Forecasts & Trends : John McCain

The Democrats' Plan To Highjack Your 401(k)

Gary D. Halbert — Tue, 04 Nov 2008 22:19:23 GMT

IN THIS ISSUE:

The Economy Falling Fast Into Recession
Democrats Want To Highjack Your 401(k)
The Democrats' 401(k) Replacement Plan
Socialism Du Jour - "Spread The Wealth Around"
Can We Afford This Nonsense? No, But So What
Conclusions - After Today, Anything Is Possible

Introduction

On this Election Day that is expected to end with a win for Senator Barack Obama, I think it's important to let you in on what the liberals in Congress are already discussing about your retirement planning options. Earlier in October, Congressional Democrats began discussing the possibility of eliminating the favorable tax benefits related to 401(k) plans, effectively killing the very popular retirement planning device.

In its place, the Dems propose to enact a government-sponsored plan that would transfer the role of total retirement security into its hands. The problem is, could the investment options be limited to only a special type of government bond? You know, the kind they use for the Social Security System where you can claim there's a trust fund but the money's all gone.

In any other circumstances, I would say that this proposal doesn't have a snowball's chance of becoming law. However, a year ago I would have told you it would be next to impossible for the Fed and Treasury to guarantee hundreds of billions in worthless bonds, force mergers of financial services companies, buy hundreds of billions in equity stakes in our largest banks or take ownership in a public corporation. If the Dems get a supermajority in both Houses of Congress, I won't be surprised by any neo-socialist boondoggles that may well appear, especially if Obama wins the election.

I fear that the recent bailout maneuvers have started us on a slippery slope toward socialism. Where will it stop? Hopefully, today. If not then, we might see it get a lot worse before it gets better. Whatever turns out to be the case, you need to know what may be coming on the retirement account front, specifically for 401(k)s.

Before we get to that, I will quickly review the latest economic numbers which are grim. We are now in a recession, textbook definition or not, and I expect it will only get worse for some time to come. I will have a more detailed analysis on the economy and what we should expect in an upcoming E-Letter.

The Economy Falling Fast Into Recession

Last Thursday the Commerce Department announced that 3Q Gross Domestic Product fell at an annual rate of -0.3%. This was the "advance" report which relies on somewhat scant data for September, so the next GDP report late this month could well be revised downward. The much-watched ISM Manufacturing Index plunged from 43.5 in September to 38.9 in October, a 26-year low. The Chicago Purchasing Managers Index, a proxy for business spending, imploded from 56.7 in September to 37.8 in October.

Consumer confidence fell off a cliff in October, plunging from 61.4 in September all the way down to 38.0, an all-time low for the index. Personal consumption spending fell 0.3% and durable goods orders slumped 2.9% in September (latest data available). General Motors reported yesterday that car sales for October were down over 45% from yearago levels. Retailers are bracing for a very disappointing holiday season.

Our economy is in serious trouble, folks! And the credit crunch is far from over. I could see this recession lasting a year or longer. I will have more detailed economic analysis in the next week or so, depending on what new surprises we see in the days just ahead.

Democrats Want To Highjack Your 401(k)

By now, many of you may have read about a new Democratic proposal to eliminate the tax incentives provided to 401(k) retirement plans, and replace them with 'government-guaranteed' retirement accounts. On its face, this plan is being touted as a way to restore stock market losses incurred by 401(k) participants over the past couple of months. However, the real agenda is far more rooted in liberal ideology. If you read what follows, I think you'll agree, and it should scare you!

Before getting into what has been proposed, let's take a look at exactly what the Democratic proposal would do away with. Many Americans are not aware of all of the tax benefits available to help workers save for retirement in 401(k) plans, including plenty of people who actually have these retirement plans. The Democrats are no-doubt counting on participants not knowing what they are giving up to make the sale easier.

The Democrats' proposal does not seek to do away with 401(k) plans. Instead, it places the tax advantages enjoyed by employers and employees in the crosshairs. Therefore, it would be beneficial to review just what those tax advantages are. Note that the following benefits pertain to traditional 401(k)s, but are not applicable to special "Roth" 401(k) contributions, which I will cover a little later on. Again, these are the current tax advantages for 401(k) accounts:

Employee contributions to the 401(k) are deductible for income tax purposes, but not for Social Security tax purposes;
Employer contributions are not taxed as compensation to participating employees for income tax or Social Security tax purposes;
Earnings (interest, dividends, capital gains, etc.) on employer and employee contributions are not currently taxed to the participant, but are allowed to accumulate on a tax-deferred basis. To illustrate, let's compare the accumulation of a contribution of $300 per month on a taxable and tax-deferred basis. Assuming a 30-year time horizon and 6% earnings (which are for illustration purposes only and not guaranteed), the taxable account would grow to $172,453, while the tax-deferred account would grow to $227,146. You can see the results using other assumptions by going to the following website for a tax-deferral calculator:

http://www.calcxml.com/do/inv07
Finally, assets grow tax-deferred in traditional 401(k) plans, not tax-free. Thus, withdrawals at retirement are taxed as ordinary income in the year in which they are actually withdrawn. Most retirees withdraw annually only what they need to supplement their other sources of retirement income.

I noted above that these tax benefits pertain to traditional 401(k) plans, but they do not apply to special "Roth-type" contributions and earnings. In Roth plans, contributions are not tax-deductible when made. However, earnings on all Roth contributions can be withdrawn tax-free IF they are held for a sufficient period of time. For younger 401(k) participants, this can be a huge advantage. Note, however, that these special rules do not apply to employer matching contributions.

As you can see, the tax benefits associated with traditional 401(k) plan contributions and earnings are not only favorable to the employer, but also to the employee. The ability to grow retirement assets on a tax-deferred basis is a huge benefit, and is part of the reason that these plans have gained so much in popularity over the last 20 years or so.

The Democrats' 401(k) Replacement Plan

I have read a number of articles describing the alternative 401(k) plan being considered by some of the Democratic leadership. This plan was the brainchild of Dr. Teresa Ghilarducci, an economics-policy professor at the New School for Social Research in New York (where else?). However, I got so many different details from the various articles I read, I figured it would be best to review Dr. Ghilarducci's own testimony and briefing paper rather than counting on hearsay.

It's a good thing I did, because Dr. Ghilarducci's original proposal is quite different in some respects than the plan she revealed in her Congressional testimony. However, either proposal would still likely result in the death of 401(k) plans and would put the government in the role of providing retirement security. Here are the details of her original briefing paper from November of 2007:

As already noted, the proposal would not do away with 401(k) plans, but would eliminate all of the tax benefits as discussed above. I must assume that this also means the tax benefits associated with Roth-type 401(k) contributions as well. This would, in effect, kill 401(k) plans as the tax incentives for employers and employees are the main drivers for their adoption and participation.
Instead of employer-sponsored 401(k) plans, the government would set up special Guaranteed Retirement Accounts (GRAs). Participation would be mandatory for all workers except for those who are covered by an equivalent or better defined benefit retirement plan.
Required contributions of 5% of salary (equally shared by employer and employee) would be made to the GRA each year, and would be administered by the Social Security Administration. Contributions will apply only up to the Social Security earnings cap (currently $102,000 for 2008), and workers will have the option to make additional after-tax contributions to the GRA.
To offset the loss of before-tax contributions in 401(k) plans, workers would receive an annual $600 refundable tax credit, indexed to inflation. Note that the "refundable" nature of this tax credit insures that workers receive it even though they may not pay any income taxes. For lower-paid workers, all or part of the $600 tax credit would be directed into the GRA to insure at least a $600 annual contribution for every worker.
As noted above, the GRAs would be administered by the Social Security Administration and would be guaranteed at least a 3% annual return. However, the original proposal suggests that these contributions be managed by a unit of the government's Thrift Savings Plan, and not placed into government IOUs. Independent trustees would direct the investment of contributions and have the authority to hire commercial money managers. While the government would guarantee a minimum return of 3%, it would also be possible to earn excess returns which could be credited to GRA accounts.
Finally, at retirement, GRA account balances are converted to inflation-indexed annuities based upon the life expectancy of the participant. Even so, individuals will be permitted to take a partial lump-sum distribution equal to the greater of 10% of their account balance or $10,000, and will also be able to select among optional survivor benefits in exchange for a smaller monthly check.

The supposed benefits of this new retirement arrangement will be to provide a benefit roughly equal to 25% of the pre-retirement income of a full-time worker who works 40 years and retires at age 65. Noting that Social Security replaces approximately 45% of pre-retirement income of the average worker earning $40,000, the proposal states that the combined programs can replace 70% of pre-retirement income of such workers.

Of course, that only applies to workers earning their "averages" and working for the period of time they consider to be typical. The actual amount of replacement income will depend upon actual earnings. A table in Dr. Ghilarducci's briefing paper notes that a "high earner" averaging $60,000 per year in earnings at retirement will replace only 61% of pre-retirement pay, while a "low earner" with only $20,000 of earnings at retirement will replace 89% of pre-retirement pay. Now that's what I call spreading the wealth, but more about that later on.

There are many other details of this plan that space does not permit me to discuss. For more details of the original proposal, see Dr. Ghilarducci's briefing paper for the Economic Policy Institute at the following web address:

http://www.sharedprosperity.org/bp204.html

Congressional Testimony Paints A Different Picture

It's safe to say that Dr. Ghilarducci's original proposal is not as bad as what we heard being proposed during her October testimony before the Committee on Education and Labor. This testimony provides some insights as to how the proposal has changed as the markets have wreaked havoc upon the account balances of 401(k) participants, and the government has moved to "bail out" various financial sectors.

For example, the original proposal didn't spend much time talking about "trading in" existing 401(k) accounts for the new GRA, but Dr. Ghilarducci's testimony notes that such a trade-in could occur based on "mid-August [stock market] prices." In other words, the government would pony up the difference between participants' current reduced account balances and what they had in mid-August before the latest stock market meltdown.

Other testimony given during the same Committee hearings stated that $2 trillion of value had been lost by participants in 401(k)s, IRAs and similar retirement plans over the course of the past 15 months. How much of this represented "lost" 401(k) balances is unknown, but whatever disappeared between mid-August and October would be restored by the government.

Also recall how Dr. Ghilarducci originally proposed a reasonable trustee-directed investment plan for the entire GRA. However, her recent Congressional testimony modified this stance. She now proposes that 401(k) accounts "traded in" to restore their mid-August values would be invested in a special type of government bond that earns 3%, adjusted for inflation. The testimony makes it clear that the government bond proposal would apply only to restored account balances traded in for GRAs, but who knows what Congress may decide.

Plus, we all know that these special bonds would likely be similar to those in the Social Security "trust funds." It is a sad fact that money contributed to the Social Security trust funds is simply spent by the government in exchange for IOUs. I have written previously about how the Congressional Budget Office described the bonds in the Social Security trust fund back in 2002, but I'll reproduce it below just to drive home the point:

"Trust fund holdings, as internal liabilities between government accounts, are not assets of the government. Nor do they represent money owed to program recipients individually; payments to Social Security recipients and beneficiaries of other social insurance programs are based on a variety of rules set by law unrelated to trust fund holdings. A federal trust fund is basically an accounting device that measures the difference between the income designated for a specific program and the expenditures made to its beneficiaries. The accumulated difference, or balance, often represents a reserve of future 'spending authority' for the program, but it is not a reserve of money for making payments." [Emphasis added]

"In the future, when receipts for such programs as Social Security fall below their expenditures, the legal authority to pay benefits will exist as long as their trust funds have balances, but the government will have to generate cash to pay benefits either by running a surplus in the rest of the budget--which would probably require cutting other spending or raising taxes--or by borrowing from the public."

Understand that the above described makeover plan for 401(k)s is just the starting point, especially under an Obama Administration and Democrat majorities in the House and Senate.

Specifically, Dr. Ghilarducci's testimony also made it clear that she is not just aiming at 401(k) plans, but also various other types of "defined contribution" plans including profit sharing, money purchase pension plans, 403(b) plans and even IRAs. Perhaps we should christen this proposal "Social Insecurity 2.0."

Other details are far less than clear right now, such as the tax treatment of 401(k) account balances transferred into a GRA, what would happen to workers who don't fit the "average worker's" 40 years to contribute to the plan, and many, many others. If this plan gains any traction in the new Congress, I'm sure we'll hear more about these and other details yet to be disclosed.

Whatever the final form of an actual bill to introduce GRAs, if any, Dr. Ghilarducci's proposals are still a major diversion from retirement planning law that has steadily evolved since the passage of the Economic Recovery and Income Security Act of 1974, otherwise known as ERISA. What would cause Congressional Democrats to trash over 30 years' worth of retirement planning law? I'll give you a hint: it starts with an "S."

Socialism Du Jour - "Spread The Wealth Around"

The first hint at the real motivations behind the GRA proposal should come from the fact that Dr. Ghilarducci's paper was published by the Economic Policy Institute, not exactly a bastion of conservative thought. Plus, the table of contents on the briefing paper was punctuated by the tagline "Agenda for Shared Prosperity." Isn't this just another way to say, as Senator Obama suggests, to "spread the wealth around?"

And don't think this is just an over-the-top reaction from a conservative. Dr. Ghilarducci, the architect of the new plan, said the following during a recent interview:

And what's amazing about this is that it's actually, um, doesn't cost the government anybody (sic). I'm just rearranging the tax breaks that are available now for 401(k)s and spreading -- spreading the wealth.
[Emphasis added - GDH]

You would think that the Democrats would have coached her to not describe it in those exact words, but the bottom line is that spreading the wealth is exactly what GRAs are designed to do.

The carrot at the end of the stick is the restoration of accounts to their August 2008 values, before the latest market crash. Imagine how many Americans would jump at the chance to recoup the market losses of the last couple of months!

Free money, or so it would seem. That's how socialism works: give 'em a short-term benefit in exchange for a lifetime of bondage.

While a lot of Dr. Ghilarducci's testimony dealt with enhancing retirement security, reducing investment-related fees and making up for losses incurred during the recent bear market, a quick review of her Congressional testimony reveals the real reason for this desire to change to a new government-sponsored universal retirement plan.

According to Dr. Ghilarducci, the current system of providing tax incentives to companies and workers for sponsoring and participating in 401(k)-type plans is inefficient. While you and I might define the term "inefficient" much differently, for purposes of the "spread the wealth" crowd, Dr. Ghilarducci defines it as having too much of the tax subsidies go to people who actually pay taxes (ie - higher income earners).

Her testimony notes that 6% of taxpayers with incomes over $100,000 per year reap 50% of the total tax benefits from 401(k) and related plans. Never mind that this 6% of taxpayers pay the lion's share of all income taxes. I don't have numbers for the top 6%, but in 2006, the top 5% of taxpayers paid 60% of all income taxes. Plus, approximately 1/3 of filers pay no income tax at all based on 2006 income tax statistics.

I would argue that it makes sense that people who actually pay taxes should be the ones receiving the lion's share of any tax benefits, not those who pay no taxes at all. Demographics would also seem to dictate that high earners would get most of the benefits. My firm counsels workers to start contributing to their 401(k) plan early to allow compound interest to grow. Thus, it makes sense that those with larger balances are those who have been saving a long time, and who are most likely to have worked their way up into high-paying positions. This proves that working hard and saving early pays off in the long run.

However, the Democrats now want to say that those who worked hard to excel and who took advantage of tax incentives to save a sizeable nest egg should be punished and have their tax benefits given to those who have not been as industrious or mindful about saving.

The bottom line is that this whole proposal is nothing more than a way to redistribute wealth based on liberal ideology. It's being sold as a way to restore balances, guarantee minimum future returns and reduce the uncertainty of market-based investments, but you can rest assured that it's just another step on the road to increased government control of every part of our lives, also known as socialism.

A New Democratic Piggy Bank

I also find it very interesting that one of the new wrinkles that has appeared in Dr. Ghilarducci's proposal between its original release and her recent testimony would allow 401(k) participants to have their account balance restored if they move their account into a new government bond. Considering that billions of dollars will be required to bail out Wall Street due to the subprime crisis, the future of social programs under a Democratically controlled Congress were in question. Where would they get the money?

Now we know one way they might try to get some cash in the coffers - highjack our 401(k)s and other tax-deferred retirement accounts.

Plus, it is currently unknown how much, if any, of the ongoing contributions would be allocated to these special government bonds. Since the whole matter is currently in flux, I could see a Democratic Congress mandating all or part of ongoing contributions be placed into government-guaranteed bonds. Sure, the Democrats will try to sell GRAs as a way to insure retirement stability, but it will really be a way to have access to a gigantic stash of cash.

Can We Afford This Nonsense? No, But So What?

This new 401(k) replacement proposal results in affordability issues at several levels. First, can the government afford to restore mid-August values for everyone in a defined contribution type of retirement plan? After all, the amount of money to do so would be gargantuan! Well, I guess it can as long as they keep the printing presses going at the Fed. However, that doesn't mean it's affordable.

The Congressional Budget Office has estimated that all types of retirement plans (IRAs, defined benefit, 401(k), etc.) have lost apprx. $2 trillion over the last 15 months due to stock market declines. I cannot find a statistic showing how much of that loss was in defined contribution plans like 401(k)s, but I would guess it's in the hundreds of billions.

Plus, what about the defined benefit plans that are now going to be under-funded. It probably won't be long until we see companies with at-risk pension plans asking for a bailout of their own. If we bail out 401(k) participants, can we justify not bailing out employers who may have no other choice than to terminate their plan if they can't get a government handout?

Another level of affordability is in relation to the returns needed in a 401(k) to produce a meaningful retirement benefit. The proposed bond investments will guarantee 3% above inflation on balances "traded in" to the GRA. Since inflation historically runs about 3% per year, that means a 6% return. It will be hard for workers to build much wealth with such low returns.

Finally, we have to look at the effects on the stock market. We don't know exactly how the money "traded in" to a GRA will be treated, but that giant sucking sound you'll hear might be money flowing out of the equity markets and into government bonds. That will mean more downward pressure on stock market prices.

And what will the government do with the trillions of dollars it will be given? Three guesses and the first two don't count: Spend it, of course. Maybe this is how Obama gets the money to fund his lavish new spending programs. It could happen.

What is really hard to understand is that Democrats continually grouse about the regressive nature of the Social Security tax, which is currently 7.65% of pay (matched by the employer). Self-employed individuals must pay both shares, so their tax rate is 15.30%. While Obama's tax plan promises to rebate part of this tax, it would seem a contradiction to add yet another 5% mandatory contribution/tax/whatever for employees to pay. Plus, if employers have to pay half of this mandatory contribution, it will represent yet another expense during a period of recession. Not a good idea!

The entire idea of replacing employer-sponsored 401(k) plans with a government sponsored Social Security - II plan would have been considered ludicrous prior to August of this year. However, after banks, brokerage firms, insurance companies and car makers all lined up for a share of government's largesse, it's now not hard to imagine something this insane actually becoming law.

Conclusions - After Today, Anything May Be Possible

Considering that this proposal has been trotted out during a Committee hearing at a time when Congress is not even in session likely indicates that it's no more than a trial balloon to gauge public reaction. Dr. Ghilarducci's original proposal made no waves when it was released a year ago, likely because no one felt there was a snowball's chance of it ever becoming law.

Now, however, times have changed. The recent market meltdown has many investors worried about their ability to retire with sufficient income. On top of that, lawmakers have seen that the major Wall Street bailouts have been passed without riots in the streets. This just might give them the ability to answer all of their constituents who have asked, "Hey, where's my bailout?"

I want to think that this proposal has very little chance of ever becoming law. Over the last 2-3 decades, there has been a continual expansion of tax incentives to get workers to save for retirement, and for employers to help them do so, and there is no doubt this has been a good thing. Thus, I would hope this will not be dismantled in the next Congress.

But we should all understand that, if Barack Obama becomes our new president with supermajorities in Congress, anything is possible. A massive expansion of government and a rollback of our freedoms are not out of the question. Such an expansion of government has to be funded somewhere, and 401(k)s and other supposedly sacred retirement plans, including IRAs, may appear to be the low-hanging fruit to the liberals who will be in control in Washington.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

'Panic of 2008' - Will the Democrats bring us a Depression? (must read)
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aY3kqxNeV7lU

We Could Be In for a Lurch to the Left
http://online.wsj.com/article/SB122576065024095511.html

Economic Ills Will Force Winner's Hand
http://online.wsj.com/article/SB122575838410095279.html

Thomas Sowell - Obama all "Ego and Mouth"
http://www.realclearpolitics.com/articles/2008/11/ego_and_mouth.html

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

Mortgage Bailout Passes, Finally - Now What?

Gary D. Halbert — Tue, 07 Oct 2008 21:04:06 GMT

IN THIS ISSUE:

An Inside Look At The Mortgage Bailout Bill

Equity Ownership & Limits On Executive Pay

Mortgage Assistance & The Bankruptcy Code

Expanded FDIC Limits On Bank Accounts

Was The Bailout The Right Thing To Do?

The Senate's $150 Billion In Extra Bailout Pork

John McCain Blew An Election Saving Opportunity

Electoral Map Now Leaning Heavily To Obama

Scotia Partners - Making Money In The Bear Market

Introduction

The massive $700+ billion bailout package finally passed Congress and was signed into law by President Bush late last Friday, to the dismay of millions of Americans. The House rejected the huge bailout bill on Monday, and the Dow Jones promptly plunged a record 777 points on that same day. Fearing the worst, the Senate amended the bailout with another $150 billion in pork and passed it overwhelmingly on Wednesday, with both Senators Obama and McCain voting in favor. On Friday, the House passed the bill by a comfortable margin.

This emergency bailout plan supposedly had only one goal: to allow the government to hoover up hundreds of billions in distressed mortgage-related securities from banks and financial firms to shore up our faltering banking and credit markets. No one knows if this rescue plan will work, or if the government will need even more money later. We'll discuss all of this as we go along.

The Senate passage of the $700 billion bailout bill on Wednesday included, drum roll please, yet another $150 billion in mostly pork barrel spending, bringing the final cost to $850+ billion. Why was this extra spending necessary? I would argue that the extra $150 billion in pork was added to buy more "yes" votes for the bailout plan in the Senate and sweeten the odds for passage in the second vote in the House. Wait until you read what they added below (hint: they think we are all idiots!).

I did not think that Secretary Paulson's initial $700 billion bailout plan was the best approach, with no accountability, no transparency and no oversight. That was never going to work or be passed. Actually, I would have preferred one of the alternative rescue plans that would have involved government loans and insurance for ailing banks, rather than the Treasury buying up distressed assets directly. But John McCain never got behind such alternative plans, so they fizzled, and now his presidential campaign is in real trouble.

There is so much to talk about this week I'm not sure where to start, but I think the best place to begin is with a summary of the latest bailout bill, now that it has become the law of the land. We will also take a look at the extra $150 billion in pork that the Senate added to the bill. Next, we'll revisit John McCain's latest moves and the Electoral Map, which shows him falling fast in the polls.

Finally, we will revisit Scotia Partners, a very successful money manager that I have written about several times this year - and for good reason. As you can read at the end, Scotia is one of the few money managers that has done well in this bear market in stocks. As always, past performance is no guarantee of future results.

An Inside Look At The Mortgage Bailout Bill

Since my company is intimately involved in the securities business, and since government regulation of the securities business gets more complex every year, we engage top-notch law firms to help us sort through the regulatory maze. One of our main legal firms is Sidley Austin LLP, one of the leading law firms in the industry.

Sidley Austin released a detailed summary of the latest government bailout bill, and its possible ramifications, on Friday of last week. We appreciate these periodic reviews from our attorneys, and the ability to share them with our clients and readers. What follows is my abbreviated summary of Sidley's latest analysis of the final bailout bill.

On October 3, the House of Representatives passed the "Emergency Economic Stabilization Act of 2008,"(the "Act") which authorized up to $700 billion in new government spending (actually more than that) to bail out banks and financial institutions that hold troubled mortgage and related debt. The Act will create a "Troubled Asset Relief Program" ("TARP") which will be overseen by the Treasury and will be the vehicle in which distressed assets are purchased from banks and other sellers of mortgage-related securities.

The Act authorizes up to $700 billion to the Treasury Secretary to enable TARP to purchase and fund commitments to purchase "troubled assets" from "financial institutions." Financial institutions, in this case, are defined as those which are established and regulated under federal or state law, or have significant operations in the US (in the case of foreign entities). The Act suggests that financial institutions would include, but would not be limited to: banks, savings and loans, credit unions, broker-dealers and insurance companies. The 'but not limited to' language gives the Treasury significant flexibility in determining which entities may participate in the TARP.

"Troubled assets" initially include residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages originating on or before March 14, 2008. Yet the language also authorizes the Treasury Secretary, in consultation with the Fed Chairman, to purchase any other financial instruments they deem necessary to promote financial market stability, but such non-mortgage related asset purchases must be reported to the Congress. Again, the scope of potential asset purchases is very large.

The Act provides up to $700 billion to the Treasury, but unlike the original proposal, the 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.

The Act states that the Treasury can establish programs, vehicles or entities that are authorized to purchase troubled assets, manage the assets and dispose of them over time. I predict this will result in dozens of newly-created government agencies and sub-agencies and many new federal employees (presumably dominated by out-of-work ex-bankers) under the Treasury.

The Treasury Secretary is directed to minimize taxpayer expense by encouraging the private sector to participate in purchases of troubled assets, and to invest in financial institutions, thereby providing opportunities for private funds looking to leverage the TARP as a partner rather than a competitor. Here, too, the Secretary has broad flexibility in such partnership arrangements. However, the Secretary is required under the Act to take steps to avoid the "unjust enrichment" of any financial institutions that participate in the TARP. This will be tricky to enforce.

Interestingly, the Act stipulates that the Treasury "must make available to the public in electronic form the description, amount and pricing of assets it acquires pursuant to the Act within 48 hours of purchase, trade or other disposition." This language was included to require "transparency," meaning that the public will know what the Treasury is paying for the assets it purchases. This requirement is intended to make clear that there is a market for these distressed mortgage-related assets and what the government is paying for them.

I would point out that while some Americans may appreciate knowing what the Treasury is paying for these distressed assets, and while this knowledge may help in freeing up liquidity in these markets, there is little doubt that potential buyers of these same securities down the road will take what the government paid for then into account when submitting offers to buy these same securities in the future.

Equity Ownership & Limits On Executive Pay

Then there is the matter of the Treasury taking equity positions in those financial institutions that sell assets to the TARP. The Act requires that the Treasury receive either warrants with the right to receive non-voting common or preferred shares from participating public companies, or a senior debt instrument in cases where the selling company is not listed on a national securities exchange.

As I read it, this process will be very complicated since the Act envisions that the Treasury will get a large enough position in potential ownership (warrants) or debt to cover any losses it might incur when it eventually sells the assets down the road. If so, this suggests that the Treasury could require a large stake in the institutions wishing to unload toxic securities, which could discourage participation.

This, of course, also brings up the question we have had all along: How does the Treasury value many of these very complex and esoteric mortgage-related instruments? Many of these credit swaps, CDOs and derivatives are extremely hard to value, which is a big reason why we are now in a credit crisis.

Next is the matter of limiting executive compensation for those companies that wish to participate in the program. In addition to requiring an equity position in the companies wishing to sell assets to the TARP, the Act also requires the Treasury to limit the compensation paid to top executives of the participating companies, especially in terms of undue bonuses and so-called "golden parachutes." Specifically, the Act changes the tax code (Section 162m) such that the corporate salary tax deduction is reduced from the current $1 million to only $500,000.

These compensation changes include the top five executives in each participating company. This effectively will put a ceiling of $500,000 on the salaries of the top five execs of the participating companies, plus whatever bonuses, if any, that are allowed by the Treasury Secretary. Again, it remains to be seen just how many companies will take the equity hit and the executive compensation hit required to participate in the bailout program.

Next, we turn to the insurance provisions in the Act. In a concession to Republican opponents of the original Treasury plan, the Secretary is required to create a program for the guarantee of troubled assets, as an alternative to straight asset purchases. Under this plan, the Treasury could agree to insure troubled assets on the books of participating companies. Upon request from a financial institution, the Secretary may guarantee, on terms established by the Secretary, the timely payment of principal and interest on a troubled asset. Frankly, I don't understand how this insurance mechanism will work, but it is not clear that the Treasury will even make use of it.

Mortgage Assistance & The Bankruptcy Code

One of the most troubling aspects to the proposed bailout (at least for conservatives) was the suggestion that the Bankruptcy Code should be changed so as to allow bankruptcy judges to unilaterally modify terms of mortgage loans. The Act does not contain any such amendments to the Bankruptcy Code that would permit so-called "cram downs" by bankruptcy judges. However, the Act does contain provisions designed to insure that the government uses its vast powers as the owner of mortgages and mortgage-backed securities to facilitate loan modifications (such as reduced interest rates, principal amounts, monthly payments and/or extended time of repayment) in order to prevent avoidable foreclosures.

In fact, the Act requires the Treasury to implement a plan that seeks to maximize assistance to homeowners and to encourage servicers of underlying mortgages to take advantage of programs to minimize foreclosures, including the HOPE for Homeowners Program under Section 257 of the National Housing Act. Also, the Treasury is authorized to use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

Expanded FDIC Limits On Bank Accounts

In an effort to shore up confidence among depositors, Congress added a provision to the bailout bill to increase FDIC insurance from $100,000 per account to $250,000 per account beginning on October 3 and until December 31, 2009. While the Act provides this increased limit temporarily, the FDIC Chairman, Sheila Bair, said that she expects Congress to make the increase permanent later this year. If the credit crisis continues, I would expect Congress to insist that the government guarantee all amounts in bank accounts and credit unions, as it has already done for money market mutual funds.

Previously, to ensure that more than $100,000 was covered by FDIC insurance, many consumers had spread cash among multiple banks, especially in recent weeks. People had also been setting up separate accounts in each spouse's name at the same bank, which provided $100,000 for each of the two separate accounts, plus a joint account (husband and wife) which doubled the coverage to $200,000 - or $400,000 total for all three accounts. Under the financial rescue plan which raises the coverage to $250,000, this combination of a joint account and a separate account in each spouse's name will result in $1 million total coverage.

Was The Bailout The Right Thing To Do?

As noted earlier, I would have preferred one of the alternative rescue plans that would have involved government loans and insurance for ailing banks, rather than the Treasury buying up distressed assets directly. But what was abundantly clear was the fact that something had to be done. The financial markets around the world were seizing up, and we were facing an international credit crisis, which may yet be far from over.

So while the $700+ billion bailout, with the government directly buying up hundreds of billions in distressed mortgage-related securities, was not my first choice, the government had to take action in my opinion. Millions of Americans were outraged over the bailout plan and many still are. Yet the market plunge of 777 points in the Dow on Monday of last week, after the House failed to pass the bailout, certainly sent a signal to many Americans that the situation was growing dire.

While the summary of the bailout bill above should be helpful, there is still much that we don't know. We still don't know, for example, how the Treasury will price the assets it will be buying, especially in light of the new wrinkles such as the equity stake they will demand from the participating companies. Will the government pay too much, to the expense of taxpayers? Will they pay too little, thus causing more waves of failures? We don't know.

Likewise, we don't know if the $700 billion will be nearly enough. Estimates vary widely, but it is generally agreed that there is at least $2 trillion in troubled mortgage-related paper out there, just in the US. Fortunately, it is also generally agreed that not all of that $2 trillion in subprime and other mortgage-related paper is worthless. That remains to be seen, of course.

The next question is, when will we know if the bailout is working? A lot may depend on when it begins. Some suggest that it will be several months before the Treasury gets the bailout plan up and running. There is a feeling that it may have to wait until after the new administration gets into power on January 20. Personally, I don't think we can wait that long.

Clearly, the markets will let us know, loud and clear, whether the new bailout plan is an acceptable option, and just how soon it needs to get up and running. I for one do not believe the bailout plan passed last Friday is a panacea, and I certainly expect the markets to continue to be a wild roller coaster just ahead. Yesterday (Monday) was a good example when the Dow Jones plunged 800 points by mid-day before reversing to close down 363, or 3.5%, on the day.

The Senate's $150 Billion In Extra Bailout Pork

Politicians on both sides of the aisle in Washington have one universal solution for solving serious issues: When in doubt, just throw more taxpayer money at the problem. This line of thinking certainly came into play when the House failed to pass the massive bailout plan on Monday of last week. The Senate wasted no time in adding on another $150 billion to the already massive $700 billion bailout plan.

There was enormous pressure to pass some kind of massive bailout plan, especially with Bush, Bernanke and Paulson warning of financial Armageddon. So what was the Senate's first thought as to what it should do? Let's add even more money to the tab so as to make it easier for House members to change their votes. This is sick! Here is a summary of the last minute add-ons:

The Senate extended provisions to exempt many Americans from the Alternative Minimum Tax, which was never intended to affect millions of middle class Americans. Never mind that Congress does not have the guts to address this egregious tax measure directly and eliminate it.
Another provision added in the Senate would require most employers and health insurers to put mental-health problems on par with physical illnesses, including coverage for hospital stays and doctor visits as well as co-payments and deductibles.
The Senate bill also added in several more key elements designed to attract House Republican votes - particularly popular tax measures that have garnered bipartisan support. It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels. It would also continue a host of other expiring tax breaks, among them the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns. And there's more.
$397 million for the "domestic production activities deduction" for the motion picture industry, and another $81 million to extend and modify treatment of "certain film and television productions."
$179 million for tax incentives for "investment in the District of Columbia." $100 million in tax breaks for "certain motorsports racing track facilities." $61 million in added credits for "steel industry fuel."
$49 million in tax breaks for people (mostly in Alaska) receiving compensation from the litigation over the Exxon Valdez oil spill. $49 million for a charitable deduction for corporations that donate books to libraries. $33 million for an economic development credit in American Samoa. $2 million in excise tax exemption on "certain wooden arrows designed for use by children."

These are just some examples of the many spending measures that were added to the $700 billion bailout plan in the Senate. We can argue about the importance of these expensive add-ons, but they never should have been a part of a financial system rescue plan in my opinion. In total, these so-called "sweeteners" (formerly known as 'earmarks') were included in the Senate version at a cost to taxpayers of at least $150 billion, bringing the total tab for the emergency bailout bill to over $850 billion.

What is clear is that these huge add-ons in the Senate were designed to give more House members "cover" so that they could switch their votes in favor of the bailout package. Never mind the cost to taxpayers. And it worked. The bailout bill passed in the House rather easily last Friday. Such is the twisted political world we live in.

John McCain Blew An Election Saving Opportunity

I really hesitate to throw in this last point, but I shall. In my view, Senator McCain blew the last opportunity he had to save his presidential campaign with his vote in favor of the massive government bailout plan. Senator McCain has accurately portrayed himself as a political 'maverick' that has frequently gone against the Republican Party on numerous contentious issues over the years. That is why he is not so popular among the GOP faithful.

With public sentiment so overwhelmingly negative over this massive bailout bill, it would have been easy for either McCain or Obama to come out against it. But Obama quickly got behind the bailout. If McCain had come out against it, and in favor of one of the alternative plans (or better yet, offered a plan of his own), he could have generated a potentially large shift in public opinion in his favor. But he didn't for reasons unknown.

As the maverick on curtailing wasteful spending, McCain could have easily justified his vote against the bill, especially with the extra $150 billion in largely pork-barrel spending put in by the Senate, in which he is a member, but he didn't. Like Obama, McCain quickly fell into line.

For the first time during this presidential campaign, Senator McCain pulled ahead of Obama shortly after the successful Republican National Convention. But then the mortgage-related financial crisis began to unfold. The media, not surprisingly, laid the blame on the Bush Administration (what else is new), and McCain's lead in the presidential polls evaporated.

Over the last 2-3 weeks as the financial crisis rose to the front pages, McCain's showing in the polls has worsened by the day. The presidential election is far from over, but as this is written, Senator McCain is behind by 5-6-7 points or more in the national polls. He will need a major gaffe by Obama, or some other serious surprise, to have a chance of winning on November 4.

Maybe Senator McCain felt he had no choice but to vote for the massive government bailout plan. I don't know. But I do believe his failure to get behind one of the alternative plans, or suggest a new one of his own, has sunk his presidential chances.

Along that line, let's take a look at the latest Electoral Map where Barack Obama has taken a commanding lead.

Electoral Map Now Leaning Heavily To Obama

The general election is less than a month away and Barack Obama is dominating John McCain in both national and state polls. Not a single national poll has McCain in the lead; in fact, Obama leads by an average of nearly six points which is beyond the margin of error.

The states solidly in the McCain column now total only 163 electoral votes. The states solidly in the Obama column total 277 electoral votes. He only needs 270 to win. If the election were held today, Obama would win even if McCain carried all the toss-up states.

I hate to be the bearer of bad news but the situation is what it is. So is McCain totally sunk? Well, never say never, but his path to 270 looks very bleak. McCain would have to pull the mother of all hat tricks and carry all seven toss-up states. (They are: IN, OH, NC, FL, CO, NV and MO.) And, he would also have to recapture VA which is now clearly in the Obama column.

It should be noted that North Carolina, Indiana and Virginia have not voted for a Democrat for president in decades. NC last voted for a Democrat - Jimmy Cater - in 1976. And IN and VA have not voted for a Democrat president since Lyndon Johnson in 1964. This is a dire situation for John McCain.

The most obvious problem McCain faces is the financial melt-down. (No it isn't Sarah Palin, though she has not helped his cause with many voters.) The financial crisis could not have come at a worse time for him, or a better time for Obama. No other issue will have much traction between now and the election; it will be all financial crisis/economy all the time. This takes McCain's biggest strength - security/foreign policy - off the table. The party in power gets the blame and takes the credit for the economy, and now there is nothing but blame to be had.

The presidential lines have been clearly re-drawn - it's no longer close. This election is now Obama's to lose. If the Electoral trends continue as they have in the last few weeks, Obama could win in a landslide. If McCain manages to win, I am sad to say, he will be the political comeback artist of the century!

Scotia Partners - Making Money In The Bear Market

Since early June, I have written about the Scotia Partners investment programs several times in this E-Letter. Many of you have responded and requested information on Scotia's Growth S&P Plus and S&P Moderate Growth investment programs, and I'm pleased to say that a number of my readers have become clients.

Many others, however, have been calling periodically to see how the Scotia mutual fund programs fared during the market's wild (mostly down) gyrations in September. I am all too happy to update everyone!

During the month of September, the Scotia S&P Plus program was up a whopping 22.67% net of fees, and the less aggressive S&P Moderate Growth program delivered a net gain of 26.37%. As you can see, both of these programs compared very favorably to the S&P 500 Index's loss of over 9% during September. These are real numbers in real accounts in real-time trading.

From June 1st through September 30th, Scotia's Growth S&P Plus program has produced a gain of 60.37%, with the Moderate program close behind at +41.25%, both net of fees. Thus, the E-Letter readers who got on board early on have had quite a good ride, depending upon when their money was actually invested. The monthly details for both programs for June through September are as follows:

Program Name	June Return	July Return	August Return	September Return	YTD Return (as of 9/30)
S&P Plus	+ 16.21%	+ 8.66%	+ 3.53%	+ 22.67%	+ 112.59%
S&P Moderate	+ 6.94%	+ 5.92%	- 1.32%	+ 26.37%	+ 62.85%

Past performance is not necessarily indicative of future results.

Remember, the underlying investment strategy employed by Scotia's founder, Cliff Montgomery, has have thrived during the market's greatly increased volatility since the middle of 2007. Thus, it was no surprise to us that September's spike in volatility was actually good for Scotia's performance.

Hopefully, the financial markets will calm down soon, but the stock markets have continued their wild ride so far in October. Frankly, it is impossible to know how long this high level of volatility will continue. If you agree, then the S&P Plus and/or S&P Moderate program may be a good place for a partial allocation within your overall portfolio.

Many of you read about Scotia early on but wanted to wait and see how they would perform. Yet if you had invested on July 1, you would have enjoyed profits of 38.0% in the S&P Plus program, and over 32% in the S&P Moderate program in July, August and September alone. Again, past performance is not a guarantee of future results.

If you would like to see if one of the Scotia programs might be suitable for your portfolio, please call one of our Investment Consultants at 800-348-3601. Or, you can request additional information by sending an e-mail to info@halbertwealth.com, or clicking on our Scotia online request form link.

Also, be sure to read all of the Important Notes and disclosures following my signature below.

Wishing you profits,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL) and Purcell Advisory Services (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this letter 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 PAS in exchange for introducing client accounts. For more information on HWM, PAS or SPL please consult Form ADV Part II, 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.

The Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these Indexes may differ materially (more or less) from that of the Advisor. The performance of these Indexes is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus or the Scotia Partners S&P Moderate Growth trading programs as comparable to the stocks that comprise these Indexes. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus and Scotia Partners S&P Moderate Growth, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in these programs. The signals are generated by the use of a proprietary model developed by Scotia Partners. 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. 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 Scotia Partners Growth S&P Plus and Scotia Partners S&P Moderate Growth trading programs.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the Scotia Partners trading programs' performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; (iv) Purcell Advisory Services 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 Purcell Advisory Services 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 the maximum management fees (which are deducted in full quarterly, and not accrued month-by-month), 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. No adjustment has been made for income tax liability. 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.

Uncle Sam's $700+ Billion Toxic Securities Fund

Gary D. Halbert — Tue, 23 Sep 2008 20:03:55 GMT

IN THIS ISSUE:

Details Of The Massive $700 Billion Bailout
Government Guarantees Money Market Funds
Will Congress Pass The Bailout Plan?
Should The Government Bail Out Homeowners?
Will Uncle Sam Overpay For The Assets?
Credit Crisis May Tip The Election To Obama
Time To Prepare For A Recession Just Ahead

Introduction

By now, everyone reading this is well aware that the Bush Administration, the Treasury Department and the Federal Reserve Bank are pushing Congress to quickly approve a gargantuan $700+ billion bailout plan, with the hope of saving large banks, investment firms and other financial institutions that are overloaded with troubled mortgage-related securities.

This is by far the largest financial rescue plan ever envisioned on the part of the government, and I would argue, by far the most risky – both in terms of the potential losses for American taxpayers, and in terms of the sweeping, unchallengeable powers it would grant to the government. I will have more to say about the latter in the pages that follow.

Three questions emerge: 1) Is this massive bailout necessary?; 2) Is it the best way to solve the credit crisis?; and 3) Will it work? Unfortunately, the answer to all three is, we just don't know.

I believe that Treasury Secretary Paulson and Fed Chairman Bernanke were correct last week to fear that we were headed for a potentially serious run on banks and money market funds, starting possibly as early as this week, had the carnage in the markets continued. Whether you agree or disagree with the bailout, I think Paulson and Bernanke believed they had no other choice.

Of course, it remains to be seen if Congress will pass the colossal $700+ billion bailout this week as Bush, Paulson and Bernanke are urging. The stock markets that plunged lower early last week reversed their losses late in the week as rumors of the huge bailout package surfaced, culminating with the official announcement on Friday.

Yet on Monday of this week, the stock markets plunged again amid fears that Congress may not go along with the government's massive bailout plan. As this is written, it is impossible to know what will happen. But what is clear is that the US financial markets have frozen up, and if something significant isn't done soon, I believe we will be headed for a stock market crash and a serious recession or worse.

Finally, there will be millions of Americans who do not understand the dire implications of this financial meltdown, and will assume that this is just another massive bailout of the Wall Street rich by the Bush Administration and the Republicans (McCain included). Therefore, I expect this latest crisis and enormous bailout will likely hand the election to Barack Obama.

There are so many ramifications of this massive bailout that I don't even know where to start. But start we must, so here we go.

Details Of The Massive $700 Billion Bailout

We are told that the government's proposed $700 billion bailout may be structured along the lines of the Resolution Trust Corporation ("RTC") established in 1989 to liquidate the assets of failed Savings & Loans. But there is one distinct difference this time around. In 1989, the RTC was formed to take over assets of S&Ls that had already gone into bankruptcy.

This time, should the massive Treasury bailout (or something like it) be passed, the government will be taking over toxic assets of financial institutions that still survive, but are at risk of failure due to the mortgage related securities they hold. Here are the details of the massive government bailout plan, at least as we know at this point.

Under the proposal (the "Act") submitted to Congress on Saturday, the Treasury Secretary would be authorized to purchase mortgage-related assets from any financial institution having its headquarters in the United States, totaling up to $700 billion at any given time. On Monday, the government expanded the bailout to include foreign corporations with "significant operations" in the US that bought mortgage related securities.

The term "mortgage-related assets" is defined in the Act as: "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008."

If the bailout passes in its proposed form, the Treasury Secretary would be authorized to take wide-sweeping actions at his sole discretion.

Such actions include: 1) designating financial institutions as "financial agents" of the government, and requiring them to perform duties related to the Act as the government may require of them; 2) creating agencies to carry out the bailout and appointing such employees as may be required to carry out the authorities in the Act and defining their duties; and 3) issuing such regulations and other guidance that may be necessary to carry out the authorities of the Act.

Such actions also include: The Secretary shall have authority to manage mortgage-related assets purchased under the Act, including revenues and portfolio risks. The Secretary may, at any time at his discretion, sell or enter into securities loans, repurchase transactions or other financial transactions in regard to any mortgage-related asset purchased under the Act.

In short, the Treasury Secretary would have complete control of how the massive bailout effort is undertaken. The Act states: "The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act."

The only requirement under the proposal sent to lawmakers on Saturday is that the Treasury Secretary must report to Congress within three months of the first exercise of the authority granted in the Act and only semi-annually thereafter. Wow! $700 billion, and you only have to report to Congress twice a year!! But that is not likely to stand.

Over the weekend, Democratic leaders discussed enhancing oversight by carving out a special monitoring role for the Government Accountability Office (GAO), the investigative arm of Congress. The Republican leadership echoed similar wishes for tougher scrutiny, suggesting the creation of a congressional oversight panel, headed by top leaders in both parties.

Oversight, or lack thereof not withstanding, there was another bombshell in the rescue package. The bailout proposal sent to Congress on Saturday states the following: "Decisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

This provision, if it stands, would mean that the Treasury bailout would be beyond the rule of law, both as it relates to the current Treasury Secretary and the next one appointed by McCain or Obama. Obviously, this provision was included to protect against potentially unlimited challenges in the courts which could stall or prohibit the rescue efforts. This is very troubling.

While the brief summary above is not comprehensive, it should give you an idea of the enormity of the latest massive plan to rescue financial institutions to the tune of at least $700 billion – actually much more as I will discuss later on.

We will continue our discussion of the bailout plan below, but first here's the latest on the money market fund developments.

Government Guarantees Money Market Funds

I trust that virtually everyone reading this E-Letter has some assets in money market funds. As you probably know, the turmoil in the financial markets spilled over into the supposedly safe money market mutual funds last week. Last Tuesday, one of the oldest and largest institutional money market funds, the Reserve Primary Fund, announced that its share price had fallen below the $1.00 level to 97 cents. In financial terms, it "broke the buck."

The Reserve Primary Fund dipped below $1.00 as a result of the bankruptcy of Lehman Brothers. The Reserve Primary Fund, with over $62 billion in assets, announced last week that it owned $785 million in Lehman bonds, and that it was writing those bonds down to zero, which effectively caused its share price to break the buck. Redemptions were halted.

Also, last week Putnam Investments closed an institutional money market fund and said it will return money to clients, after investors pulled out cash despite the fund's lack of exposure to troubled financial firms such as Lehman.

To shore up investor confidence, the Treasury Department announced plans Friday to insure and guarantee US money market funds.

President Bush authorized the Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds. And the Federal Reserve announced it will expand its emergency lending program to help support the apprx. $3.5 trillion in assets in US money market funds.

The government guarantee will be in place for at least one year. Money market funds will pay a fee to be in the insurance program. So for now, at least, your money in money market funds is as safe as if it were in a FDIC insured bank. Note, however, that the Treasury pronouncement on the money market funds guarantee stated that the insurance only applies to money that was on deposit with such funds on or before September 19. Money deposited after September 19 is apparently not covered by the guarantee.

Now back to the $700 billion mortgage bailout.

Will Congress Pass The Bailout Plan?

As noted in the Introduction, the stock markets surged higher late last week as news of the massive bailout plan surfaced, reversing all or most of the huge losses incurred early last week. But then the nation had the weekend to think about the enormous bailout plan, and whether or not the Congress would go along with the gigantic intervention.

The House of Representatives and the Senate are both controlled by the Democrats. While I believe there is a sufficient sense of urgency regarding the passage of some kind of large bailout plan, I will not be surprised if the Democrats, along with some Republicans as well, will not approve the rescue package. I believe that is precisely why the stock markets tanked again on Monday.

As this is written, several prominent Democrats are insisting that such a bailout must be accompanied by increased regulation and oversight. Certainly everyone would agree that the regulation of our financial markets is sorely overdue for an overhaul. But as Treasury Secretary Paulson made clear over the weekend, he believes the funding of the huge bailout package needs to happen NOW, whereas the regulatory changes will take time to implement.

Over the weekend, Democrats and some Republicans also complained that the proposed $700 billion bailout does little to help homeowners that are struggling to make their mortgage payments. It is very possible that lawmakers will tack on additional hundreds of billions of dollars to the already enormous rescue package that would go directly to homeowners who may be facing foreclosure.

Some Democrats, including Barack Obama, are arguing that the rescue package must include restrictions on the compensation of corporate executives of companies that make use of the rescue program to unload toxic mortgage securities on the government. On Monday, even John McCain suggested that the top executives of companies seeking to participate in the bailout should not make more than $400,000 a year (no more than President Bush's salary).

Some Democrats, including Senators Chris Dodd (D-CN) and Chuck Schumer (D-NY), are pushing for more egregious changes in US bankruptcy laws regarding home foreclosures. The proposal that Dodd has sent to Treasury Secretary Paulson would let bankruptcy judges modify the mortgages of homeowners facing foreclosure to allow them to keep their homes. Judges rewriting existing mortgages so people can stay in their homes? This is scary!

Some Democrats, including Barack Obama, are arguing that the rescue package must include a second economic stimulus package of up to $100 billion, following the $160 billion sent out earlier this year.

Then there is always the risk that Congress will load the already huge bailout legislation with billions more in "earmarks." It would not surprise me if the final bill easily surpasses $1 trillion if it is actually passed, which is looking increasingly uncertain. In that case, one can only wonder if President Bush will sign it.

So, it remains to be seen if the massive bailout Act, or something like it, is passed or not. Based on the stock market plunge on Monday, and the rhetoric coming out of the Senate banking hearings this morning, I would say the odds are no better than 50/50 for passage. If that is the case, look for the stock markets to continue to tank. Something serious needs to happen soon.

Should The Government Bail Out Homeowners?

As discussed above, many Democrats and some Republicans are arguing that, as a part of the government bailout, something should be done to help homeowners who are struggling to make their mortgage payments. In particular, many in Congress want to minimize the effect on homeowners who financed their homes with subprime and other non-traditional mortgages.

Never mind that many of these families should never have been given a mortgage due to their credit history or employment (or unemployment) situation in the first place. Most of us have heard the term NINJA loans: No Income, No Job or Assets. We also heard about the so-called LIAR loans where mortgage applicants purposely lied about their financial condition to buy a house.

Of course, in the spirit of political correctness, the government has now identified families who lied on their applications to get a mortgage as "victims." Thus, while many moan and groan about the lack of moral hazard in relation to the Wall Street bigwigs who wanted to make money, no one seems to want to hold individuals responsible for lying on their applications.

Instead, as John McCain ridiculously claimed last week, they were "forced" to take these mortgages. Give me a break! While many mortgage lenders were clearly too aggressive in offering home loans, no one forced borrowers to take out these loans. Let's get real.

It is clear now that the Democrats who run Congress are going to insist that additional billions be added to the bailout plan that will help out homeowners who are having a hard time making their mortgage payments, with little regard to whether they lied about their financial condition when they applied. If so, the bailout plan could be substantially higher than the $700 billion the Treasury asked for – if it is passed at all.

In fact, if we consider what has already been spent on the mortgage crisis, the total may be well above $1 trillion already, assuming that Congress passes the $700 billion rescue package this week, plus whatever amounts they add to it.

Will Uncle Sam Overpay For The Assets?

Treasury Secretary Paulson made the rounds on the Sunday talk shows, pushing the $700 billion bailout plan, and urging lawmakers to pass it this week before they adjourn. One thing Secretary Paulson did not make clear was how the government would value the mortgage-related assets that it would purchase from those wishing to participate in the program.

A Treasury pronouncement released on Saturday made the following statements about pricing: "Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets… The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions."

The problem is, there's no liquid market for subprime mortgages and other mortgage-backed securities that have dragged down banks and investment firms. With no trading in the assets, no one knows what they are worth now or might be worth in the future. They are being carried on institutions' books with values based on various indexes that are in some cases little more than guesses. And as those indexes have gone down, the institutions have recorded huge losses.

Furthermore, some of the instruments are complex, opaque derivatives tied to slices of other derivatives and financed by the sale of credit-default swaps to hedge funds and a variety of buyers. How do you price something like that? 80 cents on the dollar, 20 cents on the dollar, or somewhere in between? Who knows?

The government is, in some respects, constrained in driving a hard bargain because the whole point of the rescue program is to help banks get back on solid footing - not to force them into much deeper write-downs, potentially exacerbating their problems staying afloat. At the same time, the market turmoil has complicated efforts to determine the "real" value of the assets.

Obviously, it is too early for the Treasury to have all these details worked out. Suffice it to say that it will be a complicated process that will have serious implications, not only for the government and the holders of toxic debt, but also for the financial markets themselves.

Credit Crisis May Tip The Election To Obama

Americans have grown increasingly nervous as the mortgage/credit crisis has unfolded this year. The failure of Wall Street financial giants like Bear Stearns, Lehman Brothers, Merrill Lynch, AIG and others has only heightened concerns among the public.

Add to that the significant stock market downturn over the last year, which has affected tens of millions of Americans' investment and retirement accounts. Until now, most people thought this credit problem was at least reasonably under control.

Yet, last Friday's announcement of a $700+ billion government bailout of the banks and financial institutions sent a shockwave not only to Americans but investors around the world. Few, if any, had an inkling that the number would be remotely that large, and now we know that the ultimate number could be much higher, well over $1 trillion. It was a startling revelation!

But here's the reason I now believe the massive bailout may gift the election to Obama. Millions of American voters will see the bailout as nothing more than another George Bush giveaway to his rich friends and cronies on Wall Street – at the taxpayers' expense. Many may believe that John McCain would do the same thing if he were president.

Many Americans will not understand the gravity of the current financial crisis which has the potential to trigger a global recession or worse. Many will not understand Secretary Paulson's plea to enact the bailout now and reform the system and pursue and prosecute the bad guys later.

John McCain and Barack Obama have been in a statistical dead-heat for the last several months, although Obama has been marginally ahead most of the time. McCain got a bump up following his selection of Sarah Palin and the GOP convention, but over the last week or so, Obama pulled back into the lead, marginally, in the national polls.

Because of the latest escalation in the credit crisis, and the gigantic $700+ billion bailout request, I expect that potentially millions of undecided voters will now opt to go for Barack Obama. Even some who had never before considered voting for Obama may be rethinking that decision in light of the latest developments.

A lot can change in the next 43 days to the election. Who knows what other financial surprises may await us between now and November 4? But if I were to have to bet today, I would sadly put my money on Obama to win by a comfortable margin.

I have made no secret that John McCain was not my first choice for the GOP presidential nominee. But I have also made it known that I would certainly prefer Senator McCain over Senator Obama by a long-shot. So, it is not easy for me to predict now that Obama will likely be our next president.

One last political point: 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.

In light of the credit crisis and the massive bailout plan, McCain is now hedging on his promise of tax cuts, realistically so. Obama on the other hand says his social spending programs, including nationalized health care, are "already paid for." How is that? By allowing the Bush tax cuts to expire (a tax increase) and raising taxes on those making over $250,000 a year. Yet Obama claims shamelessly that he will cut taxes for 95% of Americans. Never mind it's a lie.

Time To Prepare For A Recession Just Ahead

On Friday, the Commerce Department will release its final report on 2Q Gross Domestic Product. In its previous estimate, 2Q GDP was 3.3%, well above most expectations. The pre-report estimate is that the government will raise that number to 3.4-3.5% on Friday. But in light of the deepening financial crisis, this week's final 2Q GDP report will be ignored.

While I have tended to be on the more optimistic side for the last several years as it pertains to the US economy, I am now turning bearish. I believe the events we have seen over the last two weeks will crush consumer confidence in the weeks and months ahead.

It seems clear that most consumers are angered and alarmed by the proposed massive $700+ billion bailout of financial institutions. They certainly are not comforted by it. Many are scared by the magnitude of the crisis. Virtually everyone knows who Merrill Lynch is - or was. Now it is gone as an independent American financial icon. People are realizing that we are in dangerous territory.

I predict we will see a significant slowdown in consumer spending for the balance of this year unless the financial markets stabilize quickly. Consumer spending accounts for over 70% of GDP. If I am correct, then we are headed for a recession.

The Index of Leading Economic Indicators fell 0.7% in July and 0.5% in August (latest data available). The Index has been down in three of the last four months. This suggests that economic growth slowed significantly in the 3Q. I will be surprised if economic growth doesn't fall into negative territory in the 4Q.

Much will depend on whether or not the mortgage bailout works.

Conclusions

Given the scope and magnitude of the recent mortgage-backed securities bailout proposed by the government, I think there are a number of conclusions that we can draw:

1. The massive mortgage bailout is unprecedented and extremely risky, but some kind of government intervention is most likely necessary in order to avert a global financial meltdown;

2. While the government is asking for $700 billion, we already know that the Fannie Mae, Freddie Mac and AIG bailouts transactions will push the combined cost to well over $1 trillion, plus whatever the Congress adds on, and you can bet there will be a major addition that will directed, rightly or wrongly, to struggling homeowners;

3. We are now past the issue of "moral hazard," in my opinion. We are now truly in a financial crisis that could easily spiral out of control very quickly. Something major needs to be done quickly, and there is no time for political games. People are on the verge of panic, and the stock markets may continue to plunge. Expect volatility to remain sky-high for a while longer.

4. I now believe this financial crisis will send us into a recession just ahead. While I have correctly been more optimistic than most of my peers in newsletter-land for the last several years, I am now turning bearish on the US economy. It now appears just a question of how deep it will be and how long it will last;

5. It remains to be seen just how deeply this financial crisis will affect the campaign rhetoric coming out of the two presidential contenders. Any thinking person can see that a $700 billion to $1 trillion bailout will severely restrict any politician's ability to cut taxes or increase social spending, but let's see if we hear any scaling back of such campaign promises; and

6. Finally, I now believe that the housing/financial crisis and the massive government bailout may hand the presidential election to Barack Obama in November. The general public does not fully understand the seriousness of the credit crisis, and will deem the massive bailout as just one more example of President Bush bailing out his rich cronies on Wall Street

The race between McCain and Obama has been neck-and-neck for several months, but Obama has pulled back into the lead following McCain's convention bounce. Barring something unusual, I expect the credit crisis and the bailout to send Obama increasingly ahead in the polls, with a win likely in November.

In fact, the latest polling data out this morning show Obama pulling decisively ahead in Colorado, ahead in Virginia and up to even in Ohio and North Carolina. McCain has to carry every one of these battleground states to win, yet they are now trending to Obama.

If this trend continues, it will be Obama, a Senator for less than three years, who will be in charge of solving the worst financial crisis in most of our lifetimes.

Sorry for a depressing E-Letter, but things are what they are.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

How Fannie & Freddie Failed (prepare to be angry)
http://www.ibdeditorials.com/IBDArticles.aspx?id=306978378974502

Treasury agrees to some changes in mortgage bailout proposal.
http://online.wsj.com/article/SB122209290438362805.html

Obama's spending & McCain's tax cuts are out the window now.
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091903185.html

‘Wall Street' No Longer Exists
http://online.wsj.com/article/SB122212959612065505.html

The Economy, The Electoral Map & The United Nations

Gary D. Halbert — Tue, 02 Sep 2008 20:04:45 GMT

IN THIS ISSUE:

The Economy Surges Above Expectations
Stocks - Have We Seen The Bottom?
The Electoral Map Remains Very Tight
The Scary Democratic Party Platform!!
Dems Endorse Expansion Of United Nations Power

Introduction

This week we hit a variety of topics. First, we'll look at the latest much stronger than expected economic numbers over the last couple of weeks. I believe it is now safe to say that the US economy will avoid a recession in 2008. But 2009 may be another story. Details to follow.

The Democratic National Convention came and went with a great deal of glitz, glamour and moving speeches, including the Clintons who surprised some political observers with rousing speeches for Barack Obama. It appears that Obama got a modest "convention bounce" in the polls, and it remains to be seen if McCain and the Republicans can answer with their convention, especially in light of Hurricane Gustav.

Whether Senator McCain gets his convention bounce or not, at the end of the day it still comes down to the Electoral Map which continues to show that this is a very tight race that could go either way based on the outcomes in just a handful of key swing states. I'll break it down and pinpoint the key states you need to watch over the next couple of months.

Finally, the details of the Democratic Party Platform are coming to light. While there are many things about the Dem's platform that I disagree with, there are several new developments that ought to trouble all Americans. First and foremost, the Democrats, and Obama in particular, want to strengthen the United Nations and commit more of our troops to UN-authorized military operations.

You need to know about this and several other very troubling intentions of the Democrats, especially if Obama wins in November. Cliff Kincaid of Accuracy In Media has chronicled the most troubling aspects of the Dem's platform, and I reprint that eye-opening article near the end below. Be sure to read it and pass it on.

The Economy Surges Above Expectations

The US economy surged in the 2Q, well above expectations, thereby dashing the notion that we're now in a recession. GDP rose a surprising 3.3% in the 2Q, up from just 1.9% in the advance estimate last month, and only 0.9% in the 1Q (details to follow).

The GDP surge in the 2Q was driven primarily by rising exports, consumer spending and government spending at all levels. Personal consumption spending (PCE) rose an unexpected 1.7% in the 2Q, and was no doubt helped along by the tax rebate checks doled out by the Treasury. Consumer spending accounts for apprx. 70% of GDP.

Early estimates suggest that the economy is growing at a rate of 1.8%-2.0% in the 3Q, which is also above earlier expectations for zero to negative growth in the current quarter. Several other economic reports of late look encouraging, but not all, as I will discuss below.

Given the much stronger than expected growth in the 2Q, and the strong likelihood that the 3Q will be positive as well, I think it's reasonable to conclude that the US will avoid a recession in 2008. How the economy holds up next year remains to be seen, but for now, the mainstream media, the Democrats and the gloom-and-doom crowd have been very wrong about the US economy. What else is new?

Several other recent economic reports were also encouraging. Consumer confidence finally rebounded strongly in August. Following a very modest improvement in July, the Consumer Confidence Index jumped from 51.3 to 56.9 last month. Obviously, the significant drop in oil and gasoline prices played a key role in boosting confidence.

On the manufacturing side, durable goods orders rose 1.3% in July for the second month in a row. Industrial production rose modestly in both June and July. Factory orders in June (latest data available) rose 1.7% following a gain of 0.9% in May. The ISM manufacturing index bottomed out in the 1Q and has now risen back slightly above 50.

There was even a bit of good news in the housing sector. New and existing home sales rose modestly in June. But there was also plenty of bad news as well. Housing starts and building permits continued to decline modestly in June. The inventory of unsold homes rose to 4.67 million in July, an 11.2 month supply. The median existing home sale price fell to $212,400, down 7.1% nationally from the same period last year.

The Index of Leading Economic Indicators (LEI) fell more than expected in July, down 0.7%. The LEI has been down in two of the last three months, which suggests that economic growth will slow in the current quarter (consistent with the 3Q forecasts noted above) and perhaps even more in the final quarter of this year. But as suggested above, I do not believe we will be in a recession by the end of this year.

Having said that, it will not surprise me if 4Q growth stalls to near zero or even dips slightly into negative territory. But at this point, I think it is 2009 that we have to worry about. The housing crunch will continue for all of 2009, and will the credit crunch most likely. Some of my trusted sources believe that a recession is most likely to unfold in the first half of 2009.

Stocks - Have We Seen The Bottom?

Stocks historically go up in presidential election years, but not so this year, what with oil prices soaring to near $150 per barrel and gas prices spiking above $4.00 across the country. As this is written, the S&P 500 and the Dow Jones indexes are down apprx. 13% for the year.

Clients have asked if I think we saw the bottom in July when the Dow fell below 11,000 and the S&P 500 touched 1,200. The answer is, I don't know. A big key will be whether oil and gas prices continue to fall this month with peak summer demand behind us. If energy prices continue to fall, then the July low may hold, but that remains to be seen.

On the other hand, it does appear that we are going to see the economy slow down even more over at least the next six to nine months. If we are headed for a recession in the first half of 2009, this will be bad news for stocks, and I would expect the July lows to be taken out later this year.

What I do believe strongly is that stock market volatility will remain sky-high for the rest of this year and probably well into 2009. Most investors are not well suited for this kind of volatility. I've heard from people who bailed out of the stock market over the last couple of months, and are now wondering if they should get back in.

My advice is still the same, especially with this kind of volatility. In my opinion, most investors would be well served to have a portion of their portfolio allocated to active money managers that have the flexibility to exit the market or hedge long positions as need be. There are some professional money managers that flourish during periods of high market volatility. See my June 10 E-Letter to see such an example. (Past results are no guarantee of future results.)

The Electoral Map Remains Very Tight

It appears that Barack Obama got a modest bump up in the national polls following his Hollywood style convention last week. It remains to be seen if John McCain will get a similar bounce later this week. Most analysts have felt like he will, but the hurricane has definitely toned down the GOP convention. So, maybe McCain gets a bounce, or maybe not.

Interestingly, McCain finally pulled to even or slightly above Obama in several of the national polls just as the Dem's convention started. Frankly, he's doing better than I expected, and that is a good thing - especially when you read the article below regarding the Democratic Party Platform. But as I have maintained all along, this presidential race is going to boil down to a handful of key states. Here's our latest analysis of the Electoral Map.

What a difference a month makes! The electoral map is coming into focus. The Obama-Biden ticket is very strong in states totaling 259 electoral votes, while the McCain-Palin ticket is strong in states totaling 227 electoral votes. That leaves 52 votes up for grabs.

Those 52 votes are Ohio (20), Virginia (13), Colorado (9), Nevada (5) and New Mexico (4). McCain is currently running slightly ahead in Ohio and Nevada, while Obama is running well ahead in New Mexico and slightly ahead in Colorado, with Virginia evenly split.

McCain MUST win Ohio and Virginia, losing either will cost him the election. Fortunately for McCain, that does not seem implausible, but you can be sure these states will be very hotly contested, with tens of millions spent in each coupled with numerous candidate appearances.

So, let's assume McCain manages to win both Ohio and Virginia, which will not be easy by any means, but both states historically vote Republican. If so, that brings him to 260 electoral votes, still 10 short of the 270 needed to win. McCain must therefore win Colorado and either Nevada or New Mexico.

Since New Mexico's wildly popular governor Bill Richardson is a big Obama backer, McCain will have to look to Nevada to put him over the top. This is his best bet as Nevada has gone Republican the last two elections and is trending slightly toward McCain as this is written.

But then that assumes he wins Colorado which is not a safe assumption at all. While CO went for Bush in 2004, it is currently a dead heat, and it's a must win state for McCain. McCain could be forced to spend so much time and money securing Ohio and Virginia that he simply can't pour the resources needed into the Western states and Colorado in particular.

Keep in mind that McCain will likely have to take federal matching funds, while Obama has chosen to forego federal campaign funds. McCain will be restricted to a maximum of $84 million in matching funds after the GOP convention, while Obama will have at least twice as much money as McCain to spend.

The Democrats are targeting Colorado, which is why the convention was in Denver, and the Obama campaign will spare no expense to secure the state as they see it as essential to victory, which it is. Colorado is perhaps THE most important swing state to both candidates. This looks to be one of the closest elections in history.

We will take another in depth look at the electoral map later this month and again in late October and make our final predictions on the outcome of the election then.

My Thoughts On The Sarah Palin Pick

My phone has been ringing off the hook with calls from friends and clients asking for my take on John McCain's selection of Sarah Palin, Republican Governor of Alaska, as his running mate. Here's what I think happened. When Obama passed over Hillary and took Joe Biden, this created an opening for McCain to select a woman in the hopes of courting Hillary's supporters.

Of the women candidates McCain was rumored to have considered, I think Senator McCain and his senior campaign aides decided that Sarah Palin was the one that could really catch on with voters. No doubt the selection of Governor Palin was a huge gamble, especially given her limited experience.

Mrs. Palin definitely helps McCain solidify the conservative base, and if she can handle herself well in the next few weeks, she might just catch on with some Hillary supporters and some swing voters. In that case, McCain's gamble might just pay off.

As a football coach for many years, I know that sometimes you have to "throw deep" to stretch the defense. Sarah Palin definitely qualifies as the long ball for McCain. I'm warming up to the pick, as McCain had to do something bold to have a chance against Obama.

The Scary Democratic Party Platform!!

I urge EVERY client and subscriber to this E-Letter to read the article that follows. The mainstream media is NOT talking about these issues. They don't want you to know!

According to the latest Democratic Party Platform, they would have us make a huge commitment of additional taxpayer money and US military forces to the United Nations. Obama and the Democrats would have American taxpayers spending additional billions to improve education worldwide via the U.N., while our own education system is in trouble.

Americans will be called upon to spend more on international abortion "services" and population control via the U.N. Under Obama, the military would be expanded - including open and active homosexuals - to carry out these new U.N. missions. There will also be new energy and emissions requirements on the US.

Last but not least, if Obama wins the Democrats vow to bring back the so-called "Fairness Doctrine" (albeit under a different name), which is designed to reduce conservative talk radio and restrict the ownership of broadcast outlets.

So read what follows from Accuracy In Media very carefully and help get the word out!

QUOTE:

Dems Endorse Expansion of U.N. Power

AIM Column | By Cliff Kincaid | August 21, 2008

Our media are running stories about the planks in the new 2008 Democratic Party platform but they've missed a big one―expansion of the power of the United Nations, and especially more U.S. involvement in U.N.-authorized military operations.

In another bow to the world organization, the platform indirectly endorses Senator Barack Obama's controversial pro-U.N. Global Poverty Act. "It is time to make the U.N. Millennium Development Goals, which aim to cut extreme poverty in half by 2015, America's goals as well," the document says. It leaves out the estimated cost―$845 billion over 13 years.

This plank is listed under the "Invest in Our Common Humanity" title of the platform. The word "invest" is as deceptive as the legislation. It means to spend taxpayer dollars.

While it may seem strange that the platform would not endorse the legislation by name, this reflects awareness of how controversial the Global Poverty Act (S. 2433) and its federal commitment to the U.N.'s Millennium Development Goals have become. Increased foreign aid spending is not popular with the hard-pressed American taxpayer. So the one piece of legislation actually introduced by Senator Barack Obama (which passed the House and Senator Joseph Biden's Foreign Relations committee by voice vote without hearings) is mentioned only indirectly.

A section titled, "Revitalize Global Institutions," is more direct. It declares the need for "stronger international institutions" on "issues from weapons proliferation to climate change." While admitting that the U.N. is in need of "reform," the organization is said to be "indispensable" and the U.S. must rededicate itself "to the organization and its mission." This inevitably means more money for the world body.

Even though the U.S. public school system is rotting from within because of unaccountability and incompetence, the platform calls for more spending on educational systems in other parts of the world. It urges a $2 billion Global Education Fund that will "bring the world together in eliminating the global education deficit with the goal of supporting a free, quality, basic education for every child in the world."

On another international matter, the Democrats declare that "We will repeal the global gag rule and reinstate funding to the United Nations Population Fund (UNFPA)." This means that Americans will be called upon to spend more on international abortion "services" and population control. In this context, the platform urges support for "Health Infrastructure 2020," which is described as "a global effort to work with developing countries to invest in the full range of infrastructure needed to improve and protect both American and global health." No cost is put on this effort.

Similarly, we are not told about how much it will cost to launch the "collective action" needed to confront the "global challenge" of climate change. But we are told that it will require a "Global Energy Forum that will lay the foundation for the next generation of climate protocols." It declares the need for a "global response to climate change that includes binding and enforceable commitments to reducing emissions…" This means more U.N. treaties impinging on our freedom and sovereignty.

It may surprise some "progressives" to learn that while Obama wants to withdraw U.S. forces from Iraq, he has no plan to reduce the size of the U.S. Armed Forces. Instead, "We support plans to increase the size of the Army by 65,000 troops and the Marines by 27,000 troops," it says.

If these troops are not going to be in Iraq, where will they be going? "We believe we must also be willing to consider using military force in circumstances beyond self-defense in order to provide for the common security that underpins global stability―to support friends, participate in stability and reconstruction operations, or confront mass atrocities."

Phrases such as "beyond self-defense" and "common security" constitute an endorsement of the U.N. doctrine of the "Responsibility to Protect." Since the platform declares that U.N. "peacekeeping" operations are "overextended," this means U.S. forces will have to be redeployed from Iraq and other areas to address civil wars and problems in other countries that pose no direct security threat to the U.S.

Meanwhile, the platform says the U.S. Armed Forces under President Obama will be expanded to include open and active homosexuals, despite its obvious negative impact on morale and recruitment. If normal heterosexuals leave the Armed Forces as a result of this policy, Obama may be forced to reinstitute the military draft to create the bigger military he seeks.

Thanks to conservative talk radio and other such outlets, the shocking facts about the Democratic Party platform will be provided to the American people. The conservative media have been a thorn in the side of the liberal establishment ever since President Reagan's Federal Communications Commission (FCC) began the deregulation of the media and new voices started emerging.

But the Democrats, whose base of support is in the old media, which are losing viewers and readers, want more, not less, regulation.

"We will encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation's spectrum," the Democratic platform says.

While this may sound appealing, terms like "diversity" and "diverse viewpoints" are liberal code words for using the power of the federal government to muzzle conservative talk radio and turning over broadcast properties and airtime to "progressives." This is the goal of George Soros-funded groups like the Free Press, which puts on an annual National Conference for Media Reform. As I reported in June, at this year's event, the conference turned into an Obama for president rally.

Translated into ordinary language, the term "we" in the context of the Democratic platform plank on the media means more federal government interference.

As explained by Tim Wu, a Columbia Law School Professor and chairman of Free Press, the U.S. Constitution is flawed because the founders did not anticipate the problem of "the abuse of private power." The Bill of Rights was merely designed to protect people against government and the founders were concerned about the exercise of "public power," he explained to the National Conference for Media Reform.

In direct contradiction to the intent and precise wording of the First Amendment to the Constitution, in terms of prohibiting Congressional abridgement of freedom of speech, this grant of massive authority to Congress and the federal government means that the FCC will decide what constitutes "diversity" and the "public interest" in broadcasting. Hence, the FCC, rather than market forces and the people, will decide who gets on the air, who can own media properties, and even who gets Internet access.

Meanwhile, the Democratic Congress can be counted on to increase U.S. taxpayer support for public TV and radio.

Conservative FCC Commissioner Robert McDowell recently warned that the Fairness Doctrine, which allows federal bureaucrats to monitor and dictate broadcast editorial content, may be brought back under a different name. "I think it won't be called the Fairness Doctrine by folks who are promoting it. I think it will be called something else and I think it'll be intertwined into the net neutrality debate," he told the Media Research Center. The term "net neutrality," as defined by George Soros-funded "progressive" organizations, means that federal authorities will monitor and regulate Internet networks, rather than letting private competitive forces operate on their own without governmental interference.

But other powerful "progressive" individuals and groups want the Fairness Doctrine back directly and immediately. The public should know that Democratic control of the White House would result in a 3-2 liberal majority in the FCC and the possible return of the Fairness Doctrine through administrative and executive action without any congressional approval required. House Speaker Nancy Pelosi has already declared she is in favor of it. That's why she refuses to bring the Broadcaster Freedom Act to a vote in the House. The Broadcaster Freedom Act (H.R. 2905) would prevent the FCC from unilaterally imposing the Fairness Doctrine on broadcasters.

The Democratic platform, in short, calls for more and bigger government on the domestic and international levels. This is the real story that the mainstream media won't tell.
END QUOTE

Here is the direct link to the story above:

http://www.aim.org/aim-column/dems-endorse-expansion-of-un-power/

I would encourage readers to forward this around to as many people as possible to get the word out.

There are apparently plenty of readers of this E-Letter that are leaning toward or committed to voting for Barack Obama. Obviously, millions of Americans don't mind Obama's liberal policies and/or intentions on such things as taxes, abortion, nationalized health care, protectionism, Supreme Court judges, gun control, etc., etc.

They apparently also don't mind that he not only opposes offshore drilling, but also that he opposes exploration that would finally quantify just how much oil and natural gas that is in the ground offshore. What, you haven't heard that? Then read this:

http://www.ibdeditorial.com/IBDArticles.aspx?id=303344360938478

Unfortunately, I doubt if many of Obama's supporters know what he and the Democrats have in mind for the United Nations, our military and our taxpayer dollars. Obama is spearheading this effort!

Ditto for the return of the Fairness Doctrine. Liberals complain that conservatives like Rush Limbaugh dominate the airwaves. Yet liberal talk radio programs have fallen flat on their faces time after time. Obviously, tens of millions of Americans PREFER conservative programs.

It's called the FREE MARKET. But since liberal programming can't compete, the Democrats would like to not only restrict conservative programming, but also restrict who can own the various broadcast outlets.

Let's get the word out fast.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why McCain Still Has a Chance To Win
http://online.wsj.com/article/SB122031196249888759.html?mod=opinion_main_commentaries

Palin - What the Heck is McCain Up to?
http://www.realclearpolitics.com/horseraceblog/2008/09/what_the_heck_is_mccain_up_to.html

Dems Shouldn't Underestimate Palin (written by a Democrat)
http://www.realclearpolitics.com/articles/2008/09/dems_shouldnt_underestimate_pa.html

On The Economy, The Fed & President Obama

Gary D. Halbert — Wed, 30 Jul 2008 14:30:41 GMT

IN THIS ISSUE:

Economy Holding Up Better Than Expected
Consumer Spending Remains Strong
The Fed In A Policy Box
Obama Acts As If He's Already The President
John McCain's Electoral Mountain
The Vice Presidential Sweepstakes

Introduction

If you talk to people on the street just about anywhere in the US, you find there is a broad consensus that the US economy is well into a recession at this point. Yet the US economy is holding up better than expected. 1Q GDP was revised upward once again in the final report at the end of June. This Thursday, we get the Commerce Department's first estimate of 2Q GDP, and the pre-report consensus may surprise you. We will look at this and more economic indicators below.

Meanwhile, the Federal Reserve finds itself in an increasingly uncomfortable position. It has repeatedly lowered short-term interest rates over the last 12-18 months in an effort to combat the negative consequences of the housing slump, the sub-prime mortgage crisis and the resulting credit crunch. In recent months, however, even with the economy slowing down, inflation is on the rise. Now the Fed is in a dilemma – keep rates low to help the economy or raise rates to head off inflation and risk a potentially serious recession later on. We will discuss this in detail below.

Finally, we take a look at the presidential race and my latest thoughts about Barack Obama who is acting like he is already the president-elect, just waiting to occupy the White House in January. This man has to be the most arrogant presidential candidate in my adult lifetime. This would seem surprising given that his political and policy positions are extremely liberal and his background is suspect. Despite that, he may well be our next president.

My Obama misgivings aside, we will look at the political landscape as it seems to stand now – which states are likely to go to Obama and which are likely to go to McCain – and most importantly, the “battleground states” that could still tip either way. This should be a lively discussion all the way around, so let's jump in.

Economy Holding Up Better Than Expected

Whether you are a conservative, a liberal or somewhere in between, I trust you realize that the Democrats and their accomplices in the media want you to believe that the US economy is in a serious recession and, of course, it is all the fault of President Bush. Likewise, they want you to believe that soaring oil, gasoline and energy prices are the direct result of Bush and Cheney and Big Oil lining their pockets at our expense.

There is no debate on whether the US economy is in a slump – we can all agree on that. Yet the US economy is holding up better than even I have expected in light of the housing slump and the credit crisis. But you will not hear this in the mainstream media. They want the American people in a foul mood, at least until after the election. Despite that, let's look at the latest economic reports, and you can decide for yourself. Here we go.

We start with the latest figures on Gross Domestic Product, the bellwether indicator of the trend in the economy. In its advance report, the Commerce Department estimated 1Q GDP at an anemic +0.6% annual rate of growth. In its second report, the government raised its GDP estimate to +0.9% for the 1Q. And in its final report in late June, the Commerce Department raised its final 1Q GDP number to +1.0%.

What, you didn't hear this reported in the media? Not surprising. +1.0% is nowhere near recession levels. So, what is likely in store for the 2Q? The Commerce Department's first estimate of 2Q GDP will be released this Thursday (July 31). Remember that most analysts, your editor included, have previously predicted that GDP would fall into negative growth territory in the 2Q of this year.

But the pre-report estimates suggest yet another surprise – GDP may have outperformed yet again in the 2Q ended June 30. The consensus estimate is that 2Q GDP rose 1.8%. Where is that recession, may I ask? Here are some of the pre-report estimates on 2Q GDP. Morgan Stanley estimates that 2Q GDP rose 2.2%, well above the consensus estimate. Another source I follow, Macroeconomic Advisers (www.macroadvisers.com), now predicts that 2Q GDP will come in at a surprising +2.6%. If so, that will be another big surprise.

Macroeconomic Advisors also predicts that the US economy will grow by 1.4% in the 3Q. I don't know if they will be correct, but if they are remotely in the ballpark, the media's predictions of a recession this year are out the window.

The point is, we are not in a recession now, as defined by two consecutive quarters of negative GDP. Certainly, there are parts of the US that are experiencing a recession in terms of job losses and the drop in home values. Yet there are other parts of the country where the economy remains strong and home prices and sales remain vibrant, such as where I live in Austin, Texas.

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.

Consumer Spending Remains Strong

The GDP numbers simply do not support arguments that we are in a recession. But what about other reports? Let's quickly go through the list of recent economic reports. Let me warn you in advance that more of the recent reports have been positive than negative. I'm sure this will come as a surprise, based on what you hear in the media.

The Index of Leading Economic Indicators (LEI), one of my favorite reports, was down –0.1% for June, following rises of a similar amount in April and May. FYI, the LEI has not moved more than 0.2% either way since the first of the year, which is an indication of an economy that is essentially directionless, but not headed into a recession.

It is widely agreed that consumer spending makes up apprx. 70% of GDP. Admittedly, continued strong consumer spending has astounded not only me but most other analysts in the marketplace for quite a while now. The latest data bear this out. Retail sales were up 0.1% in June, following a rise of 0.8% in May. These gains over the last two months came despite a continued drop in consumer confidence.

As I have pointed out often over the last year, US consumers continue to spend despite the drop in confidence and rising consumer debt levels. Several readers have asked me to explain this phenomenon. I have several theories I could advance, but space does not permit, so here is my short answer.

The media has blatantly contributed to the plunge in consumer confidence, but that has not translated into a nationwide plunge in jobs. The labor markets continue to be relatively firm. The unemployment rate remains historically low at 5.5%, although I expect it to rise to 5.6-5.7% for July. Meanwhile, personal income has continued to go up month after month. So most Americans are doing OK in their jobs, and they continue to spend on the things we all spend our money on, which keeps the economy from falling into a recession.

Other Economic Indicators Are Mixed

Here we go with the other recent reports. First and foremost, consumer confidence continues to plunge month after month. Yet consumer spending remains firm as discussed above. Take retail sales, for example. Retail sales rose 0.1% in June following a surprising rise of 0.8% in May. According to the Commerce Department, personal consumption expenditures rose 1.1% in the 1Q, to the surprise of many. Personal spending rose another 0.8% in May according to the latest report. Translation: the economy is in a slump, but it is a minor one and most consumers have not substantially changed their lifestyles – at least not yet.

The latest durable goods orders report for June released last Friday was significantly stronger than expected, rising 0.8% when the consensus was for a decline of 0.3%. The Commerce Department also revised its May durable goods report from a negative to +0.1%. Durable goods are generally long-lasting, higher priced items.

In other reports, industrial production rose 0.5% in June, following a decline of 0.2% in May. The ISM manufacturing index rose modestly to 50.2 in June from 49.6 in May. On the other side, the unemployment rate remained at 5.5% in June. Advance reports suggest the unemployment rate may rise to near 6% by the end of this year.

On the housing front, most reports remain negative, although a few indicators suggest the worst may be over. For example, housing starts and new building permits actually rose modestly in June. Yet sales of new and existing homes continued to fall. Pending home sales fell in May (latest data available), which is good, but is hardly a trend. It remains to be seen what happens just ahead with home prices, but it would seem that a bottom on the national level may finally be in sight by the end of this year.

On the inflation front, indicators are turning higher, or so it would seem. The Consumer Price Index for June was up 1.1% year over year, and the “core” rate was up 0.3%. The Producer Price Index (wholesale prices) was up for June 1.8%, and the core rate was up 0.2%, minus food and energy.

It is increasingly hard to separate the headline inflation rates from the ‘core' rates which exclude food and energy. It will be interesting to see how the government adapts its inflation reports in coming months to reflect this changing dynamic, if in fact they do.

The Fed In A Policy Box

Fed Chairman Ben Bernanke and his fellow members of the Fed Open Market Committee (FOMC) that sets interest rates are becoming increasingly concerned about rising inflation rates. Although the Fed has long been believed to focus on the core rate of inflation (minus food and energy), there is no doubt that Bernanke & Company are closely monitoring headline inflation as well. Bernanke made the following remarks in a speech on June 3:

“The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming. The Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning… For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.”

Those remarks delivered at an international monetary conference seemed to suggest that Bernanke is content to keep the Fed Funds rate at 2%, at least for the time being. However, there is believed to be a growing dissent among certain other members of the FOMC. The last FOMC meeting was on June 24-25 when the Fed once again elected to leave the Fed Funds rate at 2%. The FOMC policy statement included the following language:

“The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high…

Although downside risks to [economic] growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

These policy statements are carefully scrutinized, and there is little doubt that the Fed is increasingly concerned about inflation. The question is, will the Fed raise short-term rates at a time when the economy is struggling and the credit crunch is still far from over? The interest rate futures markets believe the Fed will raise rates at least once before the end of the year. My best sources, however, believe the Fed will not raise rates before the end of the year.

The next FOMC policy meeting will be held on August 5.

Do Most Americans Really Know Barack Obama?

To the surprise of most conservatives, Senator Barack Obama continues to hold a lead over Senator John McCain in most of the national tracking polls, although McCain has made some gains over the last week or two as Obama went on his global “fact-finding” tour. Most conservatives are astonished at how many Americans have jumped on the Obama bandwagon, especially given his liberal positions on so many issues, his lack of experience and his questionable background.

Let's start with the questionable background. We are told that Obama served as a “community organizer” in Chicago for ACORN (the Association of Community Organizations for Reform Now), which is one of the largest radical groups in America. You can easily check this out on the Internet. Next, there are Obama's ties to now-convicted felon, Tony Rezko. Rezko, a Chicago mover and shaker, was one of Obama's earliest supporters. After Obama was elected to the Senate in 2006, he and Rezko were involved in a questionable real estate transaction involving the purchase of Obama's mansion in Chicago. Obama has since admitted it was a mistake.

Then there is the issue of Obama's former minister of 20 years, Jeremiah Wright, who hit the national spotlight recently with his outrageous sermons. Wright also has a close relationship with and has praised Louis Farrakhan, who is the Supreme Minister of the Nation of Islam and an outspoken anti-Semite.

In addition to his questionable background, there are his various liberal policy positions and votes. Obama has been rated “the most liberal Senator in Congress” by National Review, a prominent conservative think tank in Washington. Obama is pro-abortion and pro-gun control. He will raise income taxes, especially on those making $250,000 or more a year, and he says he will increase the capital gains tax (not good for the stock markets).

He vows to nationalize health care, which in my view is one of the scariest things about Obama. He is opposed to increased offshore drilling for oil and natural gas – ANWR would definitely not be allowed. He is a global warming enthusiast. He opposed the war in Iraq. He refuses to admit that the “surge” in Iraq has worked, even after his latest visit there. And the list goes on.

Then there is the critical question of the Supreme Court. With the advanced ages of several current Justices, it is very likely that Obama will get to nominate at least two Supreme Court justices in his first term should he be elected. He could well nominate another one or two should he win a second term.

As discussed at length in my July 1, 2008 E-Letter, the Supreme Court is fairly balanced at present with four generally conservative Justices and four generally liberal ones, with one swing vote in Anthony Kennedy. Depending on which Justices retire in the next 4-8 years, Obama could swing the court significantly to the liberal side. And with the Democrats firmly in control of the Senate, you can bet Obama's Supreme Court nominees will be approved quickly.

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.

Obama Acts As If He's Already The President

Despite the negatives noted above, the mainstream media fawns over Obama's every word and refuses, for the most part, to write anything negative about the man – past or present. The ultimate proof of this was his latest overseas trip in which the evening news anchors from ABC, CBS and NBC all jumped at the chance to accompany Obama on his global junket.

Actually, I think Obama hurt himself on his foreign trip by talking and negotiating with foreign leaders as if he is already the President-elect. Excuse me, but we haven't voted yet! Not that I care to admit it, but I have marveled at Obama's confidence (at least when he has a teleprompter). However, his ill-advised discussions with foreign leaders now make me believe that he is one of the most arrogant politicians I have ever seen.

Given all of the above, why is Obama leading in the polls to become our next Commander-In-Chief? Much of it, I believe, is “Bush Fatigue.” Liberals and the media always hated Bush. Everything in the world that is wrong is Bush's fault. Many conservatives have turned against President Bush as well – he has disappointed us on many occasions. Unfortunately, many conservatives don't like McCain and may simply sit out this election, which is effectively a vote for Obama.

It is my belief that many Obama supporters are really just anti-Bush voters who simply want someone in the White House that is not the GOP candidate. That, in my view, is why many Obama supporters have dismissed (or failed to investigate) his questionable past and his liberal policy positions.

I have no doubt that I will receive many scathing e-mails in response to the analysis above from our more liberal readers. But take heart, Obama supporters! The following state-by-state electoral analysis will be sure to warm your hearts. I've asked my associate Spencer Wright to review the latest state polls and crunch the electoral numbers. Unfortunately, it does not look very good for John McCain. Take it away Spencer.

John McCain's Electoral Mountain

National tracking polls have recently narrowed, thus putting the contest between McCain and Obama close to the margin of error as of last week. In fact McCain is enjoying a rather healthy rise in public opinion. In the face of the Obama World Tour 2008, this is very encouraging news. To say nothing of a very real dose of Bush Fatigue throughout the country combined with rising energy prices and the poor economy. So, all things considered, the McCain campaign should be thrilled with the week they have had. Indeed, ANY Republican candidate would struggle in this environment, although it does not help matters that McCain is viewed by many as a weak candidate.

It is important to keep in mind that at this stage most polls are reflecting the views of partisans who do not pick the president. It has been the soft middle of American politics – the so-called “swing voters” - that have determined our president since 1988. And those that comprise the middle generally are tuned out until the party conventions, which is why the conventions have become glitzy five-day infomercials that normally give each candidate a nice bounce in the polls just afterward.

That is why, at this pre-convention stage, the national tracking polls are of marginal value, whereas looking at the individual state polling numbers is a much better way to get a read on the potential outcome. I am not going to bother looking at states that are solidly for McCain or Obama as there is no point. Instead, let's look at the handful of “battleground” states that will determine the outcome of the election.

The battleground states currently are: FL, OH, MI, NC, VA, IN, MO, CO, NM, NV and NH. This leaves Obama with a solid 238 electoral votes and McCain with a solid 163 electoral votes, leaving the 11 battlegrounds to account for a total of 137 electoral votes. Already you can see the path to 270 is much easier for Obama than McCain, as he holds a 75 electoral vote lead in solid states.

Here's my list of where the battleground states stand based on the RealClearPolitics averages. This may differ slightly from some that you see on TV, but I think this is where the race is now. (Note that “EV” stands for Electoral Votes.)

FL (27 EV): Florida was looking like a McCain stronghold until recently. Obama has made substantial gains in the state over the last month. Current Standing: Obama 45.8% / McCain 45.8%. FL is a definite ‘must win' for McCain.

OH (20 EV): Ohio is the battleground of battlegrounds, and it has been hard hit by the recent economic downturn. Bush won the state by thin margins in 2000 and 2004. Current Standing: Obama 46% / McCain 45%. Ohio is a ‘must win' for McCain.

MI (17 EV): Like Ohio, Michigan has been hard hit by the recent economic slump. Add to that its history of voting Democrat across the board from 1992 on and you get a tough landscape for McCain, although recent Democrat victories in the state have been narrow. Current Standing: Obama 46% / McCain 42%. This is a ‘must win' state for Obama.

NC (15 EV): North Carolina is yet another state that leans Republican and should not be this close, another indication of how McCain is doing poorly with the base. Current Standing: Obama 43% / McCain 47%. NC is another ‘must win' for McCain.

VA (13 EV): Virginia is another state that really should not be in contention. While VA went for George Bush in 2000 and 2004, it has been trending Democrat over the past 12 years. Current Standing: Obama 47% / McCain 46%. VA is ‘must win' for McCain.

IN (11 EV): Indiana should not be a battleground state since this state hasn't voted for a Democrat in almost 40 years. This is a sign of McCain's weakness with the GOP base. Current Standing: Obama 47% / McCain 46.5%. IN is a ‘must win' for McCain.

MO (11 EV): Missouri has been in the GOP portfolio more often than not over the last 40 years, voting for a Democrat only three times over the last 10 cycles. Yet the polls are currently very tight in this Midwest bellwether state. Current Standing: Obama 45% / McCain 47%. MO is a ‘must win' for McCain.

CO (9 EV): Colorado voted for Bush twice but by fairly small margins. The Democrats are convinced that it can be flipped. Look for lots of action in this state. Current Standing: Obama 47% / McCain 45%. CO is a ‘must win' for Obama. More on Colorado below.

NM (5 EV): New Mexico split over the last two general elections going narrowly for Gore and then narrowly for Bush. This is another western state that the Democrats believe they can take. Democratic Governor Bill Richardson is very popular and has endorsed Obama and may be in the running for the VP nod. Current Standing: Obama 49% / McCain 43%. NM is a ‘must win' for Obama.

NV (5 EV): Nevada voted for Clinton twice and Bush twice, but never by large margins. Mark this as the third western state the Democrats think they can capture. The YuccaMountain nuclear waste disposal area is a big hot button issue. Current Standing: Obama 45% / McCain 43%. NV is a ‘must win' for Obama.

NH (4 EV): New Hampshire is the rare New England state that does actually vote for a Republican now and then. It voted for Bush in 2000. McCain is very popular in the state, which is why the polls remain close. Current Standing: Obama 44% / McCain 43%. NH is a ‘must win' for Obama.

As noted at the beginning of this state-by-state analysis, Obama has a large lead over McCain in the electoral vote based on the current polls. Thus, you may be wondering why, if Obama already has a built in 75 EV lead, does he need to win any of the “must win” states marked for him? Well, those states represent Obama's path of least resistance to the magic 270 EV total needed to win.

Let's say, for example, that McCain manages to poach MI and salvage OH, VA, MO, NC and FL – states that Republicans normally have a good chance in. Based on current polls, that would be a good showing for McCain. However, Obama can still win by carrying NH, NM, CO and NV. That would give him 272 EV vs. 266 EV for McCain.

Fortunately, I have it from a good source on the ground that McCain is surging in Colorado, with its nine electoral votes, and has pulled to even with Obama in the last week. Assuming McCain carries the states he is expected to – which is a huge assumption – this race could ultimately come down to only one or two key states. We will revisit the standings after the Democratic convention, and again after the GOP convention.

The Vice Presidential Sweepstakes

McCain's biggest problem of late is that he can't get in the news. Obama, with his World Tour, has dominated the news cycles. Yet despite Obama sucking all of the oxygen out of the room, McCain has closed the gap in the national tracking polls to close to the margin of error. But for McCain to get back in the news, he has to do something big.

There is rampant speculation that McCain is on the verge of making his VP announcement to get back into the spotlight. Some believe this would be a good idea as it would not only build upon recent gains, but would shift the media attention from Obama to McCain, at least for a few days. Others like Karl Rove advise McCain to announce his VP choice only after Obama announces his. We'll see.

Of course the size of the McCain VP bounce will depend on who he picks. In my opinion he has three basic options for his running-mate: 1) base; 2) buzz; and 3) boring. He could select Mitt Romney to shore up the GOP base; he could pick Louisiana governor Bobby Jindahl, a young rising star in the GOP, which would create a real buzz; or he can pick someone boring like his old friend Tim Pawlenty, the governor of Minnesota.

Gary and I firmly believe that Mitt Romney is the best choice if McCain is to have any chance to win. Romney could solidify the GOP base and would certainly help McCain in states like Virginia, North Carolina, Ohio, Indiana, Florida and certainly Michigan where his father was a very popular governor. The problem is, McCain doesn't like Romney. Hopefully, his advisors are urging him to pick Romney anyway. We feel that if he picks Jindahl or Pawlenty or some other lightweight, it will be a sign that McCain doesn't think he can win.

And what about Obama? Rumor has it he will also announce any day now. The Democratic National Convention begins on August 25, and Obama should make his choice very soon. Unlike McCain, Obama will likely make his VP pick based purely on two factors: experience and gravitas. Obama is believed to be considering three possible VP choices (in no particular order): 1) former Georgia Senator Sam Nunn; 2) Virginia Governor Tim Kaine; and 3) NM Governor Bill Richardson, who we consider a distant third.

What about Hillary? Gary and I believe that Obama would only choose Hillary if he was falling down in the polls. We could be wrong, of course, but we don't see Obama opting to take on the Clintons' baggage, and the chance that he could be upstaged by either Bill or Hillary. As noted above, Obama still has a lead in the polls. Thus, assuming Obama announces his VP choice before the convention, we do not expect it to be Hillary.

Sam Nunn would seem an unlikely pick because he is a conservative Democrat. However, Nunn is a political heavyweight, even though he retired from the Senate in 1996. On the one hand, conservatives might hope that Obama picks Nunn who might temper Obama's liberalism. On the other hand, I think an Obama-Nunn ticket would be virtually unbeatable.

That's it for the state electoral analysis and my take on the VP sweepstakes. Back to you, Gary.

Conclusions – Pass This Along

Thanks, Spencer. As noted previously, this is one of the more interesting presidential elections in some time. This is one of the most important presidential elections, in that more is at stake than in a long time. Obama is arguably the most liberal presidential candidate to get the Democratic nomination in a generation or more, yet many Americans who are going to vote for him do not know this. Unfortunately, for many, it is simply “anyone but Bush and the GOP.”

Feel free to forward this E-Letter to as many people as you wish, in whole or in part. Investors in particular need to know where Obama stands, because I do not think he will be good for the markets. Senator McCain was not my choice for the GOP nominee, but conservatives need to come out and support him.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama's audacity of hubris
http://www.theglobeandmail.com/servlet/story/RTGAM.20080726.wxcorex26/BNStory/specialComment/home

Can McCain Back In Again?
http://www.realclearpolitics.com/articles/2008/07/can_mccain_back_in_again.html

Obama's communist connections?
http://www.aim.org/aim-column/special-report-red-faces-over-obamas-red-mentor/

Election '08 - Supreme Court In The Balance

Gary D. Halbert — Tue, 01 Jul 2008 17:20:00 GMT

IN THIS ISSUE:

Presidential Candidates Finally Settled
Is The Supreme Court A “Litmus Test”? Yes!
The Current Make-up Of The Supreme Court
Supreme Court Justices Likely To Retire Soon
What Would McCain Do To The Supreme Court?
Why It Is Still Important For McCain To Win
Recent Landmark 5-4 Supreme Court Decisions
Court Gets It Right On Gun Control, Barely
McCain & Obama’s Reaction To The Gun Decision
A 5-4 Supreme Court Is Better Than 6-3 Or 7-2

Introduction

The next president will likely have the opportunity to nominate 2-3 Supreme Court justices, especially given the ages of the two oldest justices – John Paul Stevens and Ruth Bader Ginsburg. This week, we will discuss the current make-up of the Supreme Court and the deep divide among the liberal and conservative wings of the High Court.

We will also consider what kind of judges Senators McCain and Obama would likely nominate if they are president for the next four years. We will also look at some of the recent landmark decisions from the Supreme Court, and how the votes of Justice Anthony Kennedy are often critical.

I last wrote about the Supreme Court in October 2004, just before the presidential election with President Bush and Senator John Kerry. In that E-Letter, I suggested that some landmark decisions would likely occur during the following four years, and some of those key cases have been decided in the last month alone.

I stressed the importance of having conservative judges on the Supreme Court. It is just as important today, especially with Barack Obama being one of the most liberal Senators in history. So, this suggests we take another lose look at the Supreme Court in light of the upcoming presidential election.

Presidential Candidates Finally Settled

Following the end of the Democratic primaries, our presidential rivals are John McCain and Barack Obama, and not surprisingly Obama has proven to be the early frontrunner in the polls. Obama’s popularity among younger voters ages 18-30 will mean that millions of Americans who have never, or rarely, cast their votes will do so on November 4 for the Illinois freshman Senator.

John McCain, on the other hand, has multiple challenges to deal with if he is to have a chance to become president. McCain, age 72, is a career politician and a self-described “maverick,” meaning that he has not always voted with conservatives on key issues. Yet Obama has skillfully characterized McCain as a “third term for George W. Bush,” and President Bush is one of the most unpopular presidents of the last century.

McCain faces two difficult challenges if he is to have any chance of defeating Obama in November. First, he must somehow solidify the Republican base and get conservative voters behind him, which will be a daunting challenge. Second, McCain must somehow reach out to Democrat moderates and convince them that he is a viable alternative to Obama.

As for solidifying the Republican base, McCain faces several problems. Many conservatives may not be able to bring themselves to vote for McCain given his history of taking positions they disdain. As a result, McCain has been tracking to the right on certain issues, including reversing some of his previous positions, in an effort to solidify the GOP base.

At the same time, McCain is moving to the center-left on certain other issues in the hopes of enlightening many Hillary supporters who are having trouble getting onboard the Obama bandwagon. McCain’s centerpiece for attracting these voters is his position on the environment and global warming.

So, as you can see, McCain faces an uphill battle on several fronts, trying on the one hand to convince conservatives that he is their man, while at the same time trying to woo moderate Democrats. Obama, on the other hand, seems to have the wind at his back.

McCain’s greatest worry is that many conservatives are so disgusted that they may choose to simply sit this election out and not vote at all. Some conservatives don’t realize that a decision not to vote is, in effect, a vote for Senator Obama. Even worse, some conservatives are so upset that they have decided that the best course is to actually hold their noses and vote for Obama in November to ‘teach the Republicans a lesson.’

For conservatives who may be considering not voting at all, or voting for Obama to send a message of disgust to the GOP, I would strongly suggest that we focus our sights on the Supreme Court, and the strong likelihood that the next president will get to select at least two Supreme Court justices.

Maybe this will help get some priorities in order. Let’s start with the current make-up of the Supreme Court to see which justices are likely to retire (or die) in the next four years. Next, we will look at the latest razor-thin 5-4 Supreme Court landmark decisions which could have gone either way. And finally, let’s consider whether, in reality, it makes much difference who is in the White House for the next four years, in terms of the Supreme Court. I will argue that it does matter, and that should help clarify who conservatives should vote for in November. 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.

Is The Supreme Court A “Litmus Test”? Yes!

If you are a conservative, there are many things to fear about Barack Obama. He is arguably the most liberal Senator on Capitol Hill. He definitely will raise taxes; he plans to nationalize health care; he will pull our troops out of Iraq; he is soft on the military and national defense; he has no foreign policy experience; and he has ties to some very questionable characters.

If you are a liberal/moderate, there are things to fear about John McCain (although I would argue not as many as Obama, since McCain has a history of voting with the libs on certain issues). After opposing the Bush tax cuts, McCain now says he would push to make them permanent; McCain is strong on the military and is for winning the war in Iraq; McCain’s foreign policy would be more like President Bush’s, presumably; and McCain has consistently been anti-abortion.

There are plenty of reasons not to like either of these presidential candidates, regardless of your political persuasion – if both sides are intellectually honest. Obama is too liberal for some moderates, and McCain is too moderate for some conservatives.

If you are having a hard time deciding who to vote for, or whether to vote at all, might then the debate boil ultimately down to what type of judges each would appoint to the Supreme Court?

This question is certainly not a ‘litmus test’ for me, as there is no way I could vote for Obama, but perhaps it will be of help to those of you who are having trouble deciding.

The Current Makeup Of The Supreme Court

The US Supreme Court today consists of the Chief Justice and eight Associate Justices. They are currently as follows, with a brief description (listing the conservatives first):

John Roberts, Chief Justice – age 53, appointed by George W. Bush in 2005 and is generally considered to be a conservative.

Antonin Scalia, Associate Justice – age 72, appointed by Ronald Reagan in 1986 and is staunchly on the conservative side.

Clarence Thomas, Associate Justice – age 60, appointed by George H. W. Bush in 1991 and is consistently on the conservative side.

Samuel Alito, Associate Justice – age 58, appointed by George W. Bush in 2006 and is consistently on the conservative side.

The following four justices tend to rule on the liberal side of most issues.

John Paul Stevens, Associate Justice – age 88, appointed by Gerald Ford in 1975, initially thought to be a conservative, but was a moderate at best in his early years on the court and then swerved decidedly to the liberal side.

David Souter, Associate Justice – age 68, appointed by George H. W. Bush in 1990, a moderate and disappointment to conservatives, who has consistently voted on the liberal side.

Ruth Bader Ginsburg, Associate Justice – age 75, appointed by Bill Clinton in 1993, a liberal ideologue from the get-go.

Steven Breyer, Associate Justice – age 69, appointed by Bill Clinton in 1994, another liberal as we might expect coming from Clinton.

And the last Associate Justice is the usual “swing voter” on the High Court.

Anthony Kennedy, Associate Justice – age 71, appointed by Ronald Reagan in 1988, who was thought to be mildly conservative at the time, but most often leans to the liberal side as time has gone on.

So in the current Supreme Court we have four generally conservative judges - Roberts, Scalia, Thomas and Alito; four consistently liberal judges – Stevens, Souter, Ginsburg and Breyer; and one sometimes swing voter – Anthony Kennedy (often more on the liberal side).

Casual readers might tend to think it is a good idea to have the High Court so well balanced. Admittedly, there are arguments to support such a position. But as a conservative, I would argue to the contrary. I will explain more as we go along.

Supreme Court Justices Likely To Retire Soon

Supreme Court justices tend to keep their retirement thoughts and plans to themselves, so there is no way to know with certainty if any of the current justices are likely to retire over the next four years. However, it has long been believed that the justices prefer to retire when the sitting president is someone who shares their political ideology, and who is likely to appoint a like-minded replacement.

Should Barack Obama become president, it is widely believed that the two most likely justices to retire will be John Paul Stevens and Ruth Bader Ginsburg.

As noted above, Justice Stevens is now 88 years old, so it would come as no surprise if he chooses to retire next year (or certainly in the next four years) if Obama is president. Interestingly, Justice Stevens was thought to be a conservative judge when Richard Nixon appointed him to the 7th Circuit Court of Appeals in 1970, and when Gerald Ford appointed him to the Supreme Court in 1975. Yet Justice Stevens was at best a moderate on the High Court in his early years, and soon shifted to the liberal side on most issues.

Some believe that Justice Stevens is ready to retire but is waiting until President Bush is gone and someone more to the moderate/liberal side is in the White House.

The next most likely justice to retire is thought to be Ruth Bader Ginsburg, who is now 75 years old. Justice Ginsburg was diagnosed with colo-rectal cancer in 1999 and underwent surgery followed by chemotherapy and radiation treatments. While the surgery and treatments were deemed to be successful, it is unclear how long she wishes to remain on the High Court. Justice Ginsburg is widely considered to be the most liberal justice on the Court, and like Justice Stevens, she may simply be waiting until someone more liberal is in the White House.

Judging by age alone, the next most likely justices to retire over the next few years are Antonin Scalia (72) and Anthony Kennedy (71). There are those who believe that the make-up of the High Court won’t change much if Justices Stevens and Ginsburg retire (or die) during an Obama presidency, and I might agree. Obama would simply appoint two equally liberal judges.

However, if either Justice Scalia or Justice Kennedy should retire, Obama would have the opportunity to dramatically shift the balance on the High Court to the liberal side. Justice Scalia is widely considered to be the most conservative judge in the Supreme Court. If Justice Kennedy, who is considered the swing vote, is replaced with another liberal ideologue, that too would represent a significant shift on the Court.

What Would McCain Do To The Supreme Court?

Obviously, for McCain to have any significant impact on the Supreme Court, he must be elected president, which is not looking very likely at the moment. But let’s assume he wins. In order to assess his chances of changing the Supreme Court, we must first look at the Congressional landscape that is likely to be in place starting in January 2009.

Based on current polling data, the House of Representatives is likely to shift dramatically in favor of the Democrats in this year’s elections. Estimates vary, but it is expected that the Democrats will gain 12-20 seats in the House in November. If so, that will put the House make-up at something like 256 Democrats to 179 Republicans. That will be a huge shift in an already Democrat-controlled House of Representatives.

Of course, it is the Senate that approves and confirms Supreme Court nominees. There, too, the numbers don’t look good for conservatives. Based on current polling data, the Democrats are likely to gain 12-14 seats in the Senate. In that case, the Senate make-up would be something like 63 Democrats to 35 Republicans (and two Independents) starting in 2009.

Given that the Democrats will have such overpowering control of the Senate starting next year, it is unlikely that John McCain will be allowed to get any truly conservative judges on the High Court. At best, McCain might get a moderate or two on the Supreme Court.

It is not clear in the first place what kind of judges that McCain would nominate if he were president. Most would agree that McCain is not a true conservative along the lines of Ronald Reagan, so we don’t know what he would naturally want to do with regard to High Court selections. But that doesn’t matter much. In light of the Senate make-up next year, McCain won’t have many choices if he wished to get his nominees confirmed.

And it likely gets even worse. Let’s say that Justices Stevens and Ginsburg do decide to retire, even if McCain is president. With a 60+ vote control of the Senate, I can almost guarantee you that the liberals are going to demand that any liberal justices who retire must be replaced by a judge with a similar ideology. Of course, that won’t be the standard if a conservative justice retires or passes away. This is sad.

Why It Is Still Important For McCain To Win

As discussed in the Introduction, there are many reasons why conservatives should fear an Obama presidency, but none more important than the future of the Supreme Court. Given the huge shift toward the Democrats in the Senate, Obama will have carte-blanch to nominate the most liberal judges to the High Court.

Again, one might argue that if only liberal Justices Stevens and Ginsburg retire in the next few years, how much damage could Obama do? Yet there is no guarantee that only Stevens and Ginsburg will retire in the next few years. Scalia and/or Kennedy could retire or become ill or die and thus their seats would be on the table. Likewise, none of the Supreme Court justices are immune from accidents or illnesses that could incapacitate them.

Thus, I believe it is quite naïve to believe that Obama won’t be able to significantly upset the balance in the Supreme Court. And then there’s an even more chilling thought: What if Obama wins a second term as president and is in the White House until the end of 2016? In that scenario, Obama might well have the chance to nominate 4-5 Supreme Court judges!

Even if McCain is hamstrung by the liberal Senate, we would be far better off, in my opinion, with his choices for the High Court – even if they are not as conservative as we would like – than those that Obama is sure to nominate and get confirmed easily.

Recent Landmark 5-4 Supreme Court Decisions

As discussed above, the current Supreme Court often comes down to a 5-4 vote, with Justice Kennedy tipping the decisions one way or the other. In just the last month, we have seen two landmark Supreme Court decisions which are most instructive.

In a stinging rebuke to President Bush’s anti-terror policies, a deeply divided Supreme Court ruled on June 12 that foreign detainees held for years at GuantanamoBay in Cuba have the right to appeal to US civilian courts to challenge their indefinite imprisonment without charges.

Justice Anthony Kennedy was, once again, the deciding vote in the 5-4 landmark decision. Kennedy, in writing for the 5-4 High Court majority, acknowledged the terrorism threat the US faces, and the Bush administration’s justification for the detentions, but he opined: “The laws and Constitution are designed to survive, and remain in force, in extraordinary times.”

Conservatives were outraged that the Supreme Court would essentially open up the US court system to alleged terrorists and known enemy combatants – who are NOT US citizens! Imagine the message this decision sends to terrorists around the world. Justice Kennedy was roundly criticized for his swing vote.

President Bush said he strongly disagreed with the decision - the third time the court has repudiated him on the detainees - and suggested he might seek yet another law to keep terror suspects locked up at the prison camp, even as his presidency winds down. But this is not very likely. The Supreme Court is the final arbiter and cannot be over-ruled by the president.

Then on June 25, the Supreme Court made another bone-head decision in my opinion and that of most conservatives. Last Wednesday, in yet another 5-4 decision, the Court outlawed executions for child rapists. The State of Louisiana had sentenced Patrick Kennedy to die for brutally raping his 8-year-old step-daughter. (One expert in pediatric forensic medicine said the victim’s injuries were the most severe he had ever seen from a sexual assault. They even required emergency surgery.)

Once again, Justice Kennedy joined the liberals on the Court who ruled that despite the brutality of the crime, the death sentence violated the Eighth Amendment ban against “cruel and unusual punishment.” In its ruling, the Court suggested its decision reflected “evolving standards of decency that mark the progress of a maturing society.”

Give me a break!! In terms of naked judicial activism, one can cite few better examples than this one. How could any judge advocate leniency for a child rapist and spin it as both “decent” and “mature?” FYI, this decision was criticized by both Senator McCain and Senator Obama.

Justice Alito, noting the sweeping impact of the Court’s decision, wrote in his dissent: “The Court today holds that the Eighth Amendment categorically prohibits the imposition of the death penalty for the crime of raping a child. This is so, according to the Court, no matter how young the child, no matter how many times the child is raped, no matter how many children the perpetrator rapes, no matter how sadistic the crime, no matter how much physical or psychological trauma is inflicted, and no matter how heinous the perpetrator's prior criminal record may be.”

Before the ruling, six states allowed the death penalty for convicted child rapists. Now there are none. You can thank the liberal activists on the Court, and Justice Kennedy, for that.

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.

Court Gets It Right On Gun Control, Barely

While conservatives were outraged by the Supreme Court decision on the detainees and child rapists, there are also times when Supreme Court decisions outrage liberals as well. Such a landmark decision was handed down by the High Court just last week.

On June 26, the Supreme Court ruled 5-4 in favor of gun rights. Thursday’s ruling by the High Court declared that the Second Amendment to the US Constitution provides an individual right to gun ownership. Once again, it was Justice Kennedy who delivered the deciding swing vote, this time ruling on the conservative side.

The Second Amendment, part of the Bill of the Rights, reads: “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms shall not be infringed.”

The District of Columbia passed a law in 1976 effectively banning handgun ownership in city limits. Dick Heller, an armed security guard and D.C. resident, challenged the law after his handgun application was rejected. An appellate court sided with Heller, ruling that the D.C. ban on handguns was not compatible with the Second Amendment.

The issue for the Supreme Court was simply this: Does an individual U.S. citizen have a right to own a gun, or is this right only somehow linked to membership in a state militia. That issue has been settled, albeit with a dangerously slim margin.

The majority opinion in the case District of Columbia v. Heller was written by Justice Antonin Scalia, joined in by the other three most conservative justices, along with Justice Kennedy in this case. The four more liberal justices endorsed two dissents, one written by John Paul Stevens, and the other by Stephen Breyer.

This decision outraged liberals and even many moderates. Opponents argue that the right to keep and bear arms was only intended to pertain to “militias,” that the days of militias are long gone, and that the Court was vehemently wrong in its decision.

For the record, I happen to staunchly agree with the decision and must admit that Justice Kennedy’s vote surprised me, pleasantly I might add.

McCain & Obama’s Reaction To The Gun Decision

John McCain immediately praised the Supreme Court’s decision which invalidated a District of Columbia ban on handguns. The Republican presidential nominee heralded the justices’ action as “a landmark victory for Second Amendment freedom.”

Voicing a stance that could help him with both conservatives and libertarians, McCain said, “This ruling does not mark the end of our struggle against those who seek to limit the rights of law-abiding citizens. We must always remain vigilant in defense of our freedoms.”

Barack Obama, on the other hand, did another flip-flop. Obama has long advocated that local governments should be able to regulate guns (read: “gun control”). Yet in his official statement on the Supreme Court’s decision, Obama said that he “favors an individual’s right to bear arms,” but also believes the government should have the right to regulate them. Say what?

Obama issued a carefully worded statement apparently aimed at both moderate voters and his liberal base. The statement did not specifically say whether Obama agreed with overturning the specific D.C. gun ban. But he said Thursday’s ruling “will provide much-needed guidance to local jurisdictions across the country.” What is that supposed to mean? Nothing, actually.

A 5-4 Supreme Court Is Better Than 6-3 Or 7-2

In the span of just two weeks, the current Supreme Court has outraged both conservatives and liberals, with Justice Kennedy earning the ire, and praise, of both camps. Both conservatives and liberals railed against the current make-up of the High Court and the fact that landmark decisions often come down to nothing more than Justice Kennedy’s position on the issue.

While I am definitely among those conservatives that were outraged over the detainee rights decision, I would much prefer the current make-up of the Court to that which I believe we will see if Barack Obama becomes president. Perhaps the Supreme Court make-up won’t change significantly if Obama only gets to replace Justices Stevens and Ginsburg with two more liberal judges. However, if Obama gets more opportunities, the High Court could easily shift to a lop-sided 6-3 or 7-2 liberal bias, especially if any of the more conservative justices, or even Justice Kennedy, retire, fall ill, die or otherwise become incapacitated.

In closing, if you are undecided about who to vote for in the presidential election, I suggest that you focus on the implications for the Supreme Court, if nothing else. John McCain was not my choice for the GOP nominee. I don’t agree with him on several important issues. But when I consider the implications for the Supreme Court, John McCain will get my vote in November.

Please let me know if this week’s article has been helpful for you.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Obama's (& the Democrats') Dry Hole (Must Read)
http://online.wsj.com/article/SB121478199392114387.html?mod=opinion_main_review_and_outlooks

Where does Obama really stand on gun control? (Very interesting)
http://www.realclearpolitics.com/articles/2008/06/scalia_saves_obama.html

Recent Court rulings spotlight election's 'supreme' stakes.
http://www.boston.com/news/nation/articles/2008/06/27/recent_rulings_spotlight_elections_supreme_stakes/

New York Times Perspective On Justice Kennedy (Good, but I don't totally agree)
http://www.nytimes.com/2008/06/29/washington/29scotus.html?_r=2&hp=&adxnnl=1&oref=slogin&adxnnlx=1214741769-RlZ9jRqY23h6QoFs2FcZ+w&oref=slogin

Why We Want Obama To Be The Dem's Nominee

Gary D. Halbert — Wed, 07 May 2008 04:32:47 GMT

by Gary Halbert & Spencer Wright Many of you, like us, are probably at a loss as to which candidate we want to see run against GOP nominee John McCain. Both Obama and Hillary are very liberal and have similar policies. As much as I hate to admit it...(read more)

Forecasts & Trends : John McCain

The Democrats' Plan To Highjack Your 401(k)

Introduction

The Economy Falling Fast Into Recession

Democrats Want To Highjack Your 401(k)

The Democrats' 401(k) Replacement Plan

Congressional Testimony Paints A Different Picture

Socialism Du Jour - "Spread The Wealth Around"

A New Democratic Piggy Bank

Can We Afford This Nonsense? No, But So What?

Conclusions - After Today, Anything May Be Possible

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

Mortgage Bailout Passes, Finally - Now What?

Introduction

An Inside Look At The Mortgage Bailout Bill

Equity Ownership & Limits On Executive Pay

Mortgage Assistance & The Bankruptcy Code

Expanded FDIC Limits On Bank Accounts

Was The Bailout The Right Thing To Do?

The Senate's $150 Billion In Extra Bailout Pork

John McCain Blew An Election Saving Opportunity

Electoral Map Now Leaning Heavily To Obama

Scotia Partners - Making Money In The Bear Market

Uncle Sam's $700+ Billion Toxic Securities Fund

Introduction

Details Of The Massive $700 Billion Bailout

Government Guarantees Money Market Funds

Will Congress Pass The Bailout Plan?

Should The Government Bail Out Homeowners?

Will Uncle Sam Overpay For The Assets?

Credit Crisis May Tip The Election To Obama

Time To Prepare For A Recession Just Ahead

Conclusions

The Economy, The Electoral Map & The United Nations

Introduction

The Economy Surges Above Expectations

Stocks - Have We Seen The Bottom?

The Electoral Map Remains Very Tight

My Thoughts On The Sarah Palin Pick

The Scary Democratic Party Platform!!

Dems Endorse Expansion of U.N. Power

On The Economy, The Fed & President Obama

Introduction

Economy Holding Up Better Than Expected

Consumer Spending Remains Strong

Other Economic Indicators Are Mixed

The Fed In A Policy Box

Do Most Americans Really Know Barack Obama?

Obama Acts As If He's Already The President

John McCain's Electoral Mountain

The Vice Presidential Sweepstakes

Conclusions – Pass This Along

Election '08 - Supreme Court In The Balance

Introduction

Presidential Candidates Finally Settled

Is The Supreme Court A “Litmus Test”? Yes!

The Current Makeup Of The Supreme Court

Supreme Court Justices Likely To Retire Soon

What Would McCain Do To The Supreme Court?

Why It Is Still Important For McCain To Win

Recent Landmark 5-4 Supreme Court Decisions

Court Gets It Right On Gun Control, Barely

McCain & Obama’s Reaction To The Gun Decision

A 5-4 Supreme Court Is Better Than 6-3 Or 7-2

Why We Want Obama To Be The Dem's Nominee

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