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    Daily Digest – Jan 24

    by Davos

    Saturday, January 24, 2009, 12:18 AM

  • Unemployment Graphic (Hat Tip Luke Harris)
  • Financial Coup d’Etat & Your 401(k) (Hat Tip DamTheMatrix)
  • Silver and the Chinese 
  • Is America Broke Part 3
  • Risky, Ill-Timed Land Deals Hit Calpers
  • Is Internet Advertising Revenue Falling As Fast As Print?
  • Rail Freight Traffic Slides During 2nd Week of 2009 
  • Wall Street Paychecks May Wither
  • From "Crowding Out", to "Running Away"
  • Financial Crisis Visual (Hat Tip Luke Harris)
  • GE profit drops 46 pct as finance unit struggles
  • Tarp by State

Economy

Unemployment Graphic (Hat Tip Luke Harris)

Financial Coup d’Etat & Your 401(k) (Hat Tip DamTheMatrix)

In 1997, I had approximately $500,000 of assets sitting in a 401(k) at T. Rowe Price. The funds represented a portion of the money I saved while working on Wall Street. After I left the Bush Administration, I used these funds, along with the proceeds of the sale of my house, to start a company called the Hamilton Securities Group.

It was not long before Hamilton Securities was successful and repaid my 401(k) the funds that had given it life.

A few years later, the federal loan sale program for which Hamilton served as financial advisor was the target of a highly politicized "investigation" by the federal government. A new Housing Secretary was eager to assist the Federal Reserve and Treasury in engineering a housing bubble: honest people had to go.

After a year of beating back false allegations, the government put my 401(k) under audit. My company’s chief financial officer and I looked at each other and said, "Uh-oh." Somebody was trying to prevent me from borrowing the money.

Sure enough, a few months later the U.S. Department of Housing and Urban Development (HUD) created a pretext to withhold monies owed to Hamilton and demanded several hundred thousand dollars of contract close-outs. Our bank received anonymous tips which persuaded them to pull our credit line. Our insurance company breached its obligation to fund our attorneys. And (surprise, surprise) our auditors said that the audit meant I could not arrange a loan from my 401(k) to Hamilton Securities. We were to learn in time that the auditors were quite dirty in the affair.

Fearless by nature, I closed out my 401(k) without blinking an eye, paid $225,000 in taxes and penalties, and loaned the remaining money to Hamilton Securities for contract compliance and legal expenses. I hired an excellent attorney on contingency and sued the federal government for the monies owed.

And we eventually won.

The moral of the story was that if you stand in the way of the largest housing bubble and pump and dump in history, it pays to have a nest egg.

After winning the case, my accountant hoped that some or all of the settlement would repay Hamilton’s legal expenses. Thrilled at the possibility, she said, "The first thing we’ll do is set up a new 401(k)."

"No," I said. "I will never have an IRA or 401(k) again." To this day, I never have. Fool me once, shame on you; fool me twice, shame on me.

I assumed that my situation was unique – I hold highly visible positions – and that most people had nothing to worry about. There are numerous benefits to building savings in a 401(k) or IRA, although many of these plans are restricted in their investment choices. With persistence, someone can usually make such investment vehicles work for them. So, I had never considered the possibility of overt or covert confiscation of IRAs and 401(k)s until I read one of Franklin Sanders‘ comments about gold confiscation:

"Finally, gold and silver today don’t represent the huge pool of wealth they represented in 1933. [Solari note: the US government confiscated gold in 1933.] Why risk wide-spread disobedience to steal such a tiny plum? If the government wants to steal a big pool of wealth, they’ll snatch your pension funds and IRAs, not your gold."

 

Silver and the Chinese 

Bloomberg put out some interesting news regarding the silver market stating that refined silver output in China has peaked and it could stop growing because less will be produced as a result of halting of mine expansions, higher costs for production and lower prices received for the metal itself.

Zhou Juqiu, chairman of the gold and silver division at the China Non-ferrous Metals Industry Association, said in an interview. Output may rise to nearly 10,000 metric tons this year from 9,092 tons in 2007, he said. Silver prices have more than halved from an 18- year high in March after hedge funds and speculative investors sold commodities to raise cash, while recession fears reduced demand for industrial use of the precious metal.

China’s annual silver output growth already slowed to 10 percent last year compared with an average 30 percent between 2001 and 2006, Zhou said. `There won’t be much growth going forward” in the next few months, Zhou said. While producers are still “doing ok,” they are faced with an increasingly difficult environment, including tighter financing and reduced export market, he said.

In July China revoked the export rebates on silver to control use of limited natural resources. This will force China to rely on imports to fill the needs for the precious metal. "China has the world’s biggest potential for silver consumption,” said Li Xiaoni, vice president of China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters.

The country’s consumption already accounts for 70 percent of the global total for industrial use, she said. China’s consumption of silver has grown by over 10 percent recently reaching 4,000 tons last year, Zhou said. China has 26,000 tons of silver reserves, about 9.6 percent of the global total, and the fifth biggest in the world, he said. About 60 percent to 70 percent of China’s silver is the byproduct of smelting for lead, zinc and copper, he said.

Is America Broke Part 3 

This is the third and final paper in the Is America Broke series. In the first two articles, several of the contributing factors to today’s financial crisis were discussed. Several important questions were asked: 

Why is the most advanced economy in the world buckling at the knees, acting like a punch weary fighter? How did the largest creditor nation on earth become the largest debtor nation? Are soaring debt levels consummate with wealth creation or a diminishing standard of living?

In the process of finding answers to these questions, we were led to the root cause of our economic problems: the monetary system itself, and more specifically – the unit of money of that system.

Our present day unit of money is the Federal Reserve Note or dollar bill. A dollar bill is not, however, the same as the dollar of the Constitution. The first is a piece of paper; the latter a weight of silver.

A system of paper fiat debt-money is diametrically opposed to the monetary system of gold and silver coin mandated by the Constitution. Paper money is unsound and unconstitutional.

Risky, Ill-Timed Land Deals Hit Calpers

 

At the height of the property bubble, California’s giant pension fund, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it’s one of the biggest owners of undeveloped residential land in America.

Partly because of these investments, California Public Employees’ Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception. Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.

The problems come at a time of uncertainty for the nation’s largest public pension fund, which has been …

Risky, Ill-Timed Land Deals Hit Calpers (Chart)

Is Internet Advertising Revenue Falling As Fast As Print? 

According to MINOnline, advertising pages in major monthly magazines are down 20% for issues from the first two months of this year. One of the most popular weeklies, The Economist, suffered ad pages losses of almost 30% through the end of last week.

Newspaper advertising revenue at a number of the largest chains fell by 20% last year, and early evidence indicates that ad sales at dailies at companies such as Gannett (GCI) and McClatchy (MNI) continue to fall at a rate at least that sharp this year.

Now there is evidence that online display advertising at major websites is not doing much better. The theory has been that "new media" would outperform print because it is a more efficient and targeted way to reach selected audiences. When a recession is deep enough, that may not matter.

Several online media properties are saying that their advertising revenue is running down between 20% and 30% compared with the first quarter of last year. An analysis of large internet websites shows that this is probably true.

Rail Freight Traffic Slides During 2nd Week of 2009 

WASHINGTON, January 22, 2009 – The economic slowdown continued to affect U.S. railroads as freight volume declined during the second week of 2009 in comparison with same week last year, the Association of American Railroads (AAR) reported today. 

Carload freight totaled 267,063 cars, down 17.9 percent from 2008, with loadings down 13.2 percent in the West and 24.4 percent in the East. Intermodal volume of 199,117 trailers or containers was off 13.7 percent from last year, with container volume falling 10.2 percent and trailer volume dipping 27.0 percent. Total volume was estimated at 28.3 billion ton-miles, off 16.8 percent from 2008.

All nineteen carload commodity groups were off last week in comparison with last year.

For the first two weeks of 2009, U.S. railroads reported cumulative volume of 538,534 carloads, down 17.4 percent from 2008; 403,220 trailers or containers, down 14.0 percent; and total volume of an estimated 57.1 billion ton-miles, down 16.5 percent.

Wall Street Paychecks May Wither

It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge blunders that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.

So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.

Are financial workers overpaid? And if so, will it continue?

The answers, according to a new study by two economists, are yes, they are overpaid, and no, it will not last.

"Wages in finance were excessively high around 1930 and from the mid 1990s until 2006," wrote Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, in a National Bureau of Economic Research working paper released this week, "Wages and Human Capital in the U.S. Financial Industry, 1909-2006."

They forecast that up to half the wage differential observed in recent years "can be expected to disappear. 

From "Crowding Out", to "Running Away"

While I don’t agree with the entire piece, the following portion of Hoisington Investment Management Company’s The Great Experiment caught my attention :

If there is a desire to increase government spending, the federal government must either increase taxes on the far larger private sector, an option that would presumably be precluded under the present circumstances, or borrow funds in the financial markets that would have gone to the private sector. At this point we have to ask which sector has the better track record of growing the economic pie-private or government expenditures? The private sector has demonstrated the greater flexibility and creativity to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector’s ability to grow.

In other words, the attractiveness of Treasuries has increased relative to U.S. equities and corporate debt. As of 2007 (the latest data available), Foreign investors owned $9.1 Trillion in Long Term (i.e. more than 1 year) U.S. Securities, split almost evenly between equities, private debt, and public (Treasury / Agency) debt. If the blue portion of the pie is growing, it is coming at the expense of the red, which explains part of the pressure on corporate spreads and equity prices.

 

Financial Crisis Visual (Hat Tip Like Harris)

GE profit drops 46 pct as finance unit struggles

WASHINGTON (AP) — In a discouraging report for the American economy, General Electric Co. posted a 46 percent drop in fourth-quarter earnings on Friday and warned of a tough environment this year as it struggles with its ailing finance business.

The results cap a difficult 2008 for one of the world’s largest industrial companies and point to risks ahead.

GE’s businesses touch on most sectors of an economy mired in a recession, from medical equipment and real estate to TV stations. And its longtime profit engine, GE Capital, has seen profits sapped as businesses and consumers limit borrowing or default.

"The environment in total is very tough," GE’s Chief Executive Jeff Immelt told analysts on an investor conference call.

 

Tarp by State

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