Forecasts & Trends : Credit Crisis

On the Economy & Obama's Trillions

Gary D. Halbert — Tue, 08 Sep 2009 20:33:00 GMT

IN THIS ISSUE:

The Economy - More Signs of Recovery
Is the Recession & Credit Crisis Over?
Obama Adds $2 Trillion to Debt Forecast
Economic Assumptions Still Too Optimistic
What in the World Are They Thinking?
Do They Want Control Even If It Ruins The Economy?

Introduction

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office's (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which estimated that the national debt will more than double over that 11-year period - not including over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over the next decade.

The White House Office of Management & Budget (OMB), which is partisan, runs budget deficit projections similar to those of the CBO. The OMB's deficit projections over the same period, 2009-2019, showed the national debt increasing over $2 trillion less than the CBO's forecast of $11.11 trillion. However, on Friday, August 21, the White House quietly announced that the OMB had revised upward its deficit projections to fall in line with the CBO's. So, it's official.

The only good news on the deficit front is that both the CBO and the OMB recently revised downward the fiscal 2009 budget deficit, which closes out at the end of September, from the earlier reported $1.8+ trillion to around "only" $1.6 trillion. Time to break out the bubbly, right? Wrong! We will look at the latest deficit projections as we go along, but the problem is still the same; Obama seems intent on spending this country into financial ruin.

But first, there is more good news on the economic front. More and more forecasters now believe that GDP has moved into positive territory in the 3Q, and perhaps it has. Unfortunately, we don't get our first 3Q GDP estimate until the end of October. The latest GDP estimate for the 2Q was unchanged at -1.0%, which was better than expected. I will cover the latest encouraging (and not so encouraging) economic news just below.

The Economy - More Signs of Recovery

We have seen considerably more positive signs than negative over the last month. Let's begin with the ISM manufacturing index which rose sharply to 52.9 in August, up from 43.4 in July. It is the highest reading since June 2007. A reading above 50 in the ISM index indicates that the economy is recovering. The ISM "new orders" index jumped 9.6% in August to 64.9, which confirms that inventory rebuilding is intensifying, albeit from very depressed levels.

Durable goods orders jumped 4.9% in July (latest data available) following -1.3% in June. Industrial production increased 0.5% in the same period. The factory operating rate also increased modestly in July. Construction spending, however, was still down slightly in July.

The Index of Leading Economic Indicators rose for the fourth consecutive month in July (latest data available) with a rise of 0.6% following a gain of 0.8% in June. Four consecutive up months in the LEI is quite encouraging, indicating that the worst of the recession is likely behind us, and the economy may move into positive territory before year-end.

The Consumer Confidence Index bounced back in August to 54.1 versus 47.4 in July. After rising sharply in the spring, the Index drifted lower in June and July so the latest recovery was welcomed. The University of Michigan Consumer Sentiment Index also closed out higher at the end of August.

Unfortunately, the rise in consumer confidence that began in the spring has not translated into significantly higher consumer spending. Retail sales in July fell 0.1%. Personal consumption expenditures, another measure of consumer spending, were up only 0.2% in July. Most Americans are still very concerned about the economy, and many are choosing to save rather than spend. The Commerce Department reports that the personal savings rate rose to 5% of disposable income in the 2Q, the highest rate in over a decade.

On the housing front, there was some good news in the last month. Pending home sales rose 3.2% in July following a gain of 3.6% in June. Actual sales of existing homes rose 7.2% in July to an annual rate of 5.24 million units. Sales of new homes rose 9.6% in July, the largest monthly gain since February 2005. Much of the increase in home sales in recent months is attributed to the up to $8,000 in tax incentives for first-time home buyers; yet no one knows what will happen when this stimulus program ends later this year.

The Labor Department announced last Friday that the US unemployment rate jumped to 9.7% in August, up from 9.4% in July, and above pre-report expectations. In August, the official number of unemployed persons increased by 216,000. The Labor Dept. also reported that there are now 14.9 million unemployed Americans, and this number is likely headed even higher in the months ahead.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Is the Recession & Credit Crisis Over?

In the 30 years that I have been writing about the markets and the economy, a "recession" has consistently been defined as two or more consecutive quarters of negative growth in GDP (or GNP back in the old days). Likewise, two consecutive positive quarters meant that the recession was over. Be that as it may, if the initial GDP report for the 3Q is even mildly positive (which we won't get until the end of October), you're going to hear virtually everyone declare that the recession is over - whether or not that proves to be the case.

While I remain a bit skeptical, most of my trusted sources believe at this point that 3Q GDP will be at least mildly positive, and that the 4Q will be as well, in large part due to inventory rebuilding. But most of these same sources are not predicting a strong recovery in the economy. Some believe that there is still a real chance that we will slip back into recession in late 2010 or 2011, especially if consumers continue to save rather than spend.

As for the credit crisis, I think it is fair to say that it is no longer a crisis. But as anyone who is trying to get credit for a business knows, the banks are still not lending remotely as they were before the subprime blowup occurred. New lines of credit are few and far between. Many banks still have too many bad loans on their books, so they're not looking for new ones.

According to the FDIC, 84 US banks have failed so far in 2009, a record pace. So while it may be safe to say that the credit "crisis" is over, we are still far from being out of the woods. There are now 416 banks on the FDIC's "problem list" (up from 305 in March), so there will continue to be multiple bank failures every month for some time to come.

Then there's the 800-pound gorilla in the room - the Fed. At some point, the Fed will have to unload the $2+ trillion in questionable securities and toxic assets on its balance sheet. The Fed can't continue to print money ("quantitative easing") indefinitely; likewise, it will have to shrink the money supply at some point; and finally, short and medium-term interest rates will have to be allowed to rise somewhere down the road, especially if the economy rebounds.

Obviously, no one short of Ben Bernanke knows when this will happen. My best sources believe that because of the deflationary forces created by deleveraging, the Fed has at least a year to maintain its current stimulative policies without risking higher inflation. Similarly, they believe the Fed can wait a year or so before having to begin unloading assets and trim its balance sheet.

Virtually, everyone I read in the financial/investment world agrees that the Fed faces a daunting challenge when the time comes to unload these assets. This problem, above all, will continue to hold the threat of a double-dip recession over the economy and the markets. We all need to keep this in mind even if the economy goes positive for a few quarters.

Obama Adds $2 Trillion to Debt Forecast

2009	$1.845	trillion	2015	$785	billion
2010	$1.379	trillion	2016	$895	billion
2011	$970	billion	2017	$945	billion
2012	$658	billion	2018	$1.023	trillion
2013	$672	billion	2019	$1.189	trillion
2014	$749	billion

TOTAL $11.11 Trillion

As noted in the Introduction, both the CBO and the White House Office of Management & Budget (OMB) recently reduced the budget deficit forecast for fiscal 2009 from the $1.845 trillion noted in the table above to apprx. $1.6 trillion. So, the $11.11 trillion shown above would now be reduced to apprx. $10.87 trillion (if the latest projections prove to be correct).

Note that this astronomical amount does not include over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over next decade as the Baby Boomers retire. Nor does it include the existing national debt of $11.7 trillion. The $10.87 trillion is merely the sum of annual budget deficits over the 11 years from 2009 to 2019.

Given that September is the end of fiscal 2009, the talk is now focused on record budget deficits for the 10 years from 2010 to 2019. Never mind that the 2009 deficit will be apprx. $1.6 trillion, almost four times larger than our previous worst deficit in history, which was $438 billion in fiscal 2008 under President Bush.

If you take out the $1.845 trillion 2009 deficit from the table above, the CBO deficit estimate for 2010-2019 is $9.02 trillion. This is $9 trillion that we will add to the national debt over the next 10 years, based on Obama's budget projections. Yet for months now, the Obama administration has taken flack because its own OMB has maintained that the 2010-2019 deficits would only total apprx. $7 trillion. But that has recently changed.

Now if you're the President of the United States, and you have some news that is not flattering to release to the public (especially in a recession), you might decide to quietly release that news at the end of the day on a Friday, and hope that it doesn't get much play on the weekend news shows. That is exactly what happened on Friday, August 21.

At the end of the day on Friday, August 21, a senior White House official announced that the Office of Management & Budget had revised its deficit forecasts for 2010-2019 from $7 trillion to apprx. $9 trillion. At long last, that puts Obama's forecast in line with the CBO's forecast.

Obama Administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama's budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and revised the 10-year tally of deficits to $9.05 trillion.

Some in the media welcomed the presumably more accurate deficit forecast; some even went so far as to note that such huge spending will be just fine, such as liberal commentator Paul Krugman of the New York Times. Others, however, were quite critical and seriously questioned how the Obama Administration could have been off by $2 trillion in its forecast.

The conservative Weekly Standard published a scathing article on August 31. Here are some excerpts:

"What's $2 Trillion Among Friends?

$2,000,000,000,000. That's the amount by which the Obama administration raised its ten-year estimate of the nation's budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama's budget director, is ‘higher than desirable'. He might have added that the administration's critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There's worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of [carbon] emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds ‘deeply alarming'.

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the [national] debt will be equal to 76 percent of the [projected] value of the nation's output of goods and services, almost double the 41 percent when Obama took control of the nation's finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others."

Economic Assumptions Still Too Optimistic

Warren Buffet is absolutely correct. Whether it's $7 trillion or $9 trillion, it's way too much and unsustainable. Over the next five years alone, 2010-2014, the debt swells by $4.5 trillion. In fact, these projections could actually be too low based on the economic forecasts used in the projections. I should point out that this is not just an Obama phenomenon. White House budgets, whoever was president, have been laced with optimism, and no president has forecast a recession in these 10-year projections.

(By the way, all presidential administrations produce these 10-year forecasts on spending, revenues and the budget deficits/surpluses, even though they won't be in office 10 years from now.)

Consider the latest OMB projections for growth in GDP in the next several years in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms; the economy has not seen such a period of growth since the 1960s.

And we can almost be assured of at least one more recession, if not two, over the next 10 years, what with the government running massive deficits every single year. Remember, the Fed will have to unload some $2 trillion in troubled assets at some point in the next few years. And, most forecasters agree that at some point, foreigners are going to curtail US dollar purchases, which will likely drive interest rates higher, at the least, or a currency crisis at the worst.

Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the Obama administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019. While it is true that inflation is declining now, thanks largely to the big drop in energy prices over the last year, we are almost certain to see higher inflation down the road.

What in the World Are They Thinking?

Most Americans that keep up with the economy and rising government spending, even remotely, are very alarmed about the exploding debt that President Obama has proposed for the next decade. Many of us wonder, what in the world could they be thinking? Do they want to purposely wreck the US economy? Frankly, I'm beginning to think so, as I will discuss later on.

Here is a snapshot of how many liberals on the left think about the perpetual rise in government spending and exploding deficits over the next decade. What follows is an August 23 editorial in the New York Times by liberal commentator Paul Krugman. He boldly attempts to explain why Obama's massive spending and deficits won't be a problem. He is wrong, of course, and I have inserted many bracketed words to help his column be more readable. I will elaborate afterward:

"How big is $9 trillion?

There's been some hysteria [no kidding] about the [Obama] administration's new estimate that the cumulative deficit will be $9 trillion over the next decade. Don't get me wrong: this is bad. But it's being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn't. [really?]

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion [annually]. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we're talking about adding debt that's equal to around 40% of GDP [this figure is bogus - see comments below].

Right now, even if we do run these [trillion dollar annual] deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don't change the basic picture.)

Again, the debt outlook is bad. But we're not looking at something inconceivable, impossible to deal with; we're looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with."

Wow! So record trillion dollar deficits don't matter, Mr. Krugman? There are so many ways to debunk this article, I almost don't know where to start. Let's first look at Krugman's most egregious misrepresentation. In the second paragraph, he states that the $9 trillion in new debt will be only 40% of GDP by 2019. What he fails to note is that we already have $11.7 trillion in national debt today. If we add another $9 trillion, the debt will be $20.7 trillion - or 94% of GDP - by 2019!! Nice try, Mr. Krugman.

Second, it's a lame attempt to compare the economy today with the period just after World War II. We had the most robust economic growth in history just after WWII when we were rebuilding Europe, veterans were buying homes, durable goods, cars, etc. as never before and our manufactured goods faced very little foreign competition. May I remind you, Mr. Krugman, that we are not in that position today!

Third, why should we all just assume that the US economy will average 2.5% annual growth over the next 10 years, despite doubling the national debt, just because it is some historical average? As discussed earlier, we will almost certainly see another recession in the next decade, as foreign buyers of our massive debt may require higher interest rates or dump the US dollar.

Do you honestly believe the US economy will grow by 2.5% annually for the next 10 years when consumer spending is stagnant and Americans are increasing savings at the highest rate in over a decade? We've just been through the worst financial crisis since the Great Depression, and we are very likely looking at several years of below-trend economic growth. On top of that, if we spend the $9 trillion, taxes will have to go up on almost all Americans at some point, which is also bad for the economy.

Like your liberal cronies, you make these assumptions and leave out certain facts to justify your belief that bigger government and higher taxes are the answer to all of our problems. Mr. Krugman, take a look at Social Security, Medicare and Medicaid - and more recently President Bush's prescription drug program. Give me one example of how these government-run programs have been anything but a fiscal disaster. You can't.

Finally, Mr. Krugman (in case you happen to read this), let me say that I enjoy reading your columns and watching you on the TV talk shows. You give me insight and understanding as to the thinking of those on the far left.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Do They Want Control Even If It Ruins The Economy?

As noted earlier, I have thought about this question for many years. Why do the liberals want the government to control most everything in the economy and our lives? While members of Congress have the best healthcare in the world, they will have dozens of family members and friends and countless colleagues that will be subject to the House healthcare bill, if it is passed. So why are they so hell-bent on passing it?

The answer can only come down to two questions. Question #1: Do they really believe that their proposed national heathcare program is the very best we can offer the American people? And if so, why doesn't Congress adopt it for themselves? Or Question #2: Is this really just a massive power grab that puts the government in control of our healthcare and our lives?

President Obama would like us to believe that nothing will change if healthcare reform is passed - that if you like your current insurance plan, you can keep it. But that is patently false and abundantly clear if you read the onerous House healthcare bill, or even just the highlights that are readily available on the Internet. If they ram this down our throats, I firmly believe that the quality of our healthcare will suffer and the costs will far exceed any estimates being put forth by President Obama and the Democrats.

At the end of the day, I have to conclude that nationalizing healthcare (one-sixth of the US economy) is nothing more than a giant power grab by the liberals. In addition, if our government racks up $10+ trillion in cumulative deficits over the next 10 years, as Obama proposes, we are on our way to financial ruin.

Bill Clinton never scared me; he was too much of a political animal to swerve too far from the center. Unfortunately, the same could be said of George W. Bush, who routinely strayed from his supposedly conservative principles. Not so with President Obama. Sadly, many of those who voted for him did not do their homework or they would have known that he is a left-wing ideologue, as I warned in these pages last year.

Sorry to end on such a negative note, but it is what it is.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Federal deficits to bankrupt America
http://washingtontimes.com/news/2009/sep/04/looking-behind-the-curtain/

ObamaCare's Crippling Deficits
http://online.wsj.com/article/SB10001424052970203585004574393110640864526.html

Massachusetts & the ObamaCare Mistake
http://www.realclearpolitics.com/articles/2009/09/05/obamacare_increases_costs_wait_times_98176.html

Obama Cannot Escape Hard Choices in September
http://www.realclearpolitics.com/articles/2009/09/07/obama_cannot_escape_hard_choices_in_september_98192.html

When Does the Spending Charade End?
http://www.ibdeditorial.com/IBDArticles.aspx?id=336955542241664

Insurance Companies - The Next Shoe to Drop?

Gary D. Halbert — Tue, 07 Apr 2009 19:25:50 GMT

IN THIS ISSUE:

Are Insurance Companies The Next Shoe to Drop?
2008 Was a Bad Year All Around for Insurers
Credit Crisis Severely Impacts Some Insurers
Reinsurance Companies Facing Similar Problems
Insurance Companies Look to States For Help
Look Out For Hurricane Season This Year
What to Look For in the Financial Reports

Introduction

Some observers now feel that we’ve seen the worst of the recession and the credit crisis, and that things should slowly improve in the second half of this year. People in this camp believe that the massive bailouts of major banks and President Obama’s huge stimulus package should work to unfreeze the credit markets later this year. Others like myself are not so sure.

While most of the attention has focused on the major banks in recent months, there is another potentially huge problem that I will bring to your attention in this E-Letter. The major insurance companies, with a few exceptions, may be in financial trouble. The recession has meant a large drop in premium income for all but a select few large insurance companies.

Furthermore, the credit crisis has delivered a serious blow to the major insurers who are big players in derivative instruments such as Credit Default Swaps and Collateralized Debt Obligations and others. Expect to hear much more about this in the weeks and months ahead.

Another serious problem for the major insurance companies is the bear market in stocks. A.M. Best reported recently that stock portfolios for the top 25 insurance companies fell 28% on average in 2008. Even with the latest rebound in the market, these portfolios are almost certainly down more this year. For all these reasons, insurers are looking to their home states for relief, and some states are cooperating. But will it be enough?

Next on the list of concerns is the upcoming hurricane season. As I will discuss later, the Texas and Florida hurricane catastrophe funds are dangerously under-funded. Neither the Texas nor the Florida legislatures have taken action to recapitalize these emergency funds. If we have major hurricanes this summer or fall, the major insurance companies could be very hard hit.

The major insurance companies will be releasing their financial reports for the 1Q (10-Qs) and for all of 2008 (10-Ks) over the next few weeks. It is widely expected that most of these reports will be disappointing and may well raise some red flags. I will tell you what to look for in these reports as we go along, in case you want to check up on your own insurance companies. This may be one of the most important and timely E-Letters I have published.

Insurance Companies – The Next Shoe to Drop?

As the recession and the credit crisis unfolded over the last year, most of the media attention and Congressional hearings have focused largely on the big banks. But we also know that the nation’s large insurance companies (property/casualty/life/health) are not immune from the recession or the credit crisis or the bear market in stocks. We hear from sources close to the industry that 1Q financial reports, which will be released over the next few weeks, and revisions to 4Q numbers, are likely to raise concerns that some large insurance companies may be in trouble.

We don’t tend to hear a lot about these big companies because they are largely regulated by the states, not the federal government, although that may change before long, especially if these upcoming financial reports set off alarm bells at the Treasury Department. A recently released A.M. Best Statistical Study suggests the upcoming reports could be quite ugly. A.M. Best is a worldwide credit rating agency for insurance companies and banks.

In March, A.M. Best reported that total “admitted assets” for the top 25 US life/health writers declined 10.1% at the end of 2008 to $3.6 trillion and declined by 8.7% for the entire industry to $4.6 trillion. Admitted assets include both general account assets and separate account assets. The study also shows just two insurers out of the top 25 with year-over-year profits in 2008.

A.M. Best noted that the main reason total admitted assets declined by over 10% at year-end 2008 from 2007 for the top 25 insurers was the substantial decline in separate account assets, down 28% year-over-year, largely due to the significant downturn in the equity markets. The S&P 500 declined 37% for calendar year 2008.

The companies in the top 25 showing the greatest declines in admitted assets were: Nationwide Life Group, down 21.7%; Hartford Life Group, down 21%; Axa Financial Group, down 20.6%; Lincoln Financial Group, down 16.4% and Ameriprise Financial Group, down 15%. AIG Life Group and Principal Life Group tied for the next spot, with both showing 14.9% drops in admitted assets.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

2008 Was a Bad Year All Around for Insurers

Insurance company problems and losses in 2008 affected not only life/annuity insurers, but also property/casualty writers. Losses were not only attributable to the recession, the credit crisis and the bear market in stocks, but also natural disasters. A.M. Best notes the following in regard to life/annuity insurers:

“The year 2008 was among the worst in memory for life/annuity operating performance – the key drivers being substantial realized and unrealized losses on investment portfolios, higher costs of capital and a declining revenue base. These trends clearly are continuing and could deepen well into 2009. The severe decline and volatility in the equity markets are causing capital strain for many life companies, especially large variable [annuity] writers.

A.M. Best has taken a number of negative rating actions in the life insurance sector, triggered primarily by investment concerns and expects the pace of these negative rating actions to accelerate as it reviews life insurers’ year-end results. Increased sales of less creditworthy products, erosion of earnings power and reduced capital flexibility has led A.M Best to conclude that the life/annuity segment is of lower credit quality.

Individual Life [insurance] – The most direct impact of the recession, so far, has been the accelerating decline in annualized new business premium. Individual life sales were down 3% through the third quarter and, given the economy, this trend clearly will continue through at least the first half of 2009.

Individual Annuities – Many VA [variable annuity] writers are reviewing their product designs, leading to more restrictive choices and higher prices for guaranteed benefit riders –if offered, at all. Trends in VA net assets, sales and net flows are negative, but are being somewhat offset by increases in fixed annuity sales.

Life Reinsurance – Demand for reinsurance for variable products continues to outstrip supply, driven by larger net amounts at risk and higher hedging costs due to volatility in the equity markets.

Mergers and Acquisitions (M&A) – M&A activity is likely to accelerate in 2009 as the need to raise capital clearly is a concern. Investment losses also are motivating companies to find strategic partners.”

A.M. Best goes on to highlight concerns and challenges facing property/casualty insurers:

“Natural catastrophes and financial upheaval drove a sharp reversal in the property/casualty industry’s fortunes in 2008, and the effects spread to A.M. Best Co.’s rating activity… Several destructive tropical storm systems and continued turmoil on Wall Street marked the fourth quarter of 2008. These factors drove up combined ratios and put a dent in policyholder surplus for the U.S. property/casualty industry.

Net income was down and the combined ratio was up for 2008, as investment losses took a toll, a soft market [recession] cut premium income, and natural catastrophes drove up underwriting losses. Downgrades of property/casualty insurers totaled 57 in 2008, up from 43 in 2007… Downgrades may reflect adverse reserve development; shortfalls in profitability; imprudent growth; or capitalization dropping below that needed to maintain a company’s rating level.”

2008 was a higher than normal year for natural disasters such as hurricanes, but it was certainly not the worst we have seen. But combined with the recession and the bear market, most property/casualty insurers are really hurting financially.

Credit Crisis Severely Impacts Some Insurers

The recession and the bear market may have created the “perfect storm” for insurance companies, but the news gets even worse. As it turns out, many of the largest insurers have been heavily impacted by the credit crisis, since many have been and are sizable players with large portfolios of derivative instruments such as Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs) and others. As you know, it was some of these same derivative securities that got many of the big banks in trouble. Can the insurance companies be far behind?

The Wall Street Journal posted an online article on April 1 which focused on Hartford Financial Services Group, the fourth largest insurer in the US. A research report from Credit Suisse called on Hartford to post collateral on $400 million of its CDS portfolio, following Hartford’s latest senior debt rating decline by Moody’s to Baa3, just one level above junk bonds.

Reuters reported on March 31 that following Hartford’s debt rating decline by Moody’s, its cost for insuring its senior debt increased significantly:

“The cost of insuring the debt of Hartford Financial Services Group (HIG.N) jumped on Tuesday after Moody’s Investors Service cut the ratings on the insurer's debt to the cusp of junk territory. Moody’s late on Monday cut Hartford’s senior debt ratings two steps to Baa3, the lowest investment grade, and gave the company a negative outlook, indicating an additional downgrade may be more likely over the next 12 to 18 months.

A downgrade into junk territory can significantly increase a company’s borrowing costs. Credit default swaps insuring Hartford’s debt rose to 19.25 percent of the sum insured as an upfront payment, or $1.92 million to insure $10 million for five years, plus annual payments of $500,000, from 16.25 percent upfront at Monday’s close, according to Markit Intraday.

The downgrade ‘was driven primarily by the credit deterioration of the life insurance subsidiaries, as well as a reduction in financial flexibility,’ Moody’s said in a statement. The group’s financial leverage and earnings and cash coverage are expected to deteriorate further and be constrained over the medium term due to potential realized losses and reduced earnings capacity at the operating units, Moody’s said.

Hartford, the fourth largest U.S. insurer, in February posted a fourth-quarter loss and said it would slash its dividend by 84 percent in a bid to preserve capital.”

My sources close to the insurance industry tell me that other large US insurers are in similar financial straights as Hartford. Therefore, sophisticated investors will want to pay particular attention to the financial filings (10-Qs for the 1Q and 10-Ks for 2008) that will be released over the next few weeks by the publicly-traded insurance companies.

Reinsurance Companies Facing Similar Problems

Insurance companies traditionally offset some of their risk exposure by selling it to “reinsurers.” Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness, death, etc., etc.). Reinsurers, in turn, provide insurance to insurance companies.

The main purpose for reinsurance is to allow the company to assume greater individual risks than its size would otherwise permit, and to protect the company against losses. Reinsurance enables an insurance company to offer higher limits of protection to policyholders than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure the amount of the limits in excess of $10 million.

Reinsurance companies have highly refined their policies in recent years to include applications where reinsurance was used as part of a carefully planned hedging strategy. Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.

The largest reinsurers include Swiss Re, Munich Re, Berkshire Hathaway/General Re (Warren Buffet), Hannover Re (Germany) and Reinsurance Group of America. The problem is, due to the recession, the bear market and the credit crisis, more and more insurance companies are looking to reinsure more of their books to free up capital. Yet the reinsurance companies are facing all of the same problems, plus in some cases, adverse currency exchange rates.

Reuters reported on April 1 that reinsurance rates for property catastrophe insurance rose by an average 8% worldwide based on January renewal rates. Reuters also reported in the same news release that reinsurance costs for US catastrophe risks rose by as much as 40% in 2008. So, it is clear that insurers around the world, and especially in the US, are struggling to find ways to reduce their risks in this very bad economic and financial time.

Insurance Companies Look to States For Help

When former Treasury Secretary Hank Paulson made it clear last year that TARP and federal bailout monies would not be made available to insurance companies (with the notable exception of AIG), dozens of insurers have approached their state regulators for relief from “capital and surplus requirements.” The various states which regulate insurers have capital requirements that the companies must meet or exceed.

If insurers fail to meet these capital and surplus requirements, the states can put these companies under “supervision.” If the deficits continue, the states have the power to put such companies into receivership (bankruptcy). The last time this occurred with a life insurance company was in the case of Executive Life back in 1991. More recently, property and casualty giant Reliance Insurance Company was placed in receivership by the state of Pennsylvania in May 2001 and filed for bankruptcy a month later.

The worst news is that a number of large US insurers have fallen below their capital requirements and have lobbied state regulators for changes in the accounting rules for how they value their assets and liabilities. Surprisingly, several states are obliging. The Washington Post reported on March 10 that several well-known insurers have been granted financial relief:

“State regulators trying to help life insurance companies cope with the financial crisis have granted $6 billion of relief from requirements meant to ensure financial stability, according to data released yesterday.

The top recipients were Allstate Life Insurance Co. with $1.4 billion; Jackson National Life Insurance Co. with $825.6 million and Hartford Life Insurance Co. with $655.2 million, according to the National Association of Insurance Commissioners.

The relief typically came in the form of accounting changes that allowed companies to pad their financial cushions, in effect making them appear stronger than they otherwise would. Insurance companies are required to maintain such cushions, known as capital and surplus, to absorb losses and pay claims.

Much of the padding involves increased counting of potential tax benefits that could end up being worthless to the companies.

Like other investors and financial institutions, life insurance companies have seen the value of their investments reduced by the financial crisis. Unlike banks, though, insurers have yet to receive federal bailouts to replenish lost capital.

Industry leaders have argued that regulatory relief could help insurers weather the crisis. They have expressed hope that it will stave off downgrades to their credit ratings, which can be damaging to their business. They also want to avoid having to raise capital from investors, which could cost a lot of money and dilute the value of shareholders' stock.

Critics such as the Consumer Federation of America have argued that the relief could weaken insurance companies and leave policyholders at greater risk… Some state regulators said they wanted to make sure their home-state companies weren't left at a competitive disadvantage. The result is an accounting hodgepodge that makes it harder to compare insurers and gives some companies an edge over others.

Other big recipients included Pacific Life Insurance Co. with $529.8 million, Transamerica Life Insurance Co. with $505 million, Metlife Insurance Co. of Connecticut with $396.1 million, and Lincoln National Life Insurance Co. with $313.4 million, according to the NAIC data. Many of the companies listed are part of larger families, such as the MetLife group, that operate multiple insurers.”

We can certainly argue whether giving large insurance companies breaks on their capital and surplus requirements in order to keep them afloat is a good or a bad thing. But what we should be able to agree on is the fact that these accounting changes were granted because the companies are in trouble. Further, it is all but certain that many more insurers will seek the same sort of relief from their states, if for no other reason than to remain competitive with those who have already received such breaks.

Look Out For Hurricane Season This Year

The insurance industry, especially property and casualty, is bracing for this year’s hurricane and storm season. The hurricane and windstorm emergency funds in Texas and Florida are dangerously under-funded, and this could be particularly bad news for many large insurance companies if either state is hit by a serious hurricane(s) later this year.

In Texas, we have what is known as the Texas Windstorm Insurance Association (“TWIA”). TWIA was created by the Texas legislature in 1971 to provide windstorm and hail coverage to those who are unable to obtain insurance from the traditional insurance market. TWIA was created in response to market conditions along the coast after Corpus Christi was hit by Hurricane Celia in 1970.

The public policy reasons for creating TWIA included ensuring the availability and affordability of insurance along the TexasGulfCoast, thereby supporting general economic development of the coastal area. TWIA issues insurance policies like an insurance company; however, it also functions as a pooling mechanism that allocates losses back to the insurance industry.

All property and casualty insurers licensed in Texas are required to become TWIA members as a condition of doing business in the state. Should hurricane or storm-related losses exceed the amount in the TWIA fund, then excess losses are assessed back to the member insurers. The greater an insurer’s share of the Texas market, the greater its potential for loss assessments.

In 1993, the Texas legislature created the Catastrophe Reserve Trust Fund (“CRTF”) as part of the state’s plan to specifically address catastrophic losses associated with major windstorms (ie – hurricanes). The CRTF is funded by the TWIA, which deposits all of its excess funds on an annual basis into the CRTF.

Over the last four years, the TWIA and CRTF funds have been especially hard hit by Hurricanes Rita (2005), Humberto (2007) and Dolly and Ike (2008). Hurricane Ike, for example, resulted in losses to TWIA/CRTF estimated at $2.3 billion. Ike was the Category 2 hurricane that decimated Galveston last September.

Even though TWIA made excess loss assessments of over $630 million to those P&C insurers operating in the state over the last four years, it remains dangerously under-funded. In fact, the CRTF currently has no money whatsoever. There is not nearly enough money left in TWIA to recapitalize the CRFT, and the Texas legislature has thus far failed to address this matter by appropriating new monies to the CRFT.

The Florida Hurricane Catastrophe Fund (“FHCF”) was reportedly under-funded by at least $14 billion as of the end of last year. As in Texas, the Florida legislature has thus far failed to address this issue. Florida residents are likely facing a significant increase in homeowners insurance later this year.

The bottom line is that if Texas and/or Florida are hit by a major hurricane(s) this summer or fall, insurers that do business in these states are going to get hit very, very hard.

My sources close to the insurance industry believe that if a major hurricane(s) hits Texas and/or Florida this year, a number of large insurance companies could be wiped out.

Clearly, some major insurance companies are in financial trouble already, but things may well get considerably worse depending on this year’s hurricane season.

What to Look For in the Financial Reports

As noted earlier, most of the publicly-traded insurance companies will be reporting their 10-Q financial statements for the 1Q over the next several weeks, along with their 10-Ks covering all of 2008. I am told by my sources close to the industry that these numbers, generally speaking, are going to look very bad, including a lot of downward revisions for 2008 profits and upward revisions to losses, largely as a result of the significant decline in the stock markets and shrinking premium income.

One of the simplest ways to evaluate these particular financial reports is to go directly to the “operating income” number and compare that to the total income. If the operating income is a small percentage of total income, it may indicate that the company’s core insurance business is in decline, and that it is relying on other sources for income. Also, if the operating income fell off sharply late last year and in the 1Q of this year, it may be a very good indication that the company was making much of its money from the bull market in stocks. This could also be an indication that the company may be in financial trouble already, or soon will be.

LIMRA, a well-know insurance industry consulting firm, reported in March that individual life insurance sales saw a 14% drop in the 4Q of 2008, ending the year with an overall 7% decline, according to its quarterly sales survey. The 4Q marked the single sharpest decline in premium income since the 4Q of 1951, according to LIMRA. The overall decline for the year erased the strong 7% gain in 2007, and was the largest one-year decline in the organization’s records.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

As should be obvious from the information above, we need to keep a close eye on the insurance industry in the weeks and months ahead. Look for the upcoming financial reports to be quite negative overall, with disappointing 1Q results and downward revisions to their 2008 financials.

This could be the next shock in the credit markets and the stock markets as well. While this may not be the most interesting topic to think about, virtually all of us have exposure to the major insurance companies, directly or indirectly. Certainly, the fate of the major insurance companies will impact the economy and in turn, the recession.

While the latest recovery in the stock market is impressive, I continue to recommend that you take steps to reduce downside risks in your investment portfolio. If you would like to discuss ways to do so, give us a call at 800-348-3601 or e-mail us at info@halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

States Give Regulatory Relief to Insurers
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/09/AR2009030902964.html

Failure worries drag down life insurers
http://www.charleston.net/news/2009/mar/15/failure_worries_drag_down_life_insurers/

Aftermath of the Financial Crisis for Life Insurers
http://www.insurancenetworking.com/news/life_insurance_LIMRA_LOMA_financial_crisis-12098-1.html

Have We Turned The Corner On The Recession?

Gary D. Halbert — Tue, 31 Mar 2009 20:31:08 GMT

IN THIS ISSUE:

Finally a Little Good News for the Economy
Geithner's Latest Toxic Asset Bank Bailout
Does the PPIP Have Any Chance of Working?
Fed to Buy $300 Billion in Treasuries & a Lot More
CBO Assessment of Obama's Record 2010 Budget
Conclusions, Market Implications & What to Do Now

Introduction

Some weeks, it's tough to find a good topic to write about. Then other weeks, I'm overwhelmed with all there is to write about, as is the case this week. So, we'll touch several bases in this week's E-Letter. We'll begin with the latest economic news, some of which was surprisingly positive (especially housing). Unfortunately, the latest good news does not necessarily mean we've seen the bottom of the recession or the bear market.

On Monday of last week, Treasury Secretary Geithner announced the much-awaited new plan to take toxic assets off the books of troubled banks. The plan is called the Public-Private Investment Program. Under this new program, the government along with private investors would buy up toxic assets by way of auctions to get these loans off the banks' books. But will the plan work? I'm not optimistic. We'll discuss this in some detail as we go along.

As if the Obama administration is not spending enough already, the Fed recently announced that it will print and spend over $1 trillion in the months ahead to buy at least $300 billion in direct purchases of Treasury securities and at least another $750 billion for purchasing more toxic assets from banks and other sources. Where will it end? No one knows.

In my March 10 E-Letter, I predicted that President Obama's $3.55 trillion federal budget for fiscal 2010 would result in a deficit of more than $2 trillion, as opposed to the administration's estimate of $1.75 trillion. Turns out I was wrong – the Congressional Budget Office predicted last week that Obama's 2010 budget deficit will hit $2.3 trillion. Wow, this will be bad! The CBO agrees with me that Obama's economic assumptions are too optimistic.

Following those discussions, I will give you my latest thoughts on where we stand in the big picture. With the latest smattering of good news on the economy and the nice rebound in the stock markets, some analysts are concluding that we've turned the corner on the recession and the financial crisis. I think it's premature to make that call, and I will not be surprised if we see another downward leg before long. In fact, it may have already begun. Let's get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Finally a Little Good News for the Economy

As everyone reading this is all too aware, the economic news so far this year has been horrible. Rarely has any good news been seen in recent months. But there was some good news last week, and it came in a very good spot – housing. Existing home sales in February unexpectedly rose by 5.3% above January levels to an annual rate of 4.72 million units. It was the largest monthly jump since 2003; still, sales were down almost 5% below yearago levels.

The increase in sales of existing homes was strongest in the West and in Florida, one of the worst hit markets. February sales of existing homes in Florida rose 20%. Florida Realtors also reported a 15% gain in statewide sales of existing condominiums in February, continuing a trend in recent months for higher statewide sales of both the existing home and existing condo markets compared to yearago levels.

The median sales price for existing homes nationwide rose to $165,400 in February, the first monthly increase in over a year, but it remains 15.5% below yearago levels. Unfortunately, the inventory of unsold existing homes rose again in February, despite the improved sales figures, thus putting the backlog at an estimated 9.7 months supply at the current sales pace.

New homes sales also increased by 4.7% in February to an annual rate of 337,000 units. Economists had expected new home sales to decline to a rate of 300,000 annualized units, so this was welcome news. While the unexpected rise in new home sales might be seen as a positive movement for the beleaguered housing market, the February rate for new home construction is still the second-lowest reading since the last recession in 2002. The median price of a purchased new home fell to $200,900 in February, down over 18% from a year ago.

Housing starts jumped well above expectations in February, rising 22% over January levels. Rising housing starts might not sound like a good thing, as that could mean even more homes on the market, but reportedly over 80% of the February construction starts were for apartment complexes, not new single family homes. Also, building permits climbed in February for the first time in over a year.

On another front, durable goods orders rose a surprising 3.4% in February following six consecutive monthly declines. This news was bittersweet because the Commerce Department revised January durable goods orders further downward from -5.2% to -7.3%.

Elsewhere, the economic news continued to disappoint. Last Thursday, the government reported that 4Q GDP fell at an annual rate of -6.3%, down from -6.2% as reported last month. Consumer confidence continued to plunge in February to only 25.0, a new record low, down from 37.4 in January. However, the latest Rasmussen tracking poll shows that consumer confidence has rebounded a bit in March.

The Index of Leading Economic Indicators fell 0.4% in February. The LEI has fallen very sharply since the last peak in July 2007. The unemployment rate jumped to 8.1% in February from 7.6% in January. The consensus is for a rise to 8.5% in March and at least 9% by yearend. These are just a few of the negative reports we've seen over the last month.

In summary, while we've seen a few positive reports on the economy and the housing sector in particular over the last month, we are far from out of the woods on the recession and the financial crisis. Now, let's move on to the latest bank bailout proposed by Treasury Secretary Timothy Geithner.

Geithner's Latest Toxic Asset Bank Bailout

After Treasury Secretary Geithner announced his new Public-Private Investment Program (“PPIP”) on Monday of last week, the Dow Jones promptly rallied over 500 points. That followed a rally of almost 1,000 points since the low in early March. The Dow and the S&P 500 bounced just over 20% from their recent lows – that is until the latest near 5% downward reversal over the last two trading sessions (Friday and Monday). While the equity markets clearly liked the government's latest bank bailout plan, serious questions remain – such as, will it work, and will private investor groups want to get in bed with the government, which threatened to impose a 90% tax on AIG executive bonuses?

We'll get to those questions and others as we go along, but first let's examine how the Public-Private Investment Program is supposedly designed to work. In an online article in FORTUNE, CNNMoney.com's Jon Birger provided the following summary on how the PPIP is expected to work as follows:

“The [PPIP] plan tries to fix the banking crisis by encouraging the very behavior that got us into this mess in the first place -- using buckets full of leverage to buy mortgages, asset-backed securities and other so-called toxic assets. Moreover, it requires the participation of the very folks -- Wall Street bankers and investors -- whom officials in Washington have spent the last two months threatening and vilifying.

At its core, the Public-Private Investment Program (PPIP) harkens back to what the original bank bailout bill was supposed to do when it was first passed by Congress last fall: remove toxic assets from bank balance sheets, thereby freeing up more money for lending. The mechanics of the program would operate somewhat differently for stand-alone loans than for debt securities (basically bundles of loans packaged as asset-backed or mortgage-backed securities), but the general approach is the same. The government will match, dollar for dollar, any private-sector funds put towards buying these toxic assets.

And if that weren't incentive enough, the government will also facilitate cheap loans -- think of them as FDIC-guaranteed margin loans -- to private investors who will be able to leverage their distressed-debt purchases six to one.

Here's how it might work: Say a bank has a pool of residential mortgages with a $100,000 face value that are deemed good risks by the FDIC. The pool is then auctioned off, and in this example, the winning bid is $84,000. Of that, the government puts up $6,000, the private investor another $6,000, and the remaining $72,000 is financed via a FDIC-guaranteed margin loan.

The goal is to jump start the market for toxic debt and put the prices of these loans more in line with the underlying interest payments (which in some cases have declined far less than the market valuation of the loans or debt securities). Theoretically, once the PPIPs start buying and selling this stuff, the valuations will become clearer, opening the door to other private investors who may see opportunity but have shied away up until now due to the lack of price transparency.

That's the upside. The potential downside is what happens if prices continue to fall. And if you think taxpayers are mad now, just wait till they find out that, on account of government-sponsored leverage, a further 15% decline in the debt markets caused them to lose 100% of their investment in PPIPs. Says Tom Atteberry, co-manager of the FPA New Income bond fund: ‘I do see some irony in the fact that the proposed government solution to the problem looks a lot like a hedge fund and a primary broker -- with the primary broker being the federal government.'

There's also a question of whether Wall Street money managers will play ball with a government that has been bad-mouthing them and threatening them with confiscatory taxes. ‘If they go ahead with the 90% tax, nobody is going to want to work with the government,' says a top mortgage-fund manager, referring to the bill passed by the U.S. House of Representatives that would slap a 90% tax on bonuses paid to employees of bailed-out financial companies. ‘It's a deal killer,' says Rick Hughes, co-president of Portfolio Management Consultants, which directs $70 billion in institutional and retail accounts.

Even if the bonus tax isn't implemented, the mortgage-fund manager worries what might happen if PPIP works too well. He envisions a scenario in which money managers are hauled before Congress and accused of making millions on the backs of taxpayers. ‘I'd rather be attacked by a pack of wild dogs,' he says. There are other, more conventional ways that government involvement could discourage money managers from participating.

FPA's Atteberry notes that under the Treasury Department proposal, the FDIC would provide oversight to the PPIP funds. Atteberry says that if he were putting his firm's capital at risk, he'd want to know more about what ‘oversight' entails. For instance, will political considerations prevent investors from foreclosing on certain homeowners or force them to offer generous loan modifications? Says Atteberry, ‘Those are details you need to flesh out if you want to get private investors to come on board.'

Of course, it could be that some on Wall Street -- hedge fund managers in particular -- are so desperate for any source of income, they'll gladly accept these risks.

Prime brokers are extending less credit to hedge funds and investors are pulling out their money. So if the government now wants to become hedge funds' new BFF -- their new prime broker as well as their biggest investor -- why quibble about the details? ‘The reality is that a lot of hedge funds really don't have a business model any more,' says veteran Wall Street strategist Ed Yardeni. ‘The government is basically putting Wall Street back in business with a whole new business model, which is to take all the toxic assets, repackage them and re-sell them at a discount.'

‘Wall Street is getting paid to re-arrange the deck chairs on the Titanic -- but hopefully with a better outcome.'”

Many thanks to Jon Birger of CNNMoney.com for that summary. Obviously, there are still many unanswered questions about the Public-Private Investment Program. Geithner's roll out of the program last week was very short on details, and many private investors are going to be very wary of getting in bed with the government to buy up these toxic assets, even if the discounts are very attractive.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Does the PPIP Have Any Chance of Working?

If President Obama wants this plan to have any chance of working, he needs to make sure the Senate does not go along with the House in passing the 90% retroactive income tax on the AIG executives that received big bonuses. Hedge funds, private equity funds and the like will not want to pony up money to buy toxic assets if they fear that the government will change the rules on profit sharing in these PPIP transactions.

I have read several articles recently that indicated the Treasury was already planning to recoup the AIG bonuses by subtracting that amount from the next round of bailout money AIG will need. That would have been an easy way to get the money back and put the onus on top AIG management to claw back the bonuses. But the Democrats in the House couldn't resist the opportunity to grandstand in front of the American people with an illegal, retroactive 90% income tax on the AIG bonus money.

Political commentator Dick Morris has an interesting take on the PPIP. Morris believes strongly that President Obama wants the PPIP to fail. Morris is convinced that, while Obama says publicly that he does not want to nationalize the big banks, privately Obama and Rahm Emanuel would very much like to see the government take over these large money center banks that have taken bailout money.

Morris argues that this is precisely why the president has been lambasting Wall Street and the big banks for weeks now, in the hope that private investors will not jump into the PPIP with both feet. Morris also believes that this is why Obama packaged the PPIP as Geithner's plan, not his own, so that if it fails he won't get the blame. If it does fail, Morris predicts that Obama will then nationalize the troubled banks. I sincerely hope this assessment is wrong!

As noted earlier, the stock markets reacted extremely strongly following Geithner's announcement of the Public-Private Investment Program. If it is to have any chance of working, he needs to get the details out fast, including assurances that the government won't change the rules in the middle of the game. We'll see.

Fed To Buy $300 Billion in Treasuries & a Lot More

The Fed Open Market Committee met on March 17-18, and the policymakers approved some bold new (yet troublesome) actions. Citing that the economy continues to worsen and the credit markets are still dysfunctional, the FOMC voted unanimously to authorize the Fed to make direct Treasury security purchases of $300 billion over the next six months, with a suggestion that much more could be authorized later on if needed.

This move is controversial because the Fed will have to print the $300 billion to pay for the purchases of Treasury securities. Many fear that this action (and likely more to come) will further sew the seeds of significantly higher inflation when we emerge from this recession. But as I have written often in recent letters, the Fed is scared to death of deflation and will do whatever they feel is required to avert a debt deflation in the economy.

At the same FOMC meeting, Bernanke & Company also voted to double the Fed's purchases of mortgage-backed securities and take on more agency debt. That means the Fed will purchase another $750 billion in toxic mortgage-related securities this year. Between the Treasury purchases and the additional mortgage-related securities – all of which they will have to print money for - the Fed's balance sheet liabilities will skyrocket to well above $3 trillion this year.

Here are excerpts from the March 17-18 FOMC official statement:

“In these [bad economic] circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities… and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

Following this announcement, yields on 10-year Treasury notes plummeted in the largest one-day decline on record to near 2.5%, down from above 3% just two days before. Stocks also rallied on March 18 and since then (at least until the last two days), a clear indication that many investors approve of the Fed's unprecedented actions in buying Treasury debt directly and doubling its purchases of toxic assets.

But it should also be noted that the US dollar plunged on the news that the Fed would be buying $300 billion in Treasuries and another $750 billion in toxic assets, and the implication that those numbers may well go even higher later this year. Keep in mind that these numbers are in addition to the $2+ trillion budget deficit we will have in fiscal 2010 (more on that below) and well over $1 trillion in each of the next several years.

Given the staggering size of these numbers, I don't see the US dollar going anywhere but down over the next several years. Maybe that's why China is threatening to stop buying US Treasuries and calling for a serious discussion of a new world currency at the upcoming G-20 Summit on April 2. I will discuss this issue more in coming weeks.

CBO Assessment of Obama's Record 2010 Budget

In my March 10 E-Letter, I discussed President Obama's record $3.55 trillion budget for fiscal 2010, with its projected budget deficit of a record $1.75 trillion. I also discussed why I believe the deficit next year will be well north of $2 trillion. Last week, the supposedly non-partisan (but Democrat controlled) Congressional Budget Office (CBO) released its own analysis of President Obama's proposed budget for 2010 and the next 10 years.

The CBO estimates the 2010 budget deficit at $2.3 trillion; the budget deficits for 2009-2011 at almost $5 trillion; with deficits of $1 trillion or more each year thereafter to 2019, and concludes that Obama's budgets would add $9 trillion to the national debt over that 10-year period, if enacted.

If you recall, I noted in my March 10 letter that I believe the Obama administration used economic assumptions that were too optimistic. I pointed out that Obama's projections for GDP growth were too rosy. Likewise, I noted that his assumptions for unemployment were considerably too low. I concluded that discussion by saying: But it will not surprise me if the deficit is $2 trillion or more in 2010. Now the Democrat controlled CBO agrees with me!

Interestingly, Obama has routinely criticized George W. Bush for out-of-control spending, which is a well-deserved criticism. In Bush's eight years, he – with the help of Congress – added almost $5 trillion to the national debt. Obama's budgets would add almost twice that amount - $9 trillion - according to the CBO.

I think most people reading this would agree that a 2010 budget deficit of $2.3 trillion is simply way too much, even in this economic and financial crisis. While Obama says his budget is necessary to get the economy out of the ditch, it could make things worse by ruining America's credit standing in the world. Unfortunately, it looks like he has the votes to get most of his budget passed.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions, Market Implications & What To Do Now

The 20% bounce in the stock markets and the latest smattering of good news on the economy have led some analysts to conclude that the worst of the recession and the credit crisis are behind us. That could be, but the forecasters I respect believe we will see at least another 1-2 quarters when GDP will fall 6-7% or possibly more. So, I am not convinced we've seen the worst of the recession or the credit crisis. I hope I am wrong.

The good news (if we can call it that) is that the US was the first major economy to go into recession; it has suffered a more severe contraction than most other sizable economies, with the notable exception of Japan; and it would therefore be reasonable to assume the US will be one of the first major economies to turn the corner.

Yet in many ways, calling the bottom in the recession misses the point. Unlike past recessions that were followed by a strong recovery, I believe (and my best sources agree) that we face at least a couple of years of very slow growth when this recession ends. Yes, the government and the Fed are spending trillions like drunken sailors, but this economic and financial crisis is likely to put a damper on growth for at least several more years.

With that backdrop, investors have to consider the likelihood (or unlikelihood) that the US equity markets bottomed in early March. With the major market indexes having plunged over 50% from their peak in late 2007 to early March, it is easy to assume that we've seen the bottom. I, on the other hand, am not so convinced.

But that, too, misses the point in my opinion. Whether the bottom is in or not, I fully expect the equity markets to at least retest the lows seen early this month when the Dow fell to 6,500 and the S&P 500 fell to 675. And there is no guarantee that those lows will hold. Therefore, if you are looking to exit failed buy-and-hold positions in stocks, and move to more defensive strategies, I would suggest doing so now.

My greatest concern at this point is that the new Public-Private Investment Program may not work. As I have written in several recent letters, it is clear that relatively little of Obama's $787 billion stimulus plan will be spent this year when it is needed most. Thus, that means that it is even more critical that the PPIP get started quickly and that it succeeds. As noted earlier, there is no assurance that it will get up and running quickly, or that it will succeed (or if President Obama is fully behind it).

If the PPIP does not succeed, I would expect the US equity markets to plunge once again, and if so, buy-and-hold strategies will get hammered again.

If you have been considering alternatives to the buy-and-hold strategy for a portion of your equity portfolio, such as the active management programs I recommend – which can move to cash and/or hedge long positions - now may the time to get such strategies in place.

Remember, it does not matter where you live; we have hundreds of clients all across America.

Finally, we hosted our second Webinar with Scotia Partners on March 25. I'm very pleased to report that almost 300 of you registered for this opportunity to learn more about Scotia's very successful investment program. If you missed it, you can watch and listen to the full Webinar discussion (including all charts) at www.halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Obama Budget - $9.3 Trillion in Deficits says CBO
http://news.yahoo.com/s/ap/20090320/ap_on_go_pr_wh/obama_budget

Obama Sticker Shock (more CBO budget analysis)
http://online.wsj.com/article/SB123776518094909023.html

Uncle Sam's Hedge Fund (the Geithner bank bailout plan)
http://www.realclearpolitics.com/articles/2009/03/uncle_sams_hedge_fund.html

Support Wanes For Obama's Huge Stimulus Plan

Gary D. Halbert — Tue, 10 Feb 2009 22:01:58 GMT

IN THIS ISSUE:

Public Support For Trillion Dollar Stimulus Plunges
Senate Passes $838 Billion "Stimulus" Package
Republicans' Propose Alternative Stimulus Package
Problems With Obama's Trillion Dollar "Stimulus"
Final Stimulus Bill Will Be Higher Than $838 Billion
Frustrated Obama Says Spending IS Stimulus
50% of Americans May Pay Zero Income Taxes
Geithner Announces $2-$3 Trillion To Rescue Credit Markets

Introduction

Our new president called upon Congress to come up with a giant stimulus package. And there was never any doubt that the members of the House and the Senate would deliver. There's little in life they enjoy more than spending our money! The huge stimulus bill passed in the House on January 28, and the one the Senate passed today will cost American taxpayers over $1 trillion including interest.

Public support for the so-called "stimulus" plan was at 75% just a couple of weeks ago as reported by Gallup. However, as the American people got a good look at the massive $820 billion package passed by the House, and saw that apprx. two-thirds of the money would be spent on liberal spending programs rather than stimulus, support plummeted. As this is written public support for the huge rescue package is down to only 37% and falling.

Republicans introduced alternative spending packages in the Congress that were smaller and included a much higher percentage of stimulus versus spending, but they were ignored by the Democrats who were determined to pass their much larger, pork-laden bills.

It may surprise long-time readers that my oldest and most respected source for economic and market forecasts actually agrees that the government should pass a huge stimulus bill, and even a lot more if necessary to head-off deflation. They agree with the "Bad Bank" plan I discussed last week, whereby the government would reportedly loan banks up to $2 trillion as well as taking "toxic assets" off the banks' hands. In fact, they think the government should do whatever it takes to get the credit markets functioning again, including insuring bank loans if necessary, and it should do it sooner rather than later.

Whether we believe the bailouts and the stimulus package(s) are going to be a colossal failure that could lead to hyperinflation, or whether we believe they are likely to work – it doesn't matter. President Obama got his way, and we are about to see the largest government bailout in world history.

Public Support For Trillion Dollar Stimulus Plunges

Given the business I am in, I get lots of questions from friends, relatives and business associates about the huge bailouts and stimulus packages in the wake of the recession, the financial crisis and historic stock market meltdown last fall. Interestingly, almost everyone I talk to is against the government bailouts to banks, investment houses, AIG, automakers and the like. And now that President Obama and Congress are hell-bent on a new trillion dollar "stimulus" package, most people I talk to are livid!

But while most people I talk to are opposed to the bailouts, Obama had widespread public support for a large stimulus package just a few weeks ago. A Gallup poll in late January found that 75% of Americans polled wanted Congress to pass a big economic stimulus package. Yet that was before the House of Representatives passed its $820 billion "stimulus package" on January 28.

Many Americans who had been for a big stimulus package were not happy when they learned that almost two-thirds of the House bill was mostly pork-barrel spending, while only apprx. one-third went for tax cuts. Many in the national press are already referring to the bill as the "SPENDULUS" package.

As of late last week, the latest Rasmussen poll found that public support for the rescue package had plunged to only 37% for the bill and 43% opposed! Public support is falling by the day, and Rasmussen reported yesterday (Monday) that 62% of Americans now want more tax cuts and less spending in the stimulus bill. That explains why President Obama pulled out all the stops last week to get it passed quickly in the Senate, which will apparently happen later today.

Senate Passes $838 Billion "Stimulus" Package

Last Friday night, a compromise (if we can call it that) was reached between Senate Democrats and the three "moderate" (read: liberal) Senate Republicans: Olympia Snowe (R-Maine), Susan Collins (R- Maine) and Arlen Specter (R-Pennsylvania). Why they switched and agreed to vote for the Senate stimulus bill at the last moment is not known, as their meeting with Democrats was behind closed doors. But it is no surprise that these three "RINOs" (Republicans In Name Only") voted with the Democrats to give them a filibuster-proof 61 votes to enable passage of the Senate stimulus package.

As veteran political observers knew, the final Senate stimulus package would not be far from the House version – that's just how things work in Congress. Both the House and Senate Democrats wanted to give President Obama something in the ballpark of what he asked for, and they did, as they are in the majority, with a little help from the three liberal Republican senators noted above.

The Senate stimulus bill came in at apprx. $780 billion as a baseline, plus several amendments passed earlier to add another $55-$60 billion or more to the final price tag. While the final number is not yet clear as I hit the "send" button, it is estimated to be apprx. $838 billion, slightly higher than the House version.

The Senate version, we are told, has a slightly larger portion devoted to tax cuts, and a slightly lower portion going to spending programs than the House bill. Supposedly, the Senate version has apprx. 40% in tax cuts and apprx. 60% in spending programs, versus apprx. 33% and 66% in the House version, respectively.

The bottom line is, President Obama asked for, and the Congress provided, the largest spending bill in the history of the world by far, even though no one on the planet knows if it will work. And there is another $3 trillion on the way, as I will discuss at the end.

Now the US is committed to spending well over one trillion dollars (including interest) over the next several years on an economic rescue package, with no assurance that it will work.

Senate Stimulus Amendment To Help Automakers

Last Tuesday, the Senate passed an amendment aimed at helping both automakers and car buyers that will be a part of the $838 billion stimulus package. The amendment would allow most car buyers to claim an income tax deduction for the cost of automobile sales taxes and interest payments on car loans.

The amendment would permit qualified car buyers to deduct the sales tax on the purchase of new cars up to $49,500 in price. Individuals with incomes of up to $125,000 and couples earnings as much as $250,000 could qualify, including those who do not itemize their deductions. This tax break applies to new car purchases between last November 12, 2008 and Dec. 31, 2009. The cost is estimated at $11 billion.

While this amendment was hailed as a tax cut for consumers, it was probably more intended to help the struggling automakers and their union workers. Of course, there is no guarantee that car buyers will "Buy American."

Republicans' Proposed Alternative Stimulus Packages

As I wrote last week, the giant stimulus package requested by President Obama and drafted and passed by the House totaled appx. $820 billion. Unfortunately, the bill included only about one-third in tax cuts (stimulus) and two-thirds in pork barrel spending, with relatively little for "infrastructure" projects. So much for Obama's campaign promise to end wasteful spending in Washington!

The Senate stimulus bill, by comparison, includes apprx. 40% for tax cuts and apprx. 60% for spending programs. While an improvement, the Senate bill still has well over half of the money going to spending projects, with less than half going to direct stimulus in the form of tax cuts.

Given the very negative reactions to the bill proposed and eventually passed by the House, some Senate Republicans offered alternative stimulus bills of their own. One Republican group headed by Senator Mel Martinez (R-FL) introduced an alternative stimulus plan with a price tag of apprx. $713 billion. The proposal included $430 billion in tax cuts, $114 billion for infrastructure projects, $138 billion for extending unemployment insurance, food stamps and other provisions to help those in need and $31 billion to address the housing crisis.

All of these are expenditures that would directly help Americans. This Republican plan would direct 60% of the funds to tax breaks, whereas the Congressional Democrats' plans have only 33% or 40% going for tax breaks. The McCain alternative plan directed nearly 80% of the money to tax cuts as I will discuss below.

The Democrats' $820 billion House bill included apprx. $550 billion in spending that is reportedly divided among these areas: $142 billion for education and labor, $111 billion for health care, $90 billion for infrastructure, $72 billion for aid and benefits, $54 billion for energy, $16 billion for science and technology and only $13 billion for housing. Clearly, the Martinez-sponsored GOP stimulus plan would be preferable to the version passed by the House and the Senate bill that will be voted on later today.

Another alternative stimulus plan was offered by a Republican group headed by Senators John McCain and Lindsey Graham. Their alternative stimulus package totaled apprx. $445 billion and was heavily slanted toward tax cuts that I believe make much more sense than either the House or Senate bills.

The McCain plan would cut in half the payroll tax for all U.S. employees for one year to 3.1% at a cost of $165 billion. It would lower the 10% income tax bracket to 5% and the 15% bracket to 10% for one year at a cost of $60 billion. Slash the corporate tax rate to 25% from 35% percent for a year and drop the rate for small businesses filing as individuals to 25% from 35%, all at a cost of $50 billion.

The McCain alternative would also offer homebuyers a tax credit of $15,000 or 10% of the home purchase price, whichever is less, starting immediately at a cost: $20.4 billion. The plan would also extend unemployment insurance benefits and food stamps through 2009 and eliminate taxes on unemployment benefits for the same time period at a cost of $48.15 billion. The plan also includes $11 billion to discourage mortgage servicers and lenders from executing home foreclosures, beginning immediately.

Thus, over $356 billion – or almost 80% - of the $445 billion in the McCain plan would be spent for meaningful tax cuts and other benefits to individuals, and these things would happen in the first year.

The remainder of the $445 billion would be spent on building and repairing roads and bridges ($65 billion), improve, repair and modernize Defense Department facilities, and order and/or repair equipment, vehicles, material and ammunition for combat troops ($17 billion). It also includes $4.1 billion for public transportation systems, airport improvements and other infrastructure projects.

Republican Plans Never Had A Chance, Of Course

As noted above, I liked the McCain plan a lot and it would get the stimulus money spent much faster than any of the other rescue plans propose to do. Yet at the heart of McCain's plan was lowering key tax rates, including payroll taxes, which the Democrats thoroughly oppose. The $15,000 tax credit for home purchases, which House Democrats also opposed, would immediately boost home sales, which is the epicenter of this economic crisis.

Even the considerably larger Martinez plan discussed above is preferable to either the House or Senate plans which spend less on tax cuts and more on spending programs (on a percentage basis) than the Martinez plan. But neither the McCain plan nor the Martinez plan were even considered.

The Democrats in Congress shunned these plans and gave President Obama what he wanted - the largest spending bill in history with well under half the money going to tax cuts and most going to new and existing federal spending programs. In the end, Congress was all too happy to oblige.

With Democrats holding sizable majorities in the House and Senate, the Republicans had no chance of defeating Obama's trillion dollar so-called "stimulus" package, even though 11 House Democrats voted against their own plan.

Problems With Obama's Trillion Dollar "Stimulus"

As should be obvious from the discussion above, I have lots of problems with the giant spending plans passed by the House and likely later today by the Senate. First, they are too big in my opinion. Both of the bills allocate well over half of the money to mostly wasteful spending programs that Democrats have wanted for years. Second, the money will be spent over the next 3-4 years; if it was really a true stimulus package, at least half of the money should be spent over the next year.

The next area of concern is whether or not these new spending levels will become permanent. As an example, let's say that the Department of Education gets $100 billion in additional money on top of their already oversized budget. Is the $100 billion a one-time infusion, or will it become a permanent part of their "baseline" budget each year? We don't know, but certainly some Democrats will try to make them permanent.

Another area of serious concern is that the final stimulus bill will become a vehicle for new protectionism policies. The House added "Buy American" protectionism provisions for iron, steel and textiles to its stimulus bill. The Senate stimulus package also includes similar Buy American provisions, but the details are not yet clear.

Almost immediately, criticism was heard loud and clear from all of our major trading partners. The United States has made deals under NAFTA and the WTO to give trading partners such as Canada, Mexico, Japan and the European Union access to our huge "government procurement market." In exchange, we have received similar commitments from those countries. Hopefully, the final stimulus package will water down or eliminate the Buy American requirements so as not to damage trade relations.

Here is what the Wall Street Journal had to say about the "Buy American" issue:

"On Tuesday the Senate Appropriations Committee added ‘manufactured goods' to the list of items that must be American-made in order to qualify for stimulus dollars under the American Recovery and Reinvestment Act. Congress is signaling to the rest of the world that U.S. protectionists are in charge. Forcing U.S. contractors to buy domestic goods instead of shopping for the best price available world-wide means that taxpayers risk overpaying for their roads and bridges. And that means capital will be misallocated, fewer projects will be built and the bill will go ever-higher.

There is also the little matter of retaliation by our trading partners. The European steel industry has said that it will urge the EU to challenge the [‘Buy American'] provision at the World Trade Organization. That's the high road. Another course would be for other countries to lock American companies out of the bidding on their projects. China's stimulus is estimated at $600 billion. Caterpillar Tractor says that it has a ‘major initiative to compete in infrastructure projects around the world -- particularly in China -- and this would seriously undermine it' Congress must want more Caterpillar layoffs.

Increased protectionism didn't stimulate the American economy in 1930 and it won't now. In the post-bubble environment, Americans are likely to save more and countries like China are probably going to have to spend more. Washington should ask whether it wants to close down export markets just when those markets are offering the U.S. economy its best opportunity for recovery. One more thing: Is President Obama going to exert any restraint in this stimulus bill on the worst instincts of Congress?"

The Obama administration thus far seems unconcerned about the danger these measures pose. The protectionism provisions insisted on by the Democrats could undo whatever measured job creation the stimulus plan achieves by provoking US trading partners to reduce purchases of American-made goods. We need to keep a close watch on this.

This protectionist language also begs the question: "Where's Bernanke?" In 2006 and 2007, the financial media was full of articles about how Fed Chairman Ben Bernanke warned against protectionist policies, saying in a 2007 speech, "In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers."

Thus, you would think that Chairman Bernanke would be issuing similar warnings now as the protectionist-laden Obama stimulus plan rolls through Congress. Yet, I cannot find any reference of recent comments by Bernanke on this detrimental part of the stimulus plan. It has been reported that the Senate amended the stimulus bill to soften the "Buy American" provisions, so perhaps Bernanke has been exerting his influence behind the scenes to help us avoid repeating mistakes of the past.

Final Stimulus Bill Will Be Higher Than $838 Billion

Early last week, the Senate stimulus bill was actually above $900 billion. RINO Senators Collins, Snowe and Spechter refused to sign on unless the size of the bill was reduced. So Senate Democrats actually reduced the price tag by more than $80 billion, bringing it down to the $838 billion number, at which point the RINOS agreed to vote for it last Friday night.

It is important to note that of the apprx. $100 billion taken out, $40 billion was money directed to go to the state and local governments. One of President Obama's top economic advisors said on Sunday that the administration would press hard to get that $40 billion back in the stimulus bill when it goes to the Conference Committee later this week.

Lawrence Summers, Obama's chairman of the White House National Economic Council warned that without the infusion of federal money to state and local governments, the country could face "a vicious cycle of layoffs, falling home values, lower property taxes, more layoffs." So it is clearly possible, even likely, that the final stimulus bill will be higher than the $838 billion passed by the Senate.

Frustrated Obama Says Spending IS Stimulus

Clearly frustrated, President Obama ditched his teleprompter in a nationally broadcast speech before House Democrats last Thursday night to bash Republicans for opposing his giant stimulus package. In what was the most pointedly partisan speech of his young presidency, Obama rejected Republican arguments that the massive spending in the $819 billion House stimulus bill should be replaced by a new round of massive tax cuts.

At one point, Obama not only chided Republicans for opposing the stimulus, but also for getting us into this economic and financial crisis in the first place. The President also defended the enormous spending in the stimulus package, saying at one point:

"What do you think a stimulus is? It's spending – that's the whole point! Seriously."

Millions of Americans watched this speech last Thursday night. Based on the media reactions, many people were very surprised by the President's remark above. But if you've been reading this E-Letter for long, you should not have been surprised.

50% of Americans May Pay Zero Income Taxes

It is currently estimated that apprx. 40% of Americans pay no income taxes. With the tax cuts, tax credits and tax rebates that will result from the massive stimulus package, millions more Americans will pay no income taxes going forward. Even worse, millions of Americans that pay no income tax will get another round of checks from the Treasury. Numerous articles I have read estimate that once the stimulus bill becomes law, 50%-52% of all Americans will pay no income tax at all.

This can only mean that the 50%-48% of us who do pay income taxes will be paying more, especially those with higher incomes. Obama has said repeatedly that he will only raise income taxes on those making $250,000 or more. But with half or more of the population paying no income taxes, Obama will be forced to tax the wealthy at European rates of 60-70% or more, or he will have to raise taxes on those making less than $250,000 – or both.

Along this line, I fully expect Congress to go after the Bush tax cuts very soon. I predict that Congress will roll back the Bush tax cuts as of the end of 2009 rather than waiting until the end of 2010 when they are set to "sunset" automatically. I also expect President Obama to go along. I have often written about how America's income tax burden is increasingly falling on those who make the most money and create the most jobs. Apparently, President Obama and the Democrats want them to foot the whole bill.

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Earlier today, Treasury Secretary Tim Geithner announced a massive new government effort to unfreeze the credit markets, purchase troubled assets from financial institutions, make loans available to small businesses, etc., etc. Secretary Geithner indicated that the government will spend up to $2 trillion to support these vast rescue efforts.

Geithner also indicated that the government would undertake serious measures to stimulate private investment in the troubled assets it will be buying from financial institutions, but he made it clear that the government will act swiftly in the meantime.

Secretary Geithner also indicated that the government is in the process of organizing another massive project to directly stimulate the housing market. He said the details of this housing revival effort will be announced soon and did not put a number on the amount of money they plan to spend on this project, but the assumption is it will be at least $1 trillion.

I wrote about the likelihood of this massive financial rescue effort last week, so you should not be surprised. Nevertheless, the prospect of the government spending another $3 trillion, in addition to the $1 trillion stimulus package passed by the Congress is simply staggering!

I will have more to say about this latest development as the details are made available. In the meantime, the stock markets are selling off hard following Geithner's much-anticipated speech. We can only hope that today's Treasury announcement and the passage of the Senate stimulus package don't send stocks into a new downward leg in the bear market.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Buy American, Buy Depression (very good)
http://www.realclearmarkets.com/articles/2009/02/buy_american_buy_depression.html

Pelosi's Indefensible Bill
http://online.wsj.com/article/SB123422399517965573.html

Detailed analysis of the "Buy American" protectionist threat
http://www.realclearmarkets.com/articles/Buy%2520American%2520_%2520Feb%25202009.pdf

It's Official - 2008 Was A Very Bad Year

Gary D. Halbert — Wed, 31 Dec 2008 15:16:33 GMT

IN THIS ISSUE:

"The 2008 market will go down in history"
"2008: We Learned What We Don't Know"
Happy New Year!!

Introduction

Happy Holidays! I hope that everyone who celebrated Christmas had a very merry one. We certainly did at the Halbert house. I am taking this week off to spend time with my son who is home from college. I will be back to my usual writing schedule next week.

As we close out 2008 tomorrow, I thought it might be good to look back at some of the unusual and unprecedented events that occurred this year. Accordingly, I have reprinted a very good article from MarketWatch that chronicles what happened in the investment markets and the economy this year.

Whenever unprecedented events occur, and we have seen many this year, there is always the question of whether we have learned from those experiences. On that note, I have also reprinted a very good article from economics and business writer Robert J. Samuelson on that very subject. I think you will find it very interesting.

QUOTE:
The 2008 market will go down in history
By Nick Godt

NEW YORK (MarketWatch) -- Investors lost trillions of dollars and U.S. stocks prices plunged to 11-year lows. Overseas markets suffered even worse declines.

Yet, to say that the 2008 market will go down in the history books might almost sound like whistling past the graveyard. As the U.S. and the global economies continue to worsen, investors are still licking their wounds and worrying about 2009.

Looking back to expectations at the start of the year, "the surprise was not that we had a bear market and a recession," said Hugh Johnson, chairman of Johnson Illington Advisors.

"The surprise was that events were as severe as they turned out," said the veteran adviser, who has over 40 years experience in the investment world. "I have been at this for a while and I've never experienced anything like this. It defies words to describe it."

What can be said is that many things that sounded impossible at the start of the year now have to be accepted as facts.

After its astonishing surge to nearly $150 a barrel this summer, oil now trades near $40. The market capitalization of General Motors is now lower than it was in 1927. Bear Stearns and Lehman Brothers are no more. In October, a 900-point swing in the Dow industrials became almost commonplace.

"I'd like to use the old roller-coaster ride comparison," said Paul Nolte, director of investments at Hinsdale Associates. "But it's been more like a one-way trip down the haunted house."

Trillions lost

In a way, it didn't matter that many market strategists and commentators often struggled for the right metaphor to describe the market. The numbers flashing on TV and computer screens across the globe often spoke, and continue to speak, for themselves.

As of Dec. 12, the Standard & Poor's 500 index had lost $6.17 trillion since hitting record highs in Oct. 2007.

That reduction in global stock wealth has outstripped the losses in the last bear market - the S&P 500 lost $5.76 trillion during the entire bear market of 2000-2002. Making matters worse, this one still has room to run.

By Thanksgiving, many individual investors discovered they would have been better off sticking their savings under their mattress rather than the stock market for the past decade.

On Nov. 20, the S&P crashed through the previous bear-market low of 776, made in October of 2002, to end its lowest close since April 1997.

The U.S. showed it hadn't lost its superpower qualities, as a home-grown housing bust and mortgage crisis spiraled into a global market collapse.

The S&P Broad-Market index, which blends more than 11,000 stocks from developed and emerging markets, has lost $17.7 trillion year to date. Most of the losses, or $16.1 trillion, were logged between May and December.

"Until May, global markets were still expected to grow faster than the U.S., as China was seen growing more than 10%," said Howard Silverblatt, index analyst at S&P.

That optimism evaporated as the credit crisis spread around the globe and the U.S. recession clipped the outlook for global growth.

In November, the World Bank said China's economy is likely to expand at a 7.5% rate in 2009, its slowest pace since 1990.

Once leaders in emerging markets, stocks in Russia have now plunged 72%, those in Turkey are off 68%, and those in India have fallen 67%.

In October, Japan's Nikkei 225 hit a 26-year closing low; Iceland's exchange tumbled 81%, while Brazil's Bovespa index slumped 25%, its biggest one-month percentage loss in 10 years.

Dow swings

At times earlier in the year, it looked like investors were going to get a break. After the near-collapse and subsequent bailout of 58-year old investment firm Bear Stearns in March, markets found some degree of stability and even gained back some ground until May.

But as more Wall Street institutions crumbled, all beset by investments linked to bad home loans, fresh selling bruised stocks. After Lehman Brothers went bankrupt late in September, one of a string of large financial failures and government bail-outs that month, stock markets set multidecade records for lows reached and big swings registered.

In October, the S&P 500 had its most volatile month since 1929, right after the stock market crash that preceded the onset of the Great Depression.

The Dow plunged to its worst point drop on record, down 777 points, on Sept.29. By Oct. 15, the index had registered 508- to 733-point drops in three separate session.

The index also proceeded to surge to its biggest point gain on record, up 936 points, on Oct. 13. According to S&P, over the past 60 trading sessions alone, there were 17 days where stocks moved up or down by at least 5%. To put this in perspective, there had only been 17 days of 5% or more swings over an entire 53-year period, between 1955 and 2008.

Between Oct. 27 and Nov. 4, the day of U.S. Presidential election, stocks on the S&P surged more than 18%. But between Nov.4 and Nov. 20, they proceeded to slide 25%, before gaining more than 16% through Dec. 11.

"Playing those swings correctly, an investor could have made a 72% return," said S&P's Silverblatt.

Safe havens or 'money for nothing'

But most investors are unlikely to have tried playing the swings. Safety and preservation of capital became the name of the game for many.

The need to protect one's savings became so pressing that on Dec. 9, the government sold 4-week Treasury bills at a yield of 0%, meaning that bond investors were happy to just have the principal they'd lent back to them without a loss.

The yields on other government bonds, considered the safest among all investment classes, also reached lows unseen since the government began keeping records in the 1950s.

While investors opened their wallets to the U.S. government, they lent very little to anyone else. Commercial paper markets froze after the Lehman collapse, threatening to put out of business anything from big banks to small firms dependent on short-term loans. Borrowing costs for companies surged.

Even banks became increasingly unwilling to lend to each other, as more took huge write-downs from bad assets. The London interbank offered rate, or Libor, soared to record highs near 7% after Congress first rejected a $700 billion bailout for financial firms.

Oil's wild ride

Until July, the one sure bet for the nervous investor had been commodities. Hopes for global growth, along with a combination of natural disasters, geopolitical tensions, a sliding dollar and market speculation, had led energy and food prices to rocket, causing severe food shortages in poorer countries.

It was a shock when oil surpassed $100 a barrel in January. But those prices looked cheap as the futures contracts skyrocketed to $147 a barrel by July.

That level turned out to be commodity's swan song. It has plunged to trade around $40 a barrel in December, a swift descent echoed by other commodities.

"The rise in oil to $147 per barrel and its subsequent decline to $40 was vicious volatility," said Hugh Johnson. "It defies words to describe it. It certainly made life tough for the year."

Goldman Sachs analysts, who were laughed at back in 2005 when they first suggested oil might reach $100 in a "super spike," now predict oil could fall back to $30 a barrel in the coming months.

Gold also hit a record high above $1,000 an ounce in March, before slumping back below $700. The precious metal, however, has managed to crawl back to trade above $800 an ounce as investors seek safe-haven assets.

Besides oil, food stuffs such as corn also first reached record highs above $6.5 a bushel in June, before sliding back under $4 a bushel amid fears of a global recession.

A surge in the dollar helped precipitate the collapse of commodities. The dollar halted its four-year slide around May and proceeded to rally against most of its counterparts as financial and economic concerns spread globally, turning the U.S. currency into a safe-haven play, along with the Japanese yen.

The U.S. currency jumped 13% against a basket of six major counterparts over the course of the year so far.

Dramatic and record-setting swings in nearly every sector of security have sent professional investors thumbing through the record books.

"Nothing compares with the crisis that we have faced," said Johnson of Johnson Illington Advisors. The U.S. stock rout already registers as the fourth-worst bear market since 1898, he said. "It's clearly historic."

Here's another anecdote of how market perceptions and reactions may have changed: With the Dow swinging within an 800 point range on Oct.24, there was little immediate market reaction when Alan Greenspan, the once-venerated former chairman of the Federal Reserve, admitted to making a mistake when he testified to Congress.

While every one of his utterances used to be parsed by analysts, few now reacted when Greenspan said his view of the world might not be right after all.

"Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."
END QUOTE

The following article was published yesterday in the Washington Post, RealClearPolitics.com and elsewhere. Robert Samuelson eloquently points out how many longstanding assumptions were dashed in 2008, as his title suggests below.

QUOTE:
2008: We Learned What We Don't Know
By Robert J. Samuelson

It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best. The great lesson of the past year is how little we understand and can control the economy. This ignorance has bred today's insecurity, which in turn is now a governing reality of the crisis.

Go back to the onset of the crisis in mid-2007. Who then thought that the federal government would rescue Citigroup or the insurance giant AIG; or that the Federal Reserve, striving to prevent a financial collapse, would pump out more than $1 trillion in new credit; or that Congress would allocate $700 billion to the Treasury for the same purpose; or that General Motors would flirt with bankruptcy?

In 2008, much conventional wisdom crashed.

It was once believed that the crisis of "subprime" mortgages -- loans to weaker borrowers -- would be limited, because these loans represent only 12 percent of all home mortgages. Even better, they were widely held, diluting losses to individual banks and investors.

Wrong. Subprime mortgage losses (20 percent are delinquent) triggered a full-blown financial crisis. Confidence evaporated, because subprime loans were embedded in complex securities whose values and ownership were hard to determine. Similar doubts afflicted other bonds. Demand for all these securities shriveled. Lenders hoarded cash and favored safe U.S. Treasuries. Because investment banks and others relied on short-term debt (a.k.a. "leverage"), a loss of confidence and credit threatened failure. Lehman Brothers failed. The financial system had overborrowed and underestimated risk.

It was once believed that American consumers could borrow and spend more, because higher home values and stock prices substituted for annual savings. Consider: From 1985 to 2005, the personal savings rate dropped from 9 percent of disposable income to almost zero. But over the same years, households' net worth (assets minus liabilities) quadrupled, from $14 trillion to $57 trillion.

Wrong. In recent years, consumers increasingly overborrowed, especially against inflated home values. With the housing "bubble" now collapsed, net worth is falling. Homeowners' equity in their homes -- the share not borrowed -- is at a record low of 45 percent, down from 59 percent in 2005. Consumers have responded by retrenching big-time. Retail sales have dropped for five straight months; vehicle sales are a third below 2006 levels.

It was once believed that the rest of the world would "decouple" from the United States. As Europe, Asia and Latin America expanded, their buying would cushion our recession. A better-balanced world would emerge, with smaller U.S. trade deficits and lower surpluses elsewhere.

Wrong.The crisis has gone global; economic growth in 2009 will be the lowest since at least 1980. Even China has slowed; steel output was down 12 percent in November from a year earlier. The crisis has spread through two channels: reduced money flows and reduced trade. Global financial markets are interconnected. Customer redemptions forced U.S. mutual funds and hedge funds to sell in emerging markets (such as Brazil or Korea), whose stocks have dropped about 60 percent from their peak. Credit has tightened, as money flowing into developing countries is expected to shrink 50 percent in 2009 from 2007 levels, estimates the World Bank. The bank expects trade, up 7.5 percent in 2007, to fall in 2009 for the first time since 1982.

So much that has happened was unexpected that the boom and bust's origins are obscured. These lie in the side effects of declining inflation that started in the 1980s and, in the process of reducing interest rates, boosted stock prices and housing values. Recall that in 1981, when inflation was 9 percent, 30-year mortgages averaged 15 percent. As rates fell (mortgages were 10 percent by 1990, 7 percent by 2001), home prices rose. People could afford more. With lower interest rates, stocks became more valuable.

All the bad habits of recent years -- excessive borrowing by consumers and money managers, careless and reckless lending -- grew in a climate when gains seemed ordained. Even after the "tech bubble" burst in 2000, stock prices at year-end 2002 were seven times their year-end 1981 level. Home prices increased steadily; in the 1990s, they rose 45 percent.

Prosperity, apparently forgiving of mistakes, bred the complacency that undid prosperity. On bad mortgages, losses could be recovered by selling the homes at higher values. Thus rationalized, bad loans were made. Some stocks might decline, but over time, most would rise. Risk seemed to recede, so investors and money managers undertook riskier strategies.

What will emerge from these shattered illusions? Will the crash stir social unrest, abroad if not here? Will Americans become so thrifty that they hamper recovery? Will economic nationalism surge? How will capitalism be reshaped? Much depends on whether the frantic policies to combat the recession succeed. Probably they will, but there are no guarantees. Our ignorance is humbling.
END QUOTE

Happy New Year!!

2008 brought us some tough times, both in the markets and the economy. The credit crisis is still very serious, and the housing slump gets worse by the month. It is clear we are in a recession and we still don't have a good idea how long it will last or if it will get even worse. So, the outlook for 2009 is very uncertain.

Most of the trusted sources I read forecast that the recession will continue through at least the first half of 2009 and maybe longer. None of my best sources has a resolute opinion on whether we've seen the worst of the credit crisis or not. Ditto for the stock market outlook. So it remains to be seen what lies ahead. I don't remember a time of such economic and financial uncertainty in my lifetime.

Fortunately, America has survived serious recessions and financial crises in the past, and I have no doubt that we'll weather this one as well. How long it will take, unfortunately, is anyone's guess at this point. Of course, it never hurts to pray for our leaders, including our new president.

Wishing you a Happy & Profitable New Year,

Gary D. Halbert

SPECIAL ARTICLES

Chronology of Major World Events in 2008 – Part One
http://www.monstersandcritics.com/news/usa/features/article_1448683.php/CHRONOLOGY_Major_world_events_in_2008_Part_I

Chronology of Major World Events in 2008 – Part Two
http://www.monstersandcritics.com/news/usa/features/article_1448684.php/CHRONOLOGY_Major_world_events_in_2008_Part_II

Credit Crisis: Do Bush & Paulson Have A Clue?

Gary D. Halbert — Tue, 18 Nov 2008 21:19:08 GMT

IN THIS ISSUE:

Stratfor's Take On The Subprime/Credit Crisis
Treasury Secretary Paulson Changes The Plan
Do They Even Have A Clue What To Do?
Bailout's Next Phase: Consumer Loans (Maybe)
More From Stratfor On The Credit Crisis & The Economy
Gauging The Recession & The Economy - Not Good
Stock Markets Detest Uncertainty & Economic Woes
Conclusions - They Are Few

Introduction

We begin this week with some interesting analysis from our good friends at Stratfor.com regarding the subprime/credit crisis - how it unfolded and how it may play out from here. Following that, we'll look at the latest curve ball from Treasury Secretary Paulson who last week announced that the government will not buy up troubled mortgage securities from banks, but instead will proceed with more equity infusions for financial institutions that are in trouble.

In addition, Secretary Paulson announced that a significant part of the $700 billion rescue package - most all of which was originally intended to buy up troubled assets - will now be redirected toward consumer debt, including such things as student loans, auto loans and credit card debt. One wonders if the government really has a clue about how to resolve the financial crisis and unfreeze the credit markets.

And finally, we take a look at the current state of the economy and the recession. News continues to worsen, especially forecasts for 4Q GDP, which many economists and analysts now believe could be negative 4-5%. All of this continues to weigh on the stock markets, which as this is written, are threatening to make new lows. It's a lot of ground to cover in one E-Letter, so let's get started.

Stratfor's Take On The Subprime/Credit Crisis

QUOTE:
The root of the American credit crisis is similar to that of previous recessions. As profits pile up during economic expansions, investors eventually find it difficult to find investments that generate large returns, so they send their money after riskier prospects. In the [economic] expansion that just ended, the most important of those questionable investments was subprime mortgages, culminating in mortgage loans that required minimal to nonexistent credit checks, down payments or even proof of income. In total, some $550 billion of subprime loans (and a separate $725 billion of Alt-A loans -- the next quality step up from subprime) are currently outstanding.

The worst of these mortgages granted very low teaser interest rates that adjusted to normal rates after a period of two to five years; there were some $350 billion of these in subprime, and an additional $385 billion in Alt-A. While virtually none of these questionable-quality mortgages have been granted since the credit crunch began roughly a year ago, those resets are now weighing heavily on the housing market. As the rates reset, borrowers with questionable income and credit are often unable to meet the new, grossly enlarged payments based on the new rates. The result is a cascade of foreclosures that gluts the housing market, pushing prices down. So far $55 billion of subprime mortgages are in foreclosure, and just over another $80 billion are in severe delinquency. The numbers for Alt-A are $40 billion and $45 billion, respectively.

Under normal circumstances, this is more or less where things would have ended: A glut in regional housing stocks where subprime mortgages were most overused -- especially in the Southern California, Las Vegas and Miami regions -- would lead to a recession in those housing markets and perhaps some leakage into the broader national housing market.

But there is another step in the process that made the problem bigger. Mortgages are only rarely kept by their issuers -- instead they are bundled into packages and sold to interested investors. This serves three purposes. First, since the mortgage maker can sell his loan for a profit, he can then turn around and make another mortgage. Second, this secondary tier of investors brings an entirely new source of capital into the market. Third, these packaged mortgages can be sold to yet more investors, creating a new series of mortgage-backed assets (and securities) that can be traded abroad. Taken together, this widens and deepens the capital pool and reduces mortgage rates for everyone.

The problem is that as market players chased after ever-shrinking returns, no one treated the dubious mortgages as anything different from normal mortgages -- and that includes the ratings agencies whose job it is to evaluate products. All banks and investment houses are required to hold back a percentage of their assets in cold hard cash to keep from becoming overleveraged. This reserve percentage is based upon myriad factors, but the most important one is the risk level of the investments. Mortgage investments are -- or were, until recently -- widely considered to be among the safest investments available because homeowners will do everything they can to avoid missing payments and losing their homes.

Subprime mortgages are more likely to fall into default. But add in the impact of teaser rates -- and the fact that many of these mortgages were granted without requiring down payments so no equity was ever earned -- and essentially the effect is that time bombs were hardwired into these packages of tradable mortgages.

Beginning in late 2006, these teaser rates began to adjust to normal rates and the bombs started going off. That decreased the value of the mortgage-backed assets directly by their affiliation with subprime in specific, and indirectly via their affiliation with property in general. Suddenly, anyone holding the weakening mortgage-backed securities found themselves needing to use those cash reserves to rebalance their asset sheets. As the price drops intensified, anyone who might have been willing to purchase or trade these mortgage-backed securities suddenly lost interest. The holder then held an asset of questionable value that he could not unload.

As the cash crunch of individual firms increased, two things happened. First, investment houses started snapping like twigs because they are uniquely vulnerable to credit crunches. Banks, unlike investment houses, are required to hold a certain percentage of their deposits back to cover their losses should disasters strike; right now that percentage is 10 percent. The major investment houses, however -- which are regulated by the Securities and Exchange Commission instead of the Treasury -- are only required to set aside a minuscule amount of cash, which comes out to less than 1 percent of their total asset list and therefore provides them with a smaller cushion than banks.

By the end of September, the major Wall Street investment houses had been broken (Bear Stearns), gone bankrupt (Lehman Brothers) or were forced to recategorize themselves as banks, thus submitting themselves to the regulatory authority of the Fed (Goldman Sachs). In a few short months, everything on Wall Street changed.

Second, banks also needed to rationalize their balance sheets by dipping into their reserves. Luckily, since banks have a 10 percent reserve ratio, they have much more room to maneuver than investment houses (although some, such as Washington Mutual, still cracked under the pressure).

It is at this point that Stratfor gets interested in the economics of the issue, because it is at this point the problem transforms from angst for Wall Street into a danger for the broader system.

When an investment house faces a credit crunch (or goes under) the impact is rather limited -- the only entities that are truly hurt are those that purchased shares in the house itself -- but when a bank faces a crunch, the impact is much greater. The best means that banks have of rebuilding their emergency reserves after a write-down is to reduce lending and hoard their income until their reserves are built up again. Such actions immediately reduce the availability of credit for everyone across the entire economy -- homebuyers cannot get mortgages, companies cannot borrow to fund expansions, credit card rates go through the roof. Voila, a Wall Street crisis becomes a national economic crisis.

U.S. Treasury Secretary Hank Paulson's $700 billion bailout plan is an attempt to address the problem at its source: the nonliquidity of the mortgage-backed securities. The government will offer to exchange these securities for cold, hard cash. In one fell swoop, banks can rid themselves of untradable assets of questionable value while recapitalizing their reserves. Flush with cash and sporting newly healthy asset sheets, this should unfreeze the credit picture and allow banks to get back into the business of banking -- most notably lending. END QUOTE

Treasury Secretary Paulson Changes The Plan

I am forced to depart from Stratfor's analysis of the credit crisis at this point for one important reason (we will revisit Stratfor below). On Wednesday of last week, Treasury Secretary Hank Paulson made it official that the government is abandoning the original plan to spend $700 billion to buy up troubled mortgage assets from financial institutions.

The next phase of the Treasury's $700 billion "Troubled Asset Relief Program" (TARP), according to Paulson, would have the government continue to take equity stakes in banks and financial institutions vis-à-vis more cash infusions in exchange for stock, rather than buying up their bad mortgage-related assets and taking them off their books.

This seems like an odd turn of events given that the credit markets are still more or less frozen and we are in a recession that is looking more and more severe. Yet Paulson defended the latest swerve in the TARP mission by noting that some of the $700 billion needs to be redirected at increasing the availability of student loans, auto loans and credit cards.

Some analysts viewed the Treasury's latest redirection of TARP funds as merely the recognition that the Bush Administration has finally realized that some of the TARP billions needs to be spent directly on consumers. Clearly, the public perception is that the TARP is simply a bailout of banks and Wall Street financial institutions. Some analysts welcomed the latest announcement.

Do They Even Have A Clue What To Do?

Your editor has a different take on the latest announcement by Treasury Secretary Paulson. First, I have to question whether the Bush Administration and the Treasury Secretary know what they are doing. The original $700 billion rescue plan, which was hastily passed by Congress, was intended specifically to: 1) buy up troubled mortgage-related assets from banks and others; 2) hold those assets on the Treasury's books until the housing slump subsided; and 3) eventually sell those assets back into the market when it was expedient to do so.

Supposedly, the Treasury was busy constructing the TARP infrastructure and hiring lots of people to implement the massive buying of troubled mortgage-related debt. However, in October, the Treasury shifted its focus and allocated some $250 billion for direct equity infusion to the major banks in return for stock (warrants).

The banks that agreed to receive equity investments from the Treasury included Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp. Interestingly, some of these large banks resisted the effort and opposed the cash infusion in return for equity. However, it was widely reported that Secretary Paulson made it clear that the cash infusion was not optional.

The next twist, as noted above, came last Wednesday when Paulson announced that the TARP will not purchase troubled assets from financial institutions, but instead will continue with equity infusions for banks (and non-banks) and somehow provide other TARP money for student loans, auto loans and credit card loans. This all suggests to me that the Bush Administration and the Treasury Secretary don't know what they're doing!

Obviously, the move to make TARP money available for student loans, auto loans and credit card loans is in reaction to growing pressure in Congress to make some of the money available for consumers, rather than just financial institutions. President Bush and Secretary Paulson know that they must go back to Congress for authorization of the second $350 billion installment of the TARP. But does Congress have any better idea how to spend the money than Paulson?

To me, it makes much more sense for the government to buy up the troubled assets and hold them until the housing market recovers than to buy increasing equity stakes in banks. However, in his press conference last week, Secretary Paulson said that he decided to drop the plan to buy troubled assets because it is no longer the best way to restart the credit markets. What I read that to mean is that it will take too long to buy up the troubled assets, and the banks could fail in the meantime. Thus, the decision to inject $250 billion now in return for stock was made.

Bailout's Next Phase: Consumer Loans (Maybe)

Congress is quite unhappy with Secretary Paulson for not forcing banks to make new loans with the funds they have received from the TARP. Many in Congress are also unhappy that some of the TARP money has not been earmarked to help homeowners avoid foreclosure. Paulson responded last Wednesday stating that, as a part of the new direction, the Treasury is looking into ways to use some of the TARP money to prevent home foreclosures. Specifically, he said they are considering a plan that has been floated recently by the FDIC, although he noted that the plan has some problems in his view.

Paulson stated in his news conference on Wednesday that the market in consumer finance "is currently in distress, costs of funding have skyrocketed and new issue activity [loans] has come to a halt." As a result, Paulson also announced that the Treasury is considering setting up a new lending facility to focus on consumer loans. Paulson said he was more interested in helping the currently stalled market for financing of credit card and auto loans, among other things.

The Treasury Department says nothing has been finalized, but reportedly Paulson and his advisers are looking into using TARP funds, along with some money from outside investors, to buy up credit card debt, auto loans and other, non-mortgage consumer debt. The financing mechanism for that type of debt, often called "securitization," has stalled like much of the rest of the banking sector. Paulson is hoping that buying up debts directly will be a better way of stimulating lending than just purchasing banks' shares and trying to force the firms to extend loans.

Interestingly, this new lending mechanism sounds a whole lot like another "Collateralized Debt Obligation" (CDO). Accordingly, one wonders why buying up credit card and auto loan debt is any better or easier to do than buying up mortgage bonds. In fact, when it comes to credit card debt, it could be an even riskier way to use taxpayer money. That's because credit card debt, unlike home mortgages, is unsecured. If a borrower defaults, there's no house to repossess. What's more, credit card debt, unlike a mortgage, can be wiped away in bankruptcy.

Pardon me, but this raises another obvious question. Would a huge new round of CDO-like securities be good for investors? I think not. We are in the midst of a massive deleveraging in the credit and investment markets. You would think that Bush advisors and Secretary Paulson would realize this.

Given these potential problems, it occurs to me that Secretary Paulson may simply be talking about such consumer oriented programs to satisfy Congress, when in reality he may have no plans to actually implement these proposed new plans. These ideas may simply be lip service for the time when the Treasury has to ask Congress for the second $350 billion to fund the TARP. The TARP reportedly has only apprx. $60 billion left from the initial $350 billion allocation.

Finally, it appears to me that President Bush and Secretary Paulson have decided to simply ‘run out the clock' on the bailout and hand it over to the Obama administration (note: Paulson will not be staying on at Treasury). On Wednesday, Paulson stated that he had set no date for going back to Congress for the additional $350 billion, possibly a hint that he won't.

Paulson also said he has no plans to establish major new programs ahead of President-elect Obama's inauguration. He said, "I'm not looking to make anything more difficult by implementing programs that don't need to be implemented before they're here." Paulson also said the Treasury will likely keep the remaining $60 billion on the sidelines in case of emergencies.

So, it increasingly looks like Bush and Paulson are content to run out the clock and hand this enormous credit crisis over to the Obama team.

More From Stratfor On The Credit Crisis & The Economy

I will tell you that Stratfor is less pessimistic about the credit crisis and what lies ahead for the economy than numerous other sources I read. Dr. George Friedman and his staff believe that the Treasury will be successful in largely turning around the credit crisis next year. Likewise, barring any major surprises, they do not believe that the recession will be long and overly severe. I hope they are right.

QUOTE
In our analysis of the current financial crisis in the United States -- and the world as a whole -- we have sought the center of gravity of the problem. We approached that simply by asking one question: is what is going on simply another inflection point in the business cycles that have occurred since World War II, or does it represent a systemic failure such as that which happened during the Great Depression? This struck us as the urgent issue.

We noted that in the Great Depression, the U.S. gross domestic product (GDP) contracted by nearly 50 percent over three years. It was an unprecedented calamity. Bearing this in mind, we compared the current situation to other events since World War II to see if there was a framework for measuring it. We found that framework in the Savings and Loan crisis of 1989, when an entire sector of the U.S. financial system collapsed and the federal government intervened -- essentially guaranteeing or purchasing commercial real estate, whose price decline had triggered the crisis.

We noted that the total amount allocated by the federal government in that crisis was about 6.5 percent of the GDP (and the amount actually spent, before recouping of costs via sales, was less than 3 percent). We noted also that in the current crisis another sector of the financial system -- the investment banks -- were devastated, and that the federal government intervened, this time at about 5 percent of GDP.

Meanwhile, the equity markets had not declined as much as they did in 2000-2001, and as of the second quarter of this year the economy was still growing by more than 2 percent. From this we concluded that the U.S. economy was moving into a recession but that the recession would not break the framework of the postwar economy, although clearly the degree of government intervention will reshape the financial markets.

The United States is a $14 trillion economy with a potential problem amounting to $1-2 trillion (and probably far less than that). If the government intervenes, it will create inequities and imbalances in the system. But between the size of the economy and the government printing press, the problem will be managed -- particularly because there are underlying assets -- houses -- that can be monetized in the long run. The gridlock in the financial system will undoubtedly create a recession, but there hasn't been one for seven years and it's high time. END QUOTE

Stratfor seems to believe that the worst of the credit crisis is now behind us, barring any major surprises. They note that bank lending has increased somewhat since the $250 billion injection in October. Likewise, they believe the recession will likely end in the first half of next year.

As always, I appreciate Stratfor's insights and the ability to share them with you. I encourage you to visit their website at www.Stratfor.com and consider subscribing to their always insightful analysis. Click HERE to get a free 7-day trial subscription to Stratfor .

Gauging The Recession & The Economy - Not Good

When Stratfor suggests above that "...the recession would not break the framework of the postwar economy...," I take that to mean that they do not believe the current recession will be worse than the recessions of 1973-74 or 1981-82, both of which lasted well over a year. Most economists seem to agree that the current recession probably began in July of this year.

In late October, the Commerce Department reported that 3Q GDP had contracted by an annual rate of -0.3%. On November 25, we will get the second estimate of 3Q GDP, and the consensus now is for a revision to -0.6%. That will not come as a surprise.

What is much more worrisome is the outlook for the 4Q. Economists and analysts are downgrading their estimates for 4Q GDP. I am hearing increasing forecasts of a 4-5% drop in GDP for the 4Q! We won't get the first estimate of 4Q GDP until late January, so it will be interesting to see what the consensus is after the first of the year. Suffice it to say, it will be ugly.

Retail sales fell a record 2.8% in October, and retail chains are bracing for the worst holiday shopping season in years. Best Buy now expects its sales to fall 8% for the year. What a shift - in early September, Best Buy was forecasting a sales increase of 3% for the year. Best Buy CEO Brad Anderson said, "Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Best Buy rival CircuitCity filed for bankruptcy last week.

Economists and analysts are increasingly forecasting that the recession will last at least until late next year. If that is true, the current recession would be on par with the recessions of 1973-74 or 1981-82. And it could be worse.

Most forecasters now expect the US unemployment rate to climb to at least 8% sometime next year, with many expecting that to occur in the first half of next year. Over a half a million jobs have been lost in the US in the last two months alone, driving the unemployment rate to 6.5%, a 14-year high. 8% unemployment would be the highest in 25 years.

Stock Markets Detest Uncertainty & Economic Woes

Everywhere I go, people ask me the same question: What's it gonna take for this crazy stock market to find a bottom? I don't tend to talk about my business or investments to people in my personal life, but people who have never inquired before are asking me for advice now - family, friends and even people who don't know me well but know I work in the investment industry.

The fact is, no one knows when this bear market will end. If someone tells you they know when the bear market will end, keep one hand on your wallet!

One thing is clear, however. The stock markets have consistently reacted negatively to the government's massive $700 billion bailout plan. Let's take a look at recent market action. Treasury Secretary Paulson submitted the huge bailout plan - which was intended to fix the credit crunch and stabilize the market - to Congress on Saturday, September 20. Take a look at what happened thereafter. The stock market tanked.

The Dow Jones Industrial Average plunged from above 11,000 on September 22 to below 8,000 on October 11 at the low. Certainly not the reaction that Bush, Paulson & Company had expected. The equity markets do not like uncertainty and were shocked at the massive size of the requested bailout - we all were.

The stock market tried to bounce back from the low, but on October 14 Secretary Paulson announced that on the prior day he had met with the nation's largest banks and had informed them of the government's plan to take equity stakes totalling $250 billion in their companies. You can see in the chart above that the stock markets declined sharply once again to near the October 11 low.

The markets once again tried to recover, climbing back above 9,500 in the Dow. Then last Wednesday, November 12, Secretary Paulson announced that the Treasury would not buy any of the banks' troubled assets and would only take equity positions in their stock. Now, we find the equity markets back near their October lows and threatening to make new lows as this is written.

It remains to be seen if the stock markets are in the process of forming a bottom. From a technical perspective, if the Dow can hold above the October lows once again in the next few days, that would be very encouraging (triple bottom), and we could see a much overdue strong rally in this bear market. If not, and we make new lows, expect another round of aggressive selling to follow.

Conclusions - They Are Few

I know that many of my readers are opposed to the government bailout of financial institutions. I assume that many of you will also be opposed to the latest plan to spread some of the bailout money to consumer loans. In normal times, I would agree - just let the chips fall.

However, the current credit crisis is unprecedented and the consequences of letting America's largest banks and financial institutions fail would virtually ensure a depression and a Japan-style debt deflation that could last for a decade or longer.

Of course, it remains to be seen if the government bailout plan will work. But most of my trusted sources agree that some kind of large government rescue plan was required, since letting the credit system go down the tubes would have resulted in financial Armageddon.

Personally, I believe the government will have to resort to buying up many of the toxic mortgage-related securities and taking them off the market before this crisis abates. But based on the hints and inuendo from Secretary Paulson, it seems that President Bush has decided to leave that decision to his successor, Barack Obama. I would not want to be in his shoes.

Finally, I know that many of you who read this E-Letter are facing tough decisions about what to do with your investments, your 401(k) and other retirement accounts at this point. Keep in mind that my staff of Investment Consultants and I stand ready to assist you in making those decisions if you would like to talk about it - free of charge and with absolutely no pressure to invest in the programs we recommend.

You can call us at 800-348-3601 or e-mail us at info@halbertwealth.com. We don't claim to have all the answers, but we've been through bear markets before, and we are happy to consult with you on the issue of what to do now.

Wishing you a market bottom,

Gary D. Halbert

SPECIAL ARTICLES:

Paulson - Fighting the Financial Crisis
http://www.nytimes.com/2008/11/18/opinion/18paulson.html?_r=1&ref=opinion&oref=slogin

To Prevent Bubbles, Restrain the Fed
http://online.wsj.com/article/SB122688652214032407.html

Fred Barnes on how Obama could help Republicans
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/819jyryw.asp?pg=1

"Buy-And-Hold" Bites The Dust - Now What?

Gary D. Halbert — Tue, 11 Nov 2008 20:54:52 GMT

IN THIS ISSUE:

Economic Overview
The Conventional Wisdom Was Wrong
The Shortcomings Of Index Investing
Are Low Fees The Key To Investment Success?
Risk Management Is Crucial

Introduction

In the newsletter business, it's rewarding to see market action reinforce the advice you have been giving in your publication. Ever since I started writing this E-Letter, I have warned of the perils of passive "buy-and-hold" investing in general, and "index investing" in particular. While adherents to these strategies like to trot out long-term charts and graphs supporting their case, I have always warned that passive investing can result in major losses at just the wrong time from the investor's perspective.

However, I have to admit that being right rings hollow in the aftermath of the carnage we have seen in the US stock market since its peak in October of 2007, and especially over the last month or so. It is estimated that over $8 trillion of investor value has been lost in the US equity markets since then, and no one knows how long the bear market may continue. Many Baby Boomers are now realizing that their passive investments have incurred huge losses at a time when capital preservation is far more important to them.

How did we ever get to the point where buy-and-hold became investment gospel? It's as if investors were convinced that it's OK to stay on the track and get hit by an oncoming bear-market train, since a bull-market train going the other direction would soon bring them back to where they were before, and eventually higher over the long term. Yet it has always made sense to me to step off the tracks (go to cash or hedge) to avoid oncoming trains altogether.

Many investors are now feeling as if their portfolios have been hit by a train and it's uncertain if and when one going the other direction (bull market) may come along. Since many of the highest investment balances were held by Baby Boomers nearing retirement, it's an even worse train wreck because they lack the lengthy time horizon that may be necessary for the market to regain recent large losses.

This week, I'm going to revisit the issue of passive investing, and especially index investing. I'll discuss why I think they became so popular, and why I continue to recommend actively managed programs that have the potential to reduce risk during market meltdowns. First, however, I'm going to give you an overview of the latest economic forecasts I am seeing. Let me warn you, the news is not good.

Economic Picture Getting Darker

Every economic forecasting group that I read has downgraded its predictions over the last few weeks in light of the plunge in the global equity markets in October. As noted last week, 3Q GDP was estimated at -0.3% (annual rate), and that estimate is likely to be downgraded later this month. Most forecasters are now predicting that 4Q GDP will be down at least 1-2%.

While forecasts earlier in the year suggested that the economy would rebound to positive growth in the second half of next year, such forecasts have all but disappeared. Now, there is a general consensus that the US economy will be negative for at least several more quarters to come. Specifically, that this will be the worst recession since the Great Depression. All of the sources I trust believe that it will take several years to work out of this financial crisis.

It remains to be seen if the stock markets have seen the bottom. In any event, most forecasters I respect believe that once the stock markets have bottomed, they will move into a broad, multi-year trading range. No one I respect is predicting a "V" bottom or a quick return to a bull market.

This is precisely why we need to revisit the problems associated with passive, buy-and-hold investment strategies. These strategies got killed over the last year, especially the last month or so, and are not designed to do well in a broad trading range, which could persist for the next several years. Fortunately, there are alternatives.

The Conventional Wisdom Was Wrong

The basics of passive investing are relatively simple. You put your money into a diversified portfolio, usually based on "asset allocation" strategies, and leave it there during good and bad market cycles. Armed with reams of historical data, the conventional wisdom was that including multiple asset classes in a portfolio would protect investors during all types of market conditions. While changes are made periodically to rebalance allocations or adjust for advancing age, the portfolio is largely a "set it and forget it" instrument, so the theory goes.

The historical data also suggested that most hands-on mutual fund managers were not adding value above and beyond what the broad market indexes could provide, so mutual funds tied to various market indexes were developed to offer a low-cost alternative to actively managed mutual funds. However, back in December 2005, I wrote an E-Letter about the potential drawbacks of passive index investing:

"'Index investing' is growing like wildfire among investors today…And it's no wonder why. The allure of a simple, low-cost investment strategy tied to market indices that have been shown to grow over long periods of time sounds irresistible…The main problem is that Wall Street's ad machine is only telling half of the story. They often use historical time periods that are far longer than what most people have to invest, and they also fail to disclose how much an investor might lose in a bear market or major correction."

To illustrate, during the 2000 - 2002 bear market, the S&P 500 Index lost over 44% of its value, and the Nasdaq Composite fared even worse, losing over 75%! Unfortunately, however, neither investors nor Wall Street learned a lesson about how fickle the market can be, and at the worst possible times.

Thus, even with those huge 2000 - 2002 market losses fresh on their minds, investors still flocked to index investing as if there would never be another bear market or correction. I think there were several reasons for this, including:

Having just been through a major bear market caused some of them to think that the worst was over, and that the market would now over-perform in order to get back to historical long-term averages. Unfortunately, they failed to study history, which shows that, since 1952, bear markets have occurred an average of once every five or so years, so we were actually due for a bear market.

The market's action during 2003 through 2006 seemed to confirm index investors' convictions that happy days were, indeed, here again. The S&P 500 Index gained 28.68%, 10.88%, 4.91% and 15.79% in 2003 through 2006, respectively. This annualized return of 14.74% over those four years compared favorably to the 10% to 12% touted as the long-term average stock market return, so "reversion to the mean" became the watchword of the day.
Though 2007 saw the first warnings of the subprime crisis, the Dow and S&P 500 market indexes still managed to hit all-time record highs in October of 2007. Investors were convinced that this, too, shall pass and stayed invested.
The bear market of 2000 - 2002 also claimed another victim, and that was the average mutual fund manager. Unfortunately, all active management strategies seemed to be lumped into the same category by the financial media and Wall Street firms. No difference was made between an active mutual fund manager and specialized strategies such as market timing, sector rotation, long/short or a variety of other active management techniques. Wall Street even promoted flawed statistics to support their point, as I noted in my June 21, 2005 E-Letter.
Investors were subjected to so many different investment opinions and theories that many of them just didn't know which way to turn. They were paralyzed by all of the conflicting information out there. I call it "information overload." Thus, they chose the option that seemed to be the simplest, plus it was supported by Nobel Prize Winning theories. How could they possibly go wrong?
Since most index investing used asset allocation strategies based on the work of Nobel Laureate Dr. Harry Markowitz, many investors felt that using multiple asset classes including bonds and international investments would protect them in a bear market. Another big plus was that the financial services industry found Markowitz's theories relatively easy to incorporate into computerized portfolio modeling programs, resulting in highly effective proposal presentations.

Unfortunately, we have learned that the subprime crisis spared no asset class as it ravaged global stock and bond markets. The traditional correlation among asset classes broke down, which is often the case in severe bear markets.
Finally, fees became one of the major selling points of passive index investing, especially among the financial media (more about this later on). I now find it interesting that some members of this same financial media are now declaring that "buy-and-hold is dead." How convenient to be able to change your story to fit the times.

Over the course of my 30-plus-year career in the investment business, I have found that most investors' goals are very simple. They want to put their money into investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of return; and 3) will not suffer large losses along the way. While these goals are relatively simple, how you invest to achieve them is not a simple process.

However, the investment industry is always willing to create products to fill investor demands, some of which are based on the conventional wisdom of the day. For those wanting a simple solution, the financial services industry created a number of different "one-size-fits-all" investment products, with index investing being one of the most popular.

They even created "target-retirement" and "lifestyle" funds that incorporated asset allocation so that investors need only know the year they wanted to retire in order to select the "right" investment. I guess you could call this the ultimate in conventional wisdom portfolios.

Chinks In The Index Investing Armor

Before I discuss some of the arguments against index investing, let me say that I am a big fan of both index mutual funds and ETFs. I feel that the ability to "buy the index" has changed the investing landscape in a number of positive ways, though I don't always agree with proponents of buying and holding index funds. Several of the Advisors whose programs I recommend use index mutual funds to facilitate their active management strategies, so I am a big fan.

That being said, I have often advised against combining index funds and asset allocation programs as the sole investment strategy in an investor's portfolio. The reason for this is within the passively managed nature of the index fund. Index funds, by their very nature, will not exit positions and move to cash during bear markets or downward corrections. An index fund will follow its underlying index, even if it dives right into the dirt (or gets hit by a train).

Index fund proponents say that this is no problem - just diversify among a variety of index funds covering various stock and bond asset classes, and everything will be OK in the long run. I can best illustrate this strategy using an investment offer I once received from a financial Advisor back in 2005. While the information is somewhat dated, the shortcomings are the same today as they were then.

The Advisor recommended only "index" funds allocated among a variety of selected funds based on traditional asset allocation principles. The Advisor went on to illustrate the performance of a set of index funds over a 25-year period of time from 1979 through 2004. The performance was excellent, especially as compared to fixed rate investments like CDs and fixed annuities.

The Advisor's implication was clear: the market indexes will do well over long periods of time, so all you need to do is invest in his special blend of index funds and you'll be just fine. Since the time period included returns during the bear market of 2000 - 2002, it would seem that his argument would have been fair, right?

Sorry, but I'm still not convinced. Here are just a few of the fallacies of this Advisor's argument, in my opinion:

It assumed the next 25 years will be the same as the last 25 years. Let's see, did 78 million Baby Boomers retire in the last 25 years? Were we afraid of terrorist attacks on our major financial centers prior to 2001? Will Medicare and Social Security costs be the same percentage of government spending in the next 25 years as they were in the last 25 years? And, of course, had we experienced a housing and subprime mortgage crisis resulting in a global credit crunch, massive Wall Street bailouts and a stock market meltdown? (Hint: "NO" is the appropriate answer to all of these questions.)
The 25-year time period cited as an example doesn't necessarily correspond to any individual investor's actual time frame. What if an investor's time frame had them needing their money for retirement in September of 2002 at the bottom of the bear market? I doubt index investing would have met with much praise at that point in time. Fast forwarding to the present, what if a retiree needs money NOW?
It doesn't hurt your argument when you choose a 25-year period that just happens to include the longest bull market in history, along with a stock market bubble in the go-go 90s. Let's roll the clock on back a bit. What if we chose a period of time from 1966 through 1982? Over this 16-year span of time, the stock market went nowhere.

Even Vanguard's John Bogle, the father of index investing, has pointed out that "each and every comparison we see is period-dependent." This means that the time period you choose can greatly affect the outcome of your analysis. I have written about this before, but it is especially important in regard to index investing.
Finally, historical analysis of stock market returns does show that stocks increase in value over long periods of time. Yet, there are many shorter periods in which stocks do poorly, or even lose money. Investors are often confronted with glossy charts and graphs illustrating stock market performance data over 25 years, 50 years and even 75 years. Yet, few people trying to make investment decisions today have a 50 or 75-year time horizon!

Let's look at the timelines. The youngest of the Baby Boomers are now nearing age 45, at which time they will have 20 years until retirement at 65. A 50-year-old has only 15 years, and at 55, you're looking at only a decade to accumulate wealth. Are there lots of 10-year periods during which the major market indexes did poorly? You bet there are, and we're in one of them right now!

So, you have to ask yourself, what historical 10-year period will the next 10 years be like? Don't know? Neither do I, and neither do economists, financial planners, mutual fund managers, or anyone else.

Because of these shortcomings, I continue to believe active management strategies with a historical track record of having provided reasonable returns with reduced risks are more appropriate for many investors than buy-and-hold index investing. Some of the financial media are now agreeing with me, but where were they in 1995 when I first began to recommend these active management strategies to my clients?

Do Low Fees = Good Investments?

One facet of investing where the index proponents have been successful is that of fees. Many investors will automatically reject any investment with expenses greater than those of an index fund. They have bought into the idea that active management doesn't pay, so they are not willing to pay higher fees for the expertise of an active manager. They use fees as a simple way to eliminate alternatives from their investment radar screen.

Unfortunately, this simple criterion can eliminate many qualified alternatives. After all, do you drive the least expensive car? Why not? Don't all cars offer you a mode of transportation? Do you shop for the least expensive doctor, lawyer or dentist? Those who do many times find out exactly why they charge fees below the going rates.

The important thing is not always what fees are being charged, but how the investment program has performed net of all fees and expenses. Many people will pay more for a product or service if they can see, hear, or feel added value, and investments should be no different.

Now, however, the focus on low fees is coming back to haunt many investors. For example, the Vanguard S&P 500 mutual fund has one of the lowest fees around, at only 0.15%, but according to the Vanguard website, this fund had a year-to-date loss of 32.87% as of the end of October.

At the same time, the Niemann Equity Plus Program that I have featured in this E-Letter had a year-to-date loss of only 10.85%, net of Niemann's 2.3% annual fee. Would you pay an additional 2.15% fee to shave over 22 percentage points off of your losses right now? I'll bet you would! (Past performance is not necessarily indicative of future results. Niemann's October 2008 performance is an estimate and may vary. Be sure to see Important Notes at the end of this E-Letter.)

It gets even better - since the inception of the Niemann Equity Plus program in November of 1996, it has produced an annualized return of 12.25%, again net of all fees. Over the same period of time, the Vanguard S&P 500 Index mutual fund has produced an annualized gain of only 4.32%, also net of fees. Again, the lower fee alternative produced an inferior return to the higher-fee actively managed program. Of course, there are no guarantees it will always do so.

Obviously, we have other programs that have higher and lower returns than the Equity Plus Program, but this comparison does show that relying on fees alone can be detrimental to your investment returns, even in comparisons spanning over a decade. Of course, there are no guarantees.

Finally, there are some financial services companies that extol the virtues of low fees to "retail" investors, while at the same time offering hedge funds to their wealthy clients. As you probably already know, hedge funds carry some of the highest fees of any investment vehicle.

So, if high fees are such a bane on the investment industry, then why have wealthy individuals flocked to hedge funds as never before? The answer is that there are some (albeit few) money managers who are able to provide value over and above their fees in the form of consistent risk-managed returns. This is the type of money manager we look for to recommend in our AdvisorLink® Program.

What About Risk Management?

As I noted above, many investors seek investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of growth; and 3) will not suffer large losses along the way. My biggest problem with index investing is that it can fail all three of these tests, and the recent market meltdown is a good case in point.

On the first issue of safety, you could say that index investing passes this test in one sense because there is little likelihood of losing money through embezzlement or fraud. However, safety can mean more than protection from fraud. One example is in regard to a type of mutual fund that has been getting a lot of attention lately. There are some new index funds that allow investors to "short" the market, or participate in a fund that generates double the movement of the underlying market through 2-to-1 leverage.

As the stock market has been hit by loss after loss, these funds are looking very attractive. Investors who have moved to these funds brag of outsized performance, and will continue to do so as the markets continue to go down. However, when the markets do turn around, the leverage and short position will begin to work against the investor. And since much of the gain is concentrated in the early days of a new bull market, losses could be big and quick.

Thus, while the ability to short the market and use leverage offer a lot of flexibility, they can also offer a lot of additional risk. Unless managed by a competent professional using a disciplined strategy, I consider participation in leveraged and short funds little more than gambling. You might win big, but you can lose just as big, and may never be able to recover your losses.

As for the second test of the potential to earn a reasonable rate of growth, index investing proponents would say that index funds pass this test with flying colors, considering the historical long-term return of the stock market. However, as I have shown in this article, stock market returns are very period-dependent. The shorter your investment time horizon, the better the chance that index funds will provide results below their long-term average. In fact, there have been examples in the past where the stock market has gone virtually nowhere for 10, 15 or even 20 years.

On the final qualification that the investment program not suffer large losses along the way, index investing fails miserably. Since there is no active management of the underlying portfolio, the investor is destined to rise and fall with the markets. During the past bear market of 2000 - 2002, the major market indices had some tremendous drawdowns in value, with the S&P 500 losing over 44% of its value, and the Nasdaq Composite Index losing over 75%!

In the current bear market, drawdowns have not yet accumulated to the low points experienced during 2000 - 2002, but they are very close. As this is written, the S&P 500 Index is approximately 40% below its October 2007 peak. The last bear market drawdown bottomed out in September of 2002, so that's two 40% drawdowns in six years. No wonder many retirees are saying they're "done" with the stock market.

My staff and I have personally talked to a number of investors who needed their money for retirement during this time, only to find that a large part of their investments' values had vanished into thin air. Even if I were sold on the value of index investing over the long haul, I would still not recommend it to my clients simply because of this last shortcoming.

Conclusions

I would like to believe that the latest market mayhem will spell the end of one-size-fits-all index investing, but I know better. Wall Street has sunk far too much money into literature and software to let the concept die a peaceful death. Just as we saw index investing take off after the 2000 - 2002 bear market, I expect to see it marketed heavily once the market starts to come back from the current low point.

Oh yes, some of the marketing material will be changed to reflect the subprime debacle, but I will bet that the industry will attempt to explain the current market malaise away by saying it's a "market aberration" that won't happen again because of improved regulatory scrutiny that is almost certain to come. Thus, Wall Street will attempt to skip over this bump in the road and do what they do best - marketing.

One of the primary reasons I agreed to write this weekly E-Letter in the first place was the hope that I might be able to make a difference by countering some of the expensive marketing efforts launched by the major Wall Street firms and large mutual fund families. In this way, I can share some of the insights I have been able to gain from my 30+ years in the investment industry. To that end, I hope that I have provided some information this week that will help you resist the siren song of index investing in the future.

Through the years, many of my readers have sought out some of the investment programs my company offers, but many have not. While I'm the first to admit that some of our programs did a better job of limiting risk than others, almost all have been successful in holding risks to less than those of the S&P 500 Index, which is what they are designed to do. Plus, we have a couple of programs that have actually made money during the down market. Past performance, however, cannot guarantee future results.

If you are among those who have put off checking out our risk-managed investment programs, perhaps the current market meltdown will convince you it's time to take a look. Just give one of our Investment Consultants a call at 800-348-3601 or complete our online information request form. You can also find out more about these programs and the strategies they employ on our website at www.halbertwealth.com.

Wishing you a market bottom,

Gary D. Halbert

SPECIAL ARTICLES:

The Death of Buy and Hold
http://www.cnbc.com/id/27651174

The Specter of Deflation
http://www.realclearpolitics.com/articles/2008/11/the_specter_of_deflation.html

What lower oil prices mean for the world
http://www.ft.com/cms/s/0/5c238848-af5d-11dd-a4bf-000077b07658.html?nclick_check=1

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Niemann Capital Management, (NCM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM in exchange for introducing client accounts to the Advisors. For more information on HWM or NCM, please consult HWM Form ADV Part II, NCM Form ADV Part II and Niemann's Annual Disclosure Presentation, 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite Index (which include dividends) represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500, the Vanguard S&P 500 Index and the NASDAQ Composite Index may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in the Niemann trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index and the Vanguard S&P 500 Index, or the stocks that comprise the NASDAQ Composite. Historical performance data is provided by the Advisor in compliance with the Global Investment Performance Standards (GIPS), except for the month of October 2008, which is an estimate which has not been verified for GIPS compliance. The actual final performance number for October 2008 could change significantly from the estimate. See the Annual Disclosure Presentation, 2007 for more details on GIPS performance. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Niemann Equity Plus trading program.

In addition, you should be aware that (i) the Niemann Equity Plus trading program is speculative and involves risk; (ii) the Niemann Equity Plus trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Niemann will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Niemann Equity Plus trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of actual management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. All dividends and capital gains have been reinvested. Performance is based on actual fee-paying, fully discretionary accounts in a composite. Individual account performance may differ from the composite. No adjustment has been made for income tax liability. Some Funds also charge short-term redemption fees and excess transaction fees (Special Fees), which are billed to shareholders at the time of the event causing the fee. All of these fees are in addition to Niemann's advisory fees. In selecting Funds in which to invest, Niemann considers the nature and size of the fees charged by the Funds. Niemann will select a Fund only if Niemann believes the Fund's performance, after all fees, will meet Niemann's performance standards. Consequently, Niemann may select Funds, which have higher or lower fees than other similar Funds, and which charge Special Fees. When deciding whether to liquidate a Fund position, Niemann will take into consideration any Special fees which may be charged. Niemann may decide to sell a Fund position even though it will result in the client being required to pay Special Fees. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

On The Economy And Active Management

Gary D. Halbert — Tue, 21 Oct 2008 22:07:39 GMT

IN THIS ISSUE:

A Look At The Latest Economic Numbers
Economic Forecasts Roundly Downgraded
Fallacies Of A "Buy-And-Hold" Only Approach
The Goal Of Active Management Strategies
The HWM Difference
Is It Time To Try Active Management?
Conclusions -- Don't Miss The Next Bull Market

Introduction

This week, we will take a look at the latest economic numbers which look quite bleak overall. There is little doubt that the US and the rest of the world are headed into a global recession sparked by the international credit crisis. The only question now is: How deep and how long?

Following that discussion, I will review the advantages of including active investment strategies in your portfolio. Long-time readers know that I have been a strong advocate of "active management" strategies, especially those that have the flexibility to move to cash (traditional market timing), "hedge" long positions during market downturns or even go "short" and provide the potential to profit even when the markets decline. Not surprisingly, such active management strategies are back in demand in the wake of the recent stock market collapse.

Now that active management strategies are coming back into vogue, I will tell you why I have always been a fan of money management techniques that seek to avoid big losses, especially of the magnitude that we've all seen over the last 4-5 weeks. I think you'll find that discussion very interesting in light of the recent stock market chaos.

Though I have mentioned the advantages of active management strategies many times in the past, the current market environment has resulted in many more calls to my staff from investors who now seek to include these strategies in their portfolios. Thus, this may turn out to be one of my most popular E-Letters ever, though it's unfortunate that investors have had to endure severe losses in their portfolios to make it so.

A Look At The Latest Economic Numbers

We have long known that consumer spending accounts for apprx. 70% of US Gross Domestic Product, and consumer spending is predicated on consumer confidence. At this point, consumer confidence is in the tank and consumer spending is falling off a cliff.

The mid-October University of Michigan Consumer Sentiment Index plunged to 57.5, down from 70.3 in the last half of September. This is one of the deepest monthly declines in the Sentiment Index since it has been recorded. The latest report noted that there have only been four surveys that posted monthly declines of 10 index points or more. The government's Consumer Confidence Index to be released next Tuesday is expected to show a similar sharp decline.

So a recession is upon us despite the fact that US GDP rose by a healthy 2.8% in the 2Q. We may even find that the economy remained technically in positive territory in the July-September quarter when the government releases its first report on 3Q GDP on October 30. Regardless of what next week's GDP says about the 3Q, there is little doubt that economic growth will fall into negative territory in the current 4Q. And it will likely be down a lot.

Not that much else matters when consumer confidence and spending are in freefall, but here are some of the other recent economic reports.

The Index of Leading Economic Indicators (LEI) actually rose 0.3% in September, reversing the recent downward trend. However, analysts are careful to point out that the rise was primarily due to a large increase in the money supply, essentially masking sharp declines in stock prices and residential building permits and increased layoff activity. The September increase was also offset by a larger downward revision to August's LEI. The leading indicators are almost certain to fall again for October, probably significantly due to the continued washout in the stock markets.

Retail sales fell more than expected in September, down 1.2% following a decline of 0.4% in August. Chain store sales, including Wal-Mart, declined sharply in September and will almost certainly be down even more this month. I don't shop very often, but I was in Macy's over the weekend and it looked like two-thirds of the store was marked down 40-50% or more.

US auto sales plunged 26.6% in September, making it the first month since 1993 when buyers drove less than one million new cars and trucks off the dealerships' lots. Analysts predict that October will be even worse. GMAC announced on October 13 that it will only make car loans to buyers with a credit score of at least 700. This is bad!

On the manufacturing side, the ISM Index fell from 49.9 in August to 43.5 in September. Any reading below 50 in the ISM Index indicates that manufacturing is in a recession. Factory orders fell a whopping 4.0% in August (latest data available). I'm sure it has happened before but I don't remember seeing a 4% drop in one month in the past.

The unemployment rate held steady at 6.1% in September, but this number will definitely go higher for October and the rest of the year as well.

Economic Forecasts Roundly Downgraded

I read and hear a lot of economic forecasts, and every one is being downgraded in light of the events of the last 4-5 weeks. Other than the gloom-and-doom crowd that always predicts a recession or worse, I don't know any outfit that predicted what we have seen in the last month or so. Thus, everyone is having to downgrade their economic forecasts.

The consensus outlook, prior to the last 4-5 weeks, was that the US economic growth would go mildly negative in the 4Q and somewhat more negative in the 1Q and 2Q of next year. Most forecasters felt the US economy would rebound back into positive territory in the second half of next year. But frankly, I don't know anyone that has a clear forecast for what happens next year.

The problem is, no one knows for sure if the massive government bailout is going to work. The Treasury Department is working feverishly to put together the apparatus to begin buying up distressed debts. It's a complicated process that is rife with conflicts of interest. The thinking originally was that the Treasury would be buying assets after the first of the year. Now they are hoping to be in business before the holidays. They need to be.

Fallacies Of A "Buy-And-Hold" Only Approach

The stock market collapse over the last several weeks has devastated millions of investors' portfolios and shattered retirement plans for untold numbers of Americans. Many investors' portfolios are down 35-40% or more in just the last 5-6 weeks. The market plunge has brought into serious question Wall Street's mantra of "buy-and-hold" for the long-term.

Whether it's called "asset allocation" or "index investing" or any of a number of other names, the basic premise of buy-and-hold investing is to indefinitely hold a group of investments in hopes they will produce gains in an amount to meet investment goals. If you have read me for long, you know that I have never been a big fan of having your entire investment portfolio in a buy-and-hold strategy, especially if there is no "risk management" component involved to deal with periodic bear markets.

Instead, I have recommended "active management" strategies which incorporate risk management techniques. While active management can include programs that stay fully invested and rotate among market sectors, most of those that we recommend have the flexibility to move to the safety of cash (money market) or "hedge" long positions during bear markets. Some can even "short" the market and can profit when the market drops.

At Halbert Wealth Management (HWM), we specialize in finding successful money managers that use active management strategies which seek to minimize the effects of bear markets in stocks and bonds. This is not to say that the strategies we offer cannot lose money in down markets. Any equity investment has the potential to lose money. Instead, the Advisors we recommend in our AdvisorLink® Program use sophisticated investment strategies to limit the downside risk of a bear market or major downward correction -- something you won't find in most buy-and-hold portfolios.

We continually search the universe of professional money managers in an effort to find those Advisors who have delivered solid "risk-adjusted" returns and have managed to avoid the huge losses so common in bear markets and major downward price corrections. As it has turned out over the years, we have found the best risk-adjusted returns among active managers that move out of the market or hedge long positions from time to time to avoid bear markets.

The traditional Wall Street wisdom over the years has been that it is impossible to "time" the market. They argue that if you are out of the market from time to time, you are likely to miss the best days. So you should stay fully invested at all times.

Does that argument sound familiar? I'll bet it does, especially over the last year or so when you may have wanted to sell out, but your broker talked you into holding on. Now, with the stock markets down 35-40% or more (and it may not be over yet), it's probably the worst time to sell out, so you're stuck.

But there were active managers who limited losses in the latest bear market by moving to the safety of cash, hedging their long positions and/or shorting the market. This includes many of the equity money managers I have recommended to you in these pages. Later on, I'll tell you how to find detailed performance statistics on these money managers, but first let's look at the underlying premise of one active management strategy known as "market timing."

The Goals Of Active Management Strategies

Simply put, successful active management/market timing strategies have two basic goals:

1. Participate in stock market gains in the good times; and

2. Limit market losses to half or less of equity losses in the bad times.

These goals are simple in concept, I trust you would agree, but more than a little challenging to deliver. In fact, most active managers we run across don't succeed in meeting these goals over the long haul. Yet there are those that have, if you just know where to find them.

To be honest, many money managers and even individual investors can decide to move to cash in bad times. We are encountering investors who have been on the sidelines for months due to subprime fears. The real challenge is to know when to get back into the market once the market rebounds.

It is also important to note that some active money managers go one step further and seek to make money in down markets by entering into "short" sales of major market indexes using specialized mutual funds. While this is a more aggressive strategy than one that will only go to cash or hedge long positions, it provides investors with the potential to make money even when the markets are going down.

Here is the basic challenge for active managers if they are to beat the buy-and-hold strategy: How do you devise a system that keeps you in the market on most of the good days, but also takes you out (or "short") when bear markets come along? Let me say, this is not easy! And most active managers and market timers are not successful over time.

Those that have been successful over time, generally speaking, have developed sophisticated systems that gauge stock market trends and generate signals for when to enter and exit the market. This is not seat-of-the-pants, emotional trading, though some Advisors do have some measure of discretion built into their systems.

There is much, much more to it than this, of course. It is one thing to be generally correct about the trend -- up or down; it is quite another to know which sectors of the market to invest in. Space doesn't permit me to elaborate on how successful active managers determine which sectors to invest in, when they get their trend signals, but trust that this is another important variable when it comes to selecting a successful active money manager.

The bottom line is, there are active managers and market timers out there that have been successful in delivering their clients good returns over time, but more importantly have avoided the sometimes huge losses that come with buy-and-hold strategies.

The key is, how do you find them? Most investors don't know how to find these successful active managers. Most of these successful managers don't advertise, so they are not household names. The big brokerage firms are not likely to tell you about them, since they don't buy into the Wall Street buy-and-hold mantra.

Truth is, you will probably only find them if you stumble into a boutique investment firm like mine that has the money and the commitment to search high and low for the handful of successful active managers that are out there.

The Halbert Wealth Management Difference

My firm recognizes that we're not the only company that offers active management strategies to our clients. We do, however, believe that we have structured our AdvisorLink® Program in such a way as to offer investors the most flexible way to participate in such programs.

In many cases, actively managed investment programs are "packaged" and sold to investors as a single solution. The selection and retention of each money manager, the types of strategies employed, and the allocation to each participating manager is set by the sponsoring firm. Think of it as being something like a fund of funds. There's nothing wrong with this approach, and we are even considering some of these programs to offer our clients. However, the drawback of such programs is that they limit the investor to pre-selected options.

At HWM, we have "unbundled" the mix of active money managers so that each is available with or without any of our other managers, and in an allocation that can be tailored for each investor. Since most of our clients tend to be do-it-yourself investors, we feel it offers them the following advantages:

Due Diligence -- I have written a number of times about the extensive due diligence each money manager must endure in order to be added to our list of recommended programs. We not only subject the numbers to intense analysis, but also the Advisor's administrative capabilities and business stability.

We also have face-to-face meetings with each Advisor in order to not only get a feel for his or her grasp of the strategy being employed, but also to get a personal feel for the individual with whom our clients' money will be placed. Most of the time, these meetings take place as part of an on-site visit to the Advisor's office by my due diligence staff.

We then summarize the results of our findings in an Advisor Profile document that is made available to each prospective investor. For the investor, this means that the money manager has been subjected to a great deal of scrutiny as to performance, strategy and administrative capabilities. Thus, a lot of the legwork has already been done for our clients.

Another part of due diligence is in regard to ongoing monitoring of an active money manager's performance and operations. We monitor trading and performance on a daily basis, and communicate with money managers immediately if we notice anything out of the ordinary or not within our expectations for the particular program being monitored.
Transparency -- Even before the recent subprime mortgage debacle, "transparency" was a big issue in the managed funds world. Now, it's likely to become the law of the land, even for secretive hedge funds. Fortunately, investors have always enjoyed a high level of transparency in regard to the programs we offer.

As I noted above, some sponsors of actively managed investments will keep the details of who is managing parts of the portfolio a secret. That way, they can make a change in the lineup with a minimum of disruption. However, HWM offers each money manager as a stand-alone unit, providing full visibility of each manager and his or her approach to managing money. This transparency also allows each prospective client to review a detailed summary of the money manager's actual performance since the program's inception.

Beyond the ability to know and evaluate each individual money manager, investors also are able to see exactly how their money is being invested. All of the various money managers we recommend offer our clients the ability to follow the trading of their accounts online.
Flexibility -- Since we do not offer any set portfolios containing a mixture of money managers available in our AdvisorLink® Program, investors have complete flexibility to combine programs in a way they feel is most suitable for their unique situation. We have some clients who invest in only one of the programs we offer, while many others choose to allocate their investments among several programs.

We feel that combining the various AdvisorLink® investments can offer investors additional diversification beyond just having a variety of different asset classes in a buy-and-hold portfolio. This additional diversification comes about in a number of ways, including the following:

● Diversification for different market environments. We all know that a declining market will generally result in losses in a buy-and-hold investment. However, such a market environment could also result in some active management strategies becoming "neutral" by going to cash or hedging long positions. In that event, an extended bear market could result in only money market returns. A combination of investment strategies can provide the potential for making money even in a down market. For example, it may be suitable to have both a "long or cash" strategy and a program that can go both long or short in the market. This would provide a potential for portfolio gains even in a declining market.

● Diversification to reduce correlation. I have discussed correlation of investment programs in past E-Letters, but the basic idea is that two investments are "correlated" if they tend to go up and down at the same times. It is generally best to include some non-correlated investments in a diversified portfolio. I have noted before that most of the investment alternatives in our AdvisorLink® Program have a low correlation to the major market indexes. However, it is also true that many of these programs have little or no correlation to each other

● Diversification among investment strategies. The recent market meltdown has shown that when times get tough, virtually all equity asset classes suffer. Even for investors who choose to maintain an asset allocation or other buy-and-hold investment strategy, adding actively managed programs that go to cash or even "short" the market can result in a higher level of strategic diversification.
Control -- A final advantage of our unbundled approach to active management strategies is that you have complete control over what managers are included in your portfolio. While HWM provides due diligence services and can assist you with making an allocation decision, the final say is up to you. This keeps you in complete control of your investment destiny.

Nowhere is this more important than when it comes time to move from one money manager to another. I often tell prospective clients that few, if any, money managers will ever tell you to fire them. I am personally aware of Advisors with substandard investment programs who keep promising investors that "things will get better" in an effort to retain their business.

At HWM, our due diligence and ongoing monitoring will help to identify Advisors whose programs may no longer be suitable for meeting your needs, and we will offer other alternatives. However, the final decision as to whether to retain a money manager is yours, as it should be. There are also no "lockups," early termination charges or any other impediments to accessing your money should the need arise.

In short, the HWM AdvisorLink®Program offers investors a "cafeteria-type" approach to money management. Do-it-yourself investors can evaluate each money manager on its own merits rather than accepting it as part of a "canned" approach. For investors who are not do-it-yourselfers, the HWM staff can help evaluate the most suitable mix of money management programs based on the investor's assets, risk tolerance and investment goals.

Our experienced staff is also available for ongoing questions about the performance of each of our recommended programs, as well as inquiries about specific issues regarding your account.

As you consider the investments that make up our AdvisorLink®Program, it's also important to remember that none of our Advisors invest in subprime mortgages or anything of the like. The equity managers I recommend invest in well-known, US-based mutual funds that you probably have heard of and can look up in the newspaper or on the Internet daily.

Plus, no one on my staff is paid a commission, so there is never any pressure to invest or incentive to sell you something that may be unsuitable for your needs. On that, you have my promise. Likewise, we have an ironclad "privacy policy" and your private financial information is never, ever shared with anyone else, other than as may be required by law.

Is It Time To Consider Active Management?

As I noted above, many of my readers have recently contacted us for information on the money managers I recommend in light of the market's recent meltdown. They have seen their buy-and-hold portfolios devastated by losses of 35-40% or more. Retirement prospects have been shattered for millions of investors. People across the US are now looking for risk-averse ways to invest their money that can deliver market returns with less downside risk.

Earlier, I said that I'd provide a way for you to see how our various programs have fared so far this year. If you are ready to explore the world of actively managed investments, I recommend that you visit our AdvisorLink® performance summary web page at the following address:

http://www.halbertwealth.com/advisorlink/programs.php

While you will no-doubt notice that some of the programs we offer had year-to-date losses as of the end of September, you will also note that these are far less than those suffered by the major market indexes. Our goal is to offer programs that limit losses to half or less than those of the market, which means that when the markets turn up again, there's less ground to make up.

One noticeable exception to this goal is the Niemann Dynamic Program, which has a year-to-date loss close to that of the overall market. The reason that losses have not been limited is that this particular program is a high-octane long-only program that is always fully invested. Niemann does not have the option to go to cash or hedge any of Dynamic's positions, so it suffers in down markets. However, I also urge you to look at the long-term performance of this program as compared to the S&P 500 Index. Of course, past performance is not necessarily indicative of future results.

Conclusions -- Don't Miss The Next Bull Market

The stock markets have imploded in the last 4-5 weeks on a scale that virtually no one anticipated. Buy-and-hold strategies are down nearly 35-40% or more in less than five weeks. Americans' retirement plans are now turned upside down.

I certainly don't have all the answers. But I do have some suggestions for avoiding the huge losses that have occurred in just the last few weeks.

I have argued these points about minimizing losses for over five years in these E-Letters. I have argued my thoughts about active management strategies that seek to minimize losses in market downturns.

Maybe now is the time to do something about it.

I don't know when the stock markets will bottom. Much depends on how quickly the credit markets free up. Whenever the market bottoms, I fully expect we will see a powerful bull market emerge. When that happens, you want a professional manager that will get you back in the market for the next run.

A very successful money manager once told me the following: Investors think they pay us our management fees to get them out of the market during the down periods. But what they really pay us for is to get them back in when the market heads higher again.

This is so true, I believe. Millions of investors have bailed out of the market in the last few weeks. Sadly, most will not know when to go back in. The only way to recover the massive losses that have been experienced over the last couple of months is to participate in the recovery.

The professional Advisors I recommend have histories of catching major trends in the market -- both up and down. And you don't want to miss the next bull market. Maybe it's time to get the professionals I recommend on your team.

If you are ready to join the ranks of investors who are putting active management strategies to work for them to reduce the risks of being in the market, I urge you to contact us about the various opportunities available in our AdvisorLink® Program. Feel free to call one of our Investment Consultants at (800) 348-3601, or send us an e-mail at info@halbertwealth.com. You can also request additional information about our risk-managed investments by completing one of our online request forms.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

How to Read the Constitution (By Justice Clarence Thomas -- A Must-Read!)
http://online.wsj.com/article/SB122445985683948619.html

Get Ready for the New New Deal
http://online.wsj.com/article/SB122455099434052597.html

The Coming Pink Slip Epidemic
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081020_022663.htm?chan=top+news_top+news+index+-+temp_top+story

SPECIAL ISSUE: Financial Crisis For Beginners

Gary D. Halbert — Wed, 15 Oct 2008 20:48:25 GMT

Everywhere I go, people ask me how we got into this financial crisis that has seized up credit and driven the stock markets down 40% or more, most of it in just the last few weeks. Obviously, the simple answer is that the housing bubble burst, and as home prices tumbled, mortgage delinquencies and home foreclosures spiked, and banks and other financial institutions got into trouble. In fact, many have failed.

Millions of Americans do not understand many of the financial terms that are used to identify many of the mortgage-related instruments, nor how intertwined all of the major banks and financial institutions are. This lack of understanding and confusion make the fear even worse. This is one big reason for the collapse in the stock markets.

I recently ran across the following very good explanation of the financial/credit crisis at BaselineScenario.com. BaselineScenario.com is a very useful website/webblog that was founded by Peter Boone, an Associate at the Centre for Economic Performance at the London School of Economics, Simon Johnson, former chief economist of the International Monetary Fund and professor at the MIT Sloan School of Management, and James Kwak, a former McKinsey consultant and co-founder of Guidewire Software. These are some smart guys.

On their website, they have a lot of useful information, including the article reprinted below entitled Financial Crisis For Beginners. This article explains in understandable language many of the intricacies of the credit markets, along with some of the technical terms such as CDOs, CDSs and others. If you want to better understand the credit crisis, this is a good place to start.

Finally, since their website is also a blog, I would suggest that you visit there at least occasionally to keep up with their latest thinking on the global credit crisis.

QUOTE:
Financial Crisis For Beginners

We believe that everyone should be able to understand how the financial crisis came about, what it means for all of us, and what our options are for getting out of it. Unfortunately, the vast majority of all writing about the crisis - including this blog - assumes some familiarity with the world of mortgage-backed securities, collateralized debt obligations, credit default swaps, and so on. You've probably heard dozens of journalists use these terms without explaining what they mean. If you're confused, this page is for you… (Some of the explanations on this page are simplified and not 100% accurate; their goal is to explain the key concepts to a general audience.)

Historically local banks took deposits from savings account customers and lent money to homebuyers. They paid 1% for the savings accounts and collected 6% on the mortgages, and the spread (5 percentage points in this case) was more than enough to compensate for any homebuyers who couldn't pay their mortgages. (The numbers are illustrative only.)

Then, as any explanation of the subprime crisis says, banks started reselling and securitizing mortgages. But what does it mean to resell (let alone securitize) a mortgage?

To understand this, you have to look at it from the bank's point of view. To them, a mortgage is a product. This product gives them a monthly stream of payments - about $1,000 per month for a 30-year, fixed-rate mortgage on a loan amount of $150,000 (numbers are very approximate), but that stream is not guaranteed; the homebuyer might not be able to pay (in which case they might have to renegotiate or foreclose, both of which are costly), or might pay the whole thing [off] early. The price they pay for this product (this stream of payments) is just the loan amount; from their perspective, they are "buying" the stream of payments by paying you the loan amount. The lower the interest rate you get, the higher the price they are paying for your payments.

If Bank A resells your mortgage to Bank B, Bank B buys your payment stream from Bank A in exchange for a lump sum of money. Under stable market conditions, the lump sum that B gives A will be about the same as the lump sum you received from A (in which case A only makes money from various fees). You can also think of this as Bank B loaning you the money for your house, with Bank A acting as an intermediary.

Now, in practice, Bank B (or C, or D, …) is often an investment bank. And Bank B often securitizes your mortgage. This means they take your mortgage and combine it with many (thousands of) similar mortgages. If the mortgages are similar according to certain objective criteria - creditworthiness of borrowers, loan-to-value ratios, etc. - they can be treated as homogeneous. (Something similar happened with corn in the 19th century; certain standards were established for different grades of corn, and from that point bushels of corn from different farms didn't have to be separately shipped and inspected by buyers, but could be poured together into huge vats.)

Now you have a pool of, say, 10,000 mortgages, with about $10 million in payments coming in from borrowers every month. That pool as a whole has a price - the amount someone would pay to get all of those payment streams of that riskiness. In a securitization, the investment bank divides the pool up into many small slices [also referred to as tranches] - say 1,000 in this case. Each slice can be bought and sold separately, and each slice entitles the buyer to 1/1,000th of the payments streaming into that pool.

The price of these slices is based on current assumptions about the riskiness of those payments - the riskier those payments are perceived to be, the lower the price anyone will pay for a slice of them. The problem is that at the time those mortgages were securitized, the buyers assumed that housing prices could only go up, and therefore the payments were not very risky; when housing prices began to fall, many more borrowers became delinquent than had been expected. As a result, if you own a slice of that pool, you still own 1/1,000th of the payments coming in, but your expectations of how many payments will come in are much lower than they were when you bought the slice.

(A collateralized debt obligation [CDO] is a securitization where the slices are not created equal. Some slices are entitled to the first payments that come in each month, and hence are the safest; some slices only get the last payments that come in each month, so when people start defaulting, those are the slices that lose money first.)

This brings us to writedowns and, eventually, to the subject of banking capital. Let's say you are an investment bank and you paid $1 million for a slice of a securities offering (a pool). You put that on your books as an asset (in the world of finance, a stream of payments coming to you is an asset) valued at $1 million. However, a year later, that slice is only worth $200,000 (you know this because other people selling similar slices of similar pools are only getting 20 cents on the dollar). You generally have to mark your holding to market (account for its current market value), which means now that asset is valued at $200,000 on your balance sheet. This is an $800,000 writedown, and it counts as a loss on your income (profit and loss) statement. And that is what has been going on over the last year, to the tune of over $100 billion at publicly traded banks alone.

The next problem is that, over the last two decades, most of our banks have become giant proprietary trading rooms, meaning that they buy and sell securities for profit. Let's say you start a bank with $10 million of your own money. That's your "capital." You go out and borrow $90 million from other people, typically by selling bonds, which are promises to pay back the money at some interest rate. Then you take the $100 million and buy some stuff (like slices of mortgage pools), which pays you a higher interest rate than you are paying on your bonds. Suddenly you are making money hand over fist. But then let's say that housing prices start falling, securitized subprime mortgages start plummeting in value, and your $100 million in assets are now only worth $80 million. Since the value of your debt ($90 million) hasn't changed, you are technically insolvent at this point, because your losses exceed your capital; put another way, the money coming in from your slices of mortgage pools isn't enough to pay your bondholders.

According to some observers, this is where Fannie and Freddie were until they were bailed out by the U.S. government; by certain accounting rules, they had negative capital.

Crises of confidence and bank runs

The discussion above describes how a bank can become technically insolvent - that is, their assets become worth less than their liabilities. However, since the Lehman bankruptcy on September 15, the crisis has moved into a new phase. In this phase, financial institutions are facing liquidity runs, or bank runs, whether or not they are solvent. How can this happen?

To understand this, first you have to understand the time dimension of assets and liabilities. A 30-year mortgage, for a bank, is a long-term asset. They will get a mortgage payment every month for 30 years and, most importantly, they can't call in the loan before then; that is, they can't demand that the homeowner pay it back [early]. Bank assets have different maturities, or durations, but a lot of them are medium and long term. On the other side, banks have liabilities with different maturities. For example, deposits (savings accounts) can be withdrawn at any time, so their maturity is essentially instant. Banks also issue bonds: in exchange for some money up front, the bank typically has to pay the bondholder (lender) a fixed monthly payment for some period of time, and then pay back the face value at the end of that period. Banks also engage in many more exotic forms of financing, such as repo agreements, where the bank sells a security to a counterparty for $99 and promises to buy it back for $100 some time later.

The general point, though, is that banks tend to borrow short and lend long. In the classic case, the bank takes money from depositors and loans it out as mortgages. The bank may have $100 in deposits and may lend $80 of it out as mortgages, which means it has $20 in capital and a leverage ratio (assets to capital) of just 5, which is pretty low, and it is very solvent on paper. But do you see the problem? If every depositor tries to withdraw his money at the same time, the bank can't call in its mortgages, and there won't be enough cash for everyone. Now why would this happen, since it is unlikely that everyone will need his cash at the same time? It happens if each depositor starts worrying that his or [her] money might not be safe, and that every other depositor will try to withdraw money, then everyone tries to withdraw his money at the same time.

In ordinary times, bank runs don't happen. First, the FDIC insures all deposit accounts up to $100,000 [now $250,000] per account holder, precisely to prevent this kind of panic. However, in a real bank many of the liabilities are not deposit accounts and hence are not insured. Second, banks can ordinarily borrow money "against" their assets; that is, a bank with $100 in good mortgages can borrow almost $100 from another bank - or, under certain conditions, from the Federal Reserve - by pledging those mortgages as collateral. If the bank's assets are securities - mortgage-backed securities or CDOs, for example - they can also be used to raise short-term money.

These are no ordinary times, however. The fundamental problem is that all players in the financial system have realized that a bank that is solvent (assets > liabilities) can still be subject to a bank run. Once that happens, Bank A doesn't want to lend money to Bank B for two reasons: first, Bank A wants to hold onto its cash in case it becomes the target of a bank run; and second, Bank A is afraid that Bank B could be the target of a bank run, and hence is afraid that if it lends to Bank B it won't get its money back. Like all such panics, of course, this becomes self-fulfilling: because banks don't want to lend, banks can't get short-term credit, which makes them vulnerable.

This hits home when a bank has to "roll over" its short-term liabilities. Remember, banks borrow short and lend long. So periodically - almost continuously, in fact - banks have to pay off and replace their short-term liabilities (or just agree with the lender to extend the loan another 30 or 90 days). And even though depositors are insured, all the other liabilities are not insured. The bank run happens when none of the short-term lenders want to extend their loans, and no one else is willing to offer a short-term loan.

In short, this is what has been going on during the last few weeks. The key characteristic of such a crisis is that banks can be hit by bank runs - and go bankrupt - even if their assets are worth more than their liabilities. The Fed has vastly expanded the amount of money it is willing to lend to banks and the range of collateral it is willing to take in an effort to provide the short-term funding banks need to fend off bank runs. In the longer term, though, the Fed is a relatively small player combined to the entire market for short-term credit, and the problem will not go away completely until that market is working properly again.

Credit default swaps

A credit default swap (CDS) is a form of insurance on a bond or a bond-like security. A bond is an instrument by which companies raise money. A company, say GE, issues a bond with a face value of $100 and a coupon of, say, 6%. This means that if you hold the bond, they will send you $6 per year (6% of $100) until the bond matures (say in 10 years); at that point, they will pay you $100 (the face value). To buy that bond, you pay them about $100. If you pay exactly $100, the yield is 6% ($6 divided by $100). If you pay less, the yield is more than 6%. How much the bond actually sells for depends on how risky you think GE is (the chances that they will go bankrupt and won't pay you) and on what interest rates you can get for other, similarly-risky bonds in the market. Bond-like securities, like CDOs, are similar in these basic respects.

When you buy a bond, you are taking on two types of risk: (a) interest rate risk and (b) default risk. Interest rate risk is the risk that interest rates in general will go up. If interest rates go up, the value of your bond goes down (bonds are traded in the secondary market), because you are still only getting $6 per year. Default risk is the risk that the bond issuer goes bankrupt and doesn't pay you back. A CDS is called a "swap" because you are swapping the default risk - but not the interest rate risk - to another party, the insurer. The bond holder pays an insurance premium - typically quoted in basis points, or one-hundredths of a percentage point, per year - to the insurer. In exchange, the insurer promises to pay off the bond if the issuer goes bankrupt and fails to pay it off. At the time the CDS goes into effect, the expected value of the premium payments (a small amount every year) should exactly equal the expected value of the insurance payments (a large amount, but only if the issuer defaults).

This sounds pretty simple, right? So how did CDS become a dirty word? There are two main wrinkles to be aware of.

First, in order to buy a CDS (I call the bondholder in the above example the "buyer," and the insurer the "seller"), you don't actually have to own the bond in question. These are over-the-counter derivative contracts, which means they are individually negotiated between buyers and sellers. As a result, CDS became the tool of choice for betting on the likelihood of a company going bankrupt. If you thought the chances of company A going bankrupt were higher than everyone else thought they were, you would buy a CDS on company A. Three months later, when everyone else realized company A was in trouble, the market prices for CDS would have gone up, and you could either sell your CDS to someone else at the higher price, or you could sell a new CDS at the higher price. (In the latter case, you still have your original contract, and you [write] a new contract with a new buyer.) As a result, there are a lot of CDS out there; estimates are generally around $60 trillion, which means the total face value of the bonds insured is $60 trillion.

Second, CDS are not regulated, and in fact there was a measure inserted into an appropriations bill in December 2000 that blocked any agency from regulating them. Traditional insurance, by contrast, is highly regulated. Insurers have to maintain specific capital levels based on the amount of insurance they have sold; certain percentages of their assets have to be investments of specified quality levels; and, for personal insurance and workers' compensation at least, private insurance companies are generally backed up by state guarantee funds, which charge a percentage of all insurance premiums and, in exchange, pay off claims for bankrupt insurers. The CDS market had none of that, so a bank could sell as many CDS as it wanted and invest the money in anything it wanted.

So, 2008 rolled around, and bonds started going bad. There were CDS not just for traditional corporate debt, but also for mortgage-backed securities, CDOs, and secondary CDOs. During the boom, when everyone was optimistic, CDS for these exotic products were cheap; when they started failing, the price of CDS shot up, and anyone who had sold these swaps was looking at losses on them. So CDS were one way that losses on subprime mortgages triggered writedowns at other financial institutions. This only got worse as banks, such as Bear Stearns and Lehman, started failing, and people who had sold CDS on their debt faced even larger losses. So the most basic problem with CDS is that the insurers selling them (and many of the companies selling them were not insurance companies) sold them at excessively low prices, and now they are facing major losses.

Second, you have the risk that the insurance companies won't be able to pay. If a financial institution - say, AIG - sold a lot of CDS based on the debt of a particular company - say, Lehman - there is a risk that it won't be able to honor all of those swap contracts. In that case, their counterparties - other banks - may be looking at losses they thought they were insured against. If Bank B bought a CDS from Bank C on the debt of Company X, and Company X defaults, Bank B thinks it has a payment coming to it from Bank C; but if Bank C doesn't have the cash, Bank B won't get its payment. Even worse, let's say Bank B bought a CDS from Bank C, and then sold a different one to Bank A. Bank B thinks it is perfectly hedged, and Bank A thinks it has a payment coming. But if Bank C can't pay out, Bank B may not be able to pay Bank A - and these chains can go on and on and on. So CDS are one of the things that create uncertainty in the banking sector; a bank may look healthy, but it may be counting on CDS payouts from other banks that you can't see, so you can't be sure it's healthy, so you won't lend to it.

The cumulative effect of CDS is to spread risk, which sounds good, but to spread risk in unpredictable and invisible ways. One of the major reasons why the government refused to let AIG fail - one day after letting Lehman fail - was that AIG was a large net seller of CDS, and if it had defaulted on those swaps no one could predict what the implications would be for the rest of the financial sector. At this point in the financial crisis, it would be a mistake to blame the whole thing on CDS, but they have had the effect of amplifying and spreading uncertainty in ways that have reduced confidence in the financial sector.

Stock market vs. credit market

Fears of a global economic slowdown are reflected in the stock market. Stocks are claims on the future cash flow of companies, and companies do better during economic growth periods than during recessions. When sentiment shifts from the belief that we will see a short, mild recession to the belief that we will see a long, harsh recession, the stock market goes down. By contrast, the acute credit crunch is reflected in the credit market in the record-high prices that banks are charging to lend to each other and to ordinary companies.

Although you and I and most people with investments have more money in the stock market than in the credit market, the stock market is more a gauge of sentiment than an independent force in the economy. Lower stock prices make it more expensive for companies to raise equity capital, but most companies raise more money by issuing debt than by issuing stock. And when people's investments go down, they tend to spend less, but only a little; if their 401(k) goes down by $10,000, they don't cut back on spending by $10,000. The credit markets, by contrast, have direct and immediate effects on how companies behave; in an extreme case, no credit can mean no cash with which to make payroll.

Now the credit and stock markets are related, because when the credit market freezes up, people's expectations about the future turn downward, and hence stock prices fall. Ironically, all the attention the credit crisis has gotten over the last three weeks has undoubtedly hurt stock prices because of all the talk about potential dire consequences. So in this context, what does the fall in the stock market mean? Probably two things. First, people are only beginning to realize that Europe is in big trouble - given its difficulty in coming up with coordinated economic policy, perhaps bigger trouble than the U.S. Because U.S. companies operate in a global economy, that will hurt all companies. Second, it means that more people are realizing that the Paulson plan is only a partial solution, which is something we (along with many other people) have been saying for a while.

As long as the credit market remains tight, fears of recession will remain high, and stock prices will suffer. The important question is when the credit market will loosen up. Right now it looks like there are still enough open issues with the Paulson plan (what price, which securities, how fast) that lenders are still waiting and seeing. In the long term, though, the stock market will only turn up when people believe there is a credible plan for fighting the recession in the real economy. END QUOTE

I hope the information in this SPECIAL ISSUE of Forecasts & Trends E-Letter has been helpful to you in better understanding the global credit crisis we are in. Feel free to forward and share with others as you see fit.

My thanks to the folks at BaselineScenario.com. As noted at the beginning, since their website is also a blog, I would suggest that you visit there at least occasionally to keep up with their latest thinking on the global credit crisis.

Wishing you better times,

Gary D. Halbert

What To Do About The Global Financial Crisis

Gary D. Halbert — Tue, 14 Oct 2008 17:59:30 GMT

IN THIS ISSUE:

BaselineScenario.com Urges Larger Bailout
"The Next World War? It Could Be Financial."
My Initial Thoughts & Analysis On The Above
Huge Recapitalization Plan For Major Banks
Progress Report On The Larger Bailout Plan
Conclusions & What To Do Now

Introduction

The global market plunge over the last few weeks has been nothing less than stunning. The Dow Jones Industrial Average and the S&P 500 Index have plunged 36.2% and 38.8% respectively so far this year. From their all-time highs one year ago last Thursday, the Dow was down over 40% and the S&P 500 was down over 43% as of the close last Friday.

It is estimated that pension funds and retirement accounts have lost well over $2 trillion in value this year in the US alone, most of it as the markets have collapsed in the last month or so. Worldwide, stock market losses were estimated at $8 trillion by the end of the day on Friday. Fortunately, equity markets around the world rebounded strongly on Monday, with the Dow Jones soaring 936 points in the single largest up day in history.

Banks continue to fail, major corporations are teetering and trust among financial institutions has evaporated. This despite the fact that the government passed the massive $700+ billion bailout just over a week ago. Earlier this morning President Bush and Treasury Secretary Paulson announced a new plan that will have the government take direct equity stakes in major banks to the tune of up to $250 billion of the $700 billion rescue plan.

The latest plan to inject capital in the major US banks in return for equity stakes was part of an international plan whereby governments in Europe, Japan and elsewhere made similar equity infusions in their major banks. The question remains, however, whether this latest huge step will stem the crisis in the credit markets until the remainder of the $700 billion bailout plan can be implemented.

Some analysts believe that more government assistance will be needed. This week, we look at one such analysis from BaselineScenario.com that calls for significantly more bailout efforts by the government to free up the credit markets. While I am not ready to endorse such an expanded rescue plan, it is something we should at least be aware of, especially now that both John McCain and Barack Obama are calling on the government to buy up troubled mortgages en-masse and restructure them so that people can stay in their homes.

I know that many of my clients and readers don't agree with the government bailout plan and whatever else is to come. Normally, I wouldn't either. But these are not normal times, and this is the greatest global financial crisis since the Great Depression, potentially even greater. Thus, unprecedented actions need to happen, and they need to happen fast. We can sort out the details, such as increased regulation, who is to blame and who potentially gets punished, later.

BaselineScenario.com Urges Larger Bailout

BaselineScenario.com is a very useful website/webblog that was founded by Peter Boone, an Associate at the Centre for Economic Performance at the London School of Economics, Simon Johnson, former chief economist of the International Monetary Fund and current professor at the MIT Sloan School of Management, and James Kwak, a former McKinsey consultant and co-founder of Guidewire Software.

On their website, they have a lot of useful information, including an article entitled Financial Crisis For Beginners, which I am reprinting separately for clients and readers. This article explains in understandable language many of the intricacies of the credit markets and the financial crisis, along with some of the technical terms such as CDOs, CDSs and others. If you want to better understand the credit crisis, this is a good place to start. I will send a SPECIAL ISSUE of Forecasts & Trends E-Letter later today or tomorrow.

Last Sunday, the editors at BaselineScenario.com published the article reprinted below with their ideas for how to solve the global financial/credit crisis. Their urgings go well beyond the $700 billion government bailout and other actions the US has taken to date, and would involve a huge coordinated global response.

This article was picked up over the weekend by the Washington Post, Forbes and RealClearPolitics.com, so it is getting some serious attention, and I expect we will be hearing more about it just ahead. Just to be clear, I am not endorsing this plan, at least not yet. I present it only as something that serious investors should at least be thinking about as a possibility in a worst-case scenario.

Finally, since the BaselineScanario.com website is also a blog, it is updated regularly with new information. Thus, I would suggest that you visit the website at least occasionally to keep up with their latest thinking on the global credit crisis, and that of others who post there. With that introduction, here is the article we will focus on this week. Read it carefully.

Note that some of the recommendations in the report below were taken on Monday and Tuesday with the international plan for governments to take equity stakes in their major banks.

QUOTE:
The Next World War? It Could Be Financial.

By Peter Boone and Simon Johnson
Sunday, October 12, 2008

The global financial outlook grows more dire by the day: The United States has been forced to shore up Wall Street, and European governments are bailing out numerous commercial banks. Even more alarmingly, the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare.

The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.

But there's a broader concern. With European governments turning down his appeals for assistance, Iceland's prime minister, Geir Haarde, warned last week that it was now "every country for itself." This smacks of the financial autarchy that characterized defaulters in the financial crisis in Asia in the late 1990s. Similarly, when Argentina defaulted on its debt in 2001-‘02, politicians there faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia after the crises of 1998, local enterprises and banks took the opportunity of the confusion to grab property, then found ways to ensure that courts sided with them.

This is a natural outcome of chaotic times. Iceland's promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. British Prime Minister Gordon Brown's decision last week to sue Iceland over this issue may escalate the crisis. The use of counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom also has a potentially dramatic symbolic effect.

Most of the time, financial war of this kind is painful and costly. It will lead to decades of lower international capital flows and could have other far-reaching effects on politics and global peace. Unless the leading industrial countries take concerted action, there's a very real danger that we will all suffer more.

In addition, we're now likely to see substantially more defaults and credit panics in smaller countries and emerging markets. After Iceland's fall, every creditor to other nations with large deficits and substantial external debt must be looking for ways to reduce its exposure. The obvious risks include much of Eastern Europe, Turkey and parts of Latin America. Russia's difficulties show that seemingly solvent countries can be high-risk: While the Russian central bank has gold and foreign exchange reserves of $556 billion, the private sector has recently built up an estimated $450 billion of debt. Creditors don't want to roll over the debt, so the government is using its reserves to do it. It has already ordered $200 billion channeled through state banks to companies repaying debt. If oil prices fall [and they are], a seemingly highly solvent country [Russia] could quickly look nearly insolvent. Some other rising stars, such as Brazil and even India, may have similar problems.

Added to this are worrying signs that the credibility of U.S. authorities is on the decline. Despite Washington's moves to stabilize the financial system, credit and equity markets continue to drop. This pattern is reminiscent of the 1997-98 Asian crisis, when successive International Monetary Fund programs provided briefer and briefer respites from market routs in emerging economies.

There is now a risk that continued corporate and bank defaults within nations, matched by large shifts in capital flows across nations, will lead to a chaotic series of national and local defaults. If governments don't respond with sensible, coordinated policies, there's a risk of financial war. [Emphasis included, GDH.]

Here are six steps toward avoiding a situation of "each nation for itself":

1. The world's leading financial powers -- at a minimum, the United States, the United Kingdom, France and Germany -- should jointly announce national plans to require recapitalization of banks (i.e., restructuring their debt and equity mixture) so that they have sufficient capital to weather a major global recession. How this is done can be determined internally by each nation, but this should be a common goal, so that citizens and companies can again trust their banks.

2. The countries should announce a temporary blanket guarantee on all existing bank deposits and debts. This will, in effect, promise creditors that they can safely expect the institutions to function until the recapitalization takes place, and it will help prevent the large flows of funds that could occur as some banks or countries conduct recapitalizations earlier than others. This guarantee should only be temporary (say, for six months).

3. The monetary authorities of these countries need to lower interest rates dramatically. Europe, Canada and the United States recently announced a coordinated 0.5 percent reduction in rates. This is a good start, but only a start. More will be needed, and it won't stop the credit crunch within or across countries. The events of the last nine months have set us on course for a global recession in which commodity prices will continue to fall and demand will remain weak. Inflation will be low, and deflation (falling prices) is a risk. More interest-rate cuts will be needed.

4. The monetary authorities also need to remain committed to pumping liquidity into the financial system as long as credit markets and interbank lending remain weak. This should be promised for at least one year.

5. All industrialized countries and most leading emerging markets should commit to a sizable fiscal expansion [increased government spending] (at least 1 percent of GDP), structured to work within the local political environment, to offset the coming large decline in global demand.

6. Many families worldwide are going to have negative equity (i.e., mortgages larger than the value of their homes) due to declining home prices. There are going to be large-scale recriminations against lenders and politicians. The most affected nations, including the United States, the United Kingdom, Ireland and Spain, urgently need to develop programs to provide relief for homeowners, both to offset real hardship and to prevent a vicious downward cycle in home prices.

It's important to prepare properly: Partial and piecemeal actions will no longer work. Actions by one country alone, and the current pattern of small steps, are no longer credible enough to change the tide: Markets need to be jolted out of their panic. It's worth bringing a sufficient mass of economic power to bear in a comprehensive program to unfreeze the markets. If the major powers of Europe and the United States were to implement such a program, we can be sure that other countries would follow suit, dramatically relieving fears of bank failure in these countries.

We also need to let [equity and real estate] prices move to a level supported by the market, which unfortunately means that wealth is likely to decline even further. The events of the last six months will almost surely cause a recession, and large downward revisions in earnings estimates are a near certainty. The crisis has undoubtedly changed investors' perception of the risks of investing in equities and real estate. As we saw after the Asian crises, this can mean that stocks, bonds and other assets become very cheap, and it takes a long time for values to recover. Fiscal expansion and help to homeowners will reduce the pain from these losses, but it's important to be clear that the success of the program should not be measured by rising asset prices.

Finally, it's important for everyone to recognize that we are well past the days where even dramatic steps could have stopped the panic and prevented a major recession. A successful program will not prevent recession, and we will still see many personal, corporate and perhaps even national bankruptcies. Once the genie of panic and uncertainty is unleashed, it takes years to put it back in the bottle. What we need to do is to prevent a chaotic collapse arising from incomplete policies, lack of credibility and international financial warfare. END QUOTE

My Initial Thoughts & Analysis On The Above

The suggestions from the gentlemen of BaselineScenario.com are very bold and politically challenging on various levels. At first blush, their sweeping plan of global government interventions in the credit markets, with potentially massive capital injections for banks and across-the-board guarantees of depository accounts in full, may sound overblown to many readers. However, as noted above, on Monday and earlier today, the US and governments in Europe, Japan and elsewhere announced plans to inject hundreds of billions of capital into major banks in return for equity stakes in their stock.

Why would they do this? The credit markets remain frozen, many major corporations are teetering on the brink of failure, and we may have been facing another week or two of stock market collapse, with the commensurate plunge in pension and retirement savings. The major governments felt they had no choice but to directly recapitalize the major banks in an effort to unfreeze the credit markets and avoid, hopefully, a continued stock market collapse.

Many Americans still remain dead-set against the Treasury's $700 billion bailout plan, and presumably the latest announcement that the US government will buy shares of banks. Likewise, I would assume there will also be significant resistance to the even larger bailout plan as suggested above by the gentlemen at BaselineScenario.com. While I'm not ready to endorse their plan, I would also contend that public support for such a broader rescue plan could swing quickly in favor – if the stock market collapse continues for another week or two.

Finally, there is a growing consensus that the US government's piecemeal, one-at-a-time, financial crisis rescue efforts – Bear Stearns, Merrill Lynch, AIG, et al – and of late the $700 billion bailout bill, is simply not enough. So, it will be interesting to see if the latest international plan to recapitalize the major banks will work and stem the carnage in the stock markets. If the markets continue to collapse just ahead, expect every possible rescue option to be put on the table.

Huge Recapitalization Plan For Major Banks

This morning, President Bush announced a $250 billion plan by the government to directly buy shares in the nation's leading banks, saying the drastic steps were "not intended to take over the free market but to preserve it." Treasury Secretary Paulson specified that the $250 billion will come from the $700 billion rescue package approved by Congress just over a week ago.

The Treasury is set to buy equity stakes in Bank of America\Merrill Lynch, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of New York\Mellon Corp. and State Street Bank. Bloomberg reports the Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each.

Some of the big banks had to be pressured to participate in the program by Treasury Secretary Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first, as a way of removing any stigma that might be associated with banks getting bailouts directly from the government in return for an equity stake in their stock.

According to Paulson, the initial injection into the largest banks will be on the order of $125 billion, with the remaining $125 billion to be used as needed for other smaller banks and financial institutions.

Paulson also announced that the Treasury Department will insure new bank debts in an effort to get banks lending to each other once again. Insuring loans among the banks is a huge step to take. This comes after the announcement late last week that the Fed will backstop the commercial paper market as needed. If these bold actions don't free up the commercial credit markets, I don't know what will.

Paulson also announced this morning that FDIC coverage for non-interest-bearing commercial bank accounts will be unlimited. This action is primarily targeted for businesses that must hold more than $250,000 in banks to meet payrolls and other obligations.

Progress Report On The Larger Bailout Plan

President Bush and Treasury Secretary Paulson said this morning that the latest $250 billion bailout package for banks would come out of the $700 billion rescue package approved by Congress on October 3. If so, that would leave only $450 billion in the rescue kitty.

You may recall from last week's E-Letter that the final rescue package passed by the Congress stipulated that the Emergency Act will make only $250 billion available in the first tranche, with the next $100 billion coming upon the President's request, and the final $350 billion subject to a joint resolution of Congress. Since President Bush has committed the first $250 billion to the banks, it will be interesting to see how they get at the remaining $450 billion in the weeks ahead.

Many investors are rightfully concerned that the massive Treasury rescue plan will not get up to speed in time to begin settling down the markets. Some have suggested that the Treasury won't begin buying up troubled assets until after the new administration takes office on January 20. But apparently, the Treasury is steaming ahead and may be making purchases fairly soon.

The following is from TheStreet.com this morning.

QUOTE:
On Monday, the official in charge of the federal government's $700 billion effort to weed out troubled assets clogging credit markets and the U.S. banking system said the Treasury is working quickly to kick-start the program without sacrificing quality. Neel Kashkari, the Treasury's interim assistant secretary for financial stability, said the Troubled Asset Relief Program [TARP] has begun hiring key staff and is still seeking accounting firms and companies to review proposals and manage assets.

The Treasury has selected the law firm Simpson Thatcher to advise on structuring a program to acquire equity stakes in banks, as well as the consultancy Ennis Knupp to hire asset managers.

"e have accomplished a great deal in just 10 days, but our work is only beginning," he said in a speech at the Institute of International Bankers. "A program as large and complex as this would normally take months or even years to establish. We don't have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution."

Kashkari also said TARP was taking "aggressive steps" to combat potential conflicts of interest, since companies and individuals who can best help the Treasury are also those who will most need its help. "[F]irms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP," Kashkari noted.

Firms will be required to submit an outline of any potential conflicts of interest, and the Treasury will then perform its own independent investigation before hiring them. Treasury will only hire firms when "confident in our and their ability to manage any conflicts," Kashkari said…

Kashkari said there are also provisions in place to protect taxpayers that are footing the TARP bill, including a goal to preserve homeownership, restrictions on executive compensation and strict compliance rules.

Kashkari outlined five key positions the Treasury has already filled, including chief financial officer, chief risk officer, chief of homeownership preservation, chief compliance officer and interim chief investment officer. Those officials have decades of experience in various regulatory arms domestically and abroad, including the Treasury, Federal Deposit Insurance Corp., Federal Reserve, Commerce Department, International Monetary Fund and World Bank, among others.... END QUOTE

So it does appear that the Treasury is moving full-speed ahead to get the TARP up and running as soon as possible.

Conclusions & What To Do Now

Many Americans (and most conservatives) would be outraged if the US government were to enact a bailout on the order of what is suggested above by the gentlemen at BaselineScenario.com. But as discussed above, this morning's announcement of a $250 injection of capital (from the TARP) into banks in return for equity stakes is a big step in that direction.

It is too soon to gauge the public's response to today's big announcement, but I expect it to be very negative on balance. What I do believe, however, is that if the carnage in the stock markets continues for another week or two, most Americans might well change their minds and welcome such an expanded rescue effort aimed at the banks – if it stabilizes the markets.

Both Obama and McCain have come out in favor of the government buying up troubled home mortgages and restructuring them to allow people to stay in their homes. Thus, it would appear that such a plan is going to happen one way or the other, assuming the government has the money to do so.

Is that a good thing or a bad thing, given where we are in this global financial crisis? Think of the message it will send to hard working Americans who have sacrificed and kept their home mortgage payments current. I could see a great deal of animosity in neighborhoods where people have sacrificed to keep their payments current, while others get bailed out by the government.

However, such a rescue plan may be the only way to stop the downtrend in home prices that is clearly fueling the credit crisis and the economic downturn we are headed into.

Finally, everywhere I go people are asking me about what to do with their investments, including even people I don't know. The question is, Should I sell now and take my losses? Obviously, I don't know if the market meltdown is over. No one else does either, whether they admit it or not.

As noted earlier, we saw a huge rebound in the markets on Monday, and as I am about to hit the "send" button (noon today), the markets are holding the gains from yesterday. But this is no assurance that we've seen the bottom. A great deal depends on how the US government and other governments around the world react in the weeks ahead.

What I can tell you is that the stock market decline over the last few months has eclipsed the decline we saw in the 2000-2002 recession bear market and equaled the crash in October 1987. What I can also tell you is that the people who got hurt the worst in those bear markets were those that panicked and sold out near the bottom. Those who held on were eventually rewarded.

There is no doubt that the current global financial crisis is much worse than the recession and bear market of 2000-2002, and worse than the market meltdown in October 1987. The ultimate question is whether we believe the US and the stock markets will survive this credit crisis. I believe the answer is yes.

While most of my money is invested in actively managed strategies and alternative investments (futures funds, etc) that have lost a lot less than the market (and have actually made money in this decline in a few cases), I do have some money in passive buy-and-hold investments. I am not planning to sell these investments.

As always, past performance is not necessarily indicative of future results.

Wishing you better times,

Gary D. Halbert

SPECIAL ARTICLES

Stocks experience worst week ever.
http://news.yahoo.com/s/ap/20081010/ap_on_bi_st_ma_re/wall_street

U.S. stock rise as rate cuts spark rebound
http://news.yahoo.com/s/nm/20081008/bs_nm/us_markets_global

A Capitalist Manifesto
http://online.wsj.com/article/SB122385722252027327.html

Bill Kristol tells McCain to fire his campaign staff
http://www.nytimes.com/2008/10/13/opinion/13kristol.html?_r=1&ref=opinion&oref=slogin

Might Uncle Sam Make Money On The Bailout?

Gary D. Halbert — Tue, 30 Sep 2008 19:36:00 GMT

IN THIS ISSUE:

The Latest $700 Billion Bailout Package
What Could Go Wrong? Potentially A Lot
What Could Go Right, If We're Lucky?
What Would Happen To The Profits, If Any?
A "Main Street" Backlash To Come?

Introduction

Like it or not, members of the House and Senate, with the approval of President Bush and both Senators McCain and Obama, reached a final agreement on the massive $700 billion mortgage bailout package over the weekend, with the much-awaited announcement on Sunday afternoon. Yet on Monday, the bailout bill failed to pass in the House of Representatives. As this is written, is not certain what will happen next. The next action probably doesn't happen until Thursday.

Assuming the latest rescue package (or some version of it) passes both houses of Congress, which is a real stretch at this point, it will give President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke most of what they asked for. I'll discuss the details below.

Most Americans do NOT like the latest huge government bailout of Wall Street banks, brokers, etc. Some polls late last week and over the weekend suggested that 65-75% of Americans opposed the bailout. I can understand why, especially with millions of American families struggling to make their monthly mortgage payments.

One reason for this anger over the bailout is the widespread perception that the $700 billion (or whatever the number turns out to be) is money down a rat hole that the government and taxpayers will never see again. While there are numerous risks in the bailout, the odds seem low that the government will lose all or even most of the bailout money. I will discuss some of the main risks to the bailout as we go along.

Interestingly, there is a growing number of intelligent folks in the financial world that believe the government could actually make a lot of money on this huge bailout effort, especially if they play their cards correctly. As I will discuss below, some respected analysts believe the government could net $1 trillion or more off of its investment of $700 billion.

Don't count me among this group, however. While I would concede that there may be some potential upside in this massive bailout program, we have to keep in mind that it's the government, after all, that will be running the enormous and complicated operation. The government is not known for making money, especially in complex financial dealings.

In any event, I do believe that if more Americans understood there is the potential to get most or maybe even all of the bailout money back, they might not be quite so angry about the deal. We'll talk about all of this as we go along this week.

The Latest $700 Billion Bailout Package

As discussed at length in last week's E-Letter, the massive rescue package floated by President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke on September 19 was fraught with problems. That plan would have us turn over $700 billion to the Treasury Secretary with no oversight, no transparency, no accountability and no legal challenge in the courts.

There was no chance that package was going to pass, as I pointed out last week. Yet over the ensuing week, all parties rolled up their sleeves, put in very long hours, made compromises on both sides of the aisle and came up with a much better rescue plan by last Sunday. Whether we like it or not, here is an overview of the latest massive bailout plan as we now understand it.

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use. More would be made available as needed. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Overseeing the program:The bill would establish two oversight boards. A new Financial Stability Oversight Board would be charged with ensuring that the policies implemented protect taxpayers and are in the economic interests of the United States. The oversight board would include the Federal Reserve Chairman, the Securities and Exchange Commission Chairman, the Federal Home Finance Agency Director, the Housing and Urban Development Secretary and the Treasury Secretary.

Second, a congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury's use of its authority under the rescue plan. Sitting on the panel would be five outside experts appointed by House and Senate leaders.

Insuring against losses:The Treasury would establish an insurance program - with risk-based premiums paid by the industry - to guarantee certain of the companies' troubled assets, including mortgage-backed securities purchased before March 14, 2008. The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.

Protecting taxpayers: One provision requires the President to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted. In addition, Treasury would be allowed to take ownership stakes in participating companies.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000. They also will not be allowed to write new contracts that allow for "golden parachutes" for their top five executives if they are fired or the company goes under. However, the executives' current contracts, which may include golden parachutes, would still stand.

Like it or not, these are the highlights of the latest proposed massive government bailout of troubled financial institutions which may yet be signed into law this week. While leaders of Congress praised themselves for acting quickly, it is indeed a very sad time for America.

What Could Go Wrong - Potentially A Lot

Let's be clear from the outset: this is the largest and most complex financial rescue plan in history. Given that fact, some argue that Treasury Secretary Hank Paulson is the right man for the job. Paulson was Chairman and CEO of investment banking giant Goldman Sachs from 1999 to June 2006 when be became Treasury Secretary. While Paulson may be very qualified to head-up this massive financial operation, we must keep in mind that the rescue plan will hardly be off the ground by January 20 when the new administration takes over.

Perhaps the new president will keep him on, but there's no guarantee. So, leadership of this massive, complex operation is a big, big question mark as we begin our summary of the possible risks and problems.

The next fundamental risk is this: the banks, brokerages and others will be trying to unload the worst of the worst of their mortgage-backed securities on the government for the best possible price. The question is, will the government pay too much?

The mortgage-backed securities (MBSs) that the Treasury will buy from the various financial institutions that hold them are in many cases very complicated instruments. Space does not permit a discussion of all the intricacies and the various combinations and mutations of these complex packages of MBSs (not to mention that I don't fully understand them all myself).

Suffice it to say that even the supposedly brilliant minds of Wall Street cannot determine how to value many of these securities today, so why should we think that government bureaucrats will know how to value them correctly? Why would we not assume that the Wall Street banks and brokers will convince Treasury to pay more than the securities are really worth?

And as I discussed briefly last week, the government has some incentive to pay more than these assets are really worth. After all, the supposed purpose of this massive bailout is to allow the banks and other financial institutions to recapitalize and resume lending and unfreeze the credit markets. If the government buys these MBSs at even further discounted prices, the banks would have to book even more losses, and more banks would fail.

The thinking is that since Uncle Sam has the deep pockets and the ability to hold these securities for a long time, it can pay the banks somewhat more than today's crisis values, thus allowing them to recapitalize. Presumably, the government can hold the mortgage securities long enough for them to recover and make at least a decent profit on some of them. That remains to be seen, of course.

I think we can all agree that the government has the deep pockets, at least as long as the world is willing to buy our Treasury bills, notes and bonds. But my question is whether the Treasury, the Congress (and the public for that matter) will have the patience to hold these distressed securities, potentially for years for them to recover. Or will there be pressure on the Treasury to dump these securities prematurely?

Patience is not a commodity that is in heavy supply in today's debt-laden, entitlement-oriented society in America. Baby Boomers need a renewed bull market in stocks to fund their retirement, which may be postponed due to this massive pool of MBSs hanging over the market.

Bottom line: if the Treasury is pressured into unloading these mortgage-backed securities before the economy and the debt markets have recovered, then we should expect to incur potentially huge losses and possibly yet another credit crisis.

Next, there is the question of how will the Treasury determine which banks and other financial firms get to participate in the bailout, especially in the first $250 billion tranche (assuming that is the final deal). One possible mechanism that has been discussed by Paulson and others is a "reverse auction." However, a traditional reverse auction may not be effective in this situation where the government is not necessarily looking to purchase the MBSs at the lowest possible price. The objective of the enormous bailout is not to drive more financial firms out of business, but to help them recapitalize, stay in business and resume normal lending.

Another tricky part of determining which banks and financial firms get to unload their bad debt is as follows. As noted earlier, everyone will likely try to unload the worst of the worst MBSs on the government. Some firms that are in better shape and have limited MBSs may be in a position to take less for them just to get them off their books, whereas firms that have much higher exposure to MBSs could yet go out of business were they to unload their toxic positions at further discounted prices.

The bottom line is, the process for determining which firms get to unload these securities, and at what prices, will be extremely complicated and risky. A lot could go very wrong.

The discussion just above is by no means a comprehensive summary of the possible risks to this massive mortgage bailout. In fact, it is overly general, but I think you get the idea that we are far from out of the financial crisis, even if the massive bailout becomes law later this week.

What Could Go Right, If We Are Lucky

As noted in the Introduction, there are some very smart people that believe the government could actually make a profit on the bailout, perhaps a lot of money if managed effectively. Bill Gross is one of the most highly respected money managers and financial writers around. He is the portfolio manager for the largest bond mutual fund in the world, PIMCO's Total Return Fund. He is also the author of two very popular books on investing.

Last Wednesday, Bill penned an editorial in the Washington Post in which he made it known that he was in favor of some form of the government rescue plan that was being debated in Congress last week. Furthermore, he made it clear that he believes the government could make a lot of money on the mortgage-related assets the Treasury intends to buy. He said of the bailout plan:

"The extreme measures [needed] are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from ‘troubled financial institutions' to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that…

Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below ‘par' or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth… The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic."

So, Bill believes the government should be able to make 10-15% on average on the distressed mortgage and related securities it purchases – IF the massive operation is managed well. Interestingly, it was reported in the media late last week that Bill offered to manage the government-owned mortgage/securities portfolio himself for free. Who knows if this offer is for real, but PIMCO manages over $825 billion in assets now, an amount similar to the size of the proposed bailout, so…. Hank, are you listening?

The next example of a savvy market maven who thinks the government could make some serious dough on the bailout package is Andy Kessler. Andy is a former hedge fund manager who made his claim to fame by reportedly taking $100 million in his fund's assets in 1996 to $1 billion by 2001. He has since written several popular books on investing and business.

Andy believes the government could make far more money on this mortgage rescue package than Bill Gross envisions. Here are excerpts of what Andy offered up last Thursday in his latest Wall Street Journal editorial (emphasis added):

"There is a saying on Wall Street that goes, ‘The market can stay irrational longer than you can stay solvent.' Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs [Collateralized Debt Obligations] from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than$2 trillion in notional value loans and home equity and CDOs for his $700 billion...

It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates… This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets,[the U.S.] will become a safe haven for capital...

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly."

What exactly does this mean? Kessler believes that the Treasury will recover at least $1 trillion off of the investment of $700 billion – even with some of the mortgage securities fetching zero – and quite possibly as much as $2.2 trillion. Only if the operation is bungled should the government lose a dime, so Kessler believes.

Finally, I'm seeing more and more analysts come to increasingly positive conclusions about how the government ought to be able to make money – and not lose money – on this massive mortgage rescue package.

As for me, I'm not drinking the kool-aid just yet, but then again, I'm willing to admit that there's potential if a lot of things happen right. But a lot could go wrong as well. We are talking about the government after all, and one that may well be controlled by a liberal Congress and a liberal president for the next four-to-eight years. So I would not bet a dime that this massive bailout will end up being profitable. On the other hand, I do hope that it will.

What Would Happen To The Profits, If Any?

No doubt we will all rejoice if the $700 billion bailout reaps some big profits in the next 5-10 years (not that I am convinced, of course). As thoughts of some sizeable profits have become the talk of the town in recent days, questions have arisen as to what the government would do with the windfall should it happen.

Would Uncle Sam issue checks directly to the taxpayers? Not hardly! That would be seen as a tax cut, when in fact the taxpayers never had to loan the government any money directly to fund this massive $700 billion bailout.

Some intelligent observers have suggested that the government could use the potential profits from the giant bailout to pay down the national debt. This is precisely what Andy Kessler refers to above when he writes: "Over 10 years this could change the budget scenario in D.C." He is suggesting that the government could use the profit he projects (up to $1.5 trillion) to pay down the national debt.

Others have suggested that the potential bailout windfall could be used to help shore-up Social Security and/or Medicare. A trillion dollars, they suggest, could go a long way toward keeping these giant entitlement programs solvent in the years ahead.

That's a nice idea, assuming such a windfall profit actually occurs. But even if you assume that there will be some large profits some years down the road on this huge bailout, which I don't, what do you think Congress and the Administration in power at the time will do with the money? Three guesses, and the first two don't count.

They will spend it and delight in doing so. They will not send us a check or even cut taxes. They will not pay down the national debt. They will see it as a green light to increase the budget and thus the size of government. Just keep this in mind in a few years – if there are any profits to be dealt with.

Thus, I would insist that there should be clear language in the bailout bill, assuming one passes, that specifies exactly what would be done with any profits that might result from it. Yet that is not likely to happen.

A "Main Street" Backlash To Come?

As noted earlier, some polls over the last two weeks suggested that two-thirds to three-fourths of Americans were opposed to the Wall Street bailout. Clearly, millions of Americans are downright angry about it. A few polls indicated that the numbers were not as negative as 65-75% opposed, but clearly there are far more Americans who oppose the bailout than are remotely in favor.

This indeed raises the question of whether there will be a Main Street backlash if the $700 billion bailout is voted into law. Clearly, millions of Americans see this massive bailout as nothing more than the government's willingness to spend historic amounts of taxpayer money to bail out the Fat Cats on Wall Street.

Along this line, let me remind you of something I wrote last week: "the current financial crisis and the enormous $700+ billion government bailout virtually assure that, if elected: 1) Obama will not be able to push through his aggressive spending plans; and 2) McCain will not be able to push through any tax cuts. Realistically, the money for either of these proposals is no longer there."

Let there be no mistake, millions of Americans have been counting on the promises made by these two candidates. Most of Obama's supporters have bought into his promises of wide sweeping social reform, including nationalized health care, lower taxes on the middle class, and higher taxes on those making $250,000 or more a year. Likewise, many McCain supporters are banking on him extending the Bush tax cuts and other tax cuts he has promised.

If sound fiscal minds prevail, in light of the latest $700 billion spending bailout, neither candidate will be able to pursue these campaign promises. If people are angry today, they are likely to get even angrier in the months and years ahead. Why?

Despite the dire warnings of financial calamity from the White House, the Treasury Secretary, the Fed Chairman and some high-profile business leaders, much of Middle America wasn't buying the story that their own livelihoods were linked to the fate of the rescue package. Instead, average workers read the plan as the big guys in Congress bailing out their friends on Wall Street.

A majority of Americans didn't want Congress to use taxpayer dollars to bail out financial institutions, even if their collapse meant a rocky ride for investors in the stock market. A few congressmen and women admitted publicly that their calls from constituents were running as high as 100-to-one against the bailout plan.

Never mind that the collapse of Wall Street will almost certainly result in a recession, or worse, that will affect virtually all Americans. Never mind that the credit markets have seized up, and that lending for such things as home mortgages had ground to a virtual halt. Never mind that credit card spending may actually be at risk next.

I am reminded of the 1970s the movie "Network" which featured a news anchor who lost control and exclaimed, "I'm mad as hell and I'm not going to take it any more." I think that many in our country today have similar feelings, and no one knows at this point exactly what the eventual consequences will be.

Will there be a major backlash against the big Wall Street banks, brokers and others? Will Americans opt to move their money and their business to local banks that never participated in subprime mortgages, CDOs and other complicated mortgage backed securities? Will they move their investments from the Merrill Lynches of the world to local investment firms?

In my opinion, this suggests that big banks, big brokerage firms and multi-million dollar executive big bonuses may be in big trouble. We may well see a return to local community banks, many of which are in fine shape and have no subprime/MBS exposure at all. Local investment firms, financial planners and the like may benefit from a migration from "big box" brokerage/investment firms that were big players in toxic mortgage securities and still paid their CEOs and top execs multi-million dollar bonuses.

Unfortunately, we'll also likely see a move toward populist political candidates, who are far less friendly to big business – that being the Democrats. For example, Senator Obama has seen a big bounce in the polls over the last two weeks as the credit crisis worsened and the massive bailout was concocted.

If there is a further trend toward populist politicians, that will mean more spending and higher taxes, which will be bad for our economy over the long-term. But then, that's a subject for another E-Letter.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The Bailout Defeat: A Political Credibility Crisis
http://www.time.com/time/nation/article/0,8599,1845655,00.html

ACORN, Obama and the Mortgage Mess (what, you didn't hear about this?)
http://www.realclearpolitics.com/articles/2008/09/acorn_obama_and_the_mortgage_m.html

Congress lives up to its abysmal approval rating.
http://online.wsj.com/article/SB122273257698488295.html

What Goes Before a Fall? On Wall Street, Reassurance
http://www.nytimes.com/2008/09/30/business/30sorkin.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

Is Worst Of The Credit Crunch Behind Us?

Gary D. Halbert — Tue, 13 May 2008 18:08:00 GMT

Post-Mortem On The 1Q GDP Report
Recession, Even If Outside The Long-Held Definition
So How Bad Are Things Going To Get?
Have We Seen The Worst Of The "Credit Crisis"?
Maybe It's Not As Bad As We Thought
Stocks - Have We Seen The Bottom?
Conclusions - What To Watch For

Introduction

When the 1Q GDP report came out on April 30 and was better than expected, I wondered what the reactions might be. If you will recall, the report cited GDP growth of +0.6% for the 1Q when many believed the report would yield a negative number. In fact, the mainstream media and Hillary and Obama have led us to believe that we are already in the grips of a serious recession. It comes as no surprise that they still maintain that stance, despite the latest positive GDP number.

Likewise, I knew that the gloom-and-doom crowd would claim (as always) that the GDP report was bogus, and that we are headed for economic disaster. What else is new? But I wondered how economists and respected analysts in the financial industry would react to the better than expected GDP report at the end of April. As I expected, many in the economic and financial industry downplayed the report initially and pointed out that some of the "internals" in the report were indeed negative, as I reported last week.

But I also wondered that if, after a week or two of absorbing the latest GDP data, some respected economists and financial pundits would change their views and consider that we might not be in or headed for a recession, and that the state of the US economy just might not be so bad after all. As I will discuss below, that appears to be happening.

There is a broad consensus that the fate of the US economy, and whether we have a real recession or not, hinges on the housing/credit crisis. I happen to agree with that assessment, but I also believe it is still too early to tell if a recession is inevitable. Now, in light of the latest 1Q GDP report, the opinions and forecasts of some respected analysts are growing less negative as I will discuss later on.

Finally, have you noticed that the stock markets have been going up nicely since early March, despite a ton of bad news? Stocks have a history of bottoming out before the economy recovers from a downturn. Some analysts believe that is what is happening now. Maybe it's time to consider getting back in.

Post-Mortem On The 1Q GDP Report

While the mainstream media and the Democrats all but promised a very negative GDP report for the 1Q, the actual advance number came in better than expected at +0.6% for the first three months of this year, the same as for the 4Q of last year. Granted, +0.6% is indicative of an economy that may be teetering on the edge of a recession, but it was at least mildly positive and above the pre-report consensus.

The immediate media response to the report was as expected, that the report was overly optimistic. As I reported last week, even the Wall Street Journal was skeptical:

"...But underlying data [in the report] - on consumer spending, business investment and construction - paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories... Excluding exports and inventories, the economy contracted at a 0.4% rate..."

Yet as I also reported last week, there was some encouraging news in the latest GDP numbers. For example, consumer spending that makes up apprx. 70% of GDP actually rose 1% in the 1Q, at a time when consumer confidence fell to the lowest level in 20 years. While the latest WSJ/NBC poll found that 81% of Americans believe we are now in a recession, people continued to spend money in the 1Q. This is at least somewhat encouraging.

On the inflation front, the latest GDP report revealed that the price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.5% (annual rate) in the 1Q, compared with an increase of 3.7% in the 4Q. Excluding food and energy prices, the "core" price index for gross domestic purchases increased 2.2% in the 1Q, compared with an increase of 2.3% in the 4Q of last year. This was also better than expected. In a separate report released last week, the Labor Department reported that US productivity rose by a better than expected 2.2% (annual rate) in the 1Q. Non-farm output per hour worked rose 3.2% versus a year earlier, the largest gain in almost four years.

At the end of the day, it is clear that we are not in a recession just yet, at least based on the "advance" 1Q GDP report, which will be revised two more times in the coming weeks. Maybe a recession lies ahead, but it's not here yet. Perhaps the US economy will have sunk slightly into the negative side in the 2Q, which we won't know until late July when the 2Q GDP report will be released. But even if the 2Q GDP report is slightly or somewhat negative, that will not confirm that a recession is upon us.

Keep in mind that the government's $168 billion "stimulus package" is going out to most US taxpayers as this is written, and this should provide at least a modest boost to the economy in the second half of this year.

As a result of the better than expected 1Q GDP report and the stimulus package, some respected analysts are dialing back their forecasts for a US recession just ahead, and perhaps for good reason. Some readers have criticized my view over the last year or so that a recession was not the most likely scenario, especially in light of the housing/subprime/credit crunch. Still, I may yet be proven correct. Some well-known analysts are coming to agree as I will discuss below.

Recession, Even If Outside The Long-Held Definition

In the 30+ years I have been in the investment business, a recession has been defined as two consecutive quarters of negative GDP growth. But just as I have expected, the media wants to redefine the definition of a recession to something more politically correct. The media would now have us believe that the US economy is in a recession anytime that economic growth, or the lack thereof, creates a net reduction in jobs.

Clearly that is happening - the unemployment numbers have confirmed for the last three months that net jobs are in decline. However, the April unemployment rate was actually better than expected and declined from 5.1% to 5.0%. Net job losses in April were only apprx. 20,000 which was well below the reported job losses of apprx. 80,000 in March and February.

Yet the greater question is, has the long-time definition of a recession changed? Do we now define a recession as two consecutive quarters of negative GDP growth, as we have for all these years, or is it some new definition that is much more limited? This is quite a debate, but it is fueled primarily by liberals that want to capitalize on President Bush's failures to advance their own agendas.

What is all too clear is that the US economy is indeed in a marked slowdown, recession or not. The slowdown has been precipitated and exaggerated by the subprime/housing/credit crunch, which is still far from over. And what we do know is that the housing slump has led to a plunge in consumer confidence to the lowest level in over 20 years.

So, is this a recession by historical standards? Not yet. But is it a recession based on the new media math? I would reluctantly have to say yes. Maybe we redefine it as a "psychological recession." Consumers are still spending, as noted above, but they feel really bad about the state of the economy, and think things are going to get worse.

So How Bad Are Things Going To Get?

The credit crunch is very real. The repercussions of the housing slump, the subprime crisis and the resultant credit crunch are far from over. Liquidity in the credit markets remains a fraction of what it was a year ago. We see this in the investment markets as well, where trading volume remains down significantly.

The Fed has slashed interest rates time after time in an effort to relieve the credit crunch, with the latest cut in the Fed Funds rate to 2.25% on April 30. That brings the cumulative rate cuts since last September to 3.25%, which is a more rapid rate-cutting spree than in the first eight months of 2001 when the Fed was last battling a recession. Still, it remains to be seen if this will be enough to avoid a recession this time around.

There are analysts on both sides of this fence. Some believe the combination of Fed rate cuts and other federal relief on the mortgage side, along with the stimulus package (more on this below), will be enough to prevent the housing crunch from sparking a real recession. Others believe it is too little, too late, and the plunge in consumer confidence will result in spending falling to levels that will guarantee a recession later this year.

The stimulus package that the President and Congress passed totals apprx. $168 billion, most of which will be doled out over the next couple of months. It remains to be seen just how much that will boost the economy and when. Will most consumers immediately spend the money? Or, will they save most or all of it (doubtful)? Obviously, the Bush administration hopes consumers will quickly spend the money in one way or another to boost the sagging economy.

But even if consumers do spend most of the newfound money, it is not certain just how much that will stimulate the economy. Estimates vary as to when consumers will spend the money, but generally it is believed that the stimulus package will add apprx. 1% to GDP. But when?

Some people have already received their government stimulus checks, but most will receive them over the next several weeks. This suggests that most of the positive impact on the economy from the stimulus package will not be felt until the 3Q. Furthermore, a one-time 1% boost will not, by itself, turn this economy around. Of course, we should not rule out additional stimulus to come, given that it's an election year.

Have We Seen The Worst Of The "Credit Crisis"?

As you know, the credit crisis has been sparked by the problems in the housing sector and subprime mortgage securities specifically. As noted above, the housing numbers, on balance, just continue to get worse month after month nationwide. Home foreclosures continue to rise; the inventory of unsold homes continues to rise; new and existing home sales continue to fall overall; median home sale prices continue to fall in most parts of the country; and housing starts continue to fall.

The question is, have we seen the worst of the housing/credit crisis? The answer to this question varies, of course, from region to region. Here in Austin where I live, for example, we have seen no noticeable slowdown in the housing boom; prices for homes are still going up generally; and credit for home loans is still widely available. This is also true in certain other areas of the country. Of course, in most areas of the US, just the opposite is happening and home values have fallen precipitously in some regions.

There is little doubt that the credit crisis is far from over and will persist for at least another year or two. It is clear that the credit crunch continues to spread from largely real estate related loans to commercial and industrial loans and credit card lending. Even Fed officials concur that lending requirements continue to tighten in most all loan categories nationally.

But might we have seen the worst of it by now? As noted below, there are those who believe we have. Some financial analysts now believe that the bailout of Bear Sterns in March may have signaled the worst of the credit crisis. That remains to be seen, of course.

Likewise, in light of the latest better than expected GDP report and the $168 billion stimulus package, some economic forecasters are shifting to a more positive, or less negative, slant. Given that, let's consider some more recent opinions on the overall state of the economy and the credit crisis.

Maybe It's Not As Bad As We Thought - Some Opinions

Here are some recent revised opinions on the current state of the economy from some sources that we should at least consider. The following quote is from Treasury Secretary Henry Paulson last week in an interview with the Associated Press:

"The worst of the nation's credit crisis may have passed...There's progress, and I think we're closer to the end of this than to the beginning... There's no doubt that things feel better today, by a lot, than in March... We will get some help from the stimulus [package]. Later this year, I expect growth will pick up."

Warren Buffet, the legendary investor and reportedly the richest man on the planet, had this to say last week:

"The worst of the [credit] crisis in Wall Street is over... I think the Fed did the right thing in stepping in on Bear Stearns."

Buffet said that he believes the worst of the global credit crunch is behind us, but he added that there is still considerable pain ongoing for individual consumers in many parts of the US. Based on his latest public remarks, it appears he believes we will get through this rough patch and continues to be bullish on the long-term prospects for the economy.

And this from Merrill Lynch CEO, John Thain last week:

"The U.S. credit crisis is easing and the risk in its housing market is dramatically lower now."

And this from our good friends at Stratfor.com:

"...we reiterate the view we have held from the beginning - which is that the subprime crisis would cause the economy to slow and, in extremis, cause a short recession... At the moment we are not even sure that the slowdown will cause a recession... But we rejected months ago... the idea put forward that we are in the greatest financial crisis we have seen since 1929."

And this from the Bank of England, which has had its own credit crisis:

"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months... As uncertainty falls and market liquidity improves, it should become clearer that some assets appear cheap relative to credit fundamentals."

While the housing/subprime/credit crisis is far from over, there are at least some signs that we may have seen the worst of it.

Stocks - Have We Seen The Bottom?

The major stock market indexes have been rising nicely since early March. This rally, in the midst of a great deal of bad news, has investors asking: Have we seen the bottom, and is it time to get back in? No one knows for sure, of course, but based on the discussion above and the possibility that the worst of the credit crisis might be behind us, I think there is a good chance that stocks could continue to trend higher just ahead.

Stocks have a history of bottoming out and rebounding well ahead of a turnaround in the economy. Thus, the latest strength in stocks might continue for a while. Most of the professional money managers I recommend are now positioned on the long side of stocks (vis-à-vis mutual funds). That includes Niemann Capital Management and Potomac Fund Management that I discussed at length last week.

Keep in mind, however, that I still believe (as do others) that the US equity markets may be in a broad trading range for the next year or longer. Since the range I envision is very broad, stocks could still have considerable upside potential from current levels.

Yet in this dicey environment, I think it is even more important to have a portion of your equity portfolio with professional money managers that have the flexibility to move to the safety of cash, or hedge positions, should market conditions dictate.

Conclusions - What To Watch For

As I see it, the economy has three major issues to deal with in the coming months and years. First, we have to get a better handle on exactly how much subprime exposure banks and Wall Street firms have, and whether or not they can survive. I expect we will have a much clearer picture on the subprime and related exposure before the end of this year.

Next, we're going to have to work through the housing dilemma. In some geographic areas, housing prices may continue to climb, albeit at a slower pace. In many others, however, housing prices will likely continue to fall, or stagnate where they are for an extended period of time. Either way, it's not good news for those who want a booming housing market to create equity in what is likely their largest investment.

Finally, I think the sticker shock associated with food and fuel prices is a major contributing factor to the recent plunge in the consumer confidence numbers. It seems that gas prices go up each day, and we're not even into the summer driving season yet. Food costs are also rising quickly, so it's no wonder that consumers are in a funk.

Despite that, the economy did remain in positive territory in the 1Q. Consumer spending, which accounts for apprx. 70% of GDP, continued to rise in the 1Q, although modestly. It remains to be seen if the economy will have dipped slightly into negative territory in the 2Q. And it will be interesting to see how much the stimulus package boosts the economy in the 3Q.

After reviewing the outlooks from all of my various sources of economic information, I believe we may have seen the worst of the subprime and housing crises. However, I also tend to agree with Peter Bernstein, who I quoted last week as saying that our current economic malaise could hang on longer than most people expect. Even so, there should be opportunities in the market for those who are properly positioned to take advantage of them.

Finally, I happen to think that now may be a good time to dip a toe back into the murky waters of the stock market. Sure, there's risk involved, but as I noted last week, sometimes you take on more risk by doing nothing.

So, if you are sitting on the sidelines, or are under-invested in equities, this may be a good time to consider investing with one or more of the professional money managers I recommend that have the flexibility to move to cash or hedge positions, just in case there is more bad news in the pipeline.

To talk to one of our Investment Consultants about these programs, feel free to give us a call at 800-348-3601, or send us an e-mail at info@halbertwealth.com. Plus, if you missed out on the free, no obligation risk tolerance assessment that I offered in my April 22 E-Letter, just click on the following link to access our Confidential Risk Tolerance Profile questionnaire.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Is the worst of the housing/credit crunch over? (Good read)
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/097snjun.asp?pg=1

The Challenge From China
http://online.wsj.com/article/SB121063718854786789.html?mod=opinion_main_commentaries

Superdelegates put Obama within mathematical reach.
http://apnews.myway.com/article/20080513/D90KGU400.html

Market Mayhem & Credit Fears - What's Next?

Gary D. Halbert — Tue, 11 Sep 2007 09:20:00 GMT

Market Mayhem & Credit Fears - What's Next? IN THIS ISSUE: 1. The Economy - The News Is Not All Bad 2. Consumer Spending Remains Firm For Now 3. Housing & Subprime - More Bad News 4. Should The Government Come To The Rescue? 5. The Fed Needs...(read more)

Is A Subprime Recession Inevitable?

Gary D. Halbert — Tue, 28 Aug 2007 09:21:00 GMT

Is A Subprime Recession Inevitable? IN THIS ISSUE: 1. Stocks - Correction Or New Bear Market? 2. Consumer Confidence & Spending Remain Key 3. A Look At Previous Credit Crunches 4. How Bad Is The Subprime Mortgage Problem? 5. Crisis In Confidence 6...(read more)

Forecasts & Trends : Credit Crisis

On the Economy & Obama's Trillions

Insurance Companies - The Next Shoe to Drop?

Have We Turned The Corner On The Recession?

Support Wanes For Obama's Huge Stimulus Plan

Introduction

Public Support For Trillion Dollar Stimulus Plunges

Senate Passes $838 Billion "Stimulus" Package

Senate Stimulus Amendment To Help Automakers

Republicans' Proposed Alternative Stimulus Packages

Republican Plans Never Had A Chance, Of Course

Final Stimulus Bill Will Be Higher Than $838 Billion

Frustrated Obama Says Spending IS Stimulus

50% of Americans May Pay Zero Income Taxes

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

It's Official - 2008 Was A Very Bad Year

Introduction

Happy New Year!!

Credit Crisis: Do Bush & Paulson Have A Clue?

Introduction

Stratfor's Take On The Subprime/Credit Crisis

Treasury Secretary Paulson Changes The Plan

Do They Even Have A Clue What To Do?

Bailout's Next Phase: Consumer Loans (Maybe)

More From Stratfor On The Credit Crisis & The Economy

Gauging The Recession & The Economy - Not Good

Stock Markets Detest Uncertainty & Economic Woes

Conclusions - They Are Few

"Buy-And-Hold" Bites The Dust - Now What?

Introduction

Economic Picture Getting Darker

The Conventional Wisdom Was Wrong

Chinks In The Index Investing Armor

Do Low Fees = Good Investments?

What About Risk Management?

Conclusions

On The Economy And Active Management

Introduction

A Look At The Latest Economic Numbers

Economic Forecasts Roundly Downgraded

Fallacies Of A "Buy-And-Hold" Only Approach

The Goals Of Active Management Strategies

The Halbert Wealth Management Difference

Is It Time To Consider Active Management?

Conclusions -- Don't Miss The Next Bull Market

SPECIAL ISSUE: Financial Crisis For Beginners

QUOTE:Financial Crisis For Beginners

Crises of confidence and bank runs

Credit default swaps

Stock market vs. credit market

What To Do About The Global Financial Crisis

Introduction

BaselineScenario.com Urges Larger Bailout

QUOTE:The Next World War? It Could Be Financial.

My Initial Thoughts & Analysis On The Above

Huge Recapitalization Plan For Major Banks

Progress Report On The Larger Bailout Plan

Conclusions & What To Do Now

Might Uncle Sam Make Money On The Bailout?

Introduction

The Latest $700 Billion Bailout Package

What Could Go Wrong - Potentially A Lot

What Could Go Right, If We Are Lucky

What Would Happen To The Profits, If Any?

A "Main Street" Backlash To Come?

Is Worst Of The Credit Crunch Behind Us?

Introduction

Post-Mortem On The 1Q GDP Report

Recession, Even If Outside The Long-Held Definition

So How Bad Are Things Going To Get?

Have We Seen The Worst Of The "Credit Crisis"?

Maybe It's Not As Bad As We Thought - Some Opinions

Stocks - Have We Seen The Bottom?

Conclusions - What To Watch For

SPECIAL ARTICLES

Market Mayhem & Credit Fears - What's Next?

Is A Subprime Recession Inevitable?

QUOTE:
Financial Crisis For Beginners

QUOTE:
The Next World War? It Could Be Financial.