Examples of Speculative and Investment Common Stocks You’ve Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

Image001

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

* * * * * * *

Comments on the Various Groups.  The companies listed in Group A are representative of the so-called “first-grade” or “blue-chip” industrials, which were particularly favored in the great speculation of 1928-1929 and in the markets of ensuing years.  They are characterized by a strong financial position, by presumably excellent prospects and in most cases by relatively stable or growing earnings in the past.  The market price of the shares; however, was higher than would be justified by their average earnings.  In fact the profits of the best year in the 1929-1938 decade were less than 8% of the December 1938 market price.  It is also characteristic of such issues that they sell for enormous premiums above the actual capital invested.

            The companies analyzed in Group B are obviously speculative, because of great instability of their earning records.  They show varying relationships of market price to average earnings, maximum earnings, and asset values.

            The common stocks shown in Group C are examples of those which meet specific and quantitative tests of investment quality.  These tests include the following:

1.      The earnings have been reasonably stable, allowing for the tremendous fluctuations in business conditions during the ten-year period.

2.      The average earnings bear a satisfactory ratio to market price.

3.      The financial set-up is sufficiently conservative, and the working-capital position is strong.

Although we do not suggest that common stock bought for investment be required to show asset values equal to the price paid, it is non the less characteristic of Group C that, as a whole, they will not sell for a huge premium above the companies’ actual resources.

            Common-stock investment, as we envisage it, will confine itself to issues making exhibits of the kind illustrated by Group C.  But the actual purchase of any such issue must require also that the purchaser be satisfied in his own mind that the prospects of the enterprise are at least reasonably favorable.

* * * * * * *

Safe Bulkers is a dry bulk shipper with around sixteen ships rented out to various customers.  The dry bulk market suffering due to the global recession and a glut of ships built during the boom, but Safe Bulkers is well positioned to prosper in even that harsh environment.  Its prospects and the industries are good.

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Published in: on March 31, 2011 at 9:43 am  Leave a Comment  

Ignore the last post. Formatting was messed up.

The formatting of the table in the last post did not work.  I will repost the article tomorrow with the table as a picture.  Sorry for the mess up.

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Published in: on March 30, 2011 at 3:54 pm  Leave a Comment  

Examples of Speculative and Investment Common Stocks You’ve Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

Item

Goldcorp (GG)

Proctor & Gamble (PG)

American Capital Agency Corp. (AGNC)

Seadrill Limited (SDRL)

Safe Bulkers (SB)

AT&T (T)

Dividend Yield

0.84%

3.14%

19.50%

7.46%

6.85%

5.77%

Earnings per share

2001

?

?

?

2002

?

?

?

2003

?

?

?

2004

?

?

?

2005

$0.35

?

?

?

2006

$0.51

$3.05*

$0.56

$1.48

$1.24

2007

$0.58

$3.64*

$1.32

$3.18

$2.02

2008

$1.85

$4.25*

$0.28

($0.43)

$1.81

$2.18

2009

$0.30

$4.73*

$0.94

$3.31

$2.51

$2.05

2010

$1.64

$4.47*

$2.30

?

$1.66

$3.36

10-yr. average

?

?

?

5-yr. average (2006-2010)

$0.98

$4.03

3-yr. average

$1.17

4-yr. average

$1.19

$2.13

$2.17

12 times 5Y average earnings

$11.71

$48.36

$14.08

$14.28

$25.56

$26.04

20 times 5Y average earnings

$19.60

$80.60

Published in: on March 30, 2011 at 3:46 pm  Leave a Comment  

Printing Money to Save the World.

Printing Money to Save the World

by Bill Bonner
Daily Reckoning

Recently by Bill Bonner: No Hope for a Consumer-Driven Economic Recovery

Image001

 

 

 

The Dow rose 50 points on Friday. Gold rose too.

As we ended the week, the Dow was over 12,000…gold was over 1,400…and oil was over $100.

And all seemed to be headed up.

But there’s trouble afoot.

Housing in the US, the foundation of most household wealth in the country, has gone into a double dip…which could drag millions more homeowners underwater.

In other words, the speculative markets are moving one way. The economy is moving the other. The markets are going up. The economy is going down.

Oh…and you can imagine what this does to the poor householder. He’s caught in the middle. The real economy pushes the value of his main asset down…while the feds push up the cost of his most important supplies – food and energy.

“Don’t worry about it,” says Bernanke, Geithner et al. The economy is recovering. But is it?

Nah…

It’s going to turn out very, very badly.

As predicted here, the feds’ easy money is making things much harder for most people. It’s pushing up costs…and prices. The feds can tell American households that the inflation rate is under 2%, but the poor consumer knows better. He knows that his real cost of living is going up at a rate probably more than 5%. Maybe, as John Williams tells us, more like 9%.

So, thanks to the feds’ pro-inflation policies, the consumer can’t buy as much stuff…so stores don’t sell as much stuff…and the economy weakens. And then, what do the feds do? They push even more inflation into the system.

This is not going to end well. Inflation is increasing…while inflation expectations are still low. Sometime in the future…inflation expectations will get ahead of inflation. And then, the Fed, if it is to get control of the situation, will have to put rates up above the real rate of inflation. In other words, the Fed will have to get ahead of inflation.

Is that going to happen? Not likely. Not in an economy that is slumping.

And along the same line…

We love Japan. Yes. Count on the Japanese to do things that are both great and horrible at the same time.

To put the following news item in perspective, the Japanese are in even worse straits than Americans, at least in some ways. Their government debt equals 220% of GDP. Savings rates are falling to zero. The annual government budget dwarfs tax receipts. And the Japanese face a huge bill for rebuilding after the earthquake, the most expensive natural catastrophe in history.

Where are they going to get the money?

Well, there are two possibilities. The first is bad for Japan. The second is bad for the US.

Like the US, Japan can print its way out of the problem. Some Japanese officials are all for it. Others aren’t. Bloomberg has the report:

Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation’s record earthquake.

Shirakawa repeatedly attempted to quash direct buying of government debt, a step allowed in extraordinary circumstances with the permission of the Diet, in appearances before lawmakers this week. The policy would undermine confidence in the yen and provoke a surge in consumer prices, he said at parliamentary fiscal and finance committee hearings.

“If this isn’t a special situation, what is?” Kozo Yamamoto, a Diet member with the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a 20 trillion yen ($247 billion) reconstruction program funded by BOJ debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18, according to a web log posting by DPJ member Yoichi Kaneko.

The debate parallels discussions last year in the US and Europe, where the Federal Reserve and European Central Bank adopted bond-buying programs.

The report mentions how Japan paid for its military build-up in the ’30s. It printed money! Eventually this led to runaway inflation…and economic as well as military disaster.

But what’s the choice?

Well, there’s another option: Japan should dip into its “rainy day fund,” say economists Carmen and Vincent Reinhart. While the Japanese bought Japanese government debt, the Japanese government bought the debt of other governments – primarily, the USA.

Now, it has about a trillion dollars’ worth of it. Why not just sell some of it in order to rebuild the country?

Well, yes… But then, you see the problem, don’t you, Dear Reader? What happens to the price of US government debt? It goes down, right?

And then the US has a hard time funding its deficits.

But wait. It can print money too.

Oh joy…we’re saved!

Reprinted with permission from The Daily Reckoning.

March 29, 2011

Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.

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Published in: on March 30, 2011 at 1:36 pm  Leave a Comment  

A Mechanical Check for Investment in Common Stocks. The First in a Series.

In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.

On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE .  I have to admit that I was a little lazy.  Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening.  It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.

The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.

Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog.  The goal is separate the speculative stocks from the investment stocks.  The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).

* * * * * * *

Higher Prices May Prevail for Speculative Commitments.  The intent of this distinction must be clearly understood.  We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock.  We do suggest that such a price would be speculative.  The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation.  It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations.  Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.  This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.

            Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom.  It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum.  This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects.  We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment.  It is a necessary but not sufficient condition.  The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.

            From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation.  This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.

* * * * * * * *

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Published in: on March 29, 2011 at 1:27 pm  Leave a Comment  

Even Jim Cramer is skeptical about AGNC.

Jim Cramer is now a critic of American Capital Agency Corp. (AGNC).

* * * * * * *

by Jason Smith | March 28th  |  Filed in: Dividend News

MORTGAGE REITS METRICS

Avg. Market Cap:

$1.3B

Avg. P/E Ratio:

10.9

Avg. Div Yield:

9.8%

Following comments by “Mad Money” host Jim Cramer about the group, the Mortage Investment Stocks is trading lower by 0.1% today.

Surprisingly, American Capital Agency (AGNC) is up 1% after Cramer questioned how the company can feature such a high yield. Shares of American Capital Agency currently yield a whopping 19.3% based on past distributions. Shares of Annaly Capital Management (NLY) are down about half a percent despite Cramer saying that is the one stock in the group that he recommends. “I feel real good about that one,” Cramer said in reference to Annaly.

Among other high-yielding mortgage REITs, Northstar Realty Finance (NRF) is up 2%. Those units now yield 8% based on past distributions. PennyMac Mortgage (PMT), with its 9.2% yield based on past distributions, is up 1%. Anworth Mortgage Asset (ANH), with a yield of 12.3% based on past distributions, is down 1% while Capstead Mortgage (CMO), which also sports a 12.3% yield based on past distributions, is down half a percent.

* * * * * * * *

Link to original article: http://www.tickerspy.com/newswire/?p=4245

AGNC has a whopping dividend, but diminishing earning power and a weak balance sheet.

Disclosure: I don’t own AGNC.

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Published in: on March 28, 2011 at 12:31 pm  Leave a Comment  

The Adjusted Monetary Base: February 2010 to Early March 2011. No More Exit Strategy.

There is no news on my favorite high dividend stocks, so let's see what the evil Federal Reserve chairman is up to.  See the charts below to examine the Fed's adjusted monetary base.  Ben Bernanke has been very busy counterfieting US dollars to purchase US government treasury bonds.  Government bonds are a bubble.  When interest rates rise bond prices will go down making current bonds worth less.  I wouldn't and don't own bonds in this financial environment.
 
The Adjusted Monetary Base: February 2010 to Early March 2011. No More Exit Strategy.
 
Gary North
March 24, 2010

Look at the adjusted monetary base over the last year.

Bernanke tried to get off the tiger's back. He began his much-heralded exit strategy in February 2010. He climbed back on the tiger's back in January 2011.

 

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Published in: on March 28, 2011 at 1:07 am  Leave a Comment  

Why Interest Rates Will Rise. Why AGNC Will Lose.

Conditions are optimal for American Capital Agency Corp. (AGNC) to produce profits; however, those conditions are temporary.  The people who operate AGNC  are Keynesians.  Some of the senior officers used to work for Fannie Mae and/or Freddie Mac.  You must believe in the Keynesian mantra to work at those two government-sponsored enterprises.  Interest rates will rise and destroy AGNC's profitability.  Read the article from Gary North for a detailed explanation of why interest rates will rise.  This is the Austrian economics perspective.  Ignore it at your own peril if you own AGNC or any other mortgage REIT.

Why Interest Rates Will Rise.

by Gary North

Recently by Gary North: Milton Friedman's Contraption

 

   

The world is on a Keynesian spending spree. Western central banks are inflating as never before in peacetime. Western governments are running massive budget deficits.

The European Union in 1997 established a Stability and Growth Pact, which set guidelines for fiscal policy: an annual deficit of no more than 3% of GDP and a total government-debt-to-GDP ratio of no more than 60%.

The West is far beyond both limits. In a March 20 speech by a senior IMF official, we read the following.

In advanced economies, reducing unemployment is a priority. At the same time, however, public debt is piling up to unprecedented heights, creating worries in many advanced countries about fiscal sustainability. In fact, IMF analysis indicates that advanced economy fiscal deficits will average about 7 percent of GDP in 2011, and the average public debt ratio will exceed 100 percent of GDP for the first time since the end of World War II.

As is increasingly obvious, such a fiscal trend simply is not sustainable. While expansionary fiscal policy actions helped to save the global economy from a far deeper downturn, the fiscal fallout of the crisis must be addressed before it begins to impede the recovery, and to create new risks. The central challenge is to avert a potential future fiscal crisis, while at the same time create jobs and support social cohesion.

He is a standard Keynesian economist. He stated without qualification that "expansionary fiscal policy actions helped to save the global economy from a far deeper downturn." He assumed that his listeners would agree with him. This has been the Keynesian party line ever since 1936. It is not questioned. But now the acceptance of the Keynesian party line has removed all resistance to fiscal deficits on an unprecedented peacetime level.

"The central challenge is to avert a potential future fiscal crisis, while at the same time create jobs and support social cohesion." This is like saying, "Governments need to pursue policies of black and white – no gray." According to Keynesians, the fiscal crisis can be overcome by economic growth. But governments still pursue massive deficits, and central banks inflate. No Keynesian is willing to say, "Enough is enough. The economy is now on a path to self-sustained recovery. It is time to implement an exit strategy for both the deficits and monetary expansion." On the contrary, they call for extending the deficits. They praise the central banks' willingness to buy the IOUs of national governments.

The speaker was straightforward in his assessment of what must be done. The problem is, there is no major political party that will do this.

The immediate fiscal task among the advanced countries is to credibly reduce deficits and debts to sustainable levels, while remaining consistent with achieving the economy's long-term growth potential and reducing unemployment. Achieving the fiscal adjustment alone is no small task: The reduction in advanced economies' cyclically adjusted primary budget balance that will be needed to bring debt ratios back to their pre-crisis levels within the next two decades is very large – averaging around 8 percent of GDP – although there is considerable variation across countries. Large gross financing requirements – averaging over 25 percent of GDP both this year and next – only add to the urgency of creating credible medium-term fiscal adjustment plans.

Urgency? What urgency? There is no sense of urgency. The deficits climb, the debt-to-GDP ratios climb, and politicians show no sign of being willing to reverse this.

Low interest rates have saved Western economies from suffering serious restraints on fiscal policy. This will not last much longer, he thinks.

This combination of rising debt but stable debt service payments is not likely to continue for long, however. Higher deficits and debts – together with normalizing economic growth – sooner or later will lead to higher interest rates. Evidence suggests that an increase in the debt-to-GDP ratio of 10 percentage points is associated with a rise in long-term interest rates of 30 to 50 basis points.

He identified the #1 problem: spiraling costs for government-funded medicine. The problem is, this is politically untouchable. He knows this. He failed to mention it. Instead, he merely described it.

To be credible, any advanced economy fiscal consolidation strategy must deal with the cost of entitlements that are a if not the key driver of long-term spending pressures. Of course, health care-related spending reforms will have to form a central part of any budget strategy. New projections by IMF staff show that for advanced economies, public spending on health care alone is expected to rise on average by 3 percent of GDP over the next two decades. Thus, for any budget consolidation plan to be credible, it must deal with the reality of rising health care costs. Inevitably, successful reforms in this area will include effective spending controls, but also bottom-up reforms that will improve the efficiency of health care provision.

Credibility is as credibility does. Western governments are doing nothing to bring these deficits under control. By this standard, the promises and assurances of politicians in the West are incredible.

This is the elephant in the living room. An IMF official at least mentioned its presence. He of course offered no suggestions as to how the elephant should be removed, or who will attempt to remove it. That is for politicians to decide.

Politicians have decided to let the elephant occupy the living room indefinitely.

Voters are unaware of the problem. They think that this elephant can be dealt with. But elephants must be fed, and their waste must be removed. By whom?

MEDICARE

Medicare for years has been running a deficit. This deficit has been funded by the general fund. The trustees expect this to continue. But they offer hope. The system will not be busted until 2029. By "solvent," they mean that the Trustees will not run out of nonmarketable IOUs to sell back each year from the Treasury, which has to come up with the money to buy these IOUs, year by year.

The trustees also make a major assumption. The legislation of 2010 will reduce Medicare costs, as promised. This was the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA).

Much of the projected improvement in Medicare finances is due to a provision of the ACA that reduces payment updates for most Medicare goods and services other than physicians services and drugs by measured total economy multifactor productivity growth, which is projected to increase at a 1.1 percent annual rate on average. This provision is premised on the assumption that productivity growth in the health care sector can match that in the economy overall, rather than lag behind as has been the case in the past. This report notes that achieving this objective for long periods of time may prove difficult, and will probably require that payment and health care delivery systems be made more efficient than they are currently.

Anyone who believes that passing that law is going to reduce Medicare costs probably also believes that the elephant in the living room will soon go away of his own accord. The trustees know better, so they covered their backsides: "This report notes that achieving this objective for long periods of time may prove difficult." May prove difficult! Indeed!

The handwriting is now on the wall, written in red ink. No one seems to notice. The king does not call for a modern-day Daniel to translate. The message is in a foreign tongue: digits. The king does not call in the accountants to translate, because he knows what they will say. The message is much the same as it was in Daniel's day: MENE, MENE, TEKEL UPHARSIN. TEKEL means the same: "You have been weighed in the balance and found wanting."

Any politician who openly says, "It's time to cut back on Medicare," will find himself out of a job after the next election. The insurance companies welcomed Medicare as a way to get high-risk oldsters off their rolls. They kick you off when you turn 65. They will not pay for anything that Medicare would pay for. You can stay on the rolls by paying high premiums, but you will not be paid.

There is no way to go back. The elephant will remain in the living room. He will grow. He will consume more. The pile of dropping will increase.

Everyone in high places knows how this will end: in default. No one is willing to say the form that the default will take.

Some think it will end in hyperinflation. But that does not end the program. It will still be there on the far side of T-bill repudiation.

Some think it will be the unwillingness of central banks to buy government debt. They will cease inflating That will cause Great Depression 2.

Some think the oldsters will finally be cut off and returned to their children for medical care. At today's Medicare costs, that will be $11,000 per year of added insurance fees, which private companies will refuse to insure for people with existing conditions.

Someone will pay to get the elephant out of the living room. The taxpayers will not bear the costs of Medicare indefinitely.

RE-THINKING KEYNES

John Maynard Keynes wrote in the depths of the worldwide depression. His most famous book was published in 1936: The General Theory of Employment, Interest and Money, soon captured the minds of younger economists. A decade later, Keynes died. At the time of his death, it was clear that his explanation of the Great Depression would become dominant.

In 1948, the first edition Paul Samuelson's Economics textbook appeared. It became the dominant textbook in the West. It was called neo-Keynesian. That is, it was only partially incoherent, unlike Keynes' General Theory, which is totally incoherent. (Skeptics who think I am exaggerating have either never read The General Theory or have spent years reading textbooks to prepare them to believe they understand The General Theory when they read it after they have received their Ph.Ds in economics.)

Keynes' publisher, Macmillan, had published Lionel Robbins' excellent book, The Great Depression, in 1934. It was short, readable, and theoretically accurate. It is online for free here.

In 1937, Macmillan published another book on the causes of the depression, Banking and the Business Cycle, by three economists. It is online for free here.

If these two books had carried the day in the economics profession, the West would be far richer today, if we assume that decisions made by private property owners are more efficient than decisions made by politicians and central bankers, none of whom can be held personally economically accountable for the outcome of their decisions. These two books were coherent, accurate, and committed to the free market. They are forgotten today. Were it not for the Mises Institute's program of online posting and physical reprinting of out-of-print books on free market, they would probably not be available.

The world's economists are allied to the politicians. They defend massive government deficits as necessary to avoid recessions and unemployment. But unemployment is higher than anything since the Great Depression. The policies have clearly failed. Nevertheless, apologists use the familiar argument from counter-factual history: the rate of unemployment would be much higher today if it had not been for the deficits and central bank inflation. This needs to be proven. They do not attempt to prove it.

The Keynesians have been given a free ride by non-Austrian School economists. While economists gripe about this or that minor technical detail about the deficits and the central bank inflation, there is no full-scale critique of these policies by mainstream economists. They have bet the farm on the positive outcome of the policies.

The rise of commodity prices testifies to a growing problem. Price inflation apart from energy and food has remained low. Energy and food prices are dismissed as irrelevant in the medium-term, because they are volatile. They go down, too. But when price categories do not go down, as these two have not ever since late 2008, the statisticians are supposed to incorporate them into their statistical model. Government statisticians are resisting this.

As the rise in prices forces a rise in interest rates, debt will become a major drain in consumer spending. Consumers respond to rising monthly expenditures by cutting back on borrowing. Governments do not. They call on the central bank to intervene and buy bonds with newly created money. This cannot go on much longer. The inflation premium in the bond market will increase.

Government is absorbing the savings of Americans. The sink holes that constitute the Federal government's constituencies will absorb the money that would otherwise have gone to finance businesses. Economic growth will slow. Then it will become contraction.

CONCLUSION

The IMF bureaucrat ended his speech with this.

In sum, there is no doubt that given the evolution of the recovery, countries are grappling with increasingly-complex and increasingly-diverse challenges. This is certainly true of fiscal policy. But to move toward a future of strong, sustainable, and balanced growth, these fiscal challenges need to be addressed urgently. The time for action is now.

Thank you for your attention.

The problem: no one in power is paying attention. The time for action is now, he said. Salaried economists have been saying this for years. But no one takes any action.

Government debts will increase until rates go up. Then lenders will still lend. Private capital will suffer. It will be crowded out at the governments' low rates.

The Federal Reserve System is buying most new Treasury debt today. The monetary base is rising. Monetary inflation is increasing. Price inflation is increasing. This is why interest rates will be going up.

If you are in debt for anything on a floating-rate basis, you are in trouble.

March 24, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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Published in: on March 25, 2011 at 5:27 pm  Leave a Comment  

The Party is Almost Over For American Capital Agency Corp.

Mortgage REITs are among the highest dividend yielders. I have been warning for over a quarter about the end of the party for American Capital Agency Corp. (AGNC). Now others are taking notice.

http://www.fool.com/investing/dividends-income/2011/03/24/beginning-of-the-en…

AGNC has been above 100% dividend payout ratio for two quarters now. Others in the industry are beginning to make cuts. It’s only a matter of time for AGNC.

There will be an opportunity to buy AGNC after the dividend cut and after the next Federal Reserve induced financial crash.

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Published in: on March 24, 2011 at 6:12 pm  Leave a Comment  

Bernanke’s Inept Sidekick.

Superheroes aren’t the only ones with sidekicks. Evil central bankers like Ben Bernanke have them too. Meet Ben’s evil sidekick.

http://www.lewrockwell.com/orig12/tamny4.1.1.html Note: Safe Bulkers (SB) CEO presented at an industry conference yesterday, but the slides in PDF format aren’t available on their website yet. I will write about them once they become available.

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Published in: on March 23, 2011 at 2:12 pm  Leave a Comment