I’m on vacation for the next week. There might not be any new postings until I return on October 4th because of limited Internet access.

Be seeing you!

Published in: on September 25, 2011 at 3:43 pm  Leave a Comment  

Busted Europe, Busted Dream.

Busted Europe, Busted Dream

by Gary North

Recently by Gary North: Gold Confiscation: A Highly Unlikely Threat


The European Monetary Union is going to break down. This will be followed by a break-up of the European Union.

This is denied by the New World Order’s promoters of international unification. They have been planning for this since the end of World War I. They have been actively implementing this by stealth since the early 1950s. They used treaties to bring this political unification to pass. They used economic unification as the bait. The hook of political unification was always buried in the bait.

The threat facing the NWO is that the economic bait has turned out to be poison. The EMU is based on a common central bank and a common fiat currency. But without a common system of government, there can be no fiscal union. There can be no central planning by Keynesian means.

The nationalism implied by Keynesian fiscal manipulation has led to the Greek crisis. The EMU rested on an unlikely premise: the wisdom of Europe’s commercial bankers, who had spent their careers in highly regulated domestic markets. Always before, bankers in large banks could count on their national central banks to bail them out. But, in this new world banking order, the European Central Bank does not have the flexibility to bail out all of the large national banks that are now in big trouble. There are members of the ECB’s board who are part of the German-Dutch axis, which favors tighter money and stable prices. The Board must placate them to some degree. This reduces the ECB’s response time.

The Party Line of the EU and the ECB is that there is no unity-threatening problem or series of problems facing the central government. They insist that the current problems are temporary.

We have heard all this before.


The greatest event of my life was the suicide of the Soviet Union on December 31, 1991. The Communist empire went under without a shot being fired. The Communist Party’s senior officers looted the Party’s funds and sent the money to Swiss bank accounts. Then they privatized the state’s main economic assets so that they and their cronies became incredibly rich.

The second greatest event was the decision of Deng Xiaoping in 1978 to free up Chinese agriculture. That led to the most rapid economic growth in human history. Nothing like it had ever happened to so many people. South Korea’s per capita economic growth, 1950 to 1990, was greater, but South Korea was a much smaller nation.

Communism was the most powerful ideology of tyranny in man’s history. It failed operationally in the USSR in less than 75 years. It failed in Communist China in less 30 years.

The cash nexus seduced the vanguard of the proletariat. The inevitable socialist victory was exposed as a gigantic fraud. The messianic religion of Marxism went down with the two Communist ships.

Today, the rag-tag army of tenured Marxist professors in Western universities have as their only surviving models Cuba and North Korea. The satellite photo of the two Koreas – bright lights in the south, one light in the north – is the most powerful epitaph of Communism there is.

Now another victory of liberty over centralized politics is unfolding. It is taking place in Western Europe. It is not going to be reversed. The New World Order’s number-one poster child – the European Union – has begun to fall apart. Nothing will reverse this.

There are those in the West who will deny this. There are also those who from 1992 until today insist that the collapse of the USSR was in fact a gigantic deception. The Communists are still in control, they tell us. These people cannot bring themselves to admit that Communism lost the battle. Like the original Communists, they believe in the absolute sovereignty of political power. They believe that the West could not possibly have won, because the Communists were better at intrigue and military power. But the West did win, because the Communist leaders gave up the dream of a socialist world and decided to go for the money.

Let me tell you how I knew that the Communists had failed completely. First, the new Russian government changed major cities’ names back to their pre-Bolshevik names. Leningrad became St. Petersburg. Stalin re-named Volgagrad to Stalingrad in 1925. Khrushchev changed it back in 1961 as part of his de-Stalinization program. Both changes revealed the nature of politics in Russia. The names of cities were testimonies to the ruling power. That was why the name changes after 1991 were significant.

Second, mobs of people pulled down statues of Soviet leaders. One of the statues that disappeared was that of Pavlik Morozov, the 13-year-old boy who informed on his father. He had been made a hero by Stalin after he was murdered at age 15. He had the boy’s relatives executed for the crime, although they all denied that they had done it. The Morozov story was taught to Soviet children until the very end of the regime. His statue has disappeared from the public park built in his memory.

The fall of the Soviet Union was no deception. It was real. That was two decades ago.

There is another fall coming.


I will state it again. The breakdown of the European Monetary Union will be followed by the break-up of the European Union.

The EMS is breaking down. A few columnists in the West are now admitting this. On the whole, however, the Party Line of the media follows the Party Line of the EU bureaucrats: “The crisis in Greece is a temporary aberration. It will be solved by EU, IMF, and ECB policies.”

The problem with the Party Line is that Greece keeps flaring up. Short-term interest rates are over 100%, indicating a loss of faith by investors in the Greek government’s ability to make interest payments in euros. If the EU, the IMF, and the ECB had a plan to deal with the underlying problem in Greece – its looming inability to make interest payments in euros – they would have implemented it. They keep announcing temporary bridge loans. These “bridge loans” are in fact sinkhole loans. Everyone presumably knows this, yet they do not invest accordingly. The various stock markets’ wild gyrations in Europe indicate that hope and fear are balanced, unlike any government’s budget.

Hope will degrade into fear as reality sets in. What is reality? That large European banks bought Greek government bonds, because they assumed that no member of the EMU would pull out as a way to default on euro-based debt. But it is clear that this is exactly what Greece will do. The default is statistically inevitable. The sinkhole is a bottomless pit.

The euro was the poster child of European unification, just as European unification was the NWO’s poster child for worldwide unification, the dream of the Trilateral Commission. The euro was rammed down the throats of Europe’s national central bankers in 1999. They had enjoyed considerable autonomy. National politicians also resented the fact that they would no longer have great influence in domestic monetary affairs. They would henceforth have to persuade the bankers at the European Central Bank to follow policies that would sustain national welfare state policies.

That world is gone, but there are domestic politicians in PIIGS nations who would very much like to restore it. They are being pushed hard by voters to break free of the “austerity” programs being rammed down their throats by the IMF and ECB.

The Bible teaches, “The rich ruleth over the poor, and the borrower is the servant to the lender” (Proverbs 13:22). This ticks off the borrowers. The Bible also teaches, “The wicked borroweth and payeth not again” (Psalms 37:21a). This really ticks off the borrowers. “That’s an insult to our integrity!” Then, when their governments announce limited cutbacks in domestic spending, the threatened employees take to the streets. “You owe us what you have promised!”

In short, voters want to impose austerity on the creditors. They do not want creditors to impose austerity on their welfare state governments.

Some interest groups are going to get stiffed. The Party Line at the EU, ECB, IMF is that employees of high-deficit countries are going to get stiffed. The Party Line in the Greek trade unions is that the ECB, IMF, EU bureaucrats are going to get stiffed. Politicians in PIIGS nations claim that no one is going to get stiffed if the ECB, IMF, and EU will just lend more money to tide them over. The commercial bankers want the EU and ECB to serve as lenders of last resort to banks, so that, when the PIIGS default, the bankers will not lose their bonuses. Voters in Germany don’t want to get stuck with the tab for bailing out PIIGS or banks. Investors in European stocks keep sounding like Rodney King. “Can’t everyone just get along?”

The New World Order’s promoters are wringing their hands and pleading, “We worked so hard to sneak through this deal. We are not quite finished with our plans. Now voters are trying to kill it. It’s just not fair!” I think of a classic video scene that best describes the present predicament of the NWO.


The Wall Street Journal published a report on the breakdown of the EMS. I liked the way it started out:

When the history of the rise and fall of postwar Western Europe is someday written, it will come in three volumes. Title them “Hard Facts,” “Convenient Fictions” and – the volume still being written – “Fraud.”

The author says that the first hard fact was military necessity in the post-War period. The Cold War began.

The next hard fact was hard money. He correctly identifies this as “the gift of Ludwig Erhard, author of the economic reforms that created the Deutsche mark, abolished price controls, and put inflation in check for generations.” Erhard was a disciple of Wilhelm Roepke, who was a disciple of Ludwig von Mises. In mid-June, 1948, Erhard unilaterally abolished the entire Allied military system of price controls, fiat money, and rationing. The next day – literally – the “German economic miracle” began.

The author continues: “The third hard fact was the creation of Jean Monnet’s common market that gave Europe a shared economic – not political – identity.” The author has fallen for the ultimate fraud. Monnet had been working for political unification ever since he and Raymond Fosdick, John D. Rockefeller, Jr.’s agent, sat together at the Versailles Peace Conference in 1919. In 1919, Fosdick sent a letter to his wife. He told her that he and Monnet were working daily to lay the foundations of “the framework of international government.” [July 31, 1919; in Fosdick, ed., Letters on the League of Nations (Princeton, New Jersey: Princeton University Press, 1966), p. 18.] Fosdick returned to New York City in 1920, where he took over running the Rockefeller Foundation for the next 30 years.

Monnet was the front man for the New World Order. He promoted political unification by wrapping it in the swaddling clothes of economic unification.

The author accurately describes the suicide of Western Europe.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe. Today it hovers just under 50%. In 1965, the fertility rate in Germany was a healthy 2.5 children per mother. Today it is a catastrophic 1.35. During the postwar years, annual GDP growth in Europe averaged 5.5%. After 1973, it rarely exceeded 2.3%. In 1973, Europeans worked 102 hours for every 100 worked by an American. By 2004 they worked just 82 hours for every 100 American ones.

He argues that “It was during this general slowdown that Europe entered the convenient fiction phase.” One fiction was that adding new members to the EU would enable the European economy to rival the output of the United States. Another fiction was that there was a central core of outlook and values that would unify the new collective. Here, he is woefully naive. That had been the assumption of the United Nations Organization from the beginning, and the League of Nations before it. That was the heart of Monnet’s vision. It did not start in 1973.

And there was, finally, the whopping fiction that Europe had its own “model,” distinct and superior to the American one, that immunized it from broader international currents: globalization, Islamism, demography. Europeans love their holidays and thought they were entitled to a long holiday from history as well.

He’s got that right!

Then he lists the frauds. First, Greece was allowed into the European Monetary Union. But that was not a fraud. The critics in the 1990s said that all of the Club Med nations would run deficits. They warned that the euro could not hold.

There was no fraud involved in letting in the PIIGS. This was basic to Monnet’s vision from 1919. It had to work. It must work. It is ordained to work. This is the NWO’s religion.

The non-PIIGS bankers thought it would work. They loaded up on PIIGS sovereign debt.

This was not fraud. This was the implementation of a deeply political religion. This was self-deception on a continental scale.

Yet he is right on this point.

There was the fraud of the so-called Maastricht criteria – the fiscal rules that were supposed to govern the euro only to be quickly flouted by France and Germany and then junked altogether in the current crisis. There was the fraud of the European Constitution, overwhelmingly rejected wherever a vote on it was permitted, only to be revised and imposed by parliamentary fiat.

What is now happening in Europe isn’t so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one. The shock is that it’s a shock. Greece was never going to be bailed out and will, sooner or later, default. The banks holding Greek debt will, sooner or later, be recapitalized. The recapitalization will be borne by German taxpayers, and it will bring them – sooner rather than later – to the outer limit of their forbearance. The Chinese will not ride to the rescue: They know not to throw good money after bad.

And then Italy will go Greek. Europe’s crisis will lap on U.S. shores, and America’s economic woes will lap on Europe’s – a two-way tsunami.

He sees that this fraud is not going to hold together. There is a reason for this.

The “fiscal union” that’s being mooted will never come to pass: German voters won’t stand for it, and neither will any other country that wants to retain fiscal independence – which is to say, the core attribute of democratic sovereignty.

He makes a forecast: “What comes next is the explosion of the European project.” Then he makes an assessment: “Given what European leaders have made of that project over the past 30-odd years, it’s not an altogether bad thing.” I’ll say not. It is a great thing. It is, in fact, the greatest thing that is likely to happen in the first two decades of the 21st century. It is the extension of the two break-ups of the 20th century.

But it will come at a massive cost. The riots of Athens will become those of Milan, Madrid and Marseilles. Parties of the fringe will gain greater sway. Border checkpoints will return. Currencies will be resurrected, then devalued. Countries will choose decay over reform. It’s a long, likely parade of horribles.


The price of the break-up of the ECB, the EMU, and the EU will be high because of the frauds and convenient fictions that preceded them. If Europe’s voters had not created welfare states, if they had not consented to a common fiat currency, but instead had abolished all central banking and had allowed competing private currencies, and if they had abolished tariffs and not created a bureaucratic monstrosity of non-governmental agencies with the power of government – the WTO and its peers – there would be low transition costs. But they listened to Monnet. They will now pay the price.

So will all of its trading partners. So will the large American banks that sold credit default insurance to European banks.

September 24, 2011

Gary North [send him mail] is the author of Mises on Money. Visit 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 September 24, 2011 at 11:41 pm  Leave a Comment  

The FED’s Operation Twist will be a bust and how can you profit from it.

The Federal Reserve announced that it will buy $400 billion of long
term bonds over the next year. They are calling it Operation Twist.
The FED says that it will pay for the purchases with the proceeds from
the sale of short term bonds. I’ll believe that when I see it. I
will be monitoring their balance sheet. I think that the FED will
grow its balance sheet over the next year because they don’t want to
admit that QE2 failed.

None of the FED’s actions will help the economy. The FED’s
counterfeiting will actually do harm to the purchasing power of every
holder of dollars. The FED has tripled the monetary base since late
2008. Thankfully, The loss of purchasing power through price
inflation is not occurring at the same rate of FED’s money supply
expansion. This is happening because the big banks that are selling
bonds to the FED are holding over one trillion dollars as excess
reserves. The banks are holding most of the money that the FED
printed out-of-thin-air for them. They are barely lending. If the
bankers loaned this money into the economy, then the money supply
would expand at a much greater rate and prices would increase easily
into double digits. This is how the fractional reserve banking
process work in a nutshell.

The US equity markets lost another 3% yesterday. A new batch of
investors figures out that Keynesian economics doesn’t work each week.
I hope that you are aware of this. Keynesians run governments,
corporations, the FED, and the economics profession. This is what
people are taught in school.

There is another school of economic thought known as Austrian
economics. They are opposed to the Keynesians. The Austrian school
believes in sound money and free markets. The most famous Austrian
economists are Ludwig von Mises, F.A. Hayek, and Murray Rothbard.
Visit to learn more for free.

We are in a bear market. The market is heading lower. You have to be
patient to wait for low prices to maximize dividend yields and
potential price appreciation.

I would be selling the stocks in your portfolio that are trading at
over 20 times average adjusted earnings. Buy physical gold coins on
the dips with the proceeds from your stock sales. The gold price will
continue to trend up so long as the central bankers continue to create
more digital money to bailout banks and to fund Keynesian deficit
spending. Build your gold reserves while the market tanks. Your high
dividend stocks will continue to pay dividends, but the price of the
shares will fall in this bear market. That will wipe out you gains.

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Published in: on September 23, 2011 at 4:34 pm  Leave a Comment  

A first look at the high dividend stock CenturyLink (CTL)

Dividend record: CTL paid a puny dividend until mid-2008 then it jumped 10 fold.  It paid no dividends in two quarters of 2009.  It has paid $0.725 per share quarterly for the last seven quarters (2010 to the present). 


Dividend: $0.73 quarterly

Dividend yield: 8.5% ($2.90 annual dividend at current rate/$33.90 share price)

Dividend payout ratio: 181% – 193% using the lower EPS guidance below.  The dividend will have to be cut or they will have to finance the dividend some other way (additional stock offering, saved cash, or more debt)

I noticed that there was a Reuters key development concerning earnings guidance for the rest of this year.

“CenturyLink, Inc. Raises FY 2011 Revenue Guidance; Lowers FY 2011 EPS Guidance
Wednesday, 3 Aug 2011 08:55am EDT 

CenturyLink, Inc. announced that for fiscal 2011, it expects pro forma operating revenues to be between $18.5 to $18.8 billion and pro forma diluted EPS is expected to be between $1.50 to $1.60. According to I/B/E/S Estimates, analysts on an average are expecting the Company to report revenues of $17.90 billion and EPS of $2.64 billion for fiscal 2011”

Earning power: $0.89 per share @ 616.44 million shares

(earnings adjusted for changes in capitalization.  CentruryLink has double the number of shares since 2010 which was three times higher than in the years 2006-2008)

            EPS       Net inc.             Adj EPS             Shares

2006     $3.07    $370 M              $0.60                122 M

2007     $3.72    $418 M              $0.68                113 M

2008     $3.56    $366 M              $0.59                103 M

2009     $3.23    $647 M              $1.05                199 M

2010     $3.13    $948 M              $1.54                301 M

TTM      $2.04    $770 M              $1.25                377 M

Five year average adjusted EPS = $0.89

Consider for a value buy below $7.14 (8 times average earnings)

Consider for an investment buy below $10.68 (12 times average earnings)

Consider selling above the speculative price of $17.80 (20 times average earnings)

CenturyLink is currently trading at $33.90.  It is speculatively priced because it is trading at 38 times it 5 year average earnings.

Balance sheet: Major growth in equity with each acquisition e.g. Qwest in 2011, but large debts to equity and not a lot of money available for short term debts maturing in the next year.


Book value per share: $35.11

Price to book value ratio: 0.97 (good)

Current ratio: 0.99 as of 2Q2011 (over 2.0 is good)

Quick ratio: 0.50 as of 2Q2011 (over 1.0 is good)

Debt/equity: 1.53 as of 2Q2011

Conclusion: CenturyLink’s dividend is in jeopardy, it is speculatively priced, and its balance sheet is mediocre.  Wait for the dividend cut, watch as its price drops down to lower earnings multiples and the global bear market exerts downward pressure on the stock price, and see what the merged company does to strengthen its balance sheet.  I’m ignoring this stock until it drops below $17.80 per share.

Disclosure: I don’t own CenturyLink.

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Published in: on September 21, 2011 at 1:18 pm  Leave a Comment  

Teekay Tankers still not a buy at $5.97 (-44% since April 2011).

The yield back then was reported as 11.59%, but I knew that Google Finance didn’t calculate the dividend yield correctly because of the recent dividend cut.  I estimated the dividend yield at 8.2% which still a high dividend stock.  It was trading at over 24 time its two year average earnings.  I usually use at least five years average earnings, but the tanker market has fundamentally changed for the worse in the past three years.

There is an enormous supply glut of oil tankers which have a depressing effect on tanker rental prices.  We will not see the high rental prices of 2008 in the distant future, so I’m throwing out the effects of the years 2006-2008.

Based in the Bahamas but incorporated in the Marshall Islands, Teekay Tankers owns and operates 11 medium-size oil tanker vessels. Previously a part of Teekay Corporation, TNK went public in December 2007. Although it’s not a true limited partnership, Teekay Corporation retains a controlling interest in its spun-out subsidiary, and TNK intends to pay out nearly all of its distributable cash flow to shareholders.

Teekay Tankers (TNK)

Market price $5.97

Market cap: $369 million

Shares outstanding: 61.88 million


Dividend Record: In one word – volatile.

Dividend: $0.21 quarterly, but TNK hasn’t paid the same quarterly dividend twice in the last five years.  Who knows what it will be next quarter?

Dividend yield: 14% ($0.84 annual dividend/$5.97 stock price)

Dividend payout ratio: 386% WARNING ($1.12 dividends last 12 months/$0.29 EPS last 12 months)  The dividends are being paid for by the issuance of new stock shares.  There will be either a massive dividend cut or another drop in the price of the stock as they issue more shares to finance the dividend.

Earning Power:  TNK has an average adjusted earning power of $0.38 EPS @ 61.88 million shares since 2009.

Teekay has more than double the number of outstanding shares in 2010 and it keeps issuing stock.  This highlights the importance of adjusting reported EPS for changes in capitalization.


EPS                Net inc.          Adj. EPS        Shares

2006               $2.68              $40.153 M     $0.64              –

2007               $2.76              $40.551 M     $0.66              13.384 M

2008               $2.03              $58.067 M     $0.94              25.000 M

2009               $1.28              $38.934 M     $0.63              28.644 M

2010               $0.37              $14.662 M     $0.24              42.330 M

2011Q1          $0.12             $7.09 M          $0.11              57.39 M

2011Q2          $0.02              $1.44 M          $0.02              61.88 M

Consider a value buy at or below $3.01 per share (8 times average adj. earning since 2009)

Consider an investment buy at or below $4.51 per share (12 times average adj. earnings since 2009)

Consider selling as it becomes speculatively priced at or above $7.52 per share (20 times average adj. earnings since 2009)

Balance Sheet: up mostly due to the issuance of shares of stock


Book value per share: $9.88

Price to book value: 0.60 (very good)

Current ratio: 1.78 (over 2.0 is good)

Quick ratio: 1.62 (over 1.0 is good)

Financial leverage: 1.73 is low.  This is good

Debt to equity ratio: 0.66 is also good

Conclusion: Wait for a massive dividend cut or a massive price drop down to the $4.51 – $3.01 range.  Then monitor the technicals to spot near the bottom.

Disclosure: I don’t own Teekay Tankers.

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Published in: on September 20, 2011 at 1:23 pm  Leave a Comment  

Gold-Backed Dollar Puts ‘Fair Value’ at $10,000 an Ounce: Chart of the Day

Gold is down to $1,780 today.  You should own at least $10,000 in gold coins.  Buy some tenth ounce coins from your national mint.  I like American Precious Metals Exchange .  I get no money from them.  I just had a good experience buying from them.  Don’t delay your first purchase forever.  Central bankers are printing more money than they already have due to the sovereign debt crisis in Europe that will bankrupt both the big European banks and the big American banks.  When these banks increase their lending, then prices of goods will skyrocket (including gold).

Gold-Backed Dollar Puts ‘Fair Value’ at $10,000 an Ounce: Chart of the Day

By David Wilson – Sep 14, 2011 10:01 PM MT

Enlarge image


Gold-Backed Dollar Signals $10,000 Metal Price


Paul Taggart/Bloomberg

Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday.

Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday. Photographer: Paul Taggart/Bloomberg

Gold has the potential to jump more than fivefold as the precious metal’s price catches up with the surging amount of money in the U.S. economy, according to Dylan Grice, a global strategist at Societe Generale SA.

The CHART OF THE DAY shows the price at which each U.S. dollar in the monetary base, compiled by the Federal Reserve, would have been backed by an ounce of gold for the past half century. International Monetary Fund data on the country’s gold reserves were used in the calculation.

Grice, based in London, identified this price as the metal’s “fair value” yesterday in a report. Since June, it has exceeded $10,000 an ounce, as depicted in the chart’s top panel. Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday.

The bottom panel tracks the value of U.S. gold holdings, based on the spot price, as a percentage of the monetary base for the 50-year period. August’s proportion was 18 percent of the $2.66 trillion in the economy. The latter figure was more than triple the amount three years earlier, reflecting efforts by the Fed to spur economic growth.

“There is a demand for an honest currency,” Grice wrote. “The last time honesty was perceived to be so scarce — in the 1970s gold mania — the dollar was over-backed by gold. If it happened then, why not again?”

U.S. gold holdings peaked at 131 percent of the monetary base in January 1980, when spot gold climbed to $850 an ounce after a more than 14-fold advance in the preceding decade. The high equals about $2,330 an ounce in today’s dollars, according to a Labor Department calculator.

To contact the reporter on this story: David Wilson in New York at

To contact the editor responsible for this story: Nick Baker at

Published in: on September 19, 2011 at 2:43 pm  Leave a Comment  

Peter Schiff schools the jobs committee.

Peter Schiff schools the jobs committee.  The video is in two part and each is almost 15 minutes long.  This is not boring government testimony because of Peter Schiff's candidness.  Unfortunately the government has encroached so much into the market that they can't be ignored.
Interest rates will go higher; just ask the Greeks!
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Published in: on September 18, 2011 at 10:42 pm  Leave a Comment  

TIP OF THE WEEK – My Advice for Young People

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More generally, by focusing attention away from oneself, things become clearer and it’s easier for a person to do the "responsible" things like avoiding impulse purchases and doing the extra work needed to bring in more income.

This last point is crucial for people who are suffering from depression and are in a financial hole. Part of what keeps them there is that, deep down, they don’t think they deserve to live stress free like the other people they see around them, who somehow have their act together and don’t let bills pile up on the kitchen table. By bringing in the church (or a charity that the person really respects), the depressed and financially beleaguered person can stop dwelling on self-loathing and instead focus on helping others.

Eliminate Variable-Rate Debt as Quickly as Possible

If a person already has a decent amount of cash on hand, I think the next goal should be to eliminate variable-rate debt as quickly as possible. The most obvious example is credit-card debt rolling over at an APR that moves with the prime rate. If the dollar crashes as many Austrian economists fear, we can expect massive jumps in interest rates. This will wipe out many people who thought they were doing just fine the month before.

Note that "eliminating" variable-rate debt doesn’t have to mean paying off the balances. Using a new balance-transfer promotional offer, for example, might allow a person to lock in a fixed rate for a year or more.

I have written on these pages about the pros and cons of credit-card use. Unlike my other suggestions, this particular one — namely to get out of variable-rate debt quickly — is based on our current situation, where I believe there is a real danger of interest rates spiking with little warning.

Acquire Some Physical Gold and Silver Coins

Once a young person has accumulated at least a month’s window in cash and has neutralized variable-rate debts, I think an excellent outlet for some of the saving each month is the acquisition of gold and silver coins. These don’t need to be collector’s items; in fact my favorite thing is "junk silver," because if the Big One comes it will be easy for other Americans to recognize US coins that were minted before the 1960s and have an easily verifiable silver content.


$25 $22

"Anybody who babysits or cuts lawns for neighbors is an entrepreneur."

From an Austro-libertarian perspective, the other great benefit of buying at least some physical gold and silver is educational: This is what genuine, market-produced commodity money feels like.


The above tips are mostly common sense. Except for the warning about variable-rate debt, they are good ideas in any setting. Yet they are particularly important, especially for young people, in our present environment.

In closing, I want to stress that I am by no means a role model in this arena. I can write with confidence on the above matters precisely because I have seen firsthand what happens when you don’t follow those guidelines. If you want to keep your hair, you will give serious consideration to my recommendations.

Robert Murphy is an adjunct scholar of the Mises Institute, where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to "Man, Economy, and State with Power and Market," the "Human Action" Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist. Send him mail. See Robert P. Murphy’s article archives.

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Published in: on September 16, 2011 at 12:05 pm  Leave a Comment  

Another risk to AGNC’s profitability. Prepayments.

American Capital Agency Corp. (AGNC) profits will erode as the housing market declines further for at least two reasons.  First, Fannie Mae and Freddie Mac payoff the previous mortgage after a foreclosure.  This accelerates the payment of that mortgage within the mortgage backed security pool it is in.  Second, when Federal Reserve policy and the US federal government programs artificially drive interest rates down, then more people can refinance their homes.  The old mortgage gets paid off early (prepayment) in a refinance.  AGNC management must estimate prepayment rates correctly to protect profits.  I have little faith in them because they believe in Keynesian economics.  Keynesians are leading us all off the cliff.

We read in this article that the US federal government is trying to introduce new subsidies to allow homeowners to refinance.   This is bad news for mortgage REITs like AGNC.  For more info on the nefarious plans of the government read this:

From the AGNC 2010 annual report:


Changes in prepayment rates may adversely affect our profitability.

The agency securities in our investment portfolio are backed by pools of mortgage loans. We receive payments, generally, from the payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on the related agency securities. These faster or slower than expected payments may adversely affect our profitability.

We may purchase agency securities that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the security. In accordance with GAAP, we amortize this premium over the expected term of the agency security based on our prepayment assumptions. If the agency security is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which will adversely affect our profitability.

We also may purchase agency securities that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the security.  We accrete this discount over the expected term of the agency security based on our prepayment assumptions. If the agency security is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of the portfolio and result in a lower than expected yield on securities purchased at a discount to par.

Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property. Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more delinquent from MBS trusts when the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in their portfolios.

Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, the government-sponsored entities cost of capital, general economic conditions and the relative interest rates on FRM and ARM loans, which could lead to an acceleration of the payment of the related principal. Additionally, changes in the government-sponsored entities’ decisions as to when to repurchase delinquent loans can materially impact prepayment rates.

In addition, the introduction of new government programs, such as the U.S. Treasury’s HASP program, could increase the availability of mortgage credit to a large number of homeowners in the U.S., which we would expect would impact the prepayment rates for the entire mortgage securities market, but primarily for Fannie Mae and Freddie Mac agency securities. These new programs along with any new additional programs or changes to existing programs may cause substantial uncertainty around the magnitude of changes in prepayment speeds. To the extent that actual prepayment speeds differ from our expectations, it could adversely affect our operating results.


Stay away from unstable high dividend stocks like AGNC.  Leverage works both ways – just ask Lehman Bros.

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Published in: on September 13, 2011 at 2:08 pm  Leave a Comment  

Should you buy Intel at near $20.00 per share?

One of my competitors asked in a blog if Intel (INTC) is a buy at $19.64.  Their answer was yes.  They wrote, “Intel derives approximately 90 per cent of its revenues from the PC market. Over the years it has dominated and trampled its main competitor Advanced Micro Devices (AMD), and left other chip producers such as Texas Instruments (TXN) far behind. It also has a generous dividend yield of 4.30%, a debt to equity ratio of 0.40, a low PE ratio of 9.01, and a low dividend payout ratio of 38.5%. Intel currently has revenue of 48.44 billion (trailing twelve months), with a quarterly revenue growth of 21%. The balance sheet is certainly solid, and with the price at USD $19.64, off -17.7% from May highs, Intel is looking to be an attractive buy.”

I take issue with their claim that Intel has a low PE ratio of 9.01.  If you take a longer view of Intel you will find that it is trading at 15.9 times its five year average earnings adjusted for changes in capitalization.  Intel has been buying back their stock.  In order to compare 2006 earnings with 2010 you have to adjust for the reduction in shares to get an apples to apples comparison.  For example, in 2006 Intel reported $0.86 earnings per share.  It had a net income of $5.044 billion dollars and it also had 5.88 billion shares outstanding.  Intel only has 5.25 billion shares outstanding now.  Take the net income of $5.044 billion and divided by the 5.25 billion shares.  The 2006 EPS has been adjusted to $0.96 for comparison with any other year.  You will see below how I arrived at the 15.9 PE ratio that is not a value investment.

Intel (INTC)

Market price: $20.01

Market capitalization: $101.50 billion

Shares: 5.25 billion shares


You can see that there was ample opportunity to buy Intel below $15.12.  The technical indicators that I use gave the buy signal in January 2009.  The CCI was deep in the red, the price lifted off the lower Bollinger Band,  the MACD turned upward.  I’ll go through the fundamentals below.

Dividend Record: Intel has been a steady dividend grower for the past 10 years.  It will be interesting to see if they keep up the dividend when the market crashes again.  They have the money to keep paying their dividend.  It looks like they missed on dividend payment in 2006 –OR- Google Finance could be wrong.  Intel is currently paying a quarterly dividend of $0.21 per share.  This equates to a 4.4% yield.  If the stock dropped to $14.00 per share and they keep their dividend constant, then Intel would become a high dividend stock yielding 6%.  That price coincides nicely with my value computations below.


Here is a graphic of the last five years of dividends:


Earning Power: $1.26 average earnings @ 5.25 billion shares

(earnings adjusted for changes in market capitalization)

            EPS                   Net inc.             Adj. EPS            Shares

2006     $0.86                $5,044 M           $0.96               

2007     $1.18                $6,976 M           $1.33

2008     $0.92                $5,292 M           $1.00

2009     $0.77                $4,369 M           $0.83

2010     $2.01                $11,464 M         $2.18

Five year average adjusted EPS = $1.26

Definite buy at or below $10.08 (8 times average EPS; INTC becomes a high dividend stock at $14.00 per share)

Consider buying at or below $15.12 (12 times average EPS)

Consider selling at or above $25.20 (20 times average EPS)

Intel is currently trading at 15.9 times average earnings.  This is not cheap, but it isn’t speculative either.

Balance Sheet:  Excellent


Book value per share: $8.68

Price to book value: 2.31 (good)

Current ratio: 2.23 (over 2.0 is good)

Quick ratio: 1.44 (over 1.0 is good)

Conclusion – Intel (INTC) is a buy below $15.12 and even better below $14.00.  If you own it now, then sell it at a price higher than $25.20.

Disclosure: I don’t own Intel

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Published in: on September 9, 2011 at 1:01 am  Leave a Comment