Contrarian Stock Market Investing News - Featuring Bargain Stocks » Debt Default

It’s June 1930: The ‘Greatest Depression’ Is Just Getting Started

Contrarian Profits — Mon, 13 Jul 2009 11:00:29 +0000

We are now in June 1930, according to trader/author Ron Coby, a friend and neighbor of one of our favorite underground investors Dan Ferris. (Ferris is a member of the Stansberry & Associates Investment Research team and editor of Extreme Value. ) Ron believes stocks are going to plunge – just as they did from June 1930 to July 1932 when the crash that began on October 24 1929 finally bottomed.

This from an email Ron sent Dan on Tuesday after the market closed (hat tip, The S&A Digest ):

It’s over, man. We are now in June 1930… repeat, just like we repeated 1929 in 2008 and repeated the 40 plus percent rally in Nov 1929 to April 1930… Now the real pain begins… The DJIA collapsed 89% over the following 2 years until July 1932 bottom.

We sincerely hope Ron is wrong. But the similarities between the recent sucker’s rally and the Nov 1929 to April 1930 rally are eerie to say the least.

Corporate bond spreads are still pricing in “a very bad economic and financial market scenario,” says David Rosenberg at Gluskin Sheff.

While Baa corporate spreads have narrowed sharply from their Armageddon highs (and perhaps vulnerable near-term to a healthy pullback in risk appetite), at 370bps, they are still pricing in a very bad economic and financial market scenario. Moreover, this yield spread is still wider than at any point during the 2001 or 1990 recessions or the 1998 LTCM/Russian debt default freeze-up. In fact, history suggests that the corporate default rate would have to rise well above 7% for corporate bonds to deliver negative returns with yields as high as they are at around 7¼%. In a -1¼% inflation rate world, this is a hefty 8½% real rate for investors to chew on. Not too shabby. The comparable yield in the U.S. equity market, depending on whether one uses reported or operating P/E multiples on forward or trailing earnings, is a little more than 6½%.

That puts the yield gap between corporate bonds and equities at 200bps. Here at Notes we’re extremely shy of equities right now. In our view corporate bonds are much better bet. As Rosie puts it, “In a nutshell, investment-grade corporate bonds offer some degree of cyclicality (though risk is involved) along with the benefit of capturing a decent yield that is tough to come by these days.”

US consumer credit fell for the fourth straight month in May, according to a recent report by the Fed. This from Addison Wiggin and Ian Mathias at Agora Financial’s 5 Min Forecast.

While we welcome this deleveraging, it still doesn’t seem legit. With unemployment at a 26-year high and the sudden disappearance of easy-money credit, we wonder if this balance sheet restoration is a matter of choice… or if the lowly American consumer is just playing the hand he’s been dealt.

“To be clear, the household and business sector debt reduction is still in its early stages,” adds The Richebacher Letter editor Rob Parenteau, “and has been dwarfed by the massive deleveraging of the financial sector itself as the so-called ‘shadow banking system’ has either collapsed or moved onto the Fed’s balance sheet.”

In other words the recent drop in consumer credit is just “a drop in the bucket”…

Bill Bonner insists that this is a depression, not a recession. And given that he was one of the few commentators who warned of the recent blowup, we don’t doubt him. On Wednesday, Bill (who edits The Daily Reckoning ) gave a speech to an audience of publishers in London. Here’s what he had to say on the nature of the current downturn:

For more than half a century, the driving force of the world economy has been the willingness of English-speaking consumers to go further and further into debt. That permitted businesses to expand sales and profits.

Now, that trend – that lasted longer than the lifetimes of most of the people in this room – is finished. Consumers aren’t going further into debt. Bankers aren’t lending them more money. Their houses aren’t going up in price…so they have nothing to borrow against. It’s over. And now, after working your whole careers in a growing economy… you have to figure out how to survive in a declining one

Will Obama Nationalize U.S. Private Pensions?

Bob Bauman — Mon, 19 Jan 2009 16:05:07 +0000

“It is possible that some brainless members of the U.S. Congress may have introduced a bill that seeks to nationalize pensions, but I hope that it will not be given serious consideration, even by the liberal Democrat majority now in control.”

Earlier today I received an email from a concerned member of the Sovereign Society:

“I just read a rumor that a bill is working its way through the U.S. Congress, that if becomes law, would authorize the federal government to seize all 401k’s and IRA assets. These assets would then be placed in a federally administered plan to provide ‘equal and adequate protection’ of assets for all retirees. This sounds like what recently occurred in Argentina. Have you heard anything about this and is such a scenario possible? If so, then would being offshore prevent a potential seizure?”

I certainly am aware of the situation in Argentina where, last October, President Cristina Kirchner confiscated US$29 billion worth in the country’s ten privately managed pension funds. This was presented as an emergency measure to meet her faltering government’s financing costs that had soared as Argentina’s commodity prices on exports had tumbled and thousands of farmers were on strike.

Double Defaults

This grab of private property was nothing new for Peronista Argentina. In 2001, Argentina defaulted on US$95 billion worth of government debt after a three-year economic meltdown that left Buenos Aires in bankruptcy.

At the time, that was the biggest government debt default in world history; but since then that number looks like chicken feed compared with the trillions in government bailouts of banks and private businesses in the U.S., U.K. Germany, France and elsewhere. This radical government expropriation of private funds only worsened Argentina’s situation and they are once again on the verge of national bankruptcy.

In a breathtaking piece of bravado, President Cristina Kirchner brazenly claimed the grab would “protect” retirees from the global financial crisis, while denying she was trying to “grab the cash” to pay off debt or to finance new programs or projects.

Expert Viewpoint

I turned to Larry C. Grossman, CFP, CIMA, Managing Director, Sovereign International Pension Services (no relation) and a member of our Sovereign Society Council of Experts. Larry specializes in converting American pension plans to offshore venues, which current U.S. law allows.

Here’s Larry’s opinion: “There have been several different academic papers published over the last few months, which have given rise to rumors such as these. At this point in time I am unaware of any such pending legislation.

“It is difficult to sort out fact from fiction and to decide what format it would take if something like this occurred in the U.S. Many of us believe if it does happen, your best way to conserve your assets would be to already have them placed offshore. There is an old saying that ‘bank robbers go to banks because that’s where the money is.’

“I have clients who own non-U.S. real estate in their IRAs and have done so for many many years. I think it would be difficult (although not impossible) for the government to force assets such as these to be repatriated to the U.S. Instead they would probably focus their efforts on grabbing ‘the low hanging fruit.’”

And obviously, that could be billions in existing private pension funds located and administered within the U.S.

History Repeats Itself

Beyond belief? Read American history.

* Within days of taking over the presidency in Mach 1933, President-elect Barack Obama’s hero, President Franklin D. Roosevelt, ordered all Americans to surrender to the government all their gold and gold-backed currency, allowing only small amounts for personal jewelry and dental fillings. In return Americans got devalued paper currency.

* In the last 25 years federal and state police and prosecutors, under the guise of the failed “war on drugs,” have seized billions of dollars worth of real and personal property under the civil forfeiture program. Only 20% of the property owners were ever charged with any crimes, but very few got their cash or property returned.

“The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property“,says the London Telegraph columnist, Ambrose Evans-Pritchard,

“It’s a foretaste of what may happen across the world”.

World Recession An Excuse

It started with subprime mortgage borrowers, moved on to banks and has now progressed to whole countries. Iceland has already thrown in the towel, and Argentina stole its citizens’ pensions. Socialized bailouts and government controls are now the watchword in Washington as well.

Already governments in the U.S., Britain, and Europe are mightily meddling in the markets under the guise of “saving the system”, by taking ownership stakes in banks that rank above the rights of existing bank owners, then telling these banks how much to lend and what they must do with the cash. Ditto for auto and insurance companies.

Anything Can Happen

In response to that email from our Sovereign Society member, I replied that it is possible that some brainless members of the U.S. Congress may have introduced a bill that seeks to nationalize pensions, but I hope that it will not be given serious consideration, even by the liberal Democrat majority now in control.

For one thing, adopting such a law would be a major psychological blow to Americans’ confidence, possibly to the value of the dollar, and to the worldwide credibility of the new Obama government, at a crucial time when financial confidence is low and going lower.

But I served in the U.S. Congress when Democrats were in control and I’ve seen what happens when the Republicans are in charge. Meaning simply; anything can happen!

Source: Will Obama Nationalize U.S. Private Pensions?