it.

"It is absurd to say China is in a bubble when the stock market is 50 to 60 percent below its all-time high. If you have a bubble you have things going through the roof. You have everybody screaming fire every day," he said.

Chanos, a hedge fund investor who predicted the collapse of Enron, said speculation in China's real estate sector was 1,000 times worse than Dubai.

"His remarks show a lack of understanding about Dubai and of China. Dubai's economy is built on real estate speculation, whereas China's is not. It is just part of the Chinese economy," said Rogers.

He, however, warns that the world could be heading again for 1970s-style inflation.

Rogers, 67, lives in Singapore and is the co-founder of the Quantum Fund along with noted investor George Soros.

He said while concerted government efforts to bail out economies may have averted a depression, it would eventually lead to spiraling price increases.

"Whenever governments print a lot of money, you get inflation. That is the way the world has always worked," he said.

"I am sure inflation is going to go to levels seen in the 1970s, if not higher. It is not necessarily going to happen this year, but certainly over the next few years."

Rogers believes that the inflation risk would be more acute in China as exchange controls would trap funds and restrict outflows.

"It (the money) has only so many places it can go. You cannot go and buy a house on the (French) Riviera. More and more overseas Chinese investors would want to keep their money in yuan, as they know it would appreciate later.

Refuting claims that interest rates would need to remain low to avert potential deflation, he said central banks would have to hike rates in order to keep their economies under control.

"Governments around the world are going deeper and deeper into debt and this has got to be financed. Someone will have to pay higher rates eventually, " he said.

"Interest rates have already gone up to some extent. The US long-term government bonds market has already dipped beyond its low. The US government is trying to hold down interest and mortgage rates but there is only so much they can do."

Rogers, who last invested in China equities in October 2008, said he had no clear view on whether the recent rally in share prices in China and around the world would reverse.

"We are closer to some kind of top than we were and we are overdue for a correction. But are we going to have one? I don't know," he said.

Related readings:
Rogers trains guns on Chanos for China remarks Investors shrug off bubble talk
Rogers trains guns on Chanos for China remarks China's economic growth to hit 9% this year: Deutsche Bank
Rogers trains guns on Chanos for China remarks Time to cage inflation tiger, say experts
Rogers trains guns on Chanos for China remarks Dubai offers lessons to China

Rogers said he would continue to invest in commodities, as demand continues to be strong.

"My investments have been mainly in commodities because if the world economy improves there are going to be shortages. If it doesn't improve, commodities are still the place to be in, as they (governments) are printing so much money," he said.

Rogers, whose latest book is A Gift to My Children: A Father's Lessons for Life and Investing, remains bullish about the prospects for the Chinese economy over the long term.

He believes the economic crisis could prove the catalyst for China to take over from the US as the next economic superpower.

"In the 1920s and 1930s there was shift from the UK to the US aggravated by financial upheaval and the same thing is happening now. We are in the process of a transition of economic power from America to Asia. It has been exacerbated by the financial situation," he said.

He believes that if China does become the world's dominant economic power again, it will have achieved something no other country has ever done before.

"Great Britain was great once, Egypt also once and Rome once too, but China will have done it four of five times. After 300 years of decline everything is coming together for China in the 21st century," he said.

Friday, January 15, 2010

Jim Rogers and James Chanos on the Chinese Real Estate Bubble

Here is an excellent interview with super investor Jim Rogers and his take on the commodity bubbles and especially real estate conditions in China.

I am a huge fan of Rogers and his advice is nearly always on target.

That said, I am also a fan of short seller James Chanos who is publicly disagreeing with Rogers on bubble conditions in China.

Rogers lives in Shanghai and is a long-term bull on China. Chanos admits he lacks detailed eyewitness testimony on events on the ground but I can't argue with his analysis either. His track record on his shorts is beyond impressive.

The debate here is fascinating. As an investor I am loving this disagreement because it really is inspiring some great original investment analysis from two men I deeply respect and admire.

I can't fault the analysis in either article. And I want to know the truth.

So I've decided to go to China and see for myself what is REALLY going on here. I'll be reporting from China in the weeks ahead.

Robert J. Abalos, Esq.

Thursday, January 14, 2010

Federal Reserve Risking a Negative Net Worth for the United States

Much has been reported by the mainstream (and economically ignorant) media that the Federal Reserve earned $52.1 billion last year, actually showing a profit despite the near economic collapse of the U.S. financial system.

This is a 47% increase from 2008, making it appear the Fed is doing a wonderful job managing the current crisis.


So what is the unvarnished truth that the mainstream media and its Obama Administration cheerleaders is missing?

Anyone who can print hundreds of billions of dollars of crisp brand new Treasury bonds and then buy interest paying assets could earn an infinite amount of profit doing exactly what the Fed did. A brain damaged chimpanzee high on PCP could make a fortune this same way. Every new bond that rolls off the printing press means an instant new profit for the Fed. Wouldn't you like to be able to create debt paper out of thin air and then instantly record all the interest payments yet to be received as current income?

(By the way, you can. Become a central banker.)

The Fed has printed up so much new debt paper to earn that $52.1 billion that its balance sheet is risking a negative net worth for the United States.

Currently, Goldman Sachs has assets about 15 times its capital.
Bear Sterns went bust with assets about 33 times capital.

Today, the Fed has assets FORTY-THREE TIMES its capital base---and the spread is growing.

Do the math. Less than a 3% decline in the asset value of all the Fed's Treasury bonds and its current holdings in Fannie, Freddie, and TARP paper would WIPE OUT THE EQUITY OF THE FEDERAL RESERVE BANK OF THE UNITED STATES.

The Fed has, to be blunt, shot its wad in the economic arena. It has bought assets and sold paper to such an extent that it cannot do much more. If the U.S. should experience a double-dip recession or, more likely, years of stagflation, what can the central bankers do but look helplessly from the sidelines, or worse, start monetizing the debt?

Even worse, what has all those asset purchases and bond sales given the United States these days?

The dollar is weak and falling.

A new class of zombie corporations have been created (like AIG, General Motors, Fannie Mae, Freddie Mac, and Chrysler to name but a few) that are now addicted to public money and cannot survive without still more Federal spending.

Asset values, such as in the commercial real estate and stock markets, are held aloft in the froth of super cheap and almost free money from the Fed, preventing the natural adjustments in price that a robust capitalist society requires.

And new bubble markets are appearing, supercharged by the Fed's cheap money program. Two examples of many are in bonds and stocks. Alcoa, for instance, is trading at 23 times estimated 2010 earnings, a company that actually lost $2.31 per share in 2009. Some REIT ETFs trade with P/E ratios of 50 to 70 or even more. VNQ looks like a relative bargain at a mere 28 times 2009 earnings---when most observers like me feel the commercial real estate market is yet another bubble market overripe and ready to fall.

If none of this interests you, take note.

How do you expect to prosper as a real estate investor in this environment? Real estate is a capital intensive business dependent on income gains by tenants to build property values for you.

Does the potential negative net worth of the U.S. central bank really make you feel our national economy is turning around? Does it inspire new investment in jobs, in plant and new equipment? Does it inspire consumers to go out and spend money in the face of still rising unemployment?

Um, no.

Robert J. Abalos, Esq.

Monday, January 11, 2010

Audit the Fed and Do it Now

Most people have no clue how the Federal Reserve System works. How does it really create money? Does it REALLY set interest rates?

Here is an excellent analysis of Fed operations first by Steve Forbes (obviously of FORBES magazine) and then in an interview conducted by Forbes with Congressional Representative and former Presidential candidate Dr. Ron Paul on why the Fed needs more transparent accounting.

For the record, I am not a Ron Paul supporter. I disagree with him on too many key political issues to want him in the Oval Office. But on the Fed and its disastrous record since 1913 he is dead right and I applaud him for his leadership in this area while so many in Congress are asleep at the wheel.

The case for stricter auditing review (but not Congressional oversight) of the Fed's balance sheet comes right out of the headlines given the latest controversy regarding AIG credit default swaps and how then New York Fed chief Timothy Geither (now Secretary of the Treasury) seems to have misled bankers over the value of these derivatives.

What is the cost to taxpayers of this massive blunder and potentially criminal act?

$17 billion lost through overpayments.

Representative Ron Paul has taken the leadership on this issue through his bill, HR 1207, or The Federal Reserve Transparency Act of 2009. The bill essentially allows GAO audits of the Fed's books. Here is a clip from YouTube where Paul himself discusses HR 1207.

Here is the official Congressional history of HR 1207 and its Senate counterpart, S 604, The Federal Reserve Sunshine Act of 2009. Lots of people want to audit the Fed. Check out the long list of cosponsors from every side of the political aisle.

The bottom line here is very simple. If you want predictable and stable interest rates, the nation needs to reign in an out-of-control Federal Reserve System that is printing money like, well, a central bank that has no limits, no checks, and no accountability.

Who can REALLY make the case that we should not have accurate financial statements from the Fed and its $2 trillion (and rapidly growing) balance sheet? Well, even today the Fed itself is attempting to make just this case and it should be ashamed of itself for trying to keep Fed screw ups secret and hidden from the public.

Robert J. Abalos, Esq.

Tuesday, January 5, 2010

Bernanke Says Fed Not to Blame For Real Estate Bubble

In Federal Reserve Chairman Ben Bernanke's Alice in Wonderland style of thinking, the Fed was not responsible for the recent real estate bubble or its popping. He actually blames unnamed "policymakers" for the whole problem. In fact, he went so far as to defend the disastrous financial decisions of his predecessor, the former illustrious and now widely discredited "Maestro" Alan Greenspan, who gave us not one but two ruinous financial bubbles in less than six years.

When I saw his speech all I could think was "It must be April 1st and Bernanke is kidding."

And I'm not the only one who thinks so.

Reprinted below is an excellent editorial from the Dallas Morning News. They are right and so are so many others calling for his resignation or better still, non-appointment.

Bernanke has become a joke in the financial world for his inept handling of the sole job he has, managing the currency of the United States. His public statements have become increasingly weird and out-of-touch as time goes by and we can't afford that in a Fed Chairman right about now. I'm sure he is a nice man who likes dogs and children but he has proven he cannot be trusted to manage the economy of the United States.

Remember it was Ben Bernanke himself in October 2005 while he was Chairman of the Council of Economic Advisors under President Bush and nominated to the Chair of the Fed that he stated without any doubt that "there was no housing bubble" and I quote:

"House prices are unlikely to continue rising at current rates. A moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."
Really? This in October 2005? Exactly how moderate was that housing cooling anyway and its effect on U.S. GDP?

Congress now wants to reappoint Bernanke to another term at the Fed and also strip the Fed of some of its independence. Just what the country needs. A weakened Bernanke at the helm of a damaged ship actually steered by politicians in Congress with reelection on their minds.

Bernanke blaming Congress for the real estate bubble reminds me of the old Capitol Hill saw which goes:

Don't blame you.
Don't blame me.
Blame that fellow
Behind the tree.

Robert J. Abalos, Esq.


Editorial: Congress shouldn't follow Bernanke's mistakes

Federal Reserve Chairman Ben Bernanke would have been more persuasive in his condemnation of financial regulatory failures this past weekend had he included the central bank's mistakes in his criticism.

In his words

Excerpts from a speech by Federal Reserve Chairman Ben S. Bernanke to an economics conference Sunday in Atlanta:

"Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."

"The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter."

"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs."

What's The Big Story? Find out

Blog: Opinion

Speaking in Atlanta to the American Economic Association, Bernanke blamed unnamed "policymakers" for failing to control risky underwriting and lending practices. He also deflected criticism that the Fed's decision to keep interest rates low contributed to excessively risky financial practices and, in turn, the global economic meltdown.

Indeed, the Fed did move too slowly to head off the crisis and deserves blame for interest-rate policies that helped fuel the housing bubble. Fed officials also didn't understand the risks posed by firms such as Citicorp, which made massive investments and didn't set aside enough money to cover losses. Nor did the Fed quickly recognize that the subprime housing crisis would spread wildly. For example, in 2007, Bernanke saw no lingering problem in subprime lending markets and insisted that economic downturns would be less frequent than in the past.

While he has since done a yeoman's job rescuing the economy, some of the key warning signs had festered for years within the sight of regulators who lacked the power or the will to intervene.

While it's tempting to take the Fed to the wood shed, Congress should not use its mistakes as an excuse to limit the agency's independence and authority to intervene in future financial crises. The House recently passed a provision to audit the Fed; other measures under consideration would either weaken it or compromise its independence. Such restrictions would be major setbacks for financial reform and unnecessarily subject the Fed and economic policy to the partisan whims of Congress.

The Fed's vast organization is best positioned to deal with the complexities of the global financial system. So it must be givenincreased authority to review practices and institutions that could pose major threats to the economy. Only then will there be a procedure in place to close the regulatory chasm and silos that contributed to the current recession.

The Fed was part of the problem; its greater independence is part of the solution.

Monday, January 4, 2010

Should You Buy a Piece of the World's Tallest Building?

The world's tallest building, the Burj Khalifa,
opened today in Dubai.

Regardless of market conditions, vacancy rates, and the financing issues associated with the project, it is an engineering marvel to behold.

The Burj Khalifa is more than TWICE as tall as the Empire State Building in New York.

But is the developer of the project, Emaar Properties, a bargain in this market? The stock trades under the ticker symbol EMAAR on the Dubai Financial Market in the UAE.

At first glance this seems like a natural pick for value investors like me. The stock is down more than 80% from its record high in 2008. The company has extensive real estate holdings all throughout the Middle East, Asia, Europe, and even in the United States.

As I write this, EMAAR trades at 4.02 Dirham (UAE) per share or $1.09 US Dollars.

Well, is it a good buy?

The answer is YES and I'll tell you why in a future post. I'll even tell you how to buy it. You can get started by reviewing some of the financial information posted on the company's investor relations page.

Robert J. Abalos, Esq.