Martin Hutchinson (Money Morning):

U.S. Federal Reserve Chairman Ben Bernanke’s latest thesis is that the home mortgage bubble had little to do with record low interest rates, and was actually much more a problem of regulation.

It sounds plausible – until you give it some real thought. After all, I believe that humanity has already tried a system with tight, vigorously enforced regulations, and no price mechanism.

It was called the Soviet Union.

Okay, that was a bit of a cheap shot – to some extent. Bernanke stated that “borrowers chose and were extended mortgages that they could not be expected to service over the longer term.” That appears to make the problem one of regulation: The types of mortgages that banks should be permitted to offer should be limited to ones that borrowers have a reasonable chance of servicing.

In theory this makes sense. However, it is a prime example of what I in the past have referred to as the “Keynesian Bureaucrat Fallacy,” or KBF.

Under the KBF, wise bureaucrats – who, like economist John Maynard Keynes, were presumably educated at Cambridge and steeped in the traditions of the Bloomsbury Group – will decide the appropriate regulations for every sphere of the economy.

They will then enforce them with draconian rigor, forcing the economy to behave in a way that optimizes economic welfare, measured by whatever means the bureaucrats devise. Irrational market-based signals – such as the price mechanism, will be ignored – unless the bureaucrats decide it is safe to take account of them.  . .

Click here for the rest of Mr. Hutchinson’s commentary on Money Morning.

David Fessler (Investment U):

Back in April, I wrote a column detailing the looming train wreck in the commercial real estate market.

It turned out to be a rather controversial piece.

How controversial? You can judge for yourself here in my April column: The Commercial Real Estate Sector: As The Other Shoe Drops – Be Wary of Bank Stocks. It was groundbreaking enough to land me a spot on Glenn Beck’s show on Fox News.

Virtually nobody else was talking about the topic and a number of readers e-mailed to tell me how daft I was for even mentioning it. But I sensed the mess coming a mile away.

Right now, commercial real estate is in the gutter. It’s where the banks were last March. No one wants to touch the sector in any form.

But I think it’s time to jump back in.

And before you think I’ve sucked down a little too much holiday eggnog, hear me out…

A Contrarian Bet Worth $9.5 Billion

I’m in good company with my projection here.

During last February and March, a hedge fund called Appaloosa Management was busy buying up shares of Bank of America (NYSE: BAC) and Citigroup (NYSE: C).

And the guy calling the shots was a man named David Tepper, who runs the fund.

At the time, investors, colleagues and even his friends thought he was nuts – a move akin to lounging on the deck of the Titanic while everyone else was abandons  ship.

But in yet another example of how it’s often wise to take a contrarian investment stance, the bet not only paid off handsomely for Tepper’s firm, but for Tepper personally. Appaloosa is up nearly $7 billion on the trade, while Tepper stands to pocket a very cool $2.5 billion in profit for himself.

Tepper’s no one-hit wonder either…

His track record includes huge payouts for his investors in Korean stocks, Russian debt, junk bonds and commodities over the last decade.

We should all be so astute…

Perhaps we can be, because there’s still time to get in on his next big idea…

A Lonely Voice in a Sea of Pessimism

Tepper is quietly purchasing commercial mortgage-backed securities (CMBS).

His purchases include large chunks of real-estate debt – mostly in the form of bonds, according to the Wall Street Journal.

Most notable among them are huge portions of the debt of two New York City developments – Peter Cooper Village and 666 Fifth Avenue, both high-profile real estate development deals. Tepper believes both are significantly undervalued. . .

Click here for the rest of Mr. Fessler’s article on Investment U.

Bill Bonner (The Daily Reckoning):

The Los Angeles Times tells us that mortgage defaults in the prime category rose in the 3rd quarter. If you are wondering what might happen to housing prices in the US…should the depression continue…you might want to keep an eye on the default rate.

Housing prices are down about 30% nationwide. In some areas, they are down much more. But they had been going up for so long…this downswing still seems like an aberration. Hope has momentum…especially in the housing market. Housing prices rose along with inflation for 100 years. Then, they rose much faster than inflation over the last 10 years, ending in 2007. This leaves people with the impression – false – that housing always goes up over the long run. As we have pointed out many times in these Daily Reckonings, housing prices in the nicest neighborhood of Baltimore, where we have our offices, hit their highs, in real terms, in the 1920s. They’ve been going down ever since. Even after the big run up to 2007, they were still below their ’20s peaks. That’s a bear market in real estate prices that has lasted, so far, 80 years.

We don’ t have reliable numbers – in fact, we don’t even have unreliable numbers – but our guess is that property prices in central Rome topped out during the reign of Trajan…or maybe even Augustus. They must have gone down for the next 1700 years, because as late as the 1800s, the most precious real estate of the Roman Empire…around the forum…was being used as a goat pasture. That’s still better than say Troy or Ctesiphon – cities that were abandoned and forgotten completely.

Real estate doesn’t go up over the long run. Sometimes it goes down…often for a very, very long time. . .

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning.

Bill Bonner (The Daily Reckoning):

We reported that the US government would need to roll over $2.5 trillion worth of debt next year. We probably erred. The number was right, but it was meant to be over the next two years. During the next two years also, worldwide, banks need to roll over $7 trillion. Whether it is over one year or two years, we’re talking big money.

Most people who bother to think about it are coming to the conclusion that this is very inflationary…and very bullish for gold. They think the Fed will need to “monetize the debt” directly, or indirectly. One way or another, they say, the central bank will have to increase the volume of money so that the government can finance its deficits.

Paul Krugman, Nobel Prize winner in economics, suggested that the Fed add another $2 trillion to the nation’s monetary base, partly to accommodate federal borrowing…and, he believes, to stimulate employment.

This idea is widespread. Richard Koo, one of the few economists to understand the Japanese depression and what awaits the US, thinks along similar lines. The US economy is going into a depression, like Japan; the government must spend huge amounts of money in order to keep GDP from falling.

Japan’s top man shocked the nation last week when he announced the largest budget deficit ever. The government will spend about $1 trillion – a new record. And it will collect less than half that much in taxes. Meaning, most of what the Japanese government spends is borrowed – something the Japanese haven’t done since the days when Americans were dropping bombs on them.

The Japanese government is doing what it should do, says Koo. It is replacing missing private spending with public spending. So doing, it has avoided a drop in GDP and employment. Throughout its 20 year slump, Japan’s GDP has never fallen below the peak set in 1989. Nor has unemployment ever risen above 6%. Bravo!

Bravo?

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning.

Bill Bonner (The Daily Reckoning):

No, dear reader…it’s not that simple. It never is.

That’s true of almost everything….

The bond market has begun to sell off. The big question is: what does it mean?

Is it A sell-off? Or THE sell-off?

We’ve done well with our simple trade for the last ten years. We bought gold. We sold stocks. But what’s ahead?

Will that be the best trade for the NEXT 10 years too? Or is it time to sell bonds, rather than stocks?

Hmmm….

Stocks have lost value over the last ten years. US stocks were about the worst thing you could own over that period. But what are the odds that they’ll be the worst thing you can own over the NEXT decade too?

Who knows… Historically, it would be unprecedented for stocks to have negative returns over a second 10-year term. That doesn’t mean it won’t happen. But is it a bet worthy of the Trade of the Decade?

Don’t know.

What we’re looking for are the extremes. We want to buy things that have been so beaten down for such a long time that they almost have to go up. And we want to sell things that have been going up for so long that people are sure they’re going up forever.

In 1999, gold was perfect for the buy side. It had been going down for 20 years…while other asset classes and money substitutes soared. On the sell side, stocks were perfect. The Dow had been going up since 1982…and prices had reached levels that could only be sustained by delusions and hallucinations.

But what now?

We have a couple more days to think about it… Stay tuned.

What else?

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning.

Bill Bonner (The Daily Reckoning, UK):

The financial world is slowing down. Analysts… economists… and blabbermouths are getting ready for the holidays. The news flow is quieting. The noise is abating.

So, let’s talk about gold. But first… a note about the little train that couldn’t.

The Eurostar connects London and Paris. Last Friday, several trains entered the tunnel and stopped. According to the press reports, the weather was unusually cold in France and unusually warm in the tunnel. This caused some sort of malfunction, stranding 2,000 travellers under the dark water and thousands more on both sides of the channel.

It was a blow to France’s pride; the French consider their train technology to be the best in the world. Yesterday, President Sarkozy called the head of the Eurostar and chewed him up… and this morning, the trains were meant to be running again.

We rose at 5am to rush to the Gare du Nord, so we could get the 6:43 to London.

“You’re going to take the Eurostar,” said the taxi driver with a laugh. “Well… good luck…”

When we got there, it was obvious something was wrong. Passengers weren’t lining up in an orderly fashion. Instead, hundreds of travellers who had been waiting three days for a train formed a miserable, complaining mob.

We were just trying to figure out what was going on when a phalanx of police came down the steps, followed by another group of Eurostar staff members. They wandered around… formed the passengers into lines… answered questions and then, nothing happened. We waited…

And waited…

“This is intolerable,” one French passenger yelled at a young woman in uniform.

“You people have no respect for your customers. We’ve been waiting days to get back to our families… and you treat us like cattle. It wasn’t our fault the trains didn’t run as they were supposed to. It was your fault. And you should have done a better job of dealing with the trouble you caused.”

A murmur of approval went up from the crowd. The clerk walked away. We waited. Finally, after half an hour, your editor gave up. His business in London could wait. We walked over to our office, only about 20 minutes away, on foot.

Now… back to gold…

The price fell $15 yesterday to just under $1,100. We expected a correction in the gold market. But we thought it would come along with a correction in the stock market. Stocks rose 85 points on the Dow yesterday.

We take this as a warning: something is going on that we don’t understand. That said, there’s a lot going on that we don’t understand.

But the broad patterns generally make sense. Boom was followed by bust. As dear readers know, the force of a correction is equal and opposite to the deception that preceded it.

The deception of the Bubble Era being exceptional, the correction would be exceptional too – even under the best of circumstances.

But these are not the best of circumstances. Because several other things are happening… things that need to be reckoned with too.

• The US is losing its privileged place in the world. Americans now compete with many other people in many other places for the world’s resources – including its savings.

• The international monetary system, an experimental system built of paper dollars, may be falling apart.

• The days of cheap and bountiful energy are over.

• Governments are going broke. State governments. National governments. In Europe. In the Middle East. And in America.

• The engine of economic growth – Americans’ willingness to go into debt in order to consume more and more of the world’s output – has gone into reverse.

• And, governments are meddling on an unprecedented scale… delaying and avoiding necessary adjustments, possibly turning an ordinary depression into a Great Depression… or even a Much Greater Depression.

These are not small challenges. Any one of them would be a worthy crisis on its own. Put them together and you have the makings of a catastrophe.

What will happen? Don’t know. Wish we did.

A series of mini-disasters? Or one big planet-wide blow-up?

Or, are the authorities so smart that they can engineer trouble-free solutions to these challenges?

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK Edition.

Olivier Garrett (Casey Research):

Ben Bernanke is a dubious choice to be named “Person of the Year” by Time magazine.  While Time’s Managing Editor Richard Stengel credits him with recognizing early and reacting appropriately to the ongoing financial crisis, in reality, he was wrong time and again with both his predictions and his remedies. Just remember these gems:

• On July 1, 2005, Bernanke stated without hesitation that we were not experiencing a housing bubble: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”
• November 2005, on derivatives: “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” And “the Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”
• February 15, 2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
• February 2008: “I expect there will be some failures of smaller banks” (Bear Stearns collapsed a couple of weeks later).
• But then again, I guess in regards to his nomination we are talking about achievements in 2009. That was the year Bernanke said, “Currently, we don’t think [the unemployment rate] will get to 10 percent.”

This is the same chairman of the Federal Reserve who told us that Fannie and Freddie were “adequately capitalized” and “in no danger of failing.”  

Unfortunately, he has not just been wrong about housing, unemployment, banking, and derivatives — his policies have directly contributed to all of the problems we now face.

High unemployment and the weak dollar threaten to further undermine our economy, yet his policy is to just keep borrowing. The massive debt his policies have foisted on the American taxpayer is weakening the U.S.’s position as global economic leader and hurting already tenuous relations with foreign governments. Bernanke has supported the policies of Greenspan and our current and previous administrations – the very policies that got us into this mess.  He has supported the leveraging of the American economy to rescue companies long past saving and the  borrowing of billions from foreign governments to line the pockets of corrupt investment bankers. 

I could recommend a few alternative names for runner-up, if Time’s criteria are really as dubious as they appear:

• Lloyd Blankfein from Goldman Sachs for robbing taxpayers legally
• Rick Wagoner of GM for taking the world’s largest car maker to bankruptcy in a quarter-century
• Tim Geithner for ensuring that all of our bankers prospered during the worst financial crisis since the ‘30s
• Tiger Woods for providing the nation with great dinner conversations and helping to spur tabloid sales.

Bernanke is insistent on using inflation to make our personal debts seem small, all the while setting the country up for a much larger disaster long term. Bernanke is borrowing from Peter to pay Paul… and robbing taxpayers to pay Peter. 

As you may have noticed, the government will not save you from the reverberations of a declining U.S. economy. You’ll have to take matters into your own hands… and no one is better at pointing the way than the editors of The Casey Report. No matter how dire the economic trend, double- or triple-digit gains within 12 to 24 months are easy if you discover the right opportunities to profit. Find out more by clicking here.

Bill Bonner (The Daily Reckoning, UK):

Leading economists have a one-stop solution for just about everything: stimulate consumer spending.

When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.

To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn’t enough oil in the world to allow US-style consumption for everyone.

Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And last week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits… then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: “Markets force Greek promise to slash deficit,” said its page one headline.

If markets could force the Greeks to trim their deficit – about 13% of GDP… not far from the US level – could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can’t be met. They have limits on available resources, including the most basic ones – land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn’t necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won’t give you any?

But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies… and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.

Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973… adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.

Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn’t one of them.

Now he’s up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they’re suspicious of the dollar.

Their economies are growing faster…

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK Edition.

Kent Lucas (Taipan Daily):

I’m sure many of you know all too well about the problem of insomnia. It affects four in 10 adults, according to the European Journal of Psychiatry. And a 2009 National Sleep Foundation study indicated that 67% of those surveyed experienced a sleeping problem at least a few days a week compared to only 13% in 1991.

I’m sure the wildly swinging stock market – down 50%, up 60% from the lows, etc. – hasn’t helped. Even as times get increasingly hectic, though, you want to make sure you’re getting enough quality sleep. It’s proven to help you function better during the day (and live longer).

The tie-in is that, when it comes to long-term investing at least, I’m here to help you sleep better at night. So today we’ll look at the importance of financial strength when searching for high-quality investment ideas.

The Financial Fortress

To that end, my game plan is investing in Financial Fortresses – rock-solid companies that can withstand economic fallout (and occasional serious beat downs from Mr. Market. (Picture a Sherman tank that can withstand serious artillery attack.)

There are many high-quality companies in outstanding financial position because of the many reasons, including having a “very wide economic moat,” that I previously discussed.

From my perspective, a Financial Fortress is typically an investment-grade company that either has

a) a great balance sheet

b) large cash flow generating capabilities, and/or

c) impressive asset efficiency

To give you some idea of what I mean, here is a sample list of companies that are cash-rich or otherwise don’t carry any long-term debt.

Fiscal Prudence

Companies with great balance sheets have low long-term debt levels or even no debt at all (with actual net cash on their books). This creates a solid cushion, enabling such companies to weather tough economic times or temporary challenges to the underlying business. Operating with cash on hand and little or no debt also allows for tremendous financial, strategic and operational flexibility to fuel growth and generate solid shareholder returns. And for our purposes of protecting and creating wealth, a company with a superior financial position increases the odds of generating above-market returns.

Some companies are just very conservative and refuse to take on significant amounts of debt. Among corporate financial theorists, there is plenty of research and debate in regard to potential optimal levels of debt, equity and so on.

For many if not most companies, taking on a certain amount of debt makes sense. Companies can manage what is known as their “capital structure” by issuing debt or raising new funds through equity offerings (issuing more stock) during a strong market period. Or, companies can be so profitable that they generate ample “free cash flow” from their day-to-day operations.

Click here for the rest of Mr. Lucas’ article on Taipan Daily.

Bill Bonner (The Daily Reckoning, UK):

Gold rose $15 yesterday. What to make of it?

Perhaps it was because Ben Bernanke’s extended his “extended period” pledge?

He said, in effect, if this economy doesn’t come out of its slump, it won’t be his fault. He’ll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It’s a bad theory, but it’s all he has. And it tells him that you fight a depression with loose money.

So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it… or until the depression ends… whichever comes sooner.

That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can’t think of anything better to do with their money than to give it to the government – in return for nothing. The last auction produced a yield of zero on one-month loans.

We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:

“This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too.

“Whenever the ten-year performance goes close to zero, the next few years tend to be very good for stock market investors.

“In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too.”

He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market.

We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the ‘30s, when in August ‘39 stocks had returned MINUS 4.68% for the previous ten years.

The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.

The message seems simple enough. When the market turns down sharply… expect a sharp turn-up to follow. But studying the chart more carefully, we see two things.

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning, UK Edition.