I don't get too political on the blog even though it's the topic of a lot of my conversations with people.  For a guy that doesn't like football :O, politics is about the only subject that I can talk to people I know about.  So I occasionally like to bring up politics here and usually I save it for the weekends when the markets are closed.

So now that I've justified the post, I'd like to point out socialism failing (once again) in real-time.  The state of California is asking for at least 7 billion so that it can continue to function.  Apparently the state has already stiffed some private sector contractors and is threatening stiffing the schools here pretty soon.  Folks, California, as we well know is one of the biggest left wing states in the country.  They also have one of the highest tax rates.  The problem is, once it becomes easier to do nothing than to go out and earn things start to fall apart.  Those who were generating revenue for the state are now a state liability.  Talk about cutting those social programs that allow people to sit on their butts instead of hustle out to make a living and you'll get protests in the streets.  So what's a politician that wants to keep his job to do?  Incur debt.  Hopefully that will last until you're out of office.

Well, with the current financial state, the gig is up for the state of California.  Fortunately for them and unfortunately for the rest of us, they have the tit of the U.S. taxpayer to save their behinds this time.  But what if we were to continue down the socialist path from a national standpoint.  Where do we turn when our national healthcare becomes insolvent?  And a real example for now is social security.  That will be insolvent unless they hike  taxes to prop it up just a little bit longer.  Moving forward, you can damn well believe that folks are going to be earning a negative rate of return on their social security dollars and this is BEFORE inflation.  In other words, you're being taken.

There are two good things that can come from this crisis.  One, we flush out the weak hands (weak financial institutions, weak stock holders, weak states in this union).  Second, we get people to wake up and understand things that are important ...  your politician's reckless behavior, your 401K statement, your local and national economy.  Once these are understood and not passed off, you'll begin taking action.  Being a realist, sometimes called a pessimist, I have a feeling American Idol and sport du jour will reign as the topic of conversation in the office hallway once this passes.  And then during the next down cycle, that one will be different, <cough>.

The rejection of massive new spending to bail out irresponsibility is a breath of fresh air.

<standing o!> 

<sunday political rant> 

Now Freddie and Fannie are official property of the U.S. imperial federal government.  Paulson states: it will purchase the mortgage- backed securities of Fannie and Freddie in the open market, seeking "to broaden access to mortgage funding for current and prospective homeowners."  Isn't this what got us into this mess in the first place?  Apparently there are many people who are not capable or responsible enough to handle a mortgage.  We should be limiting access, not increasing access.  In my opinion, education is the key.  It's simple math.

The U.S. government continues to encroach on anything and everything.  It seems that this country definitely is ready for an Obama presidency.  Then the feds can own your house, your health, your money and rock you from cradle to grave.  Had a bad day?  You're a victim .. now go get your check from the Department of Happiness.  For the past 10 years or so, I always thought we were merely blindly following the lead of our European friends.  We'd adopt more socialist programs after they had them in place because hey, they did it and so should we.  Regardless of the consequences, problems and outright failures.  Now I'm beginning to think we will surpass them as we let the government intervene any time risk rears its ugly head or the news isn't rosey.

Careful, while Uncle Sam is holding your hand, his other hand is picking your pocket.

</sunday political rant> 

WARNING!  Highly political content.

At the risk of sounding like an alarmist or extremist, I'm going to get on my soapbox for just a moment.  The biggest threat to our freedom today comes from within (not from terrorists).  The government has the power to control our behavior through taxes and regulations.  The IRS has the power to enforce those policies through use of force and you cannot escape them.  This is just a fact, not a scare tactic.  I do not subscribe to many political "groups".  And I'm certainly not a Repulican or a Democrat, but I am for freedom.  Each of these parties seem to take more and more away from us each and every year.  The current mindset of the public is to accept this as these broken and destined to be bankrupt policies are touted as "free" or paid for by the "evil rich".

I'm reminded of a quote from the late, great Harry Browne.  "Our government will break both of your legs, hand you a pair of crutches and say, 'Aren't you glad you have government to take care of you?'"  These "stimulus" checks were our crutches (or at least those who got them).  If you're a normal, educated, employed American professional, you probably paid 10's of thousands in taxes to fed, state and local governments last year.  Those were your broken legs.

If you're not already familiar with the FairTax concept, I highly recommend getting educated.  Detailed information can be found at fairtax.org.  In a nutshell, the fair tax is a national sales tax that taxes us on what we spend, not what we earn and invest.

I'm certainly not asking you to donate to the cause, but would be grateful.  I do encourage you to sign up and learn more though.  Maybe the idea works for you, maybe it doesn't.  The point of this blog has always been to educate, not tell you what to do.  I will say that this is one of the two organizations that sees cash donations from me annually.

A bit of a rant this morning ...

I've been trumpeting this since the fed start reducing rates by leaps and bounds.  I really don't do "I told you so's" much and I'll try to keep away from that tone, but the cuts are finally being understood by the lame stream media.  Or maybe they simply have run out of things to point the finger at for the "high" price of oil.  Personally, I don't think the price of oil is high enough, but that's a different discussion for a different day.  So now the new and fashionable scapegoat of high oil prices is the fed cutting rates.  You see, apparently inflation is up 100% in this country because that's accounting for nearly all of the increase in the price of oil.  Oh yes, I've heard that the price of oil might be up 10% or so in the last 12 months if it wasn't for the cheapening dollar.

You see, oil is traded in dollars.  Just like an American car is traded in dollars.  Because one country's currency appreciates or depreciates, that typically does not change the price of the good or service dramatically, domestically.  This is one of the benefits of a weak currency if you're a big exporter.  To your overseas customers, the price is getting lower and they're more inclined to buy your product "cheaper".  However, to citizens, the price seems about the same.  If oil were traded in Euros, I could see this argument holding water.  But it's not, so this is simply another ignorant take on the subject.  I don't know how the truth of the matter is so hard to grasp.  It's not Bush, it's not the "greedy oil companies", it's not the devalued dollar, it's simply demand.  Massive economies are coming online and developing economies are becoming developed.

But back on point.  I do agree that the weakening dollar is bad.  I half enjoy that this misdirected accusation is happening because maybe some accountability will be demanded from our reckless fed.

A depressing headline today.  Why do people have such financial problems in this country?  Probably because they're taking a cue from their government.  Spend like there's no tomorrow.  There was really no chance that our government could show some restraint and get the financial house in order.  Sure, it will pass it off as necessary domestic programs or throw some "existing necessary programs need more funding or they'll go broke" fear, but the bottom line is, they've swindled you out of your hard earned money again.

The old saying from an unknown author goes:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.
Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage."

We keep inching closer and closer as we vote for the expansion of government.

Now to change gears for just a moment.  I've been interested in the primaries especially since Super Tuesday after the race got very interesting.  The Democratic race got another interesting plot twist yesterday when Obama finally overtook the lead during yesterday's states (and D.C.) elections.

It's always fun to debate the issues (except abortion, which usually ends up with hurt feelings).  Tax cuts, social programs, pork spending, drug laws, etc are all real fun lunch time debates with friends and colleagues.  I've been trying to determine from the people I see on TV (on the street type interviews) and those that I run into why they support Barack Obama.  I can understand that maybe you feel this way about that issue and this candidate represents those viewpoints, however, from what I can tell, this man stands for nothing concrete.  He talks in vague generalities and just speaks of making things "better" with no real plan to do so.  And don't forget the "change".

The man sounds like a preacher, borderline motivational speaker.  Maybe this country is so down that it just needs a pep talk, someone to tell us it's going to be all right.  I don't know.  It just baffles me that something this ill defined has a shot at becoming the most powerful man in the world.

Maybe I'm just used to the lies and deception of most candidates.  At least have the intention of saying one thing and doing another.

In my tight circle, I don't run into too many Obama supporters.  If you're an Obama supporter, I'd really appreciate hearing why you like this candidate.  Is it the Cinderella story that appeals to you?  Does he make you feel good?  Or are there truly approaches to problems or viewpoints that appeal to you.  Try to be as specific as possible.  I've heard enough vague generalities from the candidate himself.

According to Merrill Lynch, the U.S. recession is already here.  An article in the Telegraph reports that Merrill Lynch speculates that we're in our first full blown recession in 16 years.  The sharp rise in unemployment figures last week lends a bit more credibility to this argument.  The pain of a recession isn't usually felt until a couple quarters after it happens.  In fact, it may be a couple of quarters before we can actually confirm that it happened at all.

It's not the end of the world as most can probably see.  Companies will scale back spending.  Hiring, raises and perks will go out the window which will then likely make it feel worse than it probably should've been.  If it continues to feed on itself, it will turn into a depression.  I still stand by the idea that we've talked ourselves into this one.  If it turns out to be a bad downturn, it's likely our own fault.

So what happens now?  I would imagine the spin machine will pin this one on Bush.  The new round of "presidential" candidates will tell us how they can fix the broken economy (which usually involves either more social programs, government meddling, or both).  But as usual, the president  and congress don't really have any impact on the economy, especially in the short term.

I was happy to see that there is some action being taken against risky lending.  I'm not one that likes to see the federal government intervening and sticking its nose into anything much at all, but I felt like I had some crystal ball powers with all of this.

I still make mention of the conversation that me and a friend had over lunch one day in 2003.  Apparently his father was being sold an interest only loan so that he could retire earlier since his house payment would be substantially less (today).  With his father having an ounce of sense, he ended up getting what he came in to get.  A refinance at a fixed, lower rate.  But this got us to talking about how they're pushing these loans to anyone and everyone and how many people are getting into situations that they probably won't get out of easily.  And then ultimately the emotional whining will begin about people being thrown on the streets.  Then guess who's going to have to bail them out?  The people who make proper decisions.

I wish I had a more sympathetic view of this, but everyone that I know that is in bad financial shape is that way because of a deliberate course.  Some have even told me that they live for today, not tomorrow.  Scary.

For details of the plan, please see the article in the New York Times.

The tax advantage for currency ETNs is history.  With currency ETNs, one could buy the FXE for example which directly represents British pounds held and interest paid at the prevailing rates.  These ETNs would not pay the interest directly to the shareholder, rather, they'd apply the interest to the value of the ETN itself.  Therefore you would not have to pay tax on this income until you sold.  Second, since this is/was considered a "pre-paid contract", the taxable rate was 15%.  No longer.  The tax rate can now be up to 35%.

We're seemingly at the end of a cycle.  We have a stale bull market, slowing earnings, slowing economy (although the last GDP figures were quite strong).  This is not unusual.  The market had a correction and subsequent bounce.  It would not be unusual to see lower levels from here.  It would not be unusual to see a continued run up and watch the P/E ratios get severely out of whack.  Whatever the case may be, the panicked rate cuts being fired in rapid succession are not going to change this unavoidable course much. The point of the cuts are to ease the landing, however, it is killing our currency.  The U.S. has never really had to worry about the impact of rate cuts on our currency.  Now this is a serious concern.  The dollar has been diving and this should be the priority of the fed.  For easy proof that this is serious, have a look at Japan.  The Bank of Japan has had a weak yen policy since the 80's.  Probably most of us remember the fear in this country about the Japanese taking over the world.  Looking back, the enormous growth experienced during that time was the demand for Japanese goods due to their plummetting currency value.  This was great for awhile, but has had a devastating impact on the economy through the 90's and into the present day.  The Nikkei 225 was close to 40,000 at its peak and trades around 15,000 today.  Japan has been in a deflationary environment up until very recently (currently at a 0.3% inflation rate).  Inflation greases the wheels, deflation locks them up.

I'm not saying that we're doomed to repeat the Japanese mistake, but given the current choice, I'd rather see us pay a little now than a lot more later.  Having a 10-20% ding in the portfolio for a year is quite recoverable and may expose some very nice opportunities for longer term holdings.

A good analogy is the screaming child.  We can give the child some candy and he'll shut up now, but if we keep addressing the problem with candy, further screams will be louder and more persistent.  If we ignore or deal with the scream and do not give in to the quick fix, we set ourselves up for stability (and sanity) in the future.  I'd rather not reward negative behavior which is precisely what we're doing here.  Tough love is what I'm getting at.

The strike has commenced.  The average worker at GM costs the company $25-30 more than its overseas competitors.  And what do the union workers continue to want?  More.  Then they wonder why their company can't compete and continues to lose money.

This is GM's opportunity to get competitive on a global scale by ditching the union.  Apparently these are the jobs that Americans won't do for the pay that they get.  Bring in some legal aliens that will do this work at a globally competitive price.  Let these union punks go pick onions.

So the combination of stupid people and greedy, unethical mortgage brokers may turn into Joe Taxpayer's problem.  I know that the thought of people being thrown out into the streets with their children, old folks, puppies and (insert other cute and/or helpless creature here) plays heavily on the heart strings, but let's think about this for a minute.  If we, the taxpayers are ultimately responsible for bailing out people who did something stupid, why did we not have a say to begin with?  All of us knew years ago that this was going to blow up and people that either a) should not own a home because they're not capable of doing so financially or b) bought way too much home and can no longer afford the payment were going to get bit.